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Valuation & Negotiation in Life SciencesValuation & Negotiation in Life Sciences
May 2015 | Palermo, Fit for Health 2.0May 2015 | Palermo, Fit for Health 2.0
www.venturevaluation.com
1.Overview of product valuation
2.rNPV product valuation
3.Company valuation
2
3.Company valuation
4.Deal structure
5.Case study
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
www.venturevaluation.com
Mission Independent assessment and valuation of technology driven companies / products in growth industries
Information services / Life Sciences DatabasesBiotechgate.com
Venture Valuation
- Experts Finance / High-tech industries
- Not a venture capitalist
- International experience
- Track record of over 250 valued companies
- Clients such as NVF, Fraunhofer Gesellschaft, European Investment Bank; VCs; Arpida/Evolva
www.venturevaluation.com
1.Overview of product valuation
2.rNPV product valuation
3.Company valuation
4
3.Company valuation
4.Deal structure / Negotiation
5.Case study
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
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Valuation of a product• Licensing deal
• Strategic development decision
• Expenses included are only those relevant to the product
• Product not industry comparables required
Product Valuation
5
• Product not industry comparables required
• Management risks not taken into account
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
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Input• Development cost and timelines
• Production / Marketing cost
• Market / expected sales
• Success rate based on historical data
Introduction
6
• Success rate based on historical data
Output• Expected annual discounted cash flows
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE| CASE STUDY
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Valuation components
Cash
Flo
w
Time
7
Development MarketPhase Phase
• Determine timelines and cash flows in each phase
• Develop solid assumptions for all key variables
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
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rNPV Valuation
1. Development phase => investmentProduct Risk (r) => success rate
2. Market phase => revenuesPatent expiry => end of revenues
(often no terminal value)
8
Development MarketPhase Phase
Ca
sh
Flo
w
Time
3. Discount => non-specific risk (General Risk)
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Risk-adjusted NPV
Risk adjusted Net Present Value
• Also called eNPV
• Method of choice for Big Pharma
9
Benefits:
• Helps understand accurate value and maximises deal options
• Adjusts value for Development Risk and Discount rate
⇒ Risk is split in two components
1) Product Risk (attrition rate)
2) General Risk (discount rate)
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
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1.Overview of product valuation
2.rNPV product valuation
3.Company valuation
10
3.Company valuation
4.Deal structure / Negotiation
5.Case study
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
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Five Step Process
Determine Cash Flows in Development Phase
Determine Cash Flows in Market Phase
1Devel.
2Market
3
11
Discount with Discount rate
Adjust for Risk
Sum cash flows$$$$$5
3Discount rate
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
4Risk
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rNPV – Example
- Phase 1, single product company
- 20% discount rate
- 11% Probability of success (p1 to market)
⇒CF: USD 2’269m
⇒DCF: USD 127m
12
⇒DCF: USD 127m
⇒ rNPV: USD 8m
-50000,0
-
50000,0
100000,0
150000,0
200000,0
250000,0
300000,0
350000,0
400000,0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Cash Flow
Discounted CF
rNPV
-10000,0
-5000,0
-
5000,0
10000,0
15000,0
20000,0
25000,0
30000,0
35000,0
40000,0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Discounted CF
rNPV
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Development Phase
• Determine cost and duration of clinical trials• Geographic location
• Number of patients and centres
• Type of treatment
• Manufacturing
1Devel.
2Market
3
13
• Manufacturing
• Regulatory affairs
• Long term animal tox. studies
• Misc. administration
$$$$$5
3Discount rate
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
4Risk
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Example Trial Inputs
1Devel.
2Market
3
Phase I Phase II Phase III Approval
Time (Years) 1 2 3 1
Number of Patients ~10 ~200 ~3000
Cost per patient 7 7 7
Total Patient costs 70 1400 21000
In US$ 000’s
14
$$$$$5
3Discount rate
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
Total Patient costs 70 1400 21000
Total patient costs as percentage of total costs* 30% 30% 30%
Total non-patient costs 163 3267 49000
Total costs 233 4667 70000 2500
Total Development Costs (unadjusted) 77400
* To factor in other cost including animal studies, manufacturing, administration etc.
4Risk
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Cost and Lead Times
1Devel.
2Market
3
15
Source: Tufts Center, 2014
$$$$$5
3Discount rate
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
4Risk
R&D costs per Phase
15.223.5
86.3
140
0
40
80
120
160
Phase I Phase II Phase III Post-
approval
Co
st
(US
$ m
illio
ns)
Source: Business Insights
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Market Phase
1Devel.
2Market
3
Develop assumptions to predict the
future market
Methods used:
16
$$$$$5
3Discount rate
Methods used:
• Bottom-up approach
- Based on primary market data
• Top-down approach
- based on comparable products
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
4Risk
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Product Life Cycle
1Devel.
3
2Market
60%
80%
100%
120%
"Classic" - Bauer and Fischer
"Pioneer" - Bauer and Fischer
Time to Peak sales Time at Peak sales Decay
17
$$$$$5
3Discount rate
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
4Risk
0%
20%
40%
1 2 3 4 5 6 7 8 9 101112131415161718192021
Fischer
Tufts Center for Drug Development
A. Define Growth Phase (4-8 years)
B. Define Mature Phase (1-4 years)
C. Define Decay Phase (7-10 years)
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Product Life Cycle
1Devel.
3
2Market
Which variables affect the Life Cycle?
1. Me-too drug or a pioneer
2. Competitive landscape
18
$$$$$5
3Discount rate
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
4Risk
2. Competitive landscape
3. Physician response
4. Ease of reaching physicians
5. Need for physician training
6. Payor reimbursement
7. Pharmacoeconomic reimbursement
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Bottom up approach
1Devel.
2Market
3
Primary Market Research
Physicians:
• What are the unmet medical needs
• What are the attitudes towards current therapies
Patients:
• How do the patients view the current treatments
19
$$$$$5
3Discount rate
• How do the patients view the current treatments
Product:
• What therapeutic position is the drug likely to achieve
• (1st line, 2nd line; EU, US)
• Develop a pricing model
Product life cycle and Market share are obtained from top-down methods or industry accepted values
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
4Risk
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1Devel.
2Market
3
Bottom up approachSales ForecastWestern EU 2018 2019
Population (000's) 300'000 306'000Incidence rate (%) 0.020% 60.000 61.200Diagnosed population 70% 42.000 42.840Population treated with drugs 80% 33.600 34.272Compliance rate 90% 30.240 30.845Addressable population 30.240 30.845Market penetration rate (%) 18% 34%Patient population 5.443 10.487
Market share 12%Price (EUR) 2000
20
$$$$$5
3Discount rate
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
4Risk
Price (EUR) 2000Sales Western EU (EUR 000's) 1'306 2'517
USA Sales 2'540 4'798
Japan Sales 392 755
Rest of the World (RoW) Sales 1'270 2'399
Total sales (EUR 000's) 5'508 10'469
Peak Sales Value
USD 1bn => USD 8m
USD 0.7bn => USD 3m
USD 2bn => USD 25m
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Discount rate
Used discount rate in rNPV:
• Early stage 12% - 28%
• Mid stage 10% - 22%
• Late stage 9% - 20%
1Devel.
2Market
3
21
• Late stage 9% - 20%
Source. www.biostrat.dk
Cost of equity and non-development associated risks.
$$$$$5
3Discount rate
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
4Risk
20% => USD 8m
25% => USD 2m
15% => USD 21m
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1Devel.
2Market
3
Adjust for risk (I)
22
$$$$$5
3Discount rate
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
4Risk
Source: Nature Biotechnology; Clinical development success rates for investigational drugs; January 2014
LOA: Likelihood of approval
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1Devel.
2Market
3
Adjust for risk (II)
23
$$$$$5
3Discount rate
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
4Risk
Source: Nature Biotechnology; Clinical development success rates for investigational drugs; January 2014
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Adjust for Risk (III)
2Market
3
1Devel.
The relation between Risk and Value
• Completion of a phase Direct value increase
Cumulative Sucess rate: 11%m USD
672
24OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
$$$$$5
3Discount rate
4Risk
Va
lue
Phase I Phase II NDA/BLAPhase III Approval/Market
64%
86%
61%
32%
672
477
125
188
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• Sum discounted, risk-adjusted yearly cash flows to a single value
1Devel.
2Market
3
Sum Cash Flows
YEAR 2017 2018 2019 2020 2021
Phase P III Approval Market Market Market
DEVELOPMENT COSTS -50'000 -2'500
SALES 50'000 100'000 250000-Discounts, Returns,
Allowances 0% - - - - -
25
$$$$$5
3Discount rate
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
NET REVENUES (USD 000‘s) - - 50'000 100'000 250'000
Total Product Costs - - -10'000 -20'000 -50'000
EBIT -50'000 -2'500 40'000 80'000 300'000
Tax 0% - - - -
FREE CASH FLOW -50'000 -2'500 40'000 80'000 300'000
DISCOUNTED CASH
FLOWS-43'478 -1'890 26'301 45'740 149'153
Stage Phase III Approval Market Market
Cumulative sucess rate* 100% 75% 66% 66% 66%
RISK ADJUSTED CASH FLOWS -43'478 -1‚418 17’359 30’188 98’441
TOTAL PRODUCT VALUE 125’548
*Success rate Phase I Phase II Phase III Approval
Per phase 100% 100% 75% 88%
Cumulative 100% 100% 75% 66%
4Risk
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1.Overview of product valuation
2.rNPV product valuation
3.Company valuation
26
3.Company valuation
4.Deal Structure / Negotiation
5.Case study
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
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Example
Product 1
Product 2
Product 3
+
+=
27
Early stage companySum-of parts valuationTotal value of project
Platform
Costs
+
+
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
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• Use Independent and unbiased models
• Provide simple and clear valuations to understand costs, risks and revenues
• Product valuations help to understand
Summary
28
• Product valuations help to understand investment, risk and return
• The value of the product has to be sharedbetween licensee and licensor.
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
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1.Overview of product valuation
2.rNPV product valuation
3.Company valuation
29
4.Deal structure / Negotiation
5.Case study
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
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AIM: to develop a fair deal structure
• Product value has to be shared
• The licensee (Pharma) is compensated for taking on risk
• The licensor (Biotech) receives payments and shares
Structuring the deal
rNPV
Pharma
Biotech?
30
• The licensor (Biotech) receives payments and shares some of the risk and rewards
• The model inputs and assumptions are simple, understandable, and transparent
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
The rNPV valuation can help to understand the deal terms
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Determine Product Value
Determine handover time point
$$$$$1
2Handover
3
Deal structuring process
31
Determine preferred Milestones and Royalties3
Deal terms
4Deal terms
Negotiate terms
OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
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In USD m
Payment of
rNPV*(or up-front)
• Front/ back-loading a deal can heavily influence deal structure
• Deal terms dependent on needs of both parties
Timing of payments
32
In USD m of (or up-front)
Up-front 1 m 1 m
Finish Pre-clinical 1 m 0.44 m
Finish Phase I 1 m 70’000
Finish Phase II 1 m 17’000
Finish Phase III 1 m 8’000
Approval / Enter market 1 m 5’000
Royalties 1% 0.70 m
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* Time value of money and Risk adjusted
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• Two very different deal structures can look identical
Timing of payments (II)
• Non-discounted, non-risk adjusted
rNPV
Cash Flow
Pharma
Biotech
33OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
• 25 million upfront
• 300 million milestones
• 5% royalties
• 5 million upfront
• 50 million milestones
• 12% royalties
1
2
rNPV
Pharma
Biotech
rNPV
Pharma
Biotech
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Conclusion
• Valuation is key in the development of biotechs
• Traditional methods are unsuited
• Value = future risk & potential
34
• Value = future risk & potential
• Valuation is not an exact science
• Its all about the assumptions
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Case Study
1) Case study reading time2) Group work
35OVERVIEW | rNPV PRODUCT VALUATION | COMPANY VALUATION | DEAL STRUCTURE | CASE STUDY
2) Group work3) Presentation and wrap up
A) Determine the current value of XC-71F.
B) Would you accept the deal terms suggested by the biotech company?
C) Develop a deal scenario that is fair for both parties.
D) Present the results in a short presentation, justifying all major assumptions.
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Thank you for listening!
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