bv--chempharma 19dec2014 (da final)
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Business ValuationPRESENTER: DAVID ABERCROMBIE, PHD, BCA
PRESENTED TO: CHEMPHARMA
EAC VALUATIONS LLC1450 E BOOT RD, 500-BWEST CHESTER, PA 19380610-687-5855EACVALUATIONS.COM
EAC Valuations LLC 19 December 2014
Objectives What is a Business Valuation?
Who performs a valuation? Why would a valuation be needed?
What methods are used to calculate value? Reconciliation of Values
Valuation of Intellectual Property
EAC Valuation Case Study
Questions
EAC Valuations LLC 19 December 2014
What is a Business Valuation?
“The act or process of determining the value of a business enterprise or ownership interest therein.”
-- International Glossary of Business Valuation Terms
EAC Valuations LLC 19 December 2014
Who Performs a Business Valuation? Generally performed by certified valuator from the following
organizations: National Association of Certified Valuation Analysts (CVA)
American Institute of Certified Public Accountants (ABV)
American Society of Appraisers (ASA)
International Society of Business Appraisers (BCA)
Proper valuations should follow organizational standards: AICPA issued SSVS-1 for Business Valuation Standards effective 6/1/2008
NACVA Standards Equivalent to AICPA
Uniform Standards of Professional Appraisal Practice
FIRREA recognizes USPAP as the generally accepted appraisal standards
EAC Valuations LLC 19 December 2014
Why is a Business Valuation needed?
Bank Financing
Mergers and Acquisitions
Ownership disputes
Business Planning
Estate and Gift Tax
Marital/Business dissolution
Family Limited Partnerships
Purchase Price Allocation (ASC 805)
Goodwill Impairment (ASC 360)
Buy/Sell agreements
Reorganization and bankruptcies
Deferred/Incentive Compensation
EAC Valuations LLC 19 December 2014
Business Valuation Methods
The following methods can be used in conjunction or separately to value an enterprise:
Asset Approach Book value Method
Adjusted Net Asset Method
Income Approach Capitalization of Earnings
Discounted Cash Flow
Market Approach Direct Market Data Method
Public Guideline Companies
EAC Valuations LLC 19 December 2014
Business Valuation Example Objective: Value 10% ownership in Steel Widget Inc as of 12/31/2013
Define the Valuation Purpose: IRS Gift Tax
The current state of the business defines the Premise of Value: Going Concern Value
The purpose defines the Standard of Value: Fair Market Value
Steel Widget’s shareholder agreement, the standard and premise of value, and professional experience indicates the reported value will be: Non-Control, Non-Marketable, Voting
EAC Valuations LLC 19 December 2014
Asset Approach Under going concern premise of value, this approach typically
provides a ‘floor’ value
Assets and liabilities are assigned fair market values as of the valuation date (12/31/2013)
Best for businesses with large tangible asset base or generate losses
For profitable operations this method does not address earnings
Equipment appraisal may be needed to ensure accuracy
Yields a “Control, Non-Marketable” value
EAC Valuations LLC 19 December 2014
Income Approach In the simplest terms the income approach calculates value as:
Benefit Stream divided by Risk
Benefit Stream defined as: Net Cash Flow to Equity or Net Cash Flow to Invested Capital
Risk Defined as: Cost of Equity or Weighted Average Cost of Capital (WACC)
Two approaches: Capitalization of Earnings – Linear earnings
Discounted Cash Flow – Non-linear earnings
Can yield a “Control” or “Non-Control” value
Yields a “Marketable” value
EAC Valuations LLC 19 December 2014
Weighted Average Cost of Capital Includes company’s
cost of debt
Provides weighted required
return to equity and debt holders
Cost of Debt 5.00%
Tax Rate 35.00%
After-tax Cost of Debt 3.25%
Risk-Free Rate 3.50%
Equity Risk Premium 6.70%
x Beta 1.30
+ Industry Adjusted Premium 8.71%
+ Size Premium 6.03%
+ Company Specific Risk 1.00%
= Cost of Equity 19.24%
Capitalization Structure
Debt (Market Value) 25%
Equity (Market Value) 75%
WACC 15.24%EAC Valuations LLC 19 December 2014
Capitalization of Earnings Example Determine benefit stream
Weighted Average, Average or Last Fiscal Year
12/31/2009
12/31/2010
12/31/2011
12/31/2012
12/31/2013
$200,000 $25,000 $150,000 ($20,000) $180,000 7% (1/15) 13% (2/15) 20% (3/15) 27% (4/15) 33% (5/15)
Straight Average $107,000
Weighted Average $101,333 No Trend Define risk, utilize proper discount rate
Convert discount rate to capitalization rate by subtracting long term growth rate
EAC Valuations LLC 19 December 2014
Discount Rate 19.24% Average $107,000
Less: LTG 3.00% x LTG 3.00%
= Cap Rate 16.24% = NCFE $110,210
Multiplier x 6.16
100% Equity Value $678,633
Discounted Cash Flow Example Calculate future cash flows based upon detailed projections
EAC Valuations LLC 19 December 2014
12/31/2014 12/31/201512/31/2016
12/31/2017
12/31/2018
Projected $80,000 $120,000 $100,000 $140,000 $130,000
Present Value 0.916 0.768 0.644 0.540 0.453
@ 19.24% $73,262 $92,161 $64,409 $75,623 $58,890
Residual Value: $133,900
Capitalization Rate: 16.24% Sum of Present Value: $ 364,345
Future Value: $824,507Terminal Value: $ 373,504
Present Value Factor: 0.453 100% Equity Value: $ 737,849
Terminal Value: $373,504 Rounded: $ 740,000
Market Approach Similar concept as Income Approach
Benefit (Revenue, EBITDA, EBIT, Cash Flow)
Risk (P/Rev, P/EBITA, P/EBIT, P/CF)
Two approaches: Direct Market Data Method
Use past private company transactions as a multiple, which defines risk
Yields a “Control, Non-Marketable” value
Public Guideline Company Method
Use public guideline companies multiples, which defines risk
Can yield a “Control” or “Non-Control” value
Yields a “Marketable” value
EAC Valuations LLC 19 December 2014
Reconciliation of Methods Review results from applied methods
Often a valuator will give weightings to various methods
EAC Valuations LLC 19 December 2014
Method Value DLOM ValueWeighting
Adjusted Net Assets $355,000 N/A $355,000 0%
Capitalization of Earnings $678,633 30% $475,043 100%
Discounted Cash Flow $737,849 30% $516,495 0%
Direct Market Data $559,982 N/A $559,982 0%
Public Guideline $4,250,000 30% $2,975,000 0%
100% Equity Value Conclusion: $475,04310% Equity Value (Rounded) $47,500 Non-Control, Non-Marketable
WHAT COMPRISES A BUSINESS VALUATION? (HOW DOES IP FIT?) When valuing a business we generally value it as a whole
This value reflects the value of all the assets which the business owns
This value can then be allocated into three classes of assets
EAC Valuations LLC 19 December 2014
Net Tangibles Assets(Inclusive of all liabilities)
IDENTIFYING INTELLECTUAL PROPERTY
EAC Valuations LLC 19 December 2014
WHY VALUE IP?
EAC Valuations LLC 19 December 2014
• M&A transactions; when disposing of business or acquiring a business asset - understand the value of specific intellectual property to ensure the best result in that transaction• Required that intellectual property in acquisitions be valued and
amortized over their assessed useful life
• Tax consolidation for corporate groups • Restructuring Transactions; Intellectual Property Valuations
are important in certain restructuring transactions• Litigation Proceedings; often when intellectual property
protection is breached it is important to understand the value prior to seeking compensation under litigation
VALUATION METHODOLOGIES There are three generally accepted valuation methods
utilized to value Intellectual Property: Market based – comparable market transactions Cost based – historic costs or replacement cost devoted
to the intangible asset overtime Future earnings based – expected future economic
benefits; relief of royalty savings
EAC Valuations LLC 19 December 2014
Valuation Case Study
EAC Valuations LLC 28 October 2014
A case study that demonstrates valuation of an early-stage pharma company that is pre-revenue, with purchased assets that is looking for partners to share drug development costs
EAC Valuation Case Study Small start-up pharma company acquired assets from major
pharmaceutical company that sold these assets for strategic reasons
Assets included patents, inventory, documentation, know-how, and assigned contracts
Purchase agreement called for an upfront payment and remainder to be paid to seller upon meeting milestone of dosing first patient in Phase 3 clinical trial
Additional royalties were to be paid dependent upon level of products sold worldwide
EAC Valuations LLC 28 October 2014
EAC Valuation Case Study Valuation assignment for EAC Valuations involved
providing the total enterprise value and the value of assets of the business including 5 patents and 2 patent applications (at time of valuation)
Valuation was intended to be used as a basis for further negotiation with other pharma companies desired as partners to complete development through commercialization
EAC Valuations LLC 28 October 2014
EAC Valuation Case Study Appraisal assignment started with valuation of
financial information from sales and earnings forecasts for multiple pipeline products that were based upon the acquired assets
The second part of the assignment was to value the patents that were part of the transaction
EAC Valuations LLC 28 October 2014
EAC Valuation Case Study Determination of value was based upon an income
approach Valuation used projections of the total monetary
benefits expected to accrue from sales over projected period
Monetary benefits were discounted to net present value over the projection period
Initial discount rate (WACC) developed based upon corporate risk and capital structure compared to reference companies
EAC Valuations LLC 19 December 2014
Weighted Average Cost of Capital Includes company’s
cost of debt
Provides weighted required
return to equity and debt holders
Cost of Debt 4.39%
Tax Rate 40.00%
After-tax Cost of Debt 2.63%
Risk-Free Rate 3.13%
Equity Risk Premium 6.70%
x Beta 0.56
+ Industry Adjusted Premium 3.75%
+ Size Premium 0.50%
+ Company Specific Risk 2.00%
= Cost of Equity 9.38%
Capitalization Structure
Debt (Market Value) 12.6%
Equity (Market Value) 87.4%
WACC 8.53%EAC Valuations LLC 19 December 2014
EAC Valuation Case Study Biotech/pharma early-stage companies have challenging features for
entrepreneurs/investors Very long time to market (typically 10 years or more)
Very high levels of risk (fewer than 1% of drug candidates will make it to market)
Large amounts of capital continually needed to move most technologies forward
Compared to many other assets, investors need to take on more risk, hold illiquid investments, and wait longer for a return – therefore require a higher rate of return
High risk = a high Cost of Capital► Evidence shows that the Cost of Capital for venture backed early-stage
companies in Life Sciences is 20% or higher
EAC Valuations LLC 19 December 2014
EAC Valuation Case Study A revised discount rate was calculated based upon
the WACC and based upon additional risk factors (“project development delay” factors)
Additional discounting of the income stream was based upon a probability analysis in which probable product development time delays were estimated
Time delay in development = loss of revenue= increased risk to the company and investors
The increased risk is captured in the cost of capital (discount rate)
EAC Valuations LLC 19 December 2014
EAC Valuation Case Study
EAC Valuations LLC 19 December 2014
Cost of Capital = 8.53% (base-line, build-up calculation; previous slide)
Cost of capital = 24.4%
Additional risk factors considered due to project development delays
EAC Valuation Case Study The new discount rate was applied to projected
cash flows to calculate the present value of all pipeline projects
The value of the projects was summed to provide a total enterprise value
EAC Valuations LLC 19 December 2014
EAC Valuation Case Study The next part of the valuation assignment was to
determine the contribution from the acquired patents to the total enterprise value
The indicated value for the group of patents is based upon royalty savings (relief from royalty); the royalty rate is estimated at 33% of sales revenue
EAC Valuations LLC 19 December 2014
EAC Valuation Case Study
EAC Valuations LLC 19 December 2014
Patents
0.0% FutureTotal Attributable Royalty Adjusted Mid-Year* Present
Projected Revenues Savings for Taxes PWF ValueGrowth FYE Months Period* Revenues 100.00% 33.0% 40.0% 24.4% Indication
- 12/31/12 12.0 1.0 0.0$ 0.0 - - - - - 12/31/13 24.0 2.0 0.0$ 0.0 - - - - - 12/31/14 36.0 3.0 0.0$ 0.0 - - - -
nmf 12/31/15 48.0 4.0 83.1$ 83.1 27.0 16.0 0.4657 7.0 3.00 12/31/16 60.0 5.0 249.2$ 249.2 82.0 49.0 0.3744 18.0 2.23 12/31/17 72.0 6.0 555.6$ 555.6 183.0 110.0 0.3009 33.0 1.76 12/31/18 84.0 7.0 976.3$ 976.3 322.0 193.0 0.2419 47.0 1.58 12/31/19 96.0 8.0 1,539.8$ 1,539.8 508.0 305.0 0.1945 59.0 1.40 12/31/20 108.0 9.0 2,160.4$ 2,160.4 713.0 428.0 0.1563 67.0 1.32 12/31/21 120.0 10.0 2,852.5$ 2,852.5 941.0 565.0 0.1257 71.0 1.21 12/31/22 132.0 11.0 3,461.5$ 3,461.5 1,142.0 685.0 0.1010 69.0 1.13 12/31/23 144.0 12.0 3,925.8$ 3,925.8 1,296.0 778.0 0.0812 63.0 1.12 12/31/24 156.0 13.0 4,390.1$ 4,390.1 1,449.0 869.0 0.0653 57.0 1.11 12/31/25 168.0 14.0 4,861.5$ 4,861.5 1,604.0 962.0 0.0525 51.0 1.10 12/31/26 180.0 15.0 5,333.0$ 5,333.0 1,760.0 1,056.0 0.0422 45.0 1.64 12/31/27 192.0 16.0 5,690.1$ 5,690.1 1,878.0 1,127.0 0.0339 38.0 1.03 12/31/28 204.0 17.0 5,847.2$ 5,847.2 1,930.0 1,158.0 0.0273 32.0 1.02 12/31/29 216.0 18.0 5,947.2$ 5,947.2 1,963.0 1,178.0 0.0219 26.0 1.00 12/31/30 228.0 19.0 5,947.2$ 5,947.2 1,963.0 1,178.0 0.0176 21.0 0.28 12/31/31 240.0 20.0 1,486.8$ 1,486.8 491.0 295.0 0.0142 4.0
Sum of Present Values 708
Tax Amortization Benefit Factor 0.1174
Indicated Fair Value 802$
Rounded: 800$
Intangible Asset Premium
Cumulative
EAC Valuation Case Study Patent valuation procedure -
Assumed revenue stream is 100% attributable to acquired patent-related products
The projected sales were adjusted down annually by the percentage of patents expiring in a given year
The modified revenue streams were multiplied by the percentage royalties to calculate the pre-tax royalty savings
These values are adjusted by the reciprocal of the tax rate and further by the present value factor to arrive at the annual royalty savings
The sum of annual savings, with application of the tax amortization benefit factor calculation, provided a value for the patents
EAC Valuations LLC 19 December 2014
EAC Valuation Case Study Summary of Fair Market Value Conclusions
XYZ Company Patents & Applications for Composition of Matter .................. $800 Million
Patent/App Number File Date US Application 1111 (Aug XX, 20XX)
US Application 1112 (July XX, 20XX)
US Patent 8,113,XXX (Dec XX, 20XX)
US Patent 8,114,XXX (Dec XX, 20XX)
XYZ Company Patents for Manufacturing Methods & Formulation ................ $300 Million US Patent 8,115,XXX (Aug XX, 20XX)
US Patent 8,116,XXX (June XX, 20XX)
US Patent 8,117,XXX (Dec XX, 20XX)
API & XYZ Company Inventory ..................................................................... $5.0 Million
Intangible Business Value ............................................................................. $1,400 Million
Total Value.................................................................................................... $2,500 Million
EAC Valuations LLC 19 December 2014
Conclusion Business Valuation is the process of determining the value of a business
enterprise or ownership interest therein (definition)
There are 3 approaches possible –
Income approach – value = cash flow/risk (discounted cash flow method)
Asset Approach – book value (w/ adjustments) of company assets
Market Approach – value based upon comparable private and/or public companies
Intellectual property is an intangible asset that can be valued and contribute to the overall enterprise value of a company
Discount rates are a measure of the risk of a company = cost of capital = what an investor would expect to earn from an investment in the company
EAC Valuations LLC 19 December 2014
Questions?EAC VALUATIONS LLC
1450 E BOOT RD, 500-B
WEST CHESTER, PA 19380
DABERCROMBIE@EACVALUATIONS.COM
610-687-5855 X104
EAC Valuations LLC 19 December 2014
About EAC Valuations LLCEAC Valuations has provided in-depth and trusted appraisals and valuation reports since 1971. Located 20 miles northwest of Philadelphia, near Valley Forge, our assignments have taken us around the world, and next-door. We have completed more than 10,000 appraisals for clients ranging from multi-national, multi-billion dollar Fortune 100 companies and financial institutions, to privately held local manufacturing and services companies.
Our highly qualified, certified and experienced appraisers can exceed expectations for a wide range of appraisal needs meeting IRS, FASB, IFRS, USPAP, and FIRREA requirements, encompassing appraisals of industrial and commercial real estate, machinery & equipment, intangible assets, and complete business enterprise valuations.
EAC Valuations LLC 19 December 2014
Contact Info:
David Abercrombie, BCA
EAC Valuations LLC
1450 E Boot Road, Suite 500-B
West Chester, PA 19380
610-687-5855 x104
dabercrombie@eacvaluations.com
www.eacvaluations.com
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