Professional Documents
Culture Documents
Valuation
&
Deal
Analysis
Theory & Applications
in the Pharmaceutical
Industry
March 2015
1
Agenda
Introduction
Basic Understanding
Product Valuation
2
Speaker’s Background
Education
◦ Master in Economics (Finance & Marketing), University of Fribourg (Switzerland), 1998.
◦ Chartered Financial Analyst, CFA Institute, Charlottesville (USA), 2003.
◦ Certificate in Pharmaceutical Economics & Policy, University of Lausanne, IEMS, 2008.
◦ Health Technology Assessments & Economic Valuations, SDA Bocconi, Milan, Italy, 2012.
◦ Diploma of Advanced Studies in Digital Communication, Web Expertise & Social Media,
University of Geneva, 2015 (ongoing).
Professional experience
◦ More than 10 years professional experience in Banking Industry (Equity Analyst & Fund
Manager).
◦ Senior Business Analyst in the Pharma Industry since 2010, responsible for Project
Valuations & Health Economics.
◦ Various lectures
◦ UNIL / IEMS - Financial Analysis of Pharma Companies;
◦ UNIL / HEC - Financial Analysis for CFA Research Challenge teams;
◦ University of Genova (Italy) – Sales Forecasting Techniques;
◦ HEG Geneva – Communication Strategies of Pharmaceutical Companies.
Contact Details
◦ Email: pascale.boyerbarresi@debiopharm.com
◦ Linkedin: http://www.linkedin.com/pub/pascale-boyer-barresi-cfa/0/674/a95
3
Your Expectations?
4
Introduction
5
Agenda
Introduction
Basic Understanding
Product Valuation
6
Introduction
Our goals for today… you will go home with:
◦ Background information on the pharma industry
◦ Basic knowledge in finance (focus on time value of money)
◦ Valuation tools
◦ Ability to value any product (from chewing-gum to drug and medical device)
◦ An understanding of a valuation method: rNPV (risk-adjusted Net Present
Value)
◦ Some considerations on how to manage a product portfolio
◦ An overview of players in start-up fundraising
◦ A check-list for project valuation
You will have the view of a CEO or CFO working for a start-up.
7
Drug Industry Landscape
8
Drug Industry Landscape
Some basic charts and stats about the pharmaceutical industry:
• Rx drug sales
• Key players
• Key therapeutic areas
• 2014 drug approvals
• R&D process
• R&D spending
• R&D efficiency
9
Worldwide Rx Drug Sales
10
Key Players (2020)
11
Key Therapeutic Areas
Sales 2013 Sales 2020e Growth Market Share Market Share
Therapy Area
(USDb) (USDb) (CAGR %) 2013 2020e
Oncology 72.8 153.1 11.2% 9.7% 14.4%
Diabetes 38.4 68.9 8.7% 5.1% 6.5%
Rheumatology 44.9 57.1 3.5% 6.0% 5.4%
Virology 27.8 45.6 7.3% 3.7% 4.3%
Vaccines 25.6 41.3 7.1% 3.4% 3.9%
Respiratory 32.6 35.9 1.4% 4.3% 3.4%
Sensory Organs 17.5 28.2 7.1% 2.3% 2.7%
Hypertension 33.7 26.1 -3.6% 4.5% 2.4%
Multiple Sclerosis 16.2 21.8 4.3% 2.2% 2.0%
Dermatology 13.5 19.2 5.1% 1.8% 1.8%
Blood Disorders 8.9 17.8 10.4% 1.2% 1.7%
Infectious Diseases 14.6 17.7 2.8% 1.9% 1.7%
Source: Evaluate Pharma 2014.
12
2014 FDA drug approvals
Source: http://www.nature.com/nrd/journal/v14/n2/full/nrd4545.html
13
2014 FDA drug approvals
Source: http://www.nature.com/nrd/journal/v14/n2/full/nrd4545.html
14
R&D Process
How do we get there?
16
Down trend in R&D efficiency
a | The number of new drugs approved by
the US Food and Drug Administration
(FDA) per billion US dollars (inflation-
adjusted) spent on research and
development (R&D) has halved roughly
every 9 years.
17
Time Value of Money Basics
18
Time Value of Money
The time value of money impacts business finance, consumer finance,
and government finance.
Time value of money results from the concept of interest.
What we will cover here:
- simple interest - present value
- compounding interest - present value table
- compounding formula
- future value table
19
Simple Interest
Simple interest is a topic that most people cover in elementary school.
Interest may be thought of as rent paid on borrowed money.
Simple interest is calculated only on the beginning principal (meaning
the interest amount doesn’t change).
Continuing to receive 5% interest on the original $100 amount, over five
years the growth of the original investment would look like
Year Principal Interest (5%) Total amount
1 100 5 105
2 105 5 110
3 110 5 115
4 115 5 120
5 120 5 125
20
Compound Interest
With compound interest, interest is calculated not only on the
beginning interest, but on any interest accumulated in the meantime.
Cumulated
Year Principal Interest (5%)
amount
1 100.00 5.00 105.00
2 105.00 5.25 110.25
3 110.25 5.50 115.75
4 115.75 5.75 121.50
5 121.50 6.00 127.50
6 127.50 6.25 133.75
7 133.75 6.50 140.25
8 140.25 6.75 147.00
9 147.00 7.00 154.00
10 154.00 7.25 161.25
21
Simple vs. Compound
Simple Interest vs. Compound Interest
300
250
200
Total Amount
150
100
50
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Year
When you compare the growth of simple and compound interest, investments with simple interest grow in a linear
fashion and compound interest in a geometric one.
22
Compound Interest Formula
𝑷𝑷𝒏𝒏 = 𝑷𝑷𝟎𝟎 ∗ (𝟏𝟏 + 𝒊𝒊)𝒏𝒏
𝑃𝑃𝑛𝑛 = End value after n time periods 𝑃𝑃0 = Beginning value i = interest rate n = number of years
23
Compound Interest Example
𝑷𝑷𝒏𝒏 = 𝑷𝑷𝟎𝟎 ∗ (𝟏𝟏 + 𝒊𝒊)𝒏𝒏
𝑷𝑷𝒏𝒏 = 𝟏𝟏𝟏𝟏𝟏𝟏 ∗ (𝟏𝟏 + 𝟎𝟎. 𝟎𝟎𝟎𝟎)𝟏𝟏𝟏𝟏 = 162.89
𝑃𝑃𝑛𝑛 = End value after n time periods 𝑃𝑃0 = Beginning value i = interest rate n = number of years
24
Why the results are not the
same?
The formula is based on continuous compounding, meaning that each
day the calculation is done.
In the table, the calculation is done once a year yielding a smaller
amount.
25
Future Value Tables
How to use them?
𝑷𝑷𝒏𝒏 = 𝑷𝑷𝟎𝟎 ∗ (𝟏𝟏 + 𝒊𝒊)𝒏𝒏 Future Value Factor
n
i
26
Future Value Exercises
Use the formula Use the Future Value Table
What is the future value of USD
𝑷𝑷𝒏𝒏 = 𝑷𝑷𝟎𝟎 ∗ (𝟏𝟏 + 𝒊𝒊)𝒏𝒏 1600 in 7 years with an interest
rate of 6%?
What is the future value of USD ◦ 2406
600 in 5 years with an interest ◦ 3025
rate of 3%? ◦ 1530
◦ 696
◦ 730
◦ 540
Let’s check!
27
Present Value
Present value is simply the reciprocal of compound interest.
Another way to think of present value is to adopt a stance out on the
time line in the future and look back toward time 0 to see what was the
beginning amount.
28
Present Value Formula
𝑷𝑷𝒏𝒏
𝑷𝑷𝟎𝟎 =
(𝟏𝟏 + 𝒊𝒊)𝒏𝒏
𝑃𝑃𝑛𝑛 = End value after n time periods 𝑃𝑃0 = Beginning value i = interest rate n = number of years
29
Present Value Tables
How to use them?
𝟏𝟏
𝑷𝑷𝟎𝟎 = 𝑷𝑷𝒏𝒏 ∗ Present Value Factor
(𝟏𝟏 + 𝒊𝒊)𝒏𝒏
30
Present Value Table
Present Value Factors are all less than one.
Therefore, when multiplying a future value by these factors, the future
value is discounted down to present value.
31
Present Value Exercises
Use the formula Use the Present Value Table
What is the present value of USD
𝑷𝑷𝒏𝒏 200’000 where n is 3 years and
𝑷𝑷𝟎𝟎 =
(𝟏𝟏 + 𝒊𝒊)𝒏𝒏 the interest rate is 6%?
◦ 150’872
◦ 195’637
What is the present value of USD
◦ 167’920
7500 where n is 7 years and the
interest rate is 2%?
◦ 7625 Let’s check!
◦ 6529
◦ 6551
32
Agenda
Introduction
Basic Understanding
Product Valuation
33
Drug Characteristics
34
Drug Characteristics
Topics covered in this section:
◦ Process overview
◦ Development costs
◦ Drivers of R&D costs
◦ Trends in R&D costs
◦ Success rates, timing
◦ Market access issues
◦ Execution
35
Overview
To estimate the total cost per successful new drug emerging from R&D
pipelines accurately, both
◦ the costs of lines of research that ultimately fail and
◦ the cost of capital must be included.
Out-of pocket costs are merely one part of the total cost.
Capitalized costs are real costs as investors require a return that reflects
alternative potential uses of their investment. These are the
opportunity costs, i.e. the expense of investing in drug research rather
than alternative types of investment.
36
Cumulative probability to reach the
market when you start
In Target-to-hit: 4.1%
In Phase I: 11.7%
Overview
In Phase II: 21.7%
In Phase III: 63.7%
Clinical stages
Number of products
needed in R&D to have 1
product on the market
Duration of each
phase
Source: The R&D Cost of a New Medicine, J. Mestre-Ferrandiz, Office of Health Economics, December 2012.
37
Focus - Capitalization
The cost of capitalizing R&D expenditures has to be included in the
calculation because it is an opportunity cost as we said earlier.
Capitalized costs are real costs as investors require a return that reflects
alternative potential uses of their investment.
The cost of capital is used in the calculation.
It should be measured as the expected return that is foregone, i.e. the
return that would be expected from investing in an equally risky
portfolio of other investments.
Several studies estimated it between 11 and 14%.
NB: The cost of capital for biotechnology companies, heavily focused on discovery and early
stage development, has in the past been observed to be higher than the cost of capital for more
traditional pharmaceutical companies, which have projects through all stages of R&D up to
regulatory approval.
38
How to calculate capitalized
R&D?
We will use the concept we learnt
before: Present Value & Future
Value
39
Drivers of R&D Costs
Out-of-Pocket
Costs
But there are differences due to:
◦ Therapy areas
Success Rates Average Cost of a ◦ Compound origin (in-house vs.
New Molecular in-licensed)
Development Entity ◦ Firm size (big vs. small)
Times ◦ Small molecules vs. biologics
Cost of Capital
Source: The R&D Cost of a New Medicine, J. Mestre-Ferrandiz, Office of Health Economics, December 2012.
40
Therapeutic Areas &
Compound Origin
Phase transition probabilities and clinical approval success probabilities by
source of compound, for compounds first tested in humans from 1993 to 2004
Cost per
Therapeutic NME
Area (USDm)
2011 Cumulative
probability
Respiratory 1'457 to reach the
Cancer 1'339 market
Neurological 1'306
Musculoskeletal 1'216
Blood disorders 1'164
Cardiovascular 1'140
Dermatological 870
Genito-urinary 816
HIV/AIDS 694
Anti-parasitic 583
Source: The R&D Cost of a New Medicine, J. Mestre-Ferrandiz, Office of Health Economics, December 2012.
41
Firm Size & Molecule Type
Firm Size:
◦ An important variable explored in the literature is the effect of firm size on
R&D productivity and whether R&D costs per approved drug vary with firm
size.
◦ Results of research on the impact of firm size on R&D productivity and R&D
costs are mixed. It remains unclear, however, whether R&D productivity is
greater for smaller companies than for traditional “big pharma”.
Molecule Type:
◦ Studies found generally that the overall clinical success rate for biotech
products is higher than for traditional pharmaceutical products (30.2% vs.
21.5%).
◦ Total clinical plus approval time is 8% longer for biopharmaceuticals than for
traditional pharmaceuticals, with nearly all the difference being in Phase I.
◦ Comparisons between biologics and other pharmaceuticals should be treated
with caution because the sample size for biologics still is small.
42
Trends in R&D Costs over
Time
Source: The R&D Cost of a New Medicine, J. Mestre-Ferrandiz, Office of Health Economics, December 2012.
43
Success Rates
Not all the projects started in discovery end up on the market.
Remember this figure shown at the beginning of the presentation?
44
Success Rates
Success rates differ by therapeutic area. Here are some benchmarks:
45
Study from Nature
Biotechnology (January 2014)
A wide study has been done recently and published in Nature
Biotechnology*. It was included in pre-readings.
Key Points:
◦ More relevant study (including all types of companies)
◦ More recent (time frame: 2003-2011)
◦ Inclusion of all development paths (example: if an antibody is developed
for 4 indications and only 1 reach the market, in some studies, the success
rate is 100%, in reality it is a 25% success rate)
◦ Main statistic: 10.4% of all indication development paths in phase 1 were
approved by the FDA (n = 5820)
* Nature Biotechnology, January 2014, Volume 32, Number 1, «Clinical development success rates for investigational drugs», M. Hay, D.
Thomas, J. Craighead, C. economides, J. Rosenthal.
46
Study from Nature
Biotechnology (January 2014)
47
48
Market Access
Clinical trials
Filing
Approval
Market access
Market access means negotiation with payers (pricing authorities
(Europe) or health plans or governmental organizations (USA)).
Payer evidence ≠ Regulatory evidence
Health system, payer requirements and drug pricing are different in
each country.
49
Market Access
50
Market Access Stakeholders
51
Market Access Planning
52
Execution
The characteristics of a drug (low success rates, long development
times, challenging commercialization,…) require anticipation and
strategic thinking.
It is important to take a external view
(why would I purchase this idea/product?). Reimbursement
Clinical risks
Key questions: (enrollment, drug
Challenges in availability,…)
patient practice
Regulatory risks • How the disease is
treated
• Every aspect of
Understand all the therapy delivery
possible outcomes • Specific need of
Imagine the needs • Best case patient population
• Of the patient • Worst case • Referral patterns
• Of the patient’s
family
• Of the insurance
company
• Of the doctor &
doctor’s office staff
53
Diagnostics Overview
54
Diagnostics
Medical Devices
Molecular
IVD – In Vitro
Medicine - In Vivo
Diagnostics
Diagnostics
55
Diagnostics
In this part of the lecture, we will focus only on IVD (in-vitro diagnostics)
and its applications in Personalized Medicine.
56
Personalized Medicine
Source: http://www.pfizer.ie/personalized_med.cfm
Have a look at this video - http://www.pfizer.ie/personal_med_video.cfm
57
Personalized Medicine
Source: http://www.pfizer.ie/personalized_med.cfm
58
Market Size of IVD
Source: Roche.
59
IVD Development Path
60
IVD Development Costs &
Success Rates
Probability Estimated
Cumulated Estimated
Stage to do this Duration
Probability Costs (USD)
stage (years)
Analytical validation 100% 100.0% 2 600'000
Clinical validation 90% 90.0% 1 1'000'000
Regulatory approval 40% 36.0% 1 500'000
Clinical utility 90% 32.4% 2 6'000'000
Final assay 50% 16.2% 1 100'000
Market 90% 14.6% 0 1'000'000
Total 7 -9'200'000
Source: internal estimates
61
What is the Biggest Challenge
in Development?
The biggest challenge in completing development of a new medical device:
Other 6.5%
UI Development 3.2%
62
What is the Most Critical
Success Factor?
The most critical success factor in design:
Other 4.2%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%
63
Opportunities & Challenges
Opportunities: Challenges:
• Aging populations • Regulatory requirements
• Increasing incidence of diseases • Increasing buying power
• Focus to disease prevention • Switching costs as product
• Increasing insured population lifecycles are shorter than in the
(USA) drug industry
• Increased demand for devices • Sensitivity to buying patterns &
with connectivity solutions (point formulary listings
of care), remote monitoring &
data management Trends:
• Next Generation Sequencing (all • Customer care
in one test) – Personalized • Continuous improvements
medicine • Automation
• Emerging countries • Increasing competition, even from
smaller companies
64
Regulatory Pathways
Compare & Contrast… between
• Drugs
• Medical Devices
• IVD
65
Regulatory Pathway - Drugs
Source: https://regulatory.usc.edu/consulting/resources/drugs/
66
Regulatory Pathway –
Medical Devices
Source: https://regulatory.usc.edu/consulting/resources/medical-devices/
67
Regulatory Pathway – IVD
Source: https://regulatory.usc.edu/consulting/resources/in-vitro-diagnostics/
68
Valuation Preparation
69
Valuation Preparation
Topics covered in this section:
◦ Commercial & Marketing Phase
◦ Sales Forecasts
70
Commercial & Marketing
Phase
Once approved by regulatory authorities and reimbursed by payers,
patients can start drug treatment and pharma companies will generate
sales.
Marketing basics:
◦ Building and maintaining a strong, differentiated brand
◦ Solidifying and leveraging physician relationships
◦ Increasing customer engagement, responsiveness, and loyalty
◦ Communicating quality and value
◦ Improving the patient experience
71
Sales Forecasts
Before reaching the market and generating sales, the pharma company
has to know early whether it is worth developing the project and what
is the peak sales potential.
Sales forecasting is an unavoidable step.
72
Sales Forecasts
What is forecasting?
◦ a planning tool
◦ relying on data from the past, present and trend analysis.
◦ start with assumptions based on experience, knowledge, judgment
◦ build estimates
Methodology
Presentation
•Everybody in the selection •Simulations
organization should •Scenarii
commit •Data transparency •Garbage in garbage out
•Sensitivity analysis
•Excel is sufficient for •Use ranges or scenarios
modelling purposes •Break-even analysis
•Keep asking yourself
•Adapt to product about the impact on
evolution decision making
Results analysis &
Need definition
Scenario definition
73
Sales Forecasts
Market
Sales
Product
Epidemiology Forecasts
Patient population Conversion
Competitive landscape
(diagnosed, treatable,
eligible,…) Market share estimation Dosing
Market access (insurance Adoption Compliance
typology by patients) Cannibalization Pricing (according to
Patient awareness product positioning)
Benchmark pricing
74
Sales Forecasts - Market
75
Sales Forecasts - Product
76
Sales Forecasts - Conversion
77
Market Share Estimation
Limited data available for benchmarking…
Order of entry
1 2 3 4 5 6 7 8 9 10
1 100%
2 58% 42%
3 43% 31% 26%
Number 4 35% 25% 21% 19%
5 30% 22% 18% 16% 14%
of 6 26% 19% 16% 14% 13% 12%
products 7 24% 17% 14% 13% 11% 11% 10%
8 22% 16% 13% 12% 10% 10% 9% 8%
9 20% 15% 12% 11% 10% 9% 8% 8% 7%
10 19% 14% 11% 10% 9% 8% 8% 7% 7% 7%
Source: The order of entry effect in prescription (Rx) and over-the-counter (OTC) pharmaceutical drugs, G. Kalyanaram,
International Journal of Pharmaceutical Healthcare Marketing, Volume 2, Numero 1, 2008, pp. 35-46.
78
Distribution Chain in Pharma
A small word on pricing in pharma
Government
Tax
Retail Agreed
Price Price
79
Retail Price Breakdown
Median
Average
Switzerland (2011)
Sweden (2007)
Spain (2010)
Portugal (2008)
Italy (2007)
Germany (2008)
France (2011)
Finland (2007)
Denmark (2007)
Belgium (2008)
Austria (2008)
80
Case Study
Excel spreadsheet structure
81
Exercise
Now you have all the tools to try alone.
82
Agenda
Introduction
Basic Understanding
Product Valuation
83
Net Present Value
84
NPV – Net Present Value
In finance, the net present value (NPV) of a time series of cash flows,
both incoming and outgoing, is defined as the sum of the present values
(PVs) of the individual cash flows of the same entity.
NPV is a standard method for using the time value of money to appraise
long-term projects.
Used for capital budgeting and widely used throughout economics,
finance, and accounting, it measures the excess or shortfall of cash
flows, in present value terms, above the cost of funds.
It compares the present value of money today to the present value of
money in the future, taking inflation and returns into account
85
NPV – Context
Cashflow Cashflow Cashflow Cashflow Cash
Year 1 Year 2 Year 3 Year 4 inflows
USD 1000 USD 1000 USD 1000 USD 1000
1 2 3 4 Time
Investment
USD -2000
Cash
outflows
86
NPV – What is the value today?
Cashflow Cashflow Cashflow Cashflow
Year 1 Year 2 Year 3 Year 4
USD 1000 USD 1000 USD 1000 USD 1000
1 2 3 4 Time
Investment
USD -2000
87
NPV – PV Formula
Remember?
𝑷𝑷𝒏𝒏
𝑷𝑷𝟎𝟎 =
(𝟏𝟏 + 𝒊𝒊)𝒏𝒏
𝑃𝑃𝑛𝑛 = End value after n time periods 𝑃𝑃0 = Beginning value i = interest rate n = number of years
88
NPV – Transformation of Future
Values in Present Values
Cashflow Cashflow Cashflow Cashflow
Year 1 Year 2 Year 3 Year 4
USD 1000 USD 1000 USD 1000 USD 1000
1 2 3 4 Time
𝟏𝟏𝟏𝟏𝟏𝟏𝟏𝟏
𝑷𝑷𝟏𝟏 = (𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟏𝟏
= 909
𝟏𝟏𝟏𝟏𝟏𝟏𝟏𝟏
𝑷𝑷𝟐𝟐 = (𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟐𝟐 = 826
𝟏𝟏𝟏𝟏𝟏𝟏𝟏𝟏
𝑷𝑷𝟑𝟑 = (𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟑𝟑 = 751
𝟏𝟏𝟏𝟏𝟏𝟏𝟏𝟏
𝑷𝑷𝟒𝟒 = (𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟒𝟒 = 683
89
NPV Calculation
It is the sum of the initial investment (negative cashflow) and all the
present value of the positive cash flows:
Investment
USD -2000 + 𝟏𝟏𝟏𝟏𝟏𝟏𝟏𝟏
𝑷𝑷𝟏𝟏 = (𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟏𝟏 = 909
+ 𝟏𝟏𝟏𝟏𝟏𝟏𝟏𝟏
𝑷𝑷𝟐𝟐 = (𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟐𝟐 = 826
+ 𝟏𝟏𝟏𝟏𝟏𝟏𝟏𝟏
𝑷𝑷𝟑𝟑 = (𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟑𝟑 = 751
+ 𝟏𝟏𝟏𝟏𝟏𝟏𝟏𝟏
𝑷𝑷𝟒𝟒 = (𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟒𝟒 = 683
= 1169
90
Exercise – Project Valuation
You are the project manager of a well-established brand of cakes and you
would like to launch a new flavor. You already tested the market with
several panels that decided on almond and strawberry new cake.
◦ Start-up costs (year 0): USD 5 million
◦ Launch costs (year 1): USD 1 million
◦ Sales (year 1): USD 1.5 million
◦ Sales (year 2): USD 2 million
◦ Sales (year 3): USD 3.2 million
◦ Sales (year 4): USD 4 million
◦ Discount rate: 9%
What’s the present value of the project?
91
Focus on the Discount Rate
The discount rate consists of 2 elements:
Remember that the
Time value of money
discount rate reflects your view. •Risk-free rate of return
•Return on a US Treasury security with
It will not be the same if your are: the same time horizon
•~ 3.5%
◦ the founder of the company
◦ a partner looking for a project
Risk premium - standard
◦ an investor (VC, business angel,…) •All the risks faced by the company
(management, currency, market,
country, legal, manufacturing)
•~ 5.5-6.5%
92
20-year US Treasury Yield
93
Risk-adjusted
Net Present Value
94
rNPV Introduction
Developing a cake is less risky than developing a drug.
NPVs are perfect for normally risky activities but not for valuing drug
projects because of clinical risks.
If you put clinical risks into the risk premium, you end up with very high
discount rates (see next slide).
It is better to consider clinical risk separately and leave the risk
premium unchanged (and by doing so the discount rate is reasonable
and the global value is automatically adjusted with the success rates).
95
NPV vs rNPV
NPV rNPV
o The discount rate is a “black box” o The discount rate is separated
containing all the risks from the success rate. The
cashflows are impacted more
o The investors’ preferred method precisely.
(which are looking for a common
ground for the valuation of their o The pharma & biotech industries’
holdings) preferred method
o Less precise o More precise
o Discount rates to use according to o Discount rates to use according to
the stage of development: the stage of development:
• Preclinical: 55% • Preclinical: 18-20%
• After Phase 1: 45% • After Phase 1: 17-18%
• After Phase 2: 30% • After Phase 2: 15-17%
• After Phase 3: 20% • After Phase 3: 13-14%
• Approved: 15% • Approved: 10%
Source: Avance.
96
Example
We would like to know the value of a drug project today (2014):
◦ disease: rheumatoid arthritis (arthritis & pain category)
◦ stage: Phase 1
◦ clinical costs: Phase 1: USD 15m; Phase 2: USD 40m; Phase 3: USD 150m;
submission: USD 40m. Each phase lasts one year.
◦ annual cashflows (net sales): launch year USD 5m; next year: USD 398m;
the year after: USD 740m; then you can apply a growth rate of 10% per
year
◦ discount rate: 13%
97
Exercise
Now use the success rates given by Nature Biotechnology
(Neurology therapeutic area – All indications because classification is
not the same as the previous one).
98
rNPV – Methology Summary
Goal: provide a range of financial values for a project or a deal
Methodology:
◦ Collect all datapoints from costs to sales forecasts
◦ Estimate probability of success at each phase and calculate the cumulative
probability at each phase.
◦ Choose the discount rate
◦ Build the model & sum to reach rNPV
◦ Stress your model by changing assumptions and build a summary of scenarii
and sensitivities
99
Agenda
Introduction
Basic Understanding
Product Valuation
100
Product Strategic Fit
101
Product Strategic Fit
Does the project fit in your portfolio?
How to analyze it?
How to manage several projects?
How to allocate resources?
Common sense is crucial.
102
Challenging Context
◦ Deal with future events and opportunities (where much of the
information is uncertain)
◦ Very dynamic decision environment (status and prospects for projects
are ever changing, as new info becomes available)
◦ Projects in the portfolio are at different stages of completion (all
projects compete against each other for resources)
◦ Resources to be allocated are limited and resources transfers
between projects are not totally seamless (choices have to be made)
103
Goals
Value
Balance
Maximization
Right
Strategic
Number of
Direction
Projects
104
Goals
Tools: financial models (NPV, rNPV) &
scoring models Value
Result: rank-ordered list of “Go” and Balance
Maximization
“Hold” projects
Right
Strategic
Number of
Direction
Projects
105
Goals
Tools: visual charts, portfolio maps
(bubble diagrams with the choice of the dimensions will have to fit
Value your company objectives and it will depend on the stage of the
Balance company, the product types, the targeted markets,…
Maximization The bubble size is very often representing the resources used)
Result: vision of balance
Right
Strategic
Number of
Direction
Projects
106
Goals
Value
Balance
Maximization
Tools: questions
Are all your projects consistent with your business’strategy?
Are they in or out the bounds of the defined focus areas (markets
Right
and/or technologies)? Strategic
Does the breakdown of your spending reflect your strategic Number of
priorities? Direction
Projects
Result: gap analysis between “what
should be” and “what is”.
107
Goals
Value
Balance
Maximization
108
Deal Basics
109
Deal Introduction
◦ Pharmaceutical alliances have been a critical driver of growth in the
biotech industry.
◦ An important point for biotech companies is to manage the alliance
in order to get enough funding to sustain the operating activities.
◦ What are the key characteristics of a biotech company that can
attract a potential partner?
◦ Innovation & new technology – something that represents a material change in the
treatment paradigm
◦ Broad application of the technology – the broader the better
◦ Effective and productive collaboration with academics – value of the access to KOL
(key opinion leaders)
◦ Experienced team with the right skill sets – relationships are key. A cultural fit is
always a good complement to the technical fit
◦ Financial health to pursue key programs
110
Deal Basic Questions
What are What do What is the What are What could
Opportunity Identification
Licensing Evaluation
Licensing Strategy
Post-Deal Analysis
the gaps? we need? value to us? my target be done
What can Where will acceptable better next
we offer? we find it? risks, time?
returns and
responsibili
ties?
111
Deal Types
◦ In-licensing
◦ Out-licensing
◦ Co-development
◦ Co-promotion
◦ Asset purchase / Acquisition
◦ Collaboration
◦ Joint-venture
◦ Sublicense
◦ Option
◦ Alliance
◦ Merger
◦ …
112
Deal Due Dilligence
BUSINESS
Environmental Partnering Pressure PERFORMANCE
OUTCOME
Partnering Antecedents • Economic
Environmental
Uncertainty Performance
Partnering Orientation • Patient
Global Competition Interdependence
Satisfaction
Conflict Partnering Implementation • Prescriptor’s
Trust Strategic
Loyalty
Operational Competitive
Commitment
Attainment • Relationship
Information Sharing
Organizational Effectiveness
Compatibility Technology Utilization
Strategic Interface Competitive Advantage
Top Management
Vision Teams Competitive Parity
Organizational Issues Competitive
Joint Programs Disadvantage
Asset Specificity
Joint Performance
Measures
113
Deal Structure
An perfect deal structure should:
◦ Compensate the licensee for taking on the risk
◦ Generate payments representative of the value of the product for the
licensor
114
Deal Trends
◦ Pharmaceutical trends of reducing internal R&D and increasing the in-
licensing of early clinical stage candidates is leading to active
competition in the field of spotting the best biotech opportunities.
◦ Information on the movements of big pharma is valuable for the
business development of biotech startups.
115
Big Pharma Partnering
Interest by Therapeutic Area
Source: Nature Biotechnology, Building for Big Pharma, A. Giniatullina, M. Boorsma & al., March 2013.
116
M&A Deal Statistics
(January 2005-June 2012)
Total spent Average total deal Number of
Therapeutic Area
(USDm) value (USDm) deals
Oncology 6576 387 18
Infectious diseases 6432 643 10
Cardiovascular diseases 3367 561 6
Chronic inflammation 3339 477 7
Mixed 2470 618 4
Injury 1787 596 4
Endocrine and metabolic diseases 1710 428 4
Platforms 1526 218 8
Ophthalmology 1067 534 2
Genitourinary diseases 745 373 2
CNS 715 358 4
Respiratory diseases 540 270 3
Blood disorders 445 223 2
Source: Nature Biotechnology, Building for Big Pharma, A. Giniatullina, M. Boorsma & al., March 2013.
117
Up-to-date information
◦ Interesting information on: www.currentpartnering.com select the
Scorecard tab (for deals over USD 500m).
◦ Ernst & Young, PWC, Deloitte,… are also very active in publishing
annual reports on the current state of the industry. Check their
website or subscribe to their newsletter.
118
Transaction Total Value
per Year
a | Mergers and acquisitions. The chart includes full-company acquisitions and purchases of majority stakes. The
'number of deals' total includes deals that did not have a disclosed value.
b | Partnerships.
c | Break-down of partnerships by therapeutic area. Deals involving more than one therapy area may be counted
multiple times, if applicable. Source: Medtrack.
Source: http://www.nature.com/nrd/journal/v14/n2/full/nrd4536.html
119
Biggest Deals of 2014
120
A deal is a starting point
◦ Pharmaceutical alliances = critical driver of growth in the biotech
industry
◦ Over 50% of drugs approved are originated from alliances
◦ Effective alliance management = balance of…
• Risk taking
• Discipline Regular stream of cash from
• Good relationships successfully completed milestones
121
Financing
122
Introduction
Capital raised by Life Sciences Companies (USDm)
Change
2014 2013 2012 2013-2014
(%)
Global Venture Capital 16’489 12'662 12'419 30.2%
Global IPOs (Initial Public Offering) 11’039 7'570 2'126 45.8%
Global PIPE (Private Investment in Public
5’711 4'775 5'382 19.6%
Equity)
Global Follow-ons 13’836 14'327 7'109 -3.4%
Global Other Equity 813 1'545 2'256 -47.4%
Global Debt Offerings 40’013 44'359 49'869 -9.8%
Global Other Debt 16’249 10'521 13'389 -54.4%
Global Public Financing 87’661 83'097 80'131 5.5%
Global Partnering 53’139 43‘049 38'178 23.4%
Global M&A 355’309 131‘908 108'865 169.4%
Source: Burrill & Company: http://www.burrillreport.com/article-biotech_industry_shatters_fundraising_records_in_2014.html
123
Introduction
Financing & Acquisition Activity in Lifesciences in 2013
Global IPOs
Global Venture Capital (Initial Public
5% Offering)
Global PIPE
9%
Global Other (Private
Debt Investment
13% in Public
Equity)
Global Public 6%
Global Financing Global
Mergers & 30% Follow-ons
Acquisitions 17%
49%
Global Debt
Offerings
Global 53% Global Other
Partnering Equity
16% 2%
Source: Burrill & Company, Biotech Stocks Win Big In 2013, January 2nd, 2014..
124
Introduction
Financing & Acquisition Activity in Lifesciences in 2014
Global IPOs
Global Other Debt (Initial Public
18% Offering) Global PIPE
13% (Private
Investment in
Public Equity)
6%
Global M&A
69%
Global Public
Financing
17%
Global Follow-ons
16%
Global Venture
Capital Global Other
3% Equity
1%
Global Partnering Global Debt
11% Offerings
46%
125
Funding Landscape
◦ In the past = Venture capital funds were well capitalized (by
institutional investors) and had assets under management from USD
100m up to USD 1b
◦ Economic downturn 2008-2011
◦ Returns from venture capital funds have not outperformed the public
market since the late 1990s (Ewing Marion Kaufmann Foundation
stats)
◦ Lack of transparency and long lockup periods turned many funds into
capital trap
◦ A lot of institutional investors withdrew their capital and started
their own alternative investing => new players in the field
126
Funding Landscape
Source: Nature Biotechnology, The view beyond venture capital, D. ford & B. Nelsen, January 2014..
127
Types of Investors
◦ Fundraising is an integral part of almost every young biotech’s
business strategy
◦ It is key to identify and prioritize potential investors
◦ You have 2 types of investors: private and public
128
IPO
or Initial Public Offering.
This is the first sale of stock by a private company to the public.
IPOs are often issued by smaller, younger companies seeking the capital
to expand, but can also be done by large privately owned companies
looking to become publicly traded.
In an IPO, the issuer obtains the assistance of an underwriting firm,
which helps it to determine what type of security to issue (common,
preferred,…), the best offering price and the time to bring it to the
market.
129
IPO Pros & Cons
Pros Cons
• Access to capital to fund operations • Compliance and regulatory disclosures
• Exit strategy for venture capitalists imposed by stock market regulators
• Liquidity for management and employees • Reporting for sales of securities
• Stock options to attact employees • Quarterly or half-year financial
• Greater public awareness of the company statements reporting
and its products • Risk of potential liabilities if the company
• Use of the stock for acquisitions or its directors do not comply with
regulations
• IPO cost: approximately USD 2.5m first
year, between USD 0.1 and 1m the years
after
• Trading volume and valuation issues if the
market capitalization is below a threshold
130
Lifesciences IPOs in 2014 –
What happened?
Key points:
◦ History:
◦ 11 in 2012
◦ 37 in 2013
◦ 79 in 2014
◦ This robust activity, combined with substantial deal-making in the private
venture-backed M&A arena, resulted in spectacular returns that were
double those of 2012 and more than 25 percent higher than the previous
record year of 2013.
◦ Early-stage biotechs accounted for 41% (preclinical and Phase I companies)
◦ Corporate venture arms helped support private venture groups in driving a
big increase in the amount of Series A cash flowing to early-stage ventures.
Source: http://www.fiercebiotech.com/story/record-year-biotech-inspires-some-great-expectations-2015/2015-01-06
131
Raising Start-up Capital in
Switzerland
◦ Swiss Venture Guide 2013, 5th Edition.
◦ Financing your start-up in Switzerland, Seminar «The practice of
Entrepreneurship», 2009, Zurich University, J. Fülscher,
www.jan.fuelscher.ch
132
Conclusion
133
Conclusion –
Valuation & Deals Wrap-up
Valuation check-list to get the most value from your potential partner
by presenting a well-constructed methodology for valuation:
• Revenue (Sales Forecasting Process)
• Credible epidemiology (never use 100% diagnostic rate, 100% treatment
rate, 100% compliance or 100% reimbursement rate)
• Build an understanding of the complex series of payments and product
flows in the pharmaceutical supply chain.
• The price paid to a drug manufacturer is on an exFactory basis (after
discounts and rebates)
• Anticipate strategies with payers and reflect program supports in the
valuation
• Show realistic expectations about the competitive environment
• Always explain the drivers you consider when formulating the
assumptions
134
Conclusion –
Valuation & Deals Wrap-up
• Costs
• Development costs:
• Use average cost per subject costs
• These costs will depend on the
therapeutic area
• Commercial costs:
• Cost of the salesforce, marketing and
distribution;
• Test the ratio of prescribing physicians to
sales reps (often 100:1)
• At least 10% of peak revenue annually is
spent on the combination of sales and
marketing
• Manufacturing costs
• Costs for materials used in clinical
development (will probably be high
because lacking of optimization)
Source: Cutting Edge Report, Clinical Development and Trial Operations,
Protocol Design and Cost per Patient Benchmarks, November 2013.
135
Conclusion –
Valuation & Deals Wrap-up
• Discount rate
• As indicated before in the lecture, you need a discount rate in order to
discount your cashflows
• Each cash flow (revenue – cost) is discounted for time by multiplying by
1/(1+k)n
• Lower discount rate = Higher valuation
• It is often to your benefit as an out-licensor to use the discounte rate
appropriate for your partner (a survey found that in-licensors tend to use
as discount rate 2% lower than used by precommercial companies)
• Risk-adjustment
• With benchmark success rates (publicly available, different sources)
136
Conclusion –
Valuation & Deals Wrap-up
• Allocation of value
• After completing the valuation and obtaining a range of rNPVs, the next
step is to determine how that value will be shared between the parties
• This leads to deal structuring with upfront, milestones and royalties
negotiations
• Each partner is entering the agreement because each expects to gain more
value from their share of a partnership than could be obtained by
pursuing the opportunity independently
• Rule of thumb: in phase 2, the value allocation for an out-licensor is
around 40-60%.
• It will depend on the risk taken by the party and its financial implications.
137
Conclusion –
Valuation & Deals Wrap-up
• Special case – dealing with a VC
• VC relies often on comparable analysis
• VC is interested in what your company is going to be worth when they can
sell an equity stake
• The key steps to be prepared for comparable analysis are:
• Ask industry experts about pre- and post-money valuations => benchmarks for the same
development stage
• Look for companies having achieved a liquidity event recently (acquisition or IPO)
• The closer you match the comparable (therapeutic area, development stage, region) to where
your project hopes to be at liquidity, the more credible the comparable analysis
• Check exit multiples of VCs, if available
138
Conclusion –
Valuation & Deals Wrap-up
Deals and valuation are closely linked.
You cannot do a deal without a value (and a valuation).
Make sure you control the whole valuation process and you can justify
each step in order to gain credibility in the eyes of your potential
partner.
139
Thanks for
your
attention
Any feedback?
140
• Excellent website on bioentrepreneurship:
http://www.nature.com/bioent/index.html
Non-
• Phrma 2012 profile:
exhaustive list http://www.phrma.org/sites/default/files/159
of references /phrma_industry_profile.pdf
• Valuation in LifeScience, 3rd edition, B.
Bogdan, R. Villiger, 2010.
• Forecasting for the Pharmaceutical Industry, A.
Cook, 2006.
• Valuation for M&A – Building Value in Private
Companies, F.C. Evans, 2001.
• Creating Strategic Advantage in the
Negotiation of Life Science Deals, Luis Pareras,
2011.
• Managing Your Innovation Portfolio, Harvard
Business Review, May 2012, p. 67-74.
• Deloitte Recap LLC, Deal Drafting Guidelines,
May 2009.
141