Correspondence: Robert Brooks, Department of Econometrics and Business Statistics, Monash University, PO Box 1071, Narre Warren Victoria 3805, AustraliaM Tel: +61 3 99047076; Fax: +61 3 99047225; E-mail: Robert.brooks@buseco.monash.edu.au

¹is a PhD student in the Department of Econometrics and Business Statistics, Monash University. Her research interests are in the area of the financial valuation of biotechnology companies and comparison of the theoretical valuation models to market valuation. She works for a funds management firm.

²is a professor in the Department of Econometrics and Business Statistics, Head of Faculty for the Berwick and Peninsula campuses and Associate Dean (Research Quality) in the Faculty of Business and Economics, Monash University. His broad research interests are in the area of financial econometrics with a particular emphasis on asset pricing and risk estimation. An area of work has been on valuation of biotechnology firms at both the IPO and listed stages.

Received 20 December 2007; Revised 20 December 2007; Published online 5 February 2008.

Abstract

This paper explores whether conventional financial ratios can be used for portfolio construction in the biotechnology sector after the companies are classified into groups based on technology platforms such as DNA, biochemistry and bioprocessing technologies. We find some success in the use of financial measures after the classification is made indicating that they do a better job when comparing like firms. Appropriate risk adjustment is, however, critical to determining if superior performance is attained. This remains a challenge due to the difficulties in finding appropriate risk measures for the sector.