new drug opportunity assessments strat planning for future success

New Drug Opportunity Assessment Process

Creating Strategic Planning Tools For Future Product Commercial Success

Copyright © 2009. Pharmacision LLC, www.rapid-insights.com, [email protected] 2

Why Conduct Early Stage Opportunity Assessments and Valuations?Very often, Business Development, Marketing and Strategic Planning Groups need an early read on opportunities, but don’t have time or budget for extensive market research.

Early stage pharma and diagnostic company business planningPrep for investor presentationsIn-licensing evaluationsR&D evaluations and portfolio planning

We present a step by step opportunity assessment and valuation process through a case study using actual historical data and a fictitious new drug candidate for the treatment of Clostridium Difficile Associated Disease (C.Diff.).

Benefits of employing this process:Quickly weed out projects with very low probability of commercial successConstructs a framework for deeper dive assessments to validate and refine assumptions when greater market knowledge is needed before making go/no go decisionsSupports clinical development and commercialization strategic planningReduces overall costs:

Leverages information you know up front or can gain through secondary data sourcesIdentifies key unanswered market related questions that impact future commercial successLimits need for primary market research and additional advisory board meetings to address key unanswered market related questions


CDiff New Product Opportunity Assessment Case StudyCDiff NewProd Concept

IV compound with non-clinical data showing potential to provide effective therapy for the treatment of refractory Clostridium Difficile Associated Disease (CDiff)

Disease DescriptionInfectious diarrhea caused by antibiotic use and disruption of normal floraCan lead to significant morbidity and mortality, especially in elderlyGrowing problem in hospitals

TreatmentStop antibioticsMetronidazole or VancomycinNew compounds in development

Unmet medical needEmergence of hypervirulent strains with high recent growth in number of hospital CDiff casesRecurring cases hard to resolveHigh documented opportunity costs

CDiff NewProd medical opportunityPresumed Hospital use due to IV statusLimited outpatient use due to anticipated future competition

NeedInitial evaluation of out-licensing opportunity for CDiff NewProdPosition with investors to raise additional capital

Assessment and Valuation Process


500k to 700k Projected Clostridium Difficile US Inpatient Hospital Discharges By 2018 Projected Launch Year

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

Source: HCUP Nationw ide Inpatient Sample, 2005, Agency for Healthcare Research and Quality; Pharmacision LLC projection

Construct Addressable Market Projections

Actuals Projected

Addressable market = CDiff hospital market Explore Current trends with available data sourcesMake assumptions on future trends with available info:

Lit searches, prior advisory board feedback, existing market researchThese assumptions will greatly influence sales projections!


2018 Market Projections Based on Current Patient DistributionsCurrent (2005) Prevalence of Inpatient CDAD cases (All listed ICD-9-CM diagnoses)

Age Group Prevalence % Total Pts0 - 17 yrs 20,000 3%18 - 64 yrs 170,000 28%

65+ yrs 410,000 68%

Total 600,000 100%Source: 2005 HCUP Nationwide Inpatient Sample, Agency for Healthcare Research and Quality

Disease Stage Breakdown

Age Group

Mild (resolve upon DC antibiotics)

Moderate (metronidazole/ Vanco effective)

Prolonged (Last > 10 days)

Severe (Complications)

All Ages 25% 35% 30% 10% 100%

0 - 17 yrs 25% 35% 30% 10% 100%18 - 64 yrs 25% 35% 30% 10% 100%

65+ yrs 25% 35% 30% 10% 100%

Sources:

Target Market Projection (Severity Approach)

Age Group

Mild (resolve upon DC antibiotics)

Moderate (metronidazole/ Vanco effective)

Prolonged (Last > 10 days)

Severe (Complications) Totals

0 - 17 yrs 5,000 7,000 6,000 2,000 20,00018 - 64 yrs 42,500 59,500 51,000 17,000 170,000

65+ yrs 102,500 143,500 123,000 41,000 410,000Total 150,000 210,000 180,000 60,000 600,000

Kyne et al, Factors associated with prolonged symptoms and severe disease due to C Difficile, Age and Ageing 1999;28:107-113)

Estimate 600,000 patient addressable market size

Segment, Quantify, and Prioritize Target Markets

Identify target market size in 2018Map and Identify Segments within target marketQuantify segmentsPrioritize Segments


Refine Segments Further Based on New Prod Value

Target Market Projection Severe Prolonged with Relapses

High Unmet needHigh Unmet

needModerate

Unmet Need

Age Group Severe Total Prolonged

First Relapse/ complications

+ Multiple relapses

SevereProlonged/

ComplicatedProlonged/

Unomplicated

0 - 17 yrs 2,000 6,000 828 5,17218 - 64 yrs 17,000 51,000 9,792 41,208

65+ yrs 41,000 123,000 36,900 86,100Total 60,000 180,000 47,520 132,480

Prioritize targets based on assumptions of where your new drug will have greatest hypothesized value proposition for patients

CDiff NewProd has greatest value in severe and Prolonged/ complicated hospital C. Diff casesCDiff NewProd has Less value, but still may be viable option if C. Diff case is prolonged, but uncomplicated


Estimate Level of Unmet Need and Make Price AssumptionsSegment target market

Explore opportunity costs & unmet needs by segment

Make pricing assumptions based on estimated NewProdadded potential clinical value

For CDiff NewProd, we assume $3,000 per course of Tx as a fair market price that will max profits (NPVs)

CDiff Expected Severity

AgeProlonged/

UncomplicatedProlonged/

Complicated SevereLow

Potential

0 - 17 yrs Mild Moderate Severe

18 - 64 yrs Mild SevereExtreme Severe

65+ yrs Moderate SevereExtreme Severe

Low Potential

High Potential

Sources: Kyne et al, Health Care Costs and Mortality Associated with Nosocomial Diarrhea Due to C Diff. Clin Inf Dis. 2002;34:346-53., Pharmacision modeling

Hospital Incremental Cost Increase Due to Cdiff

AgeProlonged/



Potential

0 - 17 yrs neg $1,391 $6,567

18 - 64 yrs neg $6,567 $20,459

65+ yrs $1,391 $6,567 $20,459Low

PotentialHigh

Potential


Estimate Market Potential at Launch

Map out size of opportunity by segment

CDiff NewProd Market Potential Map2018 Market Size (000s)

AgeProlonged/



Potential

0 - 17 yrs 5 1 2

18 - 64 yrs 41 10 17

65+ yrs 86 37 41Low

PotentialHigh

Potential

Addressable Annual Target Market Size: 240,000

Highest Potential Annual Target Market Size: 190,000


Estimate Peak Market PenetrationEstimate level of peak use within each segmentFactor in NewProd value prop., current and future competition These assumptions will greatly impact product sales projections!

CDiff NewProd Projected Market Shares*

AgeProlonged/



Potential

0 - 17 yrs 0% 0% 25%

18 - 64 yrs 0% 10% 30%

65+ yrs 10% 25% 35%Low

PotentialHigh

Potential

*Estimates of steady-state market shares after initial launch uptake


Calculate Peak Patient Estimates From AssumptionsProject NewProd peak use

Projected Peak CDiff NewProd Patients* (000s)

AgeProlonged/


Complicated Severe Total

0 - 17 yrs 0 0 1 1

18 - 64 yrs 0 1 5 6

65+ yrs 9 9 14 32

Totals 9 10 20 39*Assume actual peak patients will be higher when accounting for population growth


Estimate Probability of Success

Stage Time (Yrs)Prob of

Success*Pre-Clinical 2 40%Phase I/IIa 2 65%

Phase IIb 2 44%Phase III 3 65%Approval 1 80%

Cum Total 10 6%

*Sources: DiMasi 2001, Kola 2004, Avance* For Immunology drugs in development

Factor in risk and probabilities of successApprovalCommercial success


Development Timeline and CostsCreate general estimates of development costs and timeline basedon historical data and comparable drug development programs

Drug Development Timeline and RisksIND submission File NDA

Pre-Clinical Testing Phase I Phase II Phase III NDA Review Total

Years 1.5 1.5 2 3.5 1.5 8.5

Expected Costs ($ millions) in 2007$ $2 $13.5 $28.3 $81.2 $2.5 $127

Test Population20 to 100

healthy subjects100 to 500

patients1,000 to 5,000

patients n/a n/a

Purpose

Determine safety and

dosage

Evaluate efficacy, optimal

dosing, side effects

Confirm effectiveness,

monitor adverse reactions from long-term use n/a n/a

Sources: Risks in new drug development: Approval success rates for investigational drugs ; Clin Pharmacol Ther 2001;69:297-307.The Drug Discovery, Development and Approval Process , PHRMA websiteR&D Costs and Returns by Therapeutic Category ; Drug Information Journal, Vol 38, 2004.


Make Sales Ramp Up Projections

% Peak Pt Share by year since launch

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Estimate uptake over product life cycle


NewProd Post-Launch R&D and Marketing Expense Assumptions

Yr 2018 ($000s)Post-launch R&D Phase IV (per year costs, run for 2 years) $5,376Marketing

Advertising and Promotion (campaign and collateral material dev) $5,376Advocacy Development $3,360Promotional Medical Education $5,376Continuing Medical Education $3,360Publications (peer reviewed and trade publications) $4,032Sales Training $1,344Public Relations $1,344Conventions $2,016Professional Media (journal ads) $2,688Direct to Consumer Media (print, limited TV and on-line) $0Market Access (Pricing, reimbursement, pharmacoeconomics) $3,360Market Research and competitive intelligence $1,344Sampling program (samples, packaging, shipping) $0Total Marketing Expenses $33,598

Source: Pharmacision LLC, MedThink Communications, Cutting Edge. US Launch: Phase IIIa, Phase IIIB and Launch Year Brand Commercialization

Make “Best Guess” incremental Post-launch costs for:Regulatory commitmentsDriving initial product trial, usage, and brand loyalty


NewProd Post-Launch Sales Force Expense Assumptions

Sales Force Projected CostsRep Capacity

Bed Size # Hospitals Hospitals/Rep Reps required200 - 400 1,000 15 65

401+ 600 10 60Sales Force FTEs Required 125

# Reps needed: 125#MSLs needed: 15

# mgrs needed 20

Cost per rep($2008): $220,000Cost per mgr/MSL($2008): $300,000

Total Sales Force Cost in 2008: $38,079,0852008 FTE Cost (assume costs shared with two other critical care specialty products): $12,693,028

2008 2018Incremental Sales Force Cost $12,693 $17,058Source: Pharmacision estimates

Total Marketing and Sales: $37,693 $50,656Marketing and Sales Cost Budget Growth Rate: 3.00%

Make “Best Guess” incremental Post-launch costs for:Driving initial product trial, usage, and brand loyalty


Combine Mkt Assumptions and Cost Projections in a Modeling Exercise

Create tool to support decision making

“Box” to combine all assumptions and evaluate outputsEstimated Cost of Goods per course of therapyR&D, marketing and sales expensesPricingGrowth curvesPeak salesProfitability and break even pointsNPV (Net Present Value: the value of expected cash flows starting in the present time period through the life of the product once launched)rNPV* (risk adjusted Net Present Value: NPV when you factor in probabilities of success)Licensor/licensee valuations Term sheet evaluationsInvestor returns

“What-if” scenario planning

Starting point for more sophisticated analyses:Real optionsMonte Carlo

*rNPV can serve as a good valuation measure for a drug development project


Pre-Launch Risk Adj Incremental Cash Flow Assumptions and Model2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Year1 Year 2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10

Pre-Clinical Pre-Clinical Phase I/IIa Phase I/IIa Phase IIb Phase IIb Phase III Phase III Phase III NDATransition Rate 100% 40% 100% 65% 100% 44% 100% 100% 65% 80%

G&A and R&D Costs ($000s) $775 $775 $850 $850 $4,386 $4,386 $12,200 $12,200 $12,200 $2,000Discount Rate Small Pharma 18%

Discount Rate Pharma Licensor 11%Probability of Occurring 100% 100% 40% 40% 26% 26% 11% 11% 11% 7%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Patient EstimatesExpected Peak Patient Total Over Product Life Cycle (est. at launch)Population Growth Factor*% Peak Patient Totals (uptake curve)Projected US Patient Totals on NewProd

Revenues

Average Revenue per Course of Therapy $3,000 $3,120 $3,245 $3,375 $3,510 $3,650 $3,796 $3,948 $4,106 $4,270

Annual rate of price increases: 4.00%Projected US Revenues ($000s):

Cost of Goods Sold

Avg Cost per Course of Therapy (COT) $427 $444 $462 $480 $500 $520 $540 $562 $584 $608COGS inflation 4%COGSGross MarginGross Profit($000s):

Operating ExpensesG&A and R&D $775 $775 $850 $850 $4,386 $4,386 $12,200 $12,200 $12,200 $2,000Sales, Marketing Ops, CME $25,328Annual inflation for SM&CME 3% (Increase years 2 - 8, decrease yrs 9 - 15)Total Operating Expenses ($000s) $775 $775 $850 $850 $4,386 $4,386 $12,200 $12,200 $12,200 $27,328

Effective Tax Rate 26%Pre-Tax Earnings ($000s) ($775) ($775) ($850) ($850) ($4,386) ($4,386) ($12,200) ($12,200) ($12,200) ($27,328)Effective Tax Rate 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Probability of Occurring 100% 100% 40% 40% 26% 26% 11% 11% 11% 7%

Risk Adjusted Net Cash Flows ($000s) ($775) ($775) ($340) ($340) ($1,140) ($1,140) ($1,396) ($1,396) ($1,396) ($2,032)


Post-Launch Risk Adj Incremental Cash Flow Assumptions and Model2008 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027Year1 Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 Yr7 Yr8 Yr9 Yr10

Pre-Clinical Launch mid-year Market Market Market Market Market Market Market Market MarketTransition Rate 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

G&A and R&D Costs ($000s) $775Discount Rate Small Pharma 18%

Discount Rate Pharma Licensor 11%Probability of Occurring 100% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%

2008 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027Patient EstimatesExpected Peak Patient Total Over Product Life Cycle (est. at launch) 39,000 39,780 40,576 41,387 42,215 43,059 43,920 44,799 45,695 46,609Population Growth Factor* 2.000%% Peak Patient Totals (uptake curve) 5% 24% 50% 76% 91% 97% 99% 100% 95% 90%Projected US Patient Totals on NewProd 1,773 9,557 20,288 31,444 38,377 41,739 43,485 44,658 43,367 41,934

Revenues

Average Revenue per Course of Therapy $3,000 $4,441 $4,618 $4,803 $4,995 $5,195 $5,403 $5,619 $5,844 $6,077 $6,321

Annual rate of price increases: 4.00%Projected US Revenues ($000s): $7,872 $44,139 $97,444 $157,068 $199,370 $225,510 $244,342 $260,965 $263,558 $265,049

Cost of Goods Sold

Avg Cost per Course of Therapy (COT) $427 $632 $657 $684 $711 $739 $769 $800 $832 $865 $900COGS inflation 4%COGS $1,120 $6,282 $13,870 $22,356 $28,377 $32,098 $34,778 $37,144 $37,513 $37,725Gross Margin 86% 86% 86% 86% 86% 86% 86% 86% 86% 86%Gross Profit($000s): $6,752 $37,856 $83,575 $134,712 $170,993 $193,412 $209,564 $223,821 $226,045 $227,324

Operating ExpensesG&A and R&D $775 $5,376 $5,376Sales, Marketing Ops, CME $50,656 $52,176 $53,741 $55,353 $57,014 $58,725 $60,486 $62,301 $60,432 $58,619Annual inflation for SM&CME 3%Total Operating Expenses ($000s) $775 $56,032 $57,552 $53,741 $55,353 $57,014 $58,725 $60,486 $62,301 $60,432 $58,619

Effective Tax Rate 26%Pre-Tax Earnings ($000s) ($775) ($49,280) ($19,695) $29,833 $79,359 $113,979 $134,688 $149,078 $161,520 $165,613 $168,705Effective Tax Rate 0% 0% 0% 26% 26% 26% 26% 26% 26% 26% 26%Probability of Occurring 100% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%

Risk Adjusted Net Cash Flows ($000s) ($775) ($2,932) ($1,172) $1,313 $3,493 $5,017 $5,929 $6,563 $7,110 $7,290 $7,427


Project Cash Flows & NPVs Assuming Outlicensing at Phase IIbLicense deal at start of phase IIb Milestones/Upfronts

Phase I Phase II Phase III NDA Approval RoyaltiesDCF $5,000 $5,000 $8,000 $10,000 6.0%

2010 2011 2012 2013 2014 2015 2016 2017 2018Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 Yr1

Phase Phase I/IIa Phase I/IIa Phase IIb Phase IIb Phase III Phase III Phase III NDA LaunchTransition probability 100% 44% 100% 100% 65% 80% 100%Probability 100% 100% 44% 44% 44% 29% 23%Revenues ($000s) $0 $0 $0 $0 $0 $0 $7,872

G&A and R&D Expenses $4,386 $4,386 $12,200 $12,200 $12,200 $2,000 $5,376COGS $0 $0 $0 $0 $0 $0 $1,120Marketing and Sales $0 $0 $0 $0 $0 $25,328 $50,656Milestones $5,000 $5,000 $8,000 $10,000Royalties $472Expenses (for Licensee) $9,386 $4,386 $17,200 $12,200 $12,200 $35,328 $67,625

PHARMA LICENSEEEffective Tax Rate 0% 0% 0% 0% 0% 0% 0%Risk adjusted CF ($9,386) ($4,386) ($7,568) ($5,368) ($5,368) ($10,104) ($13,671)Discount 100% 90% 81% 73% 66% 59% 53%Risk adjusted net DCF ($9,386) ($3,952) ($6,142) ($3,925) ($3,536) ($5,996) ($7,309)

rNPV $17,460

BIO-TECEffective Tax Rate 26% 0% 26% 0% 0% 26% 26%Risk Adjusted CF $5,000 $0 $2,200 $0 $0 $2,288 $2,396Discount 100% 90% 81% 73% 66% 59% 53%Risk Adjusted DCF $3,700 $0 $1,321 $0 $0 $1,005 $948

rNPV in 2012 $14,071 Value of license for US rights

Value share 45%Total Milestone and Royalty Payments ($000s): $202,029 $4

Initial Valuation Assuming Outlicensing at start of Phase I/Iia2008 2009 2010 2011 2012

Cash FlowsProb 100% 100% 40% 40% 26%rCFs ($775) ($775) ($340) ($340) $3,658Discount Rate: 100% 85% 72% 61% 52%PV Cash Flows ($775) ($657) ($244) ($207) $1,887Total Value rNPV ($000s) $4

(18% discount rate used)

(11% discount rate used)

Predict licensing terms based on comparable recent deal termsConduct valuations at time of expected outlicensing and for the present time periodValuations support decision-makingNote: Special thanks to Avance for sharing licensing model (www.avance.ch)


Evaluate Valuations Based on Different AssumptionsFor CDiff NewProd Case Study (assuming $3k/course of therapy leads to product adoption):

Don’t invest if you think market will flatten out in next few yearsStill risky investment if you think market will double by launch, all else equalLikely to need prolonged market growth to make investment attractive Need market research to learn more about expectations for future hospital CDiff growth rates before making go/no go decisions toinvest or continue development

Valuation Scenarios

Low Market Growth Moderate Market Growth Continuation of High Recent Market Growth Total Hospital C Diff Mkt at Launch: 500,000 Total Hospital C Diff Mkt at Launch: 600,000 Total Hospital C Diff Mkt at Launch: 700,000

Risk Adjusted NPV: ($1,020,000) Risk Adjusted NPV: $4,000 Risk Adjusted NPV: $650,000Potential Licensing Agreement Potential Licensing Agreement Potential Licensing AgreementLicensor % of CF Value (Goal > 40%): 45% Licensor % of CF Value (Goal > 40%): 45% Licensor % of CF Value (Goal > 40%): 40%Milestone Payments ($MM): Milestone Payments ($MM): Milestone Payments ($MM):

Phase II $2,000 Phase II $5,000 Phase II $5,000Phase III $2,000 Phase III $5,000 Phase III $7,000

NDA $5,000 NDA $8,000 NDA $8,000Approval $10,000 Approval $10,000 Approval $15,000

Royalties: 3% Royalties: 6% Royalties: 8%Investors will not realize required rate of return in this scenario

NOTE: Estimated 26% Probability of reaching phase IIb and outlicense stage where investors realize any returnExit Valuation estimates represents the present value of expected future stream of revenues to founder and investors due to milestone and royalty payments. Licensing revenues are not guaranteed and are based on succesful licensure and commercial success once product is launchedModel assumes that company will have a lean organizational structure and effectively outsource key clinical development functionsTimeline should be considered realistic, but aggressiveAssumes company will be successful negotiating a licensing deal where company will realize >40% of expected value from future cash flows

Scenarios For Different Market Growth Levels- Assume project successful in clinical trials, outlicensing occurs, $3000 pricing, and sales projections reached


Explore Opportunity Further with Primary Market Research

Test assumptions with advisory board

Primary market researchConduct qualitative interviews (conversations, NOT surveys)“Gut check” and test assumptions with wider range of customers (i.e. providers, patients, payors)Answer targeted unanswered questions Discover opportunities not initially realized or consideredExplore pitfalls and challenges

Combine Primary research + secondary research to reassess opportunity

Refine commercialization roadmap and decision criteria


Key Take-AwaysIt’s never too early to evaluate the future commercial potential for compounds in development.Market models are not crystal balls and forecasts are best guesses.

However, they provide a useful tool supporting decision making and help guide product development decisions.

The greatest value in process is learning how market dynamics, predicted product adoption, and expectations for licensing terms will impact cash flows and profitability if compounds are successfully outlicensed, approved by the FDA, and launched.Working through this process will highlight the commercially important factors that you already know about your target markets and compounds indevelopment and alert you to those that you need to know.

May reduce future market research costsFocus projects to answer “need to know unanswered questions” that drive product sales and cash flows

May help guide clinical trial design to address commercial needsSelect end points that lead to commercially compelling product labels if products are FDA approved and launched


Pharmacision LLC Service OfferingsStrategic Planning

Business strategy and plan development In/out-licensing commercial due diligence assessments/preparationNew product planningNew market and competitive landscape assessmentsMarket modeling Demand forecasting and financial NPV analyses

Marketing InitiativesBrand strategy and marketing plan developmentPositioning and message developmentTargeting strategy developmentProfessional and patient advertising campaign development Marketing and communication material development


Contact Information

Pharmacision LLCThomas Marten

President

(734)[email protected]