What are some of the tax and accounting requirements that drive valuations for biotech companies?
Many biotech companies issue stock options to employees in order to conserve cash resources, because the biotech business model generally takes a long time to mature. When a biotech does this, there are both tax and accounting implications. On the accounting side, Financial Accounting Standard 123 (FAS 123) was recently revised, becoming FAS 123 (R), which, in part, says that companies have to expense the fair value of their stock option awards on their income statements. Under the old rules, stock options didn’t have to be expensed on financial statements; they were generally shown as a footnote disclosure. In order to expense options under FAS 123 (R), biotechs need to know what grants are worth on the grant date and, in order to value that option, they must know what the underlying stock is worth. Biotechs primarily use valuations as a basis for valuing options, and subsequently expensing them. If they don’t, they may have issues clearing an audit or possible restatement risk if the
