An economic valuation of a biotechnology R&D project in a developing economy

Background: Biotechnology complements technological developments in main sectors of economies, such as health, energy, and agriculture, and thus contributes to economic development. It provides solutions to the problems that are frequently faced in developing economies, such as resource constraints, lower productivity and environmental concerns. In order to benefit from biotechnology, its associated markets need to develop and function well to support the developments and transactions of intangible assets, such as technology transfers, license agreements and research and development joint ventures. Economic valuation of the intangible assets is necessary for the development and functioning of these markets. It provides better understanding of value creation at micro scales and its economic and financial dynamics. The literature lacks valuation studies in biotechnology sectors in developing economies. This study performs economic valuation analysis of a research and development project of a Turkish biotechnology company operating in health sector. Turkey, as a developing economy, has slow progress in biotechnology despite its wealth of biological resources and genetic variety. Thus, the study provides an excellent case to analyze valuation issues in developing economies. It uses data from in-depth interviews from the company and employs real options and discounted cash flow (DCF) methods.
Results: Developing countries and biotechnology sector introduce additional risks that need to be accounted for in valuation. These risks reduce the value of the project under real options and discounted cash flow methods. Since real options method permits the valuation of options that might arise during the R&D process and provides flexibility to managers to act, it results in higher values compared to discounted cash flow method. The grant from a public institution that partially financed the Project reduces the discount factor and thus increases the value of it.
Conclusions: Economic values of biotechnology intangibles in developing countries are affected by country and sector risks and public financing. Thus, both microeconomic and macroeconomic policy interventions are important for the development of biotechnology in these economies. While public financing enables the risky R&D projects to take place, it makes them more valuable than they would be under no intervention. Long run effects of these interventions require diligent analyses.

Keywords
biotechnology sector; developing economies; real options; R&D project valuation; Turkey