Nice post! Agreed reverse DCF is more useful than WACC/CAPM for pre revenue biotech.
Although do you think the study is at risk of survivorship bas? Filtering for >$1B market cap and decent analyst coverage means looking at companies the market has already decided are likely to survive.
Would the 15-39% range even hold if you expanded the universe? Intuitively smaller cap, less covered companies carry more risk so I'd expect implied returns to be higher. The catch-22 of course is that without analyst coverage there are no reliable forward estimates to reverse DCF off, so the data kind of forces you into the survivorship bias problem by design.
Hi Kevin, Jason, Do-Yun,
Nice post! Agreed reverse DCF is more useful than WACC/CAPM for pre revenue biotech.
Although do you think the study is at risk of survivorship bas? Filtering for >$1B market cap and decent analyst coverage means looking at companies the market has already decided are likely to survive.
Would the 15-39% range even hold if you expanded the universe? Intuitively smaller cap, less covered companies carry more risk so I'd expect implied returns to be higher. The catch-22 of course is that without analyst coverage there are no reliable forward estimates to reverse DCF off, so the data kind of forces you into the survivorship bias problem by design.
Best,
Josh