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Must-Know Finance Concepts for Life Sciences Valuations, Part IBased on a webinar presented by John Selig and Jeff Karan, Co-Founders and Managing Partners at WaveEdge Capital

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ShareVault and WaveEdge Capital Must-Know Finance Concepts for Life Science Valuations, Part I

Risk Factors Technology Biopharma

Technology Development 6-12 months 12+ years

Remaining Patent Protection 19 years 7-10 years

Placebo Effect None Lots

Commercialization 2-3 years 4-6 years to peak sales

Manufacturing Challenges Few Lots

Regulatory Issues None Lots

Reimbursement Considerations None Lots

Landscape in 10 Years Less important Very important

Time to Commercialization 9-24 months 12-20+ years

Unlike the life sciences sector, the tech sector has a simple business model: a few entrepreneurs, often quite young, with just a little money and just a little time, can get to a beta launch relatively quickly with a relatively high probability of success. The complexity often lies far more in the commercialization of the product than in its development. This is similar to other industries where the commercial adoption of a product is often the biggest risk, as opposed to product development. In contrast, the biopharma model often starts with a team of PhDs who are specialists in their fields, sometimes the best people in their

field in the world. They are well funded, and they exert an enormous amount of effort over the course of many years, sometimes more than a decade, before they even know whether their product will be commercially viable. Even then the chances of getting product approval can be very low.

The biopharma business model is one of the toughest compared to other spaces because it is so complex. As a result, it’s important to understand the effect of each of these complex factors on the value of the company and/or product.

In addition to differences in the amount of time and money

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Introduction Why is the valuation of life sciences assets so complex?


ð Imagine a scenario where a small biotech has a product that hasn’t yet arrived at a proof of concept, perhaps because it’s still in the preclinical phase. How does a company in this situation determine the value of their product without a target product profile?

The valuation methodology is critically important to help drive

credibility that the product has potential. Therefore, the valuation methodology must be both reasonable and validated, and should be taken as seriously as the company’s core science and development plan. It’s important both to shape perception within the company’s management team as well as with stakeholders, investors and partners.

ð First, an accurate valuation of the product is important because it will ideally give you a good idea of the target market for your product and the plausibility of its commercialization.

The product may be interesting from a scientific standpoint and even meet a currently unmet need, but it must be valuable to the people who are needed to move the company forward. Therefore, with a credible valuation, you can estimate how

attractive your technology, products or business will be to a potential investor or licensee.

Valuation is also more than just a process that pops out a number, but an important management tool to determine the optimal way to grow the company. Accurate valuation will help answer questions such as:

• What kind of capital needs to be raised, and how much will that dilute the company?

involved prior to product launch, there are also differences in the risks that technology and biopharma companies face as they develop a product. In a biopharma model, valuation must take into account downstream genericization, as well as issues in manufacturing, approval by

the FDA and cost reimbursement challenges. It’s complex both on the development side as well as on the commercialization side. It’s therefore extremely important that life sciences entrepreneurs be able to elucidate all these factors for potential investors, partners or acquirers.

How Much of Valuation Can Be Quantified and Modeled?

Why Is an Accurate Valuation So Important?

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• Is there a plan to license the product, or is there another model in place?

• Is an exit the ultimate goal?

• What are the risks involved in getting to a particular milestone?

• How is the product expected to perform at a certain level or time?

• What product lines or indications should the company be targeting?

ð The answers to these questions not only inform management decisions, but also help frame the conversations that matter most to investors and shareholders. It’s very helpful and important to identify all of the various assumptions being made along the way and to discuss them at the board level so that valuation is not just impacting management decisions, but also the company’s financing and licensing strategies.

In order to be useful, however, a valuation methodology must be understandable and have high utility. Valuation should not only be closely tied to a strongly vetted set of inputs and rationales, but also be agreed upon by all of the company’s stakeholders, including:

• Management

• Board of Directors

• Employees

• Prospective licensing parties

• Corporate partners

• Investors

• Wall Street analysts (if company is already or is going to be publicly traded)

You may have stakeholders who have a very different view of the value of the product or opportunity, or differ in their opinion of the appropriate timing and paths forward. By presenting a good clean valuation (and alternative valuations depending on different paths forward), you will be much more successful at aligning the board. It can also help to incent the management team and employees, as well as attract prospective partners and investors.

Valuation methods should also be easy to administer, consistently applied to all programs, and regularly updated and maintained with new information, new estimates and current financial market data. It’s also important that your valuation method is bias-free and is formed by input from finance, business development, marketing, research and clinical.

The good news is that forming a good valuation is not rocket science. In many ways it’s basic math.

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ð Sunk Costs is a basic valuation approach that determines value based on how much money has been spent and cannot be recovered in the course of developing the business. Acquirers will typically then offer some multiple of those costs.

The strength of this method is that it is very easily verifiable and, assuming that the valuation of the company is relatively close to the amount of money that’s been incurred, it gives an investor a fairly well guaranteed multiple. However, it can be inaccurate in some cases because it doesn’t reward the company for being lean and efficient, nor does it account for inefficiencies, waste and bad management decisions.

Sunk costs can be a useful internal benchmark to evaluate how the company is doing, but it is generally not the sophisticated method that the market generally uses.

Five Valuation Methodologies. Let’s look at the five methodologies used to value life science assets.

Sunk Costs

Sum of Parts

Comparables

Discounted Cash Flow (DCF)

Risk-Adjusted NPV (rNPV)

1.

2.

4.

3.

5.

Sunk Costs

Met

hodo

logy

One

5

1


6

ð The Sum of Parts method essentially tallies up the total value of a company’s hard assets. Essentially, it’s a fire sale. However, because many life sciences companies don’t have much in the way of hard assets and because the value of such companies tends to be in the IP and data, this method is usually a last-ditch maneuver. This method would not be used in light of valuable IP. This approach is sometimes employed when a company has a lead product

that has failed, and the business is being liquidated. It is best used when a business has substantial assets to liquidate, though the company typically receives pennies on the dollar.

ð The Comparables valuation method derives a value of a company by looking at the value of comparable products. If the comparable is a product that is in the market, the valuation can be based on sales. However, because so many life sciences products are pre-commercial, the method generally evaluates similar assets,

and not product sales. For example, to value an oncology asset in Phase II clinical development, you would look at the acquisition or licensing deal terms of other Phase II oncology assets.

Though this method saves a lot of time, there are often widely varying deal values of existing comparable

Sum of Parts

Comparables

Two

Thr

ee2

3


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products. It’s therefore important to have the ability to push back against what you perceive as an unfair comparable analysis and be able to show that you may be superior to another Phase II oncology deal to which you’re being compared.

Your board or venture firm will always request a comparable analysis, and they will look at them as legitimate benchmarks. But keep in mind that they’re only benchmarks, and they may not accurately reflect how an acquirer will actually value your company.

ð The Discounted Cash Flow and Risk-Adjusted NPV valuation models use forward-looking cash flow as the key metric to determine value.

Cash flow is future sales less the expenses required to get those sales. An analysis of these incremental sales over the long-term will result in a pre-tax stream of cash flows during specific time periods. Your cash flow is the change in cash balance in a specified period of time from

operating activities (as opposed to financing activities). Prior to product launch, a company’s cash flow is generally a negative value (unless they are collecting money through out-licensing). In order to correctly identify and value cash flows, it is important to specify the time period. You can then more accurately assign a value to those cash flows depending on how far in the future they will occur.

Discounted Cash Flow

Four

Less rebates, returns, discounts, samples

Development Costs Manufacturing Costs

Marketing And Sales Costs Outgoing License Costs

Gross Sales

Net Sales

Expenses Pre-Tax CF

4


8

Key Concept A: The Time Value of Money

Money now is worth more than money in the future. In other words, if you look at a stream of cash flow going forward over the next 10 years, $100 you have today is worth more than $100 that you will receive in 10 years, because the money you have today can be invested and earn a return. In order to more accurately account for the value of cash flows in the future, we downwardly adjust for what’s called “the time value of money.”

For example, if you could receive a 5% annual return on your money over the next year, a $105

cash flow a year from now is really only worth $100 now. The $105 has been “discounted” by the interest you could have earned in the year. Similarly, if you invested $100 now and earned a compounded annual

return of 5% each year, in ten years that $100 would be worth $162.89 ($100 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05, or $100 x 1.0510). Therefore, a cash flow of $162.89 in ten years is the equivalent of $100 today. Or, receiving one payment of $1,000 in ten years would be the equivalent of receiving $613.91 today

($1,000/1.0510), assuming you could earn 5% on that money each year.

Key Concept B: Risk-Adjustment

Assets in development have an associated risk to get to market, since there is a chance that something will not go as planned. Therefore, to get a more accurate value of an asset, you must account for this risk, or the chance that it won’t get to market, and you

must downwardly adjust the value commensurate with the risk. As much as possible, it’s important to quantify what that risk is. Developing a credible model of risk is extremely important in order to demonstrate to investors that you understand the risk in moving forward and that the risk has been considered and incorporated into the valuation model.

Two Key Finance Concepts: To fully understand discounted cash flows and the next methodology, let’s look at two key finance concepts:

ð

ð


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ð Cash flow valuation has evolved over the years from a deterministic Discounted Cash Flow (DCF) approach to a deterministic Risk-adjusted Net

Present Value approach, and now has become a probabilistic Risk-adjusted Net Present Value approach.

Rick-Adjusted Net Present Value (rNPV)Fi

ve5

GEN 1 GEN 2 GEN 3

Discounted Cash Flow(DCF) (deterministic)

Risk-adjusted Net Present Value (NPV)

(deterministic)

Risk-adjusted Net Present Value (NPV)

(probabilistic)

What Wall Street analysts did for years was to simply take a “one-size-fits-all” approach. They applied a discount rate, which was generally pretty high (20-30%) and they discounted any forward-looking cash flows or costs by that discount rate without separating out any step-ups in value like, for example, successfully getting through a clinical trial or a beta test. The advantage was that it was easy, particularly for an analyst covering 30-40 companies. The problem with this approach is that you lose the benefit of understanding how much risk you have resolved by moving from milestone to milestone, such as progressing from a Phase I to a Phase II trial.

Over the years, valuation experts have customized the risk adjustment and the cost of capital for companies

depending on factors such as the type of company, the therapeutic area, novelty of the technology, and so forth. In addition, analysts will also take into account other variables, such as the ranges on costs of pivotal trials, prevalence of the indication, manufacturing costs, market adoption, pricing, competitor entry and marketing, among others.

Deterministic Risk-Adjusted Net Present Value is a more useful valuation tool than simply considering the cash flows and a “one size fits all” discount rate, but it’s still deterministic. That is, it’s still only using point estimates for inputs, rather than ranges. However, at least the discount rate is now divided into two parts: (1) the cost of capital given the company’s financial stage and perceived risk and (2) the probability of reaching market


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at a given development stage. The cost of capital is determined by how expensive it is for any given company to raise capital in its current stage. As mentioned earlier, capital is generally more expensive at early stages of development when the company is perceived to have more risk and be further away from market and cash flow break-even.

When you incorporate both the cost of capital over the various future stages as well as the probability of success at each stage, the valuation becomes much more credible. Not

only are you customizing the nature of the valuation to the asset, but you’re also able to begin looking at discrete step-up points, milestones, or inflection points, and you can begin targeting specific points in time at which you will want to make a decision to raise more money or perhaps seek an exit either through a license deal or the sale of the company. Because it empowers future decisions, Risk-Adjusted NPV is a much more powerful valuation method than the DCF analysis.

Why Is rNPV a Superior Methodology to DCF?• Distinguishes risky, novel programs from less risky reformulation

programs by using stage probabilities• Allows much more control over customizing valuations to specific

indications using probability of success benchmarks • Allows determination of explicit risk to next milestone; can see

step-up value when getting to the next phase

As Asset A moves forward in development and successfully completes trials, it:• Resolves risk• Reduces forward-looking development spend• Moves nearer to market

$70

$60

$50

$40

$30

$20

$10

$-

$(10)

Asset A rNPV

End of Phase II End of Phase IIIToday


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ð The latest generation of valuation models is Risk-Adjusted Net Present Value of cash flows on a probabilistic basis. Deterministic means you’re putting all your inputs toward a single-point estimate and you may simply vary one or two inputs at a time. Revenue scenarios may typically involve a High, Low and Base Case, derived by simply adjusting a single input, such as market penetration or price. On the other hand, a probabilistic approach allows you to vary all of your inputs, including:

• Diagnosis rate

• Class share

• Market share

• Manufacturing cost

• Marketing and sales costs

• R&D costs

• Future uncertain impacts on market share, such as entry of new competitor

• Future uncertain impacts on price, such as a change in reimbursement regulation or entry of a generic

• Achieving a follow-on indication or extension of a product line

This method uses software to run thousands of simulations in order to end up with a distribution for any output, such as peak sales or pre-tax product value. ð This method requires a bit more analysis, but you end up with something that’s much more useful both for the management team and the board.

The key benefit of probabilistic modeling is information. You’ll be able to answer questions such as:

• What’s the key benefit of moving this product to the next stage?

• What’s the probability of revenue being less than $100M by year 5?

• What’s the impact on peak sales if fewer patients are diagnosed than expected?

• What’s the likelihood of breaking even in 3 years?

• How likely are we to spend more than $50M on development costs?

Deterministic versus Probabilistic Models:


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800

700

600

500

400

300

200

100

0

Asset B Base Case Sales by Geography Given Approval

20162017

20182019

20202021

20222023

20242025

20262027

20282029

20302031

20322033

20342035

US

EU

JapanROW

$M

720

440 EV

90%ile

10%ile210

Probabilistic bar shows peak sales given approval, accounting for the uncertainty in the epidemiologial variables (prevalence, diagnosis rate, market share, competitor entry, price, compliance, etc.)

ð In the graph above, the stacked line graphs simply show the effect of applying the base case inputs as a deterministic model to the base case and running it forward. In this case, peak sales are approximately $400M if we assume the product is successful in that indication in all of those geographic markets. Given uncertainties around the size of the market, pricing, and probability of approval in each market, the chances of total product sales being exactly those stacked bars is much lower than 1 in 1,000,000. But, running a full Monte Carlo (i.e., simulation) analysis on this, you would see an enormous range. The vertical bar shows a 10 percentile on the bottom and a 90 percentile on the top. The

90th percentile means that there’s a 10% chance of actual peak sales being $720M or greater; the 10th percentile means that there’s a 10% chance of actual peak sales being $210M or lower.

This information is extremely useful in order to show your board and team how wide the range in peak sales will be ten years in the future, even if you don’t know who will be entering the market. It will also facilitate better decision-making. For example, you may want to know the probability of earning more than $300M. In this case, it’s pretty good, and you can actually quantify it (i.e, based on our best information today, we have a 75% probability of equaling or exceeding $300M


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in sales at peak). And, if a board member thinks you’re a lock to get a billion dollars in sales, you can now confidently dispute his or her case. You can more effectively identify what is influencing the range in this distribution and why it is unlikely to get a billion dollars in sales. You could also run an analysis that shows what it would take for you to get that billion dollars in sales within 10 years.

ð Another useful tool, a Sensitivity Analysis, allows you to determine which assessments have the greatest uncertainty impact on revenue or value. This model moves all of the high and low base inputs vertically while keeping everything else constant on any given value that you’d like. In this case, the selected value is the peak revenue of Asset B.

A sensitivity analysis will allow you to focus on the uncertainties that matter the most to the desired outcome. For example, market share has the biggest impact on the peak revenue of Asset B. Whether or not Competitor Y enters the market has far smaller impact on the peak revenue. With this information, the management team and the board

can focus on what they can do to grow their market share, rather than on worrying about Competitor Y.

These tools help everyone to prioritize what will most impact the value of the product downstream. It’s very important to use these tools as a way to keep everyone focused on the highest priorities and not get distracted by discussions on less

US peak market share of segment patients

US price per regimen

Moderate / severe patients (as % of incidence)

Competitor X market entry

US incidence growth rate

Competitor Y market entry

Moderate / severe patient growth rate

Peak Revenue of Asset B ($M)100

5%

$8,000

17%

Yes

1.0%

Yes

2.0%

$15,000

23%

No

2.0%

No

2.5%

25%

200 300 400 500 600 700 800

15%

$10,000

20%

1.5%


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important matters. Anyone who has done transactions, in particular with larger companies, knows how many ways transactions can get bogged down. Therefore, the clearer you can make the value—and what impacts the value—the more quickly you can move those conversations forward.

Recently a valuation survey was conducted by a university in the Netherlands. They spoke to several hundred people in healthcare at a variety of companies: large strategics, small biotechs, medtech companies, consultancies,

investment banks, hedge funds and venture capitalists. One of the questions they asked was which of the following valuation approaches the companies were using:

• Sunk Costs

• Sum of Parts

• Comparables

• Discounted Cash Flow (DCF)

• Risk-adjusted NPV (rNPV)

• Real Options (RO)

These were the results:

250

200

150

100

50

0

All Respondents - Valuation Methods Used

DCF

62%64%

rNPV

13%

RO

58%

Comp.

17%

Other

Source: BIOSTRAT Biotech Consulting


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When looking at only large pharma and biotech professionals they saw the following results:

30

25

20

15

10

5

0

Biotech / Pharma Professionals Primary Valuation Method

DCF

36%

48%

rNPV

5%

RO

10%

Comp.


Not surprisingly, rNPV and DCF were the methods that large pharma and biotech professionals used most often. That’s because pharmas and large medtech acquirers are looking at the impact products will have on their bottom line. That is, how much cash would the product generate overall, and how does it compare to all the other products in the portfolio?

Since the commercial teams in pharma and in medtech companies are using a DCF analysis and increasingly an rNPV analysis, it is

highly advantageous for investors or entrepreneurs to use the same valuation methodology; it allows you to talk the same talk and address the same issues that would concern them. A Corporate Development executive is going to be concerned with how best to sell this opportunity upstream to management. You want to do the analysis that would enable him or her to make a convincing case that your product is a good deal and that the deal terms are fair.

Which methods do VCs use the most?


14

12

10

8

6

4

2

0

Venture Capital Investors - Primary Valuation Method

DCF

0%

36%

rNPV

5%

RO

54%

Comp.

4.5%

Other


Not surprisingly, VCs use a combination of rNPV and Comparables approaches. Part of the difference between VCs and strategics is that the latter have entire teams of people that are dedicated to valuation and therefore can create very detailed models to most accurately predict forward-looking cash flows. Venture

capitalists, on the other hand, tend to have small teams who have a lot fewer resources. So they may sometimes not do a full NPV analysis and fall back on comparables as a way of short-hand checking whether a deal has the right valuation and whether it would be the type of company that would fit their requirements.

Think of valuation as a powerful tool for management, outside investors and the board to make the best decisions in order to prioritize and optimize the company’s portfolio and drive company value. A credible valuation model is critical to a

company’s success and can be used across spaces and stakeholders, including in financing and investor relations, M&A, internal management strategic discussions, and portfolio prioritization.

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Conclusion


Is the probabilistic model what we used to call “real options analysis,” and where does a real option valuation model fall into the spectrum of NPVs?

Today, real options analysis isn’t used that often in healthcare valuation discussions. It’s fairly complex and a bit beyond what a lot of smaller companies are going to be able to afford. Because it’s not used as often by the people

that you look to eventually acquire you or to license your asset, you’re generally much better off trying to speak the same language as the acquirers and the partners, which is why we recommend a risk-adjusted net present value of cash flow approach. In all the years we’ve been doing this we’ve never been in a dialogue with a buyer, investor or pharmaceutical company who has asked to use a real option model.

Can you speak to applying these concepts to very early-stage academic molecule discoveries, in which the small pharma company is trying to get the agent through Phase I and then doing a deal with a large partner? Do you suggest establishing valuation of an early-stage pharma based on expected upfront milestones or on an expected total deal? Can you address valuation methodology differences between early versus late-stage programs?

Generally, you do want to account for the fact that an earlier-stage company or asset looks different than a later-stage company or asset. That can be accounted for by increasing the risk adjustment for earlier stage companies and in turn recognizing the additional cost moving forward. But in terms of methodology differences, it’s important to note that for an early-stage company you have less information than you do for a

later-stage product. You don’t have a target product profile or human clinical trials showing efficacy, and you haven’t shown how you plan to resolve risk. You also have less of an idea who the competitors will be and what the market will be because it’s that much further out. But that’s okay. You need to be explicit and use a valuation range or a probabilistic analysis. Account for the fact that these are educated, but thoughtful guesses, but you don’t have a crystal ball.

So, you’re trying to be as reasonable, credible and rational as possible in exactly the same way that the teams in a pharma or medtech company are making those guesses when they’re attempting to prioritize different programs. A huge driver of this is—does the science even work? Is this the right approach? Is this market something interesting to pursue? And, at this point right now given who we know is in the

Q&A

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competitor pipeline, is this an unmet need and is it likely to still be an unmet need by the time we get to market? These are the questions you need to be able to answer, as opposed to a situation at a later-stage when you will have market research, pricing reimbursement research and an understanding of manufacturing costs, and when so many uncertainties will have been resolved. The earlier the asset the larger that valuation range will most likely be.

The methodology, however, isn’t different. When you think about methodology, think of it as a stair-step graph, such that the valuation goes up after each successful trial. The methodology we’re using is exactly the same across that entire time horizon. What differs is the types of inputs going into the model

and where you’re spending your money and your time. So, if you’re starting off in preclinical, you’re going to spend a lot more time on your inputs around mechanisms of action and selecting the right target and the issues around that. And frankly, you’re not going to spend a lot of money or time on running up market surveys or doing market research for sales that are going to be twelve years out. Conversely, a company in Phase III going into the FDA can eliminate all of those questions and focus solely on the credibility of success at the FDA, time to market, reimbursement, risk, and then success in the market. So, the model is the same, but the inputs on which you focus your time and money will differ depending on where you are in that stair-step time frame.

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How does one determine how many competitors could be in one space? Is it arbitrary?

There are a lot of great databases out there that track competitors. Of course, the earlier stage you’re in the less accurate they are because there are plenty of early-stage companies that are on stealth. But what these resources do is monitor websites such as clinicaltrials.gov and PR announcements in order to track how many companies are at Phase II or Phase III and their focus of their development efforts.

Frankly, for any product that

you’re developing, whether it’s in therapeutics, devices, or diagnostics, you should be aware of who else is out there and what they’re doing. It’s absolutely critical because you need to understand who your competition is, not just who’s in the market, but who’s very close to market and how the standard of care may likely change. You can then take all of those competitors and apply statistical benchmarks to their probabilities of success depending on their area of focus. This is information that you will need to convey to potential investors and partners.


Can you talk about exit strategies and how to evaluate long-term value?

re are different ways that people evaluate a product’s appropriate take-out value. There are two levels to this: the product value and the deal terms linked to that product value. The first of two main ways people evaluate a product on a long-term basis is simply going through the entire product lifecycle

and estimating revenues, expenses and cash flows all the way through the expiration of the patent. The alternative is to put a cut-off point somewhere after launch and then put in what’s called a terminal value to measure what you think the remaining value is in the product. Since the lags in life sciences are generally definable, we strongly recommend going through the full product lifecycle and not using a terminal value as a valuation.

Is there any difference when valuing intellectual property or business opportunity with a university as opposed to a start up?

There shouldn’t be. A product is a product, but in reality, universities often get taken to the cleaners. They almost always have the lowest deal terms compared to ongoing businesses in those areas. What

I would say for the entrepreneurs out there is that the more you can value your product based on the asset, the science and the downstream market opportunity and competitors, the more you can avoid getting taken to the cleaners and the more you can be seen as someone who’s aware of the true value of their asset and isn’t simply using comps.

What’s an appropriate discount rate?

For a very early stage company that’s pre-revenue you’re going to be looking at a discount rate of at least 18% to 20%. Most pharmas and medtech companies generally use what they call a hurdle rate of 10 to 12%, although their cost of capital may only be 6%. So, if

you’re looking at your asset on a transaction basis—out-licensing or selling now—you should be using 10% to 12%. If you’re looking at doing an exit downstream you should probably be penalizing yourself a bit more (18% to 20%) and then lowering your discount rate later once you’ve achieved revenue.

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I’m currently trying to do pipeline valuation modeling on two immunotherapy platforms with multiple agent-targeted diseases, plus out-licensing deals with two in Phase III and the balance in Phase I, II and IIB. Are there models that can address this level of complexity?

Sure. Generally, this is a collaborative effort between the internal folks who know the most about the asset in question and

the external folks who often have the expertise in putting together the model and who know industry statistical benchmarks, discount rates, marketing and sales costs. And you really need those people to come together and take the time to go through each asset separately or each company separately and value them appropriately. Once you break it down into those component parts it’s not as complex. Clarity equals value.

How do you appropriately value buy-out milestone payments in a structured buy-out scenario? For example, how much of the total value of the product/company can be taken upfront versus in downstream payments?

Think about the value of the asset as a pie. When you’re selling or licensing the asset you’re splitting the pie. That pie is the risk-adjusted net present value of cash flow of that product. When you license your asset, the in-licensor is getting some portion of the pie and the out-licensor is getting some portion of it such that they add up to 100%. The question is how large is your share of the pie? And then, within the portion of the pie that you get if you’re the out-licensor, how much is an upfront payment versus how much is for downstream milestone payments versus how much are royalties.

On average, either you out-license an asset or you sell an asset the

closer it is to market. Even on a risk-adjusted basis where you’re already downwardly adjusting the NPV, the seller or out-licensor gets a higher share of the pie then they would for the same asset earlier. Remember, the pie is bigger when it’s a later-stage asset because you’ve resolved risk, you’re closer to market and there are less forward-looking development costs. But not only is it a bigger pie, you also get a bigger share of that bigger pie, so you double dip when you make it to the next step of value (Phase I to Phase II to Phase III). There are two reasons for this. Number one is that we hate risk. Organizations will pay more for less risk even after you’ve accounted for that risk in the quantitative value. The second reason is there are a lot fewer later stage assets available, so companies are willing to pay more for those post-proof-of-concept assets than they are for the myriad of Phase I and preclinical assets.

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About the Authors. Jeff Karan, Co-Founder and Managing Partner, WaveEdge Capital

Jeff brings over 30 years of investment banking and corporate advisory experience to WaveEdge Capital. He started his career in 1980 at Morgan Stanley and moved to Goldman Sachs six years later. In addition to his extensive knowledge of capital raising and merger & acquisitions, Jeff has advised clients on corporate strategy, business valuation, and a wide range of strategic partnership structures.

WaveEdge Capital is the healthcare spinout of Woodside Capital Partners, a boutique investment bank Jeff founded in 2001.

Jeff holds an MBA from Dartmouth’s Amos Tuck School of Business Administration (Tuck Scholar), a BA in Economics from Dartmouth College, and later received an MA on the west coast in Comparative Philosophy and Religion. Jeff is an avid skier and cyclist and is passionate about philosophy, the history of ideas, poker theory, and global economic analysis. (FINRA 7, 24, 63, 79, 99)

John Selig, Co-Founder and Managing Partner, WaveEdge Capital

John advises life sciences companies on M&A, licensing and financial strategy. John speaks frequently on topics in valuation, deal term benchmarking, and strategy. He teaches the Valuation and Finance module at BIO’s Executive Management Training course for BD professionals each year, and he will be teaching the Valuation module at Stanford Medical School’s Entrepreneurship Program.

Prior to joining WaveEdge, John was a Managing Director at Woodside Capital Partners, the boutique investment bank that our other speaker, Jeff Karan, founded. Previously, he was a Partner at Keelin Reeds Partners, a life sciences management consulting firm, where he advised dozens of VC-backed and small to mid-cap biopharmaceutical, medical device, and diagnostics companies on M&A, licensing strategies, portfolio management, valuation and strategic direction. While at Keelin Reeds, John led a partnership and M&A deal term benchmarking effort and has extensive experience in applying that data to yield market-value deal terms for dozens of assets, using the results to inform product strategy and to provide ongoing support during deal negotiations. John also combined his expertise in valuation, deal term benchmarking and decision analysis with his background in law to help companies make optimal decisions in litigation and settlement.

Previously, John was a senior consultant with Strategic Decisions Group, a global management consulting firm, where he advised many of the top 20 pharmaceutical and medical device companies, as well as Fortune 500 companies in other industries on valuation, business strategy and M&A. Prior to consulting, John was an attorney with Weil, Gotshal and Manges LLP where he focused on M&A and corporate finance. John holds a JD from Stanford Law School, where he was an Associate Editor of the Law Review, and a BA, magna cum laude, from Brown University, where he was a member of Phi Beta Kappa. (FINRA 24, 63, 79)


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About ShareVault.

About WaveEdge Capital

ShareVault® is the industry leader in supplying intuitive, innovative virtual data rooms that provide a simple and secure way to share sensitive documents with third parties during the due diligence process.

The on-demand platform is an innovative cloud-computing solution that enables its customers to manage critical time-sensitive and document-centric processes faster and more intuitively. ShareVault offers the highest degree of security and reliability combined with unparalleled speed, ease of use and functionality. Backed by the experience of billions of dollars in successful deal transactions, along with industry-leading customer support, ShareVault can be a critical tool in accelerating deal transaction times and increasing deal success rates.

For more information, visit www.sharevault.com or email [email protected].

WaveEdge Capital (formerly Mavericks Capital) and its licensed broker dealer, WaveEdge Capital Securities, specializes in M&A, capital raises and strategic partnerships across the healthcare sector. We help construct and facilitate innovative and lucrative solutions for our clients. Our practices include therapeutics, devices, diagnostics, services and digital health.

We help you determine the optimal path and outcome for your company. We help you develop a unique value proposition for buyers, partners and investors. We educate the market to heighten interest and widen the reach beyond the obvious and traditional. We pressure-test assumptions and bring deep financial, valuation, structuring and negotiating skills to bear, all to increase the value of your transaction.

Speaking the language of the target audience takes more than investment banking skills. Our unique, systematic approach is differentiated by a diverse, senior team with deep medical and patient perspectives, core scientific knowledge, proprietary analytics, and three decades of investment banking experience in healthcare and life science sectors.

For more information, visit www.waveedgecap.com or send a message at waveedgecap.com/contact.

must-know finance concepts for life sciences …...must-know finance concepts for life sciences...

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