The biotechnology sector is an innovative and growing industry. Back in 1982 the sector had virtually no products, now biotech firms have successfully commercialized over 30 products, with nearly 10 times that number still in clinical trials. Biotech companies have introduced many new drug products, but many biotech firms are still in the developmental stage, with their fortunes largely determined by investor perceptions of the relative merits of their research and development pipelines. In addition, the endeavors of biotech research have extended beyond the field of medicine to other fields, such as agriculture, energy, and environmental protection. One of the most striking aspects of the biotech industry is its scarcity of earnings.
Most biotech companies carry losses for years, even after they have launched a new product.
As a result, valuing biotechs is a precarious undertaking at its best. The details of a biotech firm's business, its research methods, its test results, even the products themselves, can be highly complex. The success or failure of a drug during clinical trials is difficult and often impossible to predict. Investing in biotechnology stocks is somewhat unlike other investing stocks because in valuing biotechnology stocks, it has always been difficult to use traditional net present value and discounted cash flow approaches, particularly for the clinical and pre-clinical stage companies. Predicting the probability of a single product's success in the clinic depends on many variables such as clinical trial design, difficulty of indication, and quality of Phase II data.