Valuing NOL Carryforwards for the Small Cap Biotechnology Subindustry

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Under the 2017 tax law, carryforward rules for net operating losses (NOLs) allow corporations to apply these losses forward for up to twenty years of taxable income. Startup corporations primarily engaged in basic research or that require rapid growth to be sustainable can go a number years with no positive earnings and thus accumulate net operating losses. These losses can be used to reduce tax obligations in the future. This paper estimates the value of NOLs across firms in a specific subindustry: small cap biotechnology. A valuation method based on ARIMA estimates of future income is used to calculate the value of the NOLs that can be carried forward. The results indicate that even for a subindustry which typically has net operating losses for many years in a startup phase, the expected value of the future benefit of a reduction in taxes is actually fairly modest.