Transparency: The safety net of high price-to-dream ratios

Cheming Yang

Recently in Taiwan, a highly valued, in terms of stock prices, biotech startup, Obipharma, stirred up turmoil after unblinding one of its clinical trials. The clinical trial is about a cancer vaccine and was touted to be quite promising all along. As what usually happens in clinical trials, the results fail to live up to the company’s and the general public’s high expectation. Needless to say, the final results of this trial fell short of the primary end point. No surprise at all, its stock prices plummeted.

In the course of this downward spiral, the President of Academia Sinica came to Obipharma’s defense by saying that the trial itself is still a success, and so forth and so on. He proclaimed that he had no vested interest in Obipahrma and his remark was purely based on scientific evidence and out of concern for the development of Taiwan’s biotechnology industry. After a series of expose by the media, it turns out that the President’s daughter is a major stock holder of Obipharma. Uproar ensued and the scandal is still evolving.
The development of new drugs for humans is certainly the riskiest among biotechnology businesses in the sense that it takes a tremendous amount of time and money to put a new drug on the market. This kind of ventures is capital intensive and the return can be astronomical if they make it. However, the success rate is extremely low. During the processes, the promising few still need to depend on the capital market to raise enough money to invest in this time consuming ventures. Otherwise, most of these startup companies will not be able to last to the end of the day. As a result, the regulators of the stock market have to make special arrangements for this kind of currently money losing enterprises to go public and these enterprises need to paint a rosy picture to keep the investor interested in continuing pumping money into R&D without any profit in sight. So it has been said that this kind of risky ventures have very high price to dream ratios in the sense that they in reality have no earnings at all. Technically, the right way to determine stock values of this kind of companies is the PEG ratio. The price/earnings to growth ratio (PEG ratio) is a stock’s price-to-earnings ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock’s value while taking the company’s earnings growth into account, and is considered to provide a more complete picture than the P/E ratio.
Needless to say, the management of the company needs to paint a rosy picture about the potential growth for the future. Since they are saying in future tenses, their guesses are as good as anyone else’s. So there is always bragging galore. Bluffing alone is not in and of itself wrong, but lying is. How do we deter companies go too far away from the truth? Transparency is certainly the best policy. The more transparent the industry is, the better protection the investors will get. With the advance of ICT, it is much easier to track the stock transaction and capital movement in this time and era. More revelation of the activities of stakeholders of startup biotech companies should make it more difficult for the companies to lie to the public. And the pursuit of maximal transparency should also be the ethical guideline for all corporates so as to prevent over stepping the reasonable boundaries of being overly optimistic.


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