Valuation In M&A Of Biotech Industry

As a rising industry in the 21st century, the biotech industry has been stimulated to develop swiftly for its enormous market prospects, which, together with the information industry, will lead the trend of social progress in the future. Viewing the industry on the whole, it has matured progressively in America and Europe, especially that its scale and technology are all at the front in the world. The biotech industry in China is developing very fast, however, compared with America and Europe we are still lagged behind on the whole. It will surely be confronted with great impact from the large-scale biotech enterprises at abroad after joining WTO. Under this situation, M&A and reform is an effective way to enhance the core competitiveness of the biotech enterprises at home. How to successfully carry out a M&A becomes a hot issue for scholars in this field.The main content of this paper is on enterprise valuation, which is the key to a successful M&A. In this paper, on the analysis of the feature and means of valuation, it is attempted to find out a most effective and truthful means of valuation to reduce the risk and increase the chance of success.There are four traditional means of valuation. They are book value adjusted, market value, directly comparing, discount cash flow .respectively, which only assess at the enterprise's existing value while it is difficult to assess at the enterprise's future profit. As we know, there are several features of the biotech enterprises: first, the value of the biotech enterprises lies in a future chance to a great extent. That is, the real option forms an important component of a company's value. Second, the development of biotechnology goes through many stages. Thus, the composition of the real option is not unitary. Third, high risks of management, uncertainty of the future and difficulties in cash flow makes it much more complex.It can be concluded from the above that the traditional valuationmeans have great limitation to the valuation of biotech enterprises. This problem could be well solved by using the real option means.In practice, this means is classified into growing option, delaying option, abandoning option, contracting option, switching option and staged investment option. Usually the real option an enterprise has is compounded, which makes it difficult to accurately assess at the value. In practice, the real option model Black-Scholes is introduced and the cash flow discount is combined to generate a structure of assessment: Enterprise Value = Existing Value +Rela Option Value.The real option proves to be more truthful and suitable by a case of real option in the paper, contrasted with the means of cash flow discount applied in a biotech enterprise with a growing option. By this case, the real option proves to be more truthful and suitable.