September 12, 2002 CFO Roundtable - Valuing Biotech
September 12, 2002 CFO Roundtable - Valuing Biotech
Tools for Valuing Tools for Valuing Biotech Investments Biotech Investments
Alan GreerAlan GreerGreer ConsultingGreer [email protected](604) 682-6943
BC Biotech - CFO RoundtableBC Biotech - CFO RoundtableVancouver, B.C. September 12, 2002Vancouver, B.C. September 12, 2002
September 12, 2002 CFO Roundtable - Valuing Biotech
Today’s PresentationToday’s Presentation
PurposePurpose introduce/discuss innovative modeling introduce/discuss innovative modeling
tools for technology valuationtools for technology valuation OutlineOutline
1.1. Biotech Valuation Needs / ApproachesBiotech Valuation Needs / Approaches
2.2. The The Biotech Biotech (ENPV)(ENPV) ModelModel
3.3. Further DiscussionFurther Discussion
September 12, 2002 CFO Roundtable - Valuing Biotech
Biotech Valuation NeedsBiotech Valuation Needs
R&D program design;R&D program design; financing, M&As;financing, M&As; licensing/partnering licensing/partnering
agreements; andagreements; and strategy development.strategy development.
TOOLS:– discounted cash flow (NPV)– expected value / decision trees– simulation– real options analysis
September 12, 2002 CFO Roundtable - Valuing Biotech
Limits to Traditional Limits to Traditional ValuationValuation
Valuation requires:Valuation requires: Long history of earnings/market pricesLong history of earnings/market prices Current financial statements that reflect Current financial statements that reflect
underlying assetsunderlying assets Peer group of readily comparable (traded) firmsPeer group of readily comparable (traded) firms
BUT, small biotech firms:BUT, small biotech firms: No earnings history No earnings history IP asset value not on companies booksIP asset value not on companies books Seek novel technology with no/few comparisonsSeek novel technology with no/few comparisons
September 12, 2002 CFO Roundtable - Valuing Biotech
Valuation of FundamentalsValuation of Fundamentals
FundamentalFundamental value is function of value is function of Cash flows generated by assetCash flows generated by asset Life of assetLife of asset Expected growthExpected growth Riskiness of cash flowsRiskiness of cash flows
September 12, 2002 CFO Roundtable - Valuing Biotech
LONG TIMEFRAME
RISK / UNCERTAINTY
FLEXIBILITY (STAGED INVESTMENTS)
Modeling ApproachesModeling Approaches
Discounted Cash Flow (Net Present Value)
Decision Tree Analysis
(Expected NPV)
Option Pricing
Monte Carlo Simulation
September 12, 2002 CFO Roundtable - Valuing Biotech
Val
ue
Time
Growth and uncertaintyGrowth and uncertainty
September 12, 2002 CFO Roundtable - Valuing Biotech
Biotech ENPV ModelBiotech ENPV Model
Spreadsheet-based (Microsoft Excel) Spreadsheet-based (Microsoft Excel) Model has common analytical "engine"; Model has common analytical "engine";
can drive different applications:can drive different applications: STRATEGY modelSTRATEGY model
compares different scenarios re. timing of licensingcompares different scenarios re. timing of licensing DEAL modelDEAL model
compares deal terms offered by two partiescompares deal terms offered by two parties
Illustrative examplesIllustrative examples key model data/results altered to camouflage key model data/results altered to camouflage
confidential informationconfidential information
September 12, 2002 CFO Roundtable - Valuing Biotech
Key Model AssumptionsKey Model AssumptionsRESEARCH / DISCOVERY No. of compounds / year of discovery Annual cost & no. of years of funding
Scenario 1Compounds:A B C D E
…Scenario 9Compounds:A B C D E
DEVELOPMENT risks (% continuing to next phase) costs per phase duration (years)COMMERCIALIZATION Prices/dosage, market size / share Costs (marketing, admin, etc.)
DEAL TERMS License fees, FTE funding, milestone payments Royalty rates/brackets Development / Profit % Opt Out provisions
September 12, 2002 CFO Roundtable - Valuing Biotech
Expected ValueExpected Value Probability-weightedProbability-weighted average of possible average of possible
outcomesoutcomes
80% prob. of failure
20% probability of success
Invest $10 M in research for new product
50% prob. of $ 100 M sale
50% prob. of $20 M sale
$10 M LOSS
$10 M PROFIT
$90 MPROFIT
EXPECTED VALUE =
80% X -$10 M + 10% X $90 M+ 10% X $10 M
= $2 M
September 12, 2002 CFO Roundtable - Valuing Biotech
Drug DevelopmentDrug Development
PRE-CLINICAL
PHASE 1
PHASE 2
PHASE 3
NDA
Abandon
Abandon
Abandon
Abandon
Reject
Commercialization
Continue
Continue
Continue
Continue
Approved
DISCOVERY
90%
75%
50%
85%
75%
10%
25%
50%
15%
25%
90% 67.5% 33.8% 28.7% 21.5%100%
September 12, 2002 CFO Roundtable - Valuing Biotech
Modeling Cash FlowModeling Cash FlowDrug DevelopmentDrug Development
-$14 m
-$12 m
-$10 m
-$8 m
-$6 m
-$4 m
-$2 m
$0 m
Pre-clin Phase 1 Phase 2 Phase 2 Phase 3 Phase 3 Phase 3 NDA NDA
100% 90% 67.5% 33.8% 28.7%
Risk factors
September 12, 2002 CFO Roundtable - Valuing Biotech
Modeling Cash FlowModeling Cash FlowDrug Development (Expected Drug Development (Expected Value)Value)
-$14 m
-$12 m
-$10 m
-$8 m
-$6 m
-$4 m
-$2 m
$0 m
Pre-clin Phase 1 Phase 2 Phase 2 Phase 3 Phase 3 Phase 3 NDA NDA
100% 90% 67.5% 33.8% 28.7%
September 12, 2002 CFO Roundtable - Valuing Biotech
Modeling Cash FlowModeling Cash FlowDevelopment & CommercializationDevelopment & Commercialization
-$25 m
$25 m
$75 m
$125 m
$175 m
$225 m
100%
90% 67.5% 33.8% 28.7%
21.5%Risk factors
September 12, 2002 CFO Roundtable - Valuing Biotech
Modeling Cash Flow Modeling Cash Flow Development & Commercialization (Expected Development & Commercialization (Expected Value)Value)
-$25 m
$25 m
$75 m
$125 m
$175 m
$225 m
21.5%
100%
90% 67.5% 33.8% 28.7%
September 12, 2002 CFO Roundtable - Valuing Biotech
Modeling Cash Flow Modeling Cash Flow Development & Commercialization (Expected Present Development & Commercialization (Expected Present Value)Value)
-$25 m
$25 m
$75 m
$125 m
$175 m
$225 m
Divide by (1+discount rate)year
September 12, 2002 CFO Roundtable - Valuing Biotech
Modeling Cash Flow Modeling Cash Flow Development & Commercialization (Expected Present Development & Commercialization (Expected Present Value)Value)
-$6 m
-$4 m
-$2 m
$0 m
$2 m
$4 m
$6 m
$8 m
$10 m
$12 m
$14 m
ENPV = $57 m
September 12, 2002 CFO Roundtable - Valuing Biotech
Monte Carlo SimulationMonte Carlo Simulation
September 12, 2002 CFO Roundtable - Valuing Biotech
Monte Carlo SimulationMonte Carlo Simulation
September 12, 2002 CFO Roundtable - Valuing Biotech
Strategy Model ScenariosStrategy Model Scenarios
Compare ENPVs for 9 licensing scenarios:Compare ENPVs for 9 licensing scenarios:
Deal NowDeal Now Phase 2 Phase 2 DealDeal
Phase 3 Phase 3 DealDeal
No Deal No Deal
Joint fund thruJoint fund thru
Phase 2Phase 2Straight licenseStraight license
Joint fund thruJoint fund thru
Phase 3Phase 3Joint fund thruJoint fund thru
Phase 3Phase 3Straight licenseStraight license
Joint fund thru Joint fund thru CommercializatiCommercializationon
Joint fund thru Joint fund thru CommercializatiCommercializationon
Joint fund thru Joint fund thru CommercializatiCommercializationon
Self fund Self fund throughoutthroughout
September 12, 2002 CFO Roundtable - Valuing Biotech
Results: Strategy ModelResults: Strategy Model1 Expected NPV to BiotechX - $ Millions
$171.7 M $263.3 M
$200.4 M$145.1 M $163.1 M
$146.1 M$145.6 M
$146.6 M
$242.4 M
Preclinical Phase 1 Phase 2 Phase 3 NDA Commercialization
PROGRAM DEAL NOW
PARTNER AFTER PH 2
Opt Out Ph 2
Opt Out Ph 2
Opt Out Ph 3
Opt Out Ph 3
PARTNER AFTER PH 3
Opt Out Ph 3
SELF-DEVELOP/MARKET
Joint Develop
Joint Develop
Joint Develop
ENPV
Capital Requirements (Exp.)
ENPV per share
September 12, 2002 CFO Roundtable - Valuing Biotech
Results: Strategy ModelResults: Strategy Model2 Expected Value of R&D Capital Requirements - $ Millions
($20.3) M ($38.6) M
($65.7) M($108.3) M ($115.2) M
($140.2) M($109.7) M
($131.3) M
($191.0) M
Preclinical Phase 1 Phase 2 Phase 3 NDA Commercialization 0
PROGRAM DEAL NOW
PARTNER AFTER PH 2
Opt Out Ph 2
Opt Out Ph 2
Opt Out Ph 3
Opt Out Ph 3
PARTNER AFTER PH 3
Opt Out Ph 3
SELF-DEVELOP/MARKET
Joint Develop
Joint Develop
Joint Develop
ENPV
Capital Requirements (Exp.)
ENPV per share
September 12, 2002 CFO Roundtable - Valuing Biotech
Deal ModelDeal Model Models licensing negotiation between two Models licensing negotiation between two
parties:parties: Pharma X Pharma X Biotech XBiotech X
Early stage deal with provisions for Early stage deal with provisions for License fees, milestones, research funding; License fees, milestones, research funding; Allocation (%) development costs, profit-Allocation (%) development costs, profit-
sharing;sharing; Royalty rates, brackets.Royalty rates, brackets.
Compares competing offers and different Compares competing offers and different assumptions of both sidesassumptions of both sides
September 12, 2002 CFO Roundtable - Valuing Biotech
Deal Model InputsDeal Model Inputs
September 12, 2002 CFO Roundtable - Valuing Biotech
Results: Deal ModelResults: Deal Model
Summary - ENPV Allocation
200 150
100 50 0 50 100 150 200
Straight LicensingJoint Development
ENPV to Pharma X
Biotech X Offer
Pharma X Offer
ENPV to Biotech X
Straight LicensingJoint Development
September 12, 2002 CFO Roundtable - Valuing Biotech
Limits of ModelsLimits of Models
““All models are wrong. Some are All models are wrong. Some are useful.” useful.”
George Box George Box Forecasting uncertaintyForecasting uncertainty Modeling errorModeling error Spreadsheet errorSpreadsheet error
September 12, 2002 CFO Roundtable - Valuing Biotech
Val
ue
Time
Uncertainty and flexibilityUncertainty and flexibility
September 12, 2002 CFO Roundtable - Valuing Biotech
Biotech Biotech real optionsreal options Underlying assetUnderlying asset
Product (with patent protection)
Exercise priceExercise price Cost of next phase
VolatilityVolatility Technical (private) -
development risk Market (public) –
competition/price risk Time limitTime limit
Patent life
Types of optionsTypes of options Defer Defer - delay/advance
research for compound AbandonAbandon - option to
abandon prior to full commitment of funds;
LearningLearning - Invest in additional research re. alternative indications, comparison with other drugs
Growth/strategic Growth/strategic - platform/pipeline with future unforeseen potential
September 12, 2002 CFO Roundtable - Valuing Biotech
SummarySummary
Biotech (ENPV) Model:Biotech (ENPV) Model: fundamental (cash flow) basis for valuationfundamental (cash flow) basis for valuation allows for scenario comparison / tailoring allows for scenario comparison / tailoring
of assumptionsof assumptions uses expected value & Monte Carlo uses expected value & Monte Carlo
methods to assess risk/uncertaintymethods to assess risk/uncertainty customizable to suit different business customizable to suit different business
needs (e.g., deals, strategy, financing)needs (e.g., deals, strategy, financing) easily adapted to other biotech easily adapted to other biotech
applications (e.g. tools, medical devices)applications (e.g. tools, medical devices)
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