Bio Tech, Ltd.

Fair Market Value of Common Stock

On

April 7, 2010

CASE STUDY _ JHU CAREY

Task: Please read the case. Determine the appropriate equity valuation for BioTech for

the four valuation methods.

Apply, in your opinion, the relevant percent (%) weight to each method. Summarize your conclusion.

No need for case introduction.

Use a simple DCF analysis for part of this task.

Report should be 3-4 pages with short charts, 12 fonts, single space.

You do not have to accept all the assumptions in the case if such assumptions seem illogical.

Table of Contents

Page

I. Summary 1II. Description of Assignment III. Description of the Business IV. Financial Condition V. VI. Review of Biotech Industry VII. Drug Development Process VIII. MethodologyIX. Valuation Analysis X. Conclusion

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I. SUMMARY

Bio Tech Ltd. (“Company”) has retained Carey, LLC to appraise the fair market value of BioTech common equity on April 7, 2010.

II. DESCRIPTION OF ASSIGNMENT

Client

The client is Bio Tech, Ltd., Baltimore MD

The date of the appraisal is April 7, 2010 (“valuation date”).

Purpose of Appraisal

To estimate the fair market value of the Company’s common equity.

III. DESCRIPTION OF BIOTECH

Background

BioTech is an early-stage company that is developing a fast-acting wound dressing (“QUICK Dressing”). QUICK Dressing is capable of stopping severe bleeding from external wounds. The Company began in 2005, is privately owned, and operates research offices in Baltimore, Maryland.

To date, the Company has recorded no product revenue. It has not begun Phase I clinical trials with the federal Food & Drug Administration (FDA). Phase I is a precursor to Phase II and Phase III trials and to eventual commercialization of the product.

Funding has come from government research grants and the sales of stock. Bio Tech has spent $8 million over the last five years, including grants ($5) and investors ($3).

BioTech’s technology originated from research conducted by the prestigious Johns Hopkins Hospital (JHH).

Ownership

A majority of the Company’s outstanding common stock, and all of its Series A Preferred stock, is owned by LDG, LP, a partnership owned by Susan Leed, an early investor in Google. To date, the cash invested by the preferred investors and all common equity owners has been $3.0 million.

Table 1Ownership

At April 7, 2010(Expressed in 000’s shares, not $)

Number of shares

Common Stock

Number of Shares

Pfd.A(1)

Number of shares

Pfd.B(1)

Total Before Options Options(2)

Fully Diluted

Common StockShares

%

LDG 2,925 11,565 ------ 14,490 ----- 14,490 62Employees 600 ------ ----- 600 6,450 7,050 30Other 775 ------ 900 1,675 ------ 1,675 8

4,300 11,565 900 16,765 6,450 23,215 100(1) Convertible into common on a 1:1 basis. The preferred stock was bought in 2008 for $0.15 per share in December 2008(2) Option strike price is $0.21 per share, a price the Board of Directors thought was the fair value in December 2009.

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Proposed Product

The QUICK Dressing is composed of clotting agents that the human body uses to stop bleeding. The agents combine to form a strong structure that becomes a glue-like seal over a bloody wound. The QUICK Dressing halts the bleeding immediately, giving rescuers time to get the patient to the nearest medical facility.

Competitors and Markets

There are numerous products designed to close bleeding wounds. They represent a global market of $6.0 billion and a domestic market of $3.5 billion. The market has four categories (1) sutures, staples and tape; (2) hemostats; (3) tissue sealants; and (4) glues. The QUICK Dressing falls into the hemostat category, and, within this category, the potential market in 2011 for a fast dressing is $250 million annually, according to Western Associate Consultants (assuming a unit cost of $500 per dressing). Med Market Diligence Consultants estimates a larger market of $400 million.

Western Associates identified eight products (in the commercial market) with treatment attributes similar to those of QUICK Dressing, and a ninth that is presently in Phase II clinical trials sponsored by Johnson & Johnson, the sizeable manufacturer of healthcare products. Bio Tech management (and Western Associates) have identified weaknesses in the existing participants (and the J&J product), and they believe the Dressing will be a “better mousetrap” at a competitive price point.

Med Market Diligence has identified several proposed new products for the wound closure market. Theoretically, these new products might compete with the QUICK Dressing and sinlar existing products.

Customers and Grants

As noted, the Company has recorded no product sales. Its only revenue to date is from federal government grants. The government has approved new grants for Biotech’s fiscal year ending December 31, 2010 for $2.2 million. Management is confident that it will receive another grant for the fiscal year 2011.

Management Team

Bio Tech has a team of employees with experience in start-ups and biotech applications. The Company employed ten people at the valuation date. If management proceeds with Phase I clinical trials, new employees (and financing) will be required.

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IV. FINANCIAL CONDITION

Balance Sheet

Summary balance sheet data appears below:

Table 2BioTech Ltd.

Summary Balance Sheet DataAt February 28, 2010

($000)

Cash $ 116A/R 401Other Current Assets 71Total Current Assets 588Fixed Assets 16Other Assets 323

$ 927

Accounts Payable $ 411Notes Payable 345Other Liabilities 10Total Liabilities 766Stockholders’ Equity 161

$ 927

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Income Statement

In the next table are summary income statement data:

Table 3BioTech, Ltd.

Summary Income Statement Data($000)

12/31/07 12/31/08 12/31/09 12/31/10(E)

Revenue $ 309 $1,341 $1,899 $ 2,566Salaries and Benefits 578 704 1,216 1,617Consulting 257 389 476 300Other Expenses 401 526 494 684Operating Loss (927) (278) (287) (35)Other Expense ----- 160 ----- 2,276Deprec. & Amort. 14 20 36 54Net Loss $ (941) $ (458) $ (323) $(2,365)

2007-2009 Results

Higher revenues reflect greater grant awards. The increase in salaries and benefits result from more employees. Consulting costs derive from firms assisting in the Company’s regulatory process. The Company has been “ramping up” activity and R&D, in anticipation of starting clinical trials to prove the product.

2010

For 2010, management has presented a budget of $2.6 million in revenue and breakeven income. The revenue comes principally from a grant.

If BioTech obtains new equity finance, management wants to spend $2.3 million in additional 2010 expense, in order to prepare the Company for the beginning of Phase I clinical trials.

2011 and Beyond

Management has not prepared detailed P&L forecasts past 2010. However, it has produced revenue forecasts, assuming:

(i) five years to commercialize the product by 2015; and (ii) and then seven years to penetrate fully the U.S. and international markets. (iii) the revenue projections are based upon Biotech obtaining a portion of the

revenues predicted for the competing J&J dressing.

In 2020 (10 years), the Company predicts a 30% market share and $200 million in revenues. Similar products have a net profit margin (net income/sales) of 15%.

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Terminal Value

In 2010, established bio-tech firms sell for 20x net income.

Funding

The federal FDA approval process for QUICK has a budget of $35 million, comprised as follows:

Table 4

(Millions)5 years of base operations $10Clinical trials 10Manufacturing facility 10Other 5

$35

The $35 million is spent from 2010 to 2015.

The Company believes cash flow will be positive $5 million per year, from 2015 to 2020.

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V. VI. REVIEW OF US BIOTECH INDUSTRY

Interest in US biotechnology companies last boomed in 2000, when valuations rocketed as investors sought to capitalize on the future surrounding the outcome of sequencing the human genome. The pricing of such companies collapsed in 2002 by 70%, only to recover to about 80% of peak value by April 2010.

Historically, ‘biotechnology’ companies were different from ‘pharmaceutical’ companies by their use of biotechnology techniques (in essence a comparison between recombinant engineering and synthetic chemistry).

However, the large pharmaceutical companies learned rapidly from the new start-ups. Companies in both biotechnology and pharmaceutical sectors utilize all of the tools available.

Biotech companies are small to medium-sized companies operating in the pharmaceutical research and development industry (R&D). The development of a new drug as their primary focus. High levels of technical and commercial uncertainty are features of the biotechnology sector. Many companies have significant equity valuations -- years before they earn any profits from selling their products.

Key difficulties in biotechnology are the long timeframes and the high development costs to bring one product to the market, along with risk and technical uncertainty.

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DRUG DEVELOPMENT PROCESS

The discovery and development process has five distinct stages, during which the drug company gathers evidence to convince government regulators that it can consistently manufacture a safe drug for the medical condition that the drug is intended to treat.

At the end of each stage, the company uses the technological and market information to decide whether to abandon or to continue development of the drug. As it proceeds to latter stages, the company will tend to see the company’s equity value increase.

The risks associated with the different stages are very different.

• Drug discovery : The aim in this phase is to identify a candidate drug, also termed a “lead” candidate by conducting initial tests on a variety of compounds.

• Preclinical development : The preclinical phase refers to a variety of animal studies that form part of the FDA filing package. The bulk of these animal studies are completed before the drug enters humans. The key objective is to ensure that the drug is safe to be given (for a short period) to humans.

• Early clinical phase incorporating Phase 1 and 2 studies : These studies assess the drug’s properties in healthy human volunteers, and, then, in small numbers of actual patients with medical problems.

• Phase 3 trials : To determine statistically significant efficacy and safety in patients. This late stage of clinical development is sometimes ‘pooled in’ with the other phases of clinical development.

• Post-marketing surveillance studies : These studies monitor the safety of newly marketed drugs.

On average, it takes over 10 years for a new drug to come to market. 5-6 years are dedicated to preclinical development and Phase 1-3 studies. (Bio Tech may shorten the process, since J&J is taking a similar product through the FDA now.)

Of 100 drugs that start a clinical trial development program, about 70 will successfully complete Phase 1 trials and go on to Phase 2; about 33% of the starting 100 will complete Phase 2 trials and go into pivotal Phase 3 trials. Of these, approximately 25-30 of the original 100 will clear Phase III.

On average, about 20% of the initial 100 will be approved for marketing. Looking at this attrition rate another way, there is a low probability of a drug reaching the market. Once it reaches the market, the drug faces numerous hurdles to profitability, such as competitors or pricing.

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VII. METHODOLOGY

As noted in the FASB’s Valuation Aid, “the stage of development of an enterprise is an important determination of the value of the enterprise and an indicator as to which approaches for valuing the enterprise are generally appropriate.” An enterprise typically builds value throughout the various stages of development. In valuing an enterprise, it is important to recognize the enterprise’s stage of development and its achievement of developmental milestones.

A. Development Progress

At the valuation date, the Company was a development stage business, and it had made progress. A high degree of uncertainty existed whether it could achieve its goals. It had a history of no product sales and operating losses, but it had assembled a management team, recruited investors and obtained support from the federal government.

B. Appraisal Methodologies Considered

No Contemporaneous Transaction. There have been no purchases of the Company’s equity over the last 12 months. However, there was a transaction two years ago in a convertible preferred.

Applicability of Traditional Assets/Earnings/Cash Flow Multiples. On April 7, 2010, BioTech was a Stage 1 enterprise. Tangible assets consisted principally of cash and accounts receivable, and there was no customer base.

Public Comparable Companies. Many publicly-traded firms (a) engage in biotech, drug or medical device related activities; and (b) are similar to the Company’s small size and early stage. Most of these publicly-traded firms, however, are of limited usefulness because they address different business opportunities, are at later stages of the FDA approval process, and have higher expense levels. Nevertheless, a few are in preclinical and Phase I, and they have expense histories similar to BioTech. We reviewed their valuations.

We also examined three recent convertible-preferred-stock transactions of public companies.

Relevance of Private Comparables. A number of private firms have similarities to the Company, and they (i) have been sold in M&A deals within one year of the appraisal date, or (ii) have received funding from outside investors. Detailed information was limited, but we interviewed two practitioners with knowledge of such development stage valuations.

Cost Approach. The cost approach suggests that the shareholder investments (equity and loans) and grants are one indicator of fair value.

Discounted Cash Flow. The estimated value of an enterprise’s common stock is based upon an analysis of future values for the Company, assuming various possible future liquidity events (in this case, IPO, sale or merger, or dissolution). Value is based upon the present value of expected future net cash flows (distributions to shareholders), considering each of the possible future events and using a high discount rate (such as 60%).

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VIII. BIOTECH VALUATION ANALYSIS

A. Public Comparables Approach

There are dozens of micro-cap (under $50 million) biotech, drug and medical device companies trading publicly. We identified four that qualified as “comparable” under the following criteria:

• Development stage business with little or no revenue and operating losses;

• Preclinical, or with products in Phase I or early Phase II trials;

• Annual expenses (and therefore losses) under $10 million; and

• Under 25 employees.

Summary results for the group are set forth in the next table:

Table 5Comparable Public Companies

(In millions)

Latest 12 Months Enterprise ValueCompany Revenues Losses Field

Applied Neuro.(1) $ 1.5 $ (1.0) $ 3.7 Alzheimer’sBio Moda ---- (0.9) 26.1 Cancer assaysMedaSorb ---- (3.2) 10.9 SepsisPharmos ---- (6.1) 4.4 Irritable bowel

Median $ 7.7

(1) Relationship with Eli Lilly and Albert Einstein Medical College.

We also reviewed recent cvt pfd stk transactions for firms that were comparable, These three firms were more advanced than BioTech, and perhaps more valuable. These transactions occurred within the last four months.

Table 6Recent PIPE Transactions—$2-$10 Million in Amount

(In millions)

Latest 12 Months Enterprise Value(1)Company Revenues Losses Field

Cyclacel $ 1.0 (19.9) $ 65.5 CancerEcho Therapeutics 0.6 (4.2) 42.4 DiabetesImmunoCell ---- (2.4) 21.9 Cancer

Median $ 42.4

(1) Indicated EV, according to terms of investment.

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A number of the public comparables are speculative “penny, Pink Sheet stocks”, while others had institutional investors, investment banking research coverage and previous IPO’s.

One could logically argue that Pharmos is downsizing, and it is therefore unsuitable.

Factors contributing to a Bio Tech premium over the median include: (1) likely product acceptance and potential market through the J&J experience to date; and (2) prestigious sponsors with the government, Johns Hopkins, and Susan Leed.

The principal Bio Tech negative factor is no commercial partner (such as Pfizer). The CEO has successful start-up experience, but not in biotech, so we grade management as a neutral factor.

Overall, the comparables suggest a Biotech enterprise value of $ --- million.

B. Cost Approach

$8 million has been invested to develop the business plan. Management is knowledgeable about the industry and believes this money was spent well. Most institutional investors would consider $8 million as one reference point in a valuation of the business.

C. Industry Participants

As noted earlier, we interviewed two industry participants (on a “no-names” basis) with knowledge of the pricing of equity investments in private, development stage, biotech, drug or medical device firms. Their estimates of the valuation “markers” for a biotech firm were:

Table 7Typical Enterprise Valuations of Development Stage Drug Companies

Valuation(Millions)

Pre-clinical Less than $10Phase I 10-25Complete Phase I/II 25-75Complete Phase III 75 plus

Without (i) a large commercial sponsors, or (ii) a management team with a proven track record in biotech start-ups, BioTech would be unable to break the $10 million threshold, in their opinion. However, given the government and JHU connection, operating progress, and the money invested to date, both participants indicated that a $5-6 million valuation was too small. $7-8 million seemed reasonable.

D. Recent Transactions

The Company sold preferred stock in 2008 at $0.15 per share.

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E. Weighting of Approaches

Based on our weighting of the approaches, the BioTech enterprise value (including its debt) is $--- million.

Table 8BioTech, Ltd.

Weighting of Approaches(In millions)

Approach Amount Weighting AmountPublic Guideline Firms $ ? % $ ?Cost ? -% ?Industry ExpertsDCF

? ?

-%-%

? ?

Weighted Average $ ?

F. Calculations

See table 9.

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Table 9BioTech Equity Value

($000)

Enterprise value $ ???Subtract: debt (345)Subtract: preference Series B(1) (900)Add: cash 116Add: common stock option proceeds(2) 1,354Equity value $ ---

IX. CONCLUSION

Based on the foregoing analysis, it is our opinion that the fair market value of the common stock (minority basis) of BioTech, Ltd. at April 7, 2010 was $ ----.

Exhibits ( Not Included for Case Study)

A. BioTech Historical Financials

B. Forecasts

C. Existing Competing Products

D. Forecast Competing Products

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