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Tools for Valuing Biotech Investments . BC Biotech - CFO Roundtable Vancouver, B.C. September 12, 2002. Alan Greer Greer Consulting ag@greerconsult.com (604) 682-6943. Today’s Presentation. Purpose introduce/discuss innovative modeling tools for technology valuation Outline

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tools for valuing biotech investments

Tools for Valuing Biotech Investments

BC Biotech - CFO RoundtableVancouver, B.C. September 12, 2002

Alan Greer

Greer Consulting

ag@greerconsult.com

(604) 682-6943

CFO Roundtable - Valuing Biotech

today s presentation
Today’s Presentation
  • Purpose
    • introduce/discuss innovative modeling tools for technology valuation
  • Outline
    • Biotech Valuation Needs / Approaches
    • The Biotech (ENPV)Model
    • Further Discussion

CFO Roundtable - Valuing Biotech

biotech valuation needs
R&D program design;

financing, M&As;

licensing/partnering agreements; and

strategy development.

Biotech Valuation Needs
  • TOOLS:
  • discounted cash flow (NPV)
  • expected value / decision trees
  • simulation
  • real options analysis

CFO Roundtable - Valuing Biotech

limits to traditional valuation
Limits to Traditional Valuation
  • Valuation requires:
    • Long history of earnings/market prices
    • Current financial statements that reflect underlying assets
    • Peer group of readily comparable (traded) firms
  • BUT, small biotech firms:
    • No earnings history
    • IP asset value not on companies books
    • Seek novel technology with no/few comparisons

CFO Roundtable - Valuing Biotech

valuation of fundamentals
Valuation of Fundamentals
  • Fundamental value is function of
    • Cash flows generated by asset
    • Life of asset
    • Expected growth
    • Riskiness of cash flows

CFO Roundtable - Valuing Biotech

modeling approaches
Modeling Approaches

Option Pricing

FLEXIBILITY (STAGED INVESTMENTS)

Decision Tree Analysis (Expected NPV)

Monte Carlo

Simulation

RISK / UNCERTAINTY

Discounted Cash Flow (Net Present Value)

LONG TIMEFRAME

CFO Roundtable - Valuing Biotech

growth and uncertainty
Growth and uncertainty

CFO Roundtable - Valuing Biotech

biotech enpv model
Biotech ENPV Model
  • Spreadsheet-based (Microsoft Excel)
  • Model has common analytical "engine"; can drive different applications:
    • STRATEGY model
      • compares different scenarios re. timing of licensing
    • DEAL model
      • compares deal terms offered by two parties
  • Illustrative examples
    • key model data/results altered to camouflage confidential information

CFO Roundtable - Valuing Biotech

key model assumptions
Key Model Assumptions

CFO Roundtable - Valuing Biotech

expected value

50% prob. of

$ 100 M sale

$90 MPROFIT

20% probability

of success

50% prob. of

$20 M sale

Invest $10 M in research for new product

$10 M

PROFIT

80% prob.

of failure

Expected Value
  • Probability-weighted average of possible outcomes

EXPECTED VALUE =

80% X -$10 M

+ 10% X $90 M

+ 10% X $10 M

= $2 M

$10 M LOSS

CFO Roundtable - Valuing Biotech

drug development

75%

100%

90%

67.5%

33.8%

28.7%

85%

50%

75%

25%

90%

15%

50%

25%

10%

Drug Development

21.5%

CFO Roundtable - Valuing Biotech

modeling cash flow drug development

100%

90%

67.5%

33.8%

28.7%

Modeling Cash FlowDrug Development

Risk factors

CFO Roundtable - Valuing Biotech

modeling cash flow drug development expected value

100%

90%

67.5%

33.8%

28.7%

Modeling Cash FlowDrug Development (Expected Value)

CFO Roundtable - Valuing Biotech

modeling cash flow development commercialization

100%

67.5%

33.8%

28.7%

21.5%

90%

Modeling Cash FlowDevelopment & Commercialization

Risk factors

CFO Roundtable - Valuing Biotech

modeling cash flow development commercialization expected value

100%

67.5%

33.8%

28.7%

90%

Modeling Cash Flow Development & Commercialization (Expected Value)

21.5%

CFO Roundtable - Valuing Biotech

modeling cash flow development commercialization expected present value
Modeling Cash Flow Development & Commercialization (Expected Present Value)

Divide by (1+discount rate)year

CFO Roundtable - Valuing Biotech

modeling cash flow development commercialization expected present value1
Modeling Cash Flow Development & Commercialization (Expected Present Value)

ENPV = $57 m

CFO Roundtable - Valuing Biotech

monte carlo simulation
Monte Carlo Simulation

CFO Roundtable - Valuing Biotech

monte carlo simulation1
Monte Carlo Simulation

CFO Roundtable - Valuing Biotech

strategy model scenarios
Strategy Model Scenarios

CFO Roundtable - Valuing Biotech

results strategy model
Results: Strategy Model

CFO Roundtable - Valuing Biotech

results strategy model1
Results: Strategy Model

CFO Roundtable - Valuing Biotech

deal model
Deal Model
  • Models licensing negotiation between two parties:
    • Pharma X
    • Biotech X
  • Early stage deal with provisions for
    • License fees, milestones, research funding;
    • Allocation (%) development costs, profit-sharing;
    • Royalty rates, brackets.
  • Compares competing offers and different assumptions of both sides

CFO Roundtable - Valuing Biotech

deal model inputs
Deal Model Inputs

CFO Roundtable - Valuing Biotech

results deal model

Summary - ENPV Allocation

ENPV to Biotech X

ENPV to Pharma X

200

150

100

50

0

50

100

150

200

Biotech X Offer

Straight Licensing

Joint Development

Pharma X Offer

Straight Licensing

Joint Development

Results: Deal Model

CFO Roundtable - Valuing Biotech

limits of models
Limits of Models

“All models are wrong. Some are useful.” George Box

  • Forecasting uncertainty
  • Modeling error
  • Spreadsheet error

CFO Roundtable - Valuing Biotech

uncertainty and flexibility
Uncertainty and flexibility

CFO Roundtable - Valuing Biotech

biotech real options
Underlying asset

Product (with patent protection)

Exercise price

Cost of next phase

Volatility

Technical (private) - development risk

Market (public) – competition/price risk

Time limit

Patent life

Types of options

Defer - delay/advance research for compound

Abandon- option to abandon prior to full commitment of funds;

Learning- Invest in additional research re. alternative indications, comparison with other drugs

Growth/strategic - platform/pipeline with future unforeseen potential

Biotech real options

CFO Roundtable - Valuing Biotech

summary
Summary

Biotech (ENPV) Model:

  • fundamental (cash flow) basis for valuation
  • allows for scenario comparison / tailoring of assumptions
  • uses expected value & Monte Carlo methods to assess risk/uncertainty
  • customizable to suit different business needs (e.g., deals, strategy, financing)
  • easily adapted to other biotech applications (e.g. tools, medical devices)

CFO Roundtable - Valuing Biotech