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Project Valuation

& Deal

AnalysisTheory & Applications in the Pharmaceutical

Industry

Pascale Boyer Barresi, CFAAssociate Director, Business Analysis,

Business Development & Licensing, Debiopharm International,

Lausanne (Switzerland)

March 2015

1

Agenda

Business Development & Financing

Product Fit inside the Company Deals Basics Financing

Product Valuation

Case Study without Risk Case Study with Risks

Basic Understanding

Drug Characteristics Diagnostics Overview Valuation Preparation

Introduction

Drug Industry Landscape Finance – Time Value of Money Basics

2

Speaker’s BackgroundEducation

◦ 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: [email protected]◦ Linkedin: http://www.linkedin.com/pub/pascale-boyer-barresi-cfa/0/674/a95

3

mailto:[email protected]

http://www.linkedin.com/pub/pascale-boyer-barresi-cfa/0/674/a95

Your Expectations?

4

Introduction

5



Product Valuation


Basic Understanding


Introduction


Agenda

6

IntroductionOur 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 LandscapeSome 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 AreasTherapy Area Sales 2013

(USDb)Sales 2020e

(USDb)Growth

(CAGR %)Market Share

2013Market Share

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

EMA approved 40 drugs in 2014 and 34 in 2013.

13

http://www.nature.com/nrd/journal/v14/n2/full/nrd4545.html

2014 FDA drug approvals

BCG's analysis looked at peak sales estimates for53 new therapeutic drugs (NTDS) that wereapproved in 2014, including new molecular entities(NMEs) and biologic license applications (BLAs).


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How do we get there?R&D Process

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Worldwide R&D Spending

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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.

b | The rate of decline in the approval of new drugs per billion US dollars spent is fairly similar over different 10-year periods.

c | The pattern is robust to different assumptions about average delay between R&D spending and drug approval.

17


Time Value of Money Basics

18

Time Value of MoneyThe 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

Future Value Concept Present Value Concept

19

Simple InterestSimple 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 amount1 100 5 1052 105 5 1103 110 5 1154 115 5 1205 120 5 125

20

Compound InterestWith compound interest, interest is calculated not only on the beginning interest, but on any interest accumulated in the meantime.

Year Principal Interest (5%) Cumulatedamount

1 100.00 5.00 105.002 105.00 5.25 110.253 110.25 5.50 115.754 115.75 5.75 121.505 121.50 6.00 127.506 127.50 6.25 133.757 133.75 6.50 140.258 140.25 6.75 147.009 147.00 7.00 154.00

10 154.00 7.25 161.25

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Simple vs. Compound

0

50

100

150

200

250

300

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Tota

l Am

ount

Year

Simple Interest vs. Compound Interest

Simple Interest Compound Interest

When you compare the growth of simple and compound interest, investments with simple interest grow in a linearfashion and compound interest in a geometric one.

22

Compound Interest Formula

𝑷𝑷𝒏𝒏 = 𝑷𝑷𝟎𝟎 ∗ (𝟏𝟏 + 𝒊𝒊)𝒏𝒏

𝑃𝑃0 = Beginning value𝑃𝑃𝑛𝑛 = End value after n time periods i = interest rate n = number of years

23

Compound Interest Example𝑷𝑷𝒏𝒏 = 𝑷𝑷𝟎𝟎 ∗ (𝟏𝟏 + 𝒊𝒊)𝒏𝒏

𝑷𝑷𝒏𝒏 = 𝟏𝟏𝟎𝟎𝟎𝟎 ∗ (𝟏𝟏 + 𝟎𝟎.𝟎𝟎𝟎𝟎)𝟏𝟏𝟎𝟎= 162.89


Year Principal Interest (5%) Cumulated amount

1 100.00 5.00 105.002 105.00 5.25 110.253 110.25 5.50 115.754 115.75 5.75 121.505 121.50 6.00 127.506 127.50 6.25 133.757 133.75 6.50 140.258 140.25 6.75 147.009 147.00 7.00 154.00

10 154.00 7.25 161.25

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Why the results are not the same?The formula is based on continuous compounding, meaning that eachday the calculation is done.

In the table, the calculation is done once a year yielding a smalleramount.

25

Future Value TablesHow to use them?

𝑷𝑷𝒏𝒏 = 𝑷𝑷𝟎𝟎 ∗ (𝟏𝟏 + 𝒊𝒊)𝒏𝒏 Future Value Factor

i

n

To find the future value of a present amount, locate the appropriate number of years and the appropriate interest rate, take the resulting factor and multiply it times the present value.

26

Future Value ExercisesUse the formula

What is the future value of USD 600 in 5 years with an interestrate of 3%?

◦ 696◦ 730◦ 540

Let’s check!

Use the Future Value Table

What is the future value of USD 1600 in 7 years with an interestrate of 6%?

◦ 2406◦ 3025◦ 1530

𝑷𝑷𝒏𝒏 = 𝑷𝑷𝟎𝟎 ∗ (𝟏𝟏 + 𝒊𝒊)𝒏𝒏

27

Present ValuePresent 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.

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Present Value Formula

𝑷𝑷𝟎𝟎 =𝑷𝑷𝒏𝒏

(𝟏𝟏 + 𝒊𝒊)𝒏𝒏


29

Present Value Tables

𝑷𝑷𝟎𝟎 = 𝑷𝑷𝒏𝒏 ∗𝟏𝟏

(𝟏𝟏 + 𝒊𝒊)𝒏𝒏

How to use them?

Present Value Factor

To find the present value of a future amount, locate the appropriate number of years and the appropriate interest rate, take the resulting factor and multiply it times the future value.

30

Present Value TablePresent 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.

𝑃𝑃0 < 𝑃𝑃𝑛𝑛The Present Value is always inferior to the Future Value.

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Present Value ExercisesUse the formula

What is the present value of USD 7500 where n is 7 years and the interest rate is 2%?

◦ 7625◦ 6529◦ 6551

Use the Present Value Table

What is the present value of USD 200’000 where n is 3 years and the interest rate is 6%?

◦ 150’872◦ 195’637◦ 167’920

Let’s check!


(𝟏𝟏 + 𝒊𝒊)𝒏𝒏

32

Agenda



Product Valuation


Basic Understanding


Introduction


33

Drug Characteristics

34

Drug CharacteristicsTopics 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

OverviewTo 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

OverviewClinical stages

Source: The R&D Cost of a New Medicine, J. Mestre-Ferrandiz, Office of Health Economics, December 2012.

Cumulative probability to reach the market when you start In Target-to-hit: 4.1% In Phase I: 11.7% In Phase II: 21.7% In Phase III: 63.7%

Probability of success of the current phase

Number of productsneeded in R&D to have 1 product on the market

Cost per product in R&D per phase

Duration of eachphase

WIP needed for 1 launch* Cost per WIP per phase e.g. (24.3*1) TTH or (19.4*2.5) HTL

See next slide

37

Focus - CapitalizationThe 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 riskyportfolio of other investments.

Several studies estimated it between 11 and 14%.NB: The cost of capital for biotechnology companies, heavily focused on discovery and earlystage 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 capitalizedR&D?

Total processduration: 13 years

We will use the concept we learntbefore: Present Value & Future Value

In this case, the present value is the Cost per launch: $24The number of years is the total process duration: 13.5The cost of capital used as i is 11%

So we calculate the Future Value for TTH by applying the formula:FV TTH = 24*(1+11%)13=$94

For the next phases, you have to reduce the duration as youprogressed along the wholeprocess.FV HTL = 49*(1+11%)(13-1)=171

The amount differences are due to rounding in duration

39

Drivers of R&D Costs

Out-of-Pocket Costs

Success Rates

Development Times

Cost of Capital

Average Cost of a New Molecular

Entity

But there are differences due to:◦ Therapy areas◦ Compound origin (in-house vs.

in-licensed)◦ Firm size (big vs. small)◦ Small molecules vs. biologics


40

Therapeutic Areas & Compound Origin

TherapeuticArea

Cost per NME

(USDm) 2011

Respiratory 1'457 Cancer 1'339 Neurological 1'306 Musculoskeletal 1'216 Blood disorders 1'164 Cardiovascular 1'140 Dermatological 870 Genito-urinary 816 HIV/AIDS 694 Anti-parasitic 583

Phase transition probabilities and clinical approval success probabilities bysource of compound, for compounds first tested in humans from 1993 to 2004

Cumulative probability

to reach the market


41

Firm Size & Molecule TypeFirm 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


43

Success RatesNot all the projects started in discovery end up on the market.

Remember this figure shown at the beginning of the presentation?

44

Success RatesSuccess rates differ by therapeutic area. Here are some benchmarks:

Therapeutic Area Phase 1 Phase 2 Phase 3 Approval CumulativeArthritis & Pain 77% 38% 78% 89% 20%Central Nervous System 66% 46% 62% 78% 15%Cardiovascular 63% 43% 76% 84% 17%Gastrointestinal 67% 49% 71% 86% 20%Immunology 65% 45% 65% 82% 15%Infectious Diseases 71% 51% 80% 97% 28%Metabolism 48% 52% 79% 93% 18%Oncology 77% 44% 62% 85% 18%Respiratory Diseases 63% 41% 60% 77% 12%

Source: Tufts University, 2010; Villiger, 2012.

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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 successrate is 100%, in reality it is a 25% success rate)

◦ Main statistic: 10.4% of all indication development paths in phase 1 wereapproved 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.

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Study from Nature Biotechnology (January 2014)

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Market AccessMarket access ≠ marketing

Market access is linked to the anticipation of whether the payer will reimburse your drug and at what price…

Budget pressure + increase of health expenditures = more scrutiny from payers

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

Source: Bridgehead, Oncology Workshop, London, 2012.

50

Market Access Stakeholders

51

Market Access Planning

Source: Bridgehead, Oncology Workshop, London, 2012.

52

ExecutionThe characteristics of a drug (low success rates, long developmenttimes, challenging commercialization,…) require anticipation and strategic thinking.

It is important to take a external view(why would I purchase this idea/product?).

Key questions:

Imagine the needs• Of the patient• Of the patient’s

family• Of the insurance

company• Of the doctor &

doctor’s office staff

Understand all the possible outcomes• Best case• Worst case

Regulatory risks

Challenges in patient practice• How the disease is

treated• Every aspect of

therapy delivery• Specific need of

patient population• Referral patterns

Clinical risks(enrollment, drugavailability,…)

Reimbursement

53

Diagnostics Overview

54

DiagnosticsMedical Devices

Diagnosis

IVD – In Vitro Diagnostics

Collect, prepare, analyze samples

from human body

MolecularMedicine - In Vivo

Diagnostics

Measure anatomy& patient function

(imaging,…)

Therapy Monitoring Telemedicine

55

DiagnosticsIn this part of the lecture, we will focus only on IVD (in-vitro diagnostics) and its applications in Personalized Medicine.

56

Personalized Medicine

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http://www.pfizer.ie/personal_med_video.cfm

http://www.pfizer.ie/personalized_med.cfm

Personalized Medicine

Source: http://www.pfizer.ie/personalized_med.cfm

58

http://www.pfizer.ie/personalized_med.cfm

Market Size of IVD

Source: Roche.

59

From genediscovery to healthapplication•Analytical validation•Clinical validation

From healthapplication to evidence-basedguideline•Clinical utility•CE & CU studies•Meta-analyses•Systematic reviews•HTA•Guideline

development

From guideline to healthpractice•Dissemination

research•Implementation

research•Diffusion research

From practice to health impact•Outcomes research

IVD Development Path

Source: adapted from http://www.cihr-irsc.gc.ca/e/46872.html

60

http://www.cihr-irsc.gc.ca/e/46872.html

IVD Development Costs & Success Rates

StageProbability to do this

stage

CumulatedProbability

EstimatedDuration (years)

EstimatedCosts (USD)

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?

Source: http://fr.slideshare.net/eInfochips_Solution/designer-pulse-medical-device-developers-survey (2014)

3.2%

3.2%

3.2%

6.5%

6.5%

9.7%

12.9%

19.4%

35.5%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Well defined architecture

UI Development

Hardware design

Software based control

Other

Software development

Design verification test development

Replicating all use case scenarios

Regulatory compliance

The biggest challenge in completing development of a new medical device:

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http://fr.slideshare.net/eInfochips_Solution/designer-pulse-medical-device-developers-survey

What is the Most Critical Success Factor?

3.2%

4.2%

8.7%

9.7%

12.9%

19.4%

41.9%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%

Transitioning to products tailored for mHealth era

Other

Improving quality

Lowering development costs to compete globally

Reducing time to market

Lowering product costs to compete globally

Continuing to out-innovate the competition

The most critical success factor in design:

Source: http://fr.slideshare.net/eInfochips_Solution/designer-pulse-medical-device-developers-survey (2014)

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http://fr.slideshare.net/eInfochips_Solution/designer-pulse-medical-device-developers-survey

Opportunities & Challenges Opportunities:

• Aging populations• Increasing incidence of diseases• Focus to disease prevention• Increasing insured population

(USA)• Increased demand for devices

with connectivity solutions (point of care), remote monitoring & data management

• Next Generation Sequencing (all in one test) – Personalizedmedicine

• Emerging countries

Challenges:• Regulatory requirements• Increasing buying power• Switching costs as product

lifecycles are shorter than in the drug industry

• Sensitivity to buying patterns & formulary listings

Trends:• Customer care• Continuous improvements• Automation• Increasing competition, even from

smaller companies

64

Regulatory PathwaysCompare & Contrast… between• Drugs• Medical Devices• IVD

65

Regulatory Pathway - Drugs

Source: https://regulatory.usc.edu/consulting/resources/drugs/

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https://regulatory.usc.edu/consulting/resources/drugs/

Regulatory Pathway –Medical Devices

Source: https://regulatory.usc.edu/consulting/resources/medical-devices/

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https://regulatory.usc.edu/consulting/resources/medical-devices/

Regulatory Pathway – IVD

Source: https://regulatory.usc.edu/consulting/resources/in-vitro-diagnostics/

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https://regulatory.usc.edu/consulting/resources/in-vitro-diagnostics/

Valuation Preparation

69

Valuation PreparationTopics covered in this section:

◦ Commercial & Marketing Phase◦ Sales Forecasts

70

Commercial & Marketing PhaseOnce 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 ForecastsBefore 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 ForecastsWhat 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

•Everybody in the organization shouldcommit

Need definition

•Data transparency•Excel is sufficient for

modelling purposes•Adapt to product

evolution

Methodologyselection •Simulations

•Scenarii•Sensitivity analysis•Break-even analysis

Results analysis & Scenario definition

•Garbage in garbage out•Use ranges or scenarios•Keep asking yourself

about the impact on decision making

Presentation

73

Sales Forecasts

Market

EpidemiologyPatient population (diagnosed, treatable, eligible,…)Market access (insurancetypology by patients) Patient awareness

Product

Competitive landscapeMarket share estimationAdoptionCannibalization

Conversion

DosingCompliancePricing (according to product positioning)Benchmark pricing

Sales Forecasts

74

Sales Forecasts - Market

Population• Epidemiology• Growth rate• Symptomatic• Diagnosed

PotentialPatients• Treatable• Eligible• Patient awareness

Treated Patients• Patient access• Insurance types• Patient action

75

Sales Forecasts - Product

Treated patients• Patient access• Insurance types• Patient action

Patients treated withyour product• Competitive landscape• Market share estimation• Adoption curves• Cannibalization

76

Sales Forecasts - Conversion

Patient treatedwith your product• Competitive landscape• Market share

estimation• Adoption curves• Cannibalization

Volume forecast• Dosing• Compliance• Persistence

Sales forecast• Benchmark pricing• Positioning• Target pricing• Discount & rebates• Price erosion/inflation

77

Market Share EstimationLimited data available for benchmarking…

Order of entry1 2 3 4 5 6 7 8 9 10

Number of

products

1 100%2 58% 42%3 43% 31% 26%4 35% 25% 21% 19%5 30% 22% 18% 16% 14%6 26% 19% 16% 14% 13% 12%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 PharmaA small word on pricing in pharma

Manufacturer Wholesaler Pharmacist PayerPatient

Government

Ex-Factory

Price

WholsalePrice

PharmacyPrice

RetailPrice

Tax

Out of pocket

AgreedPrice

COGS

Used to calculate

sales forecasts

About Drug PricesThe manufacturer won’t sell its medicine directly. It will go through a wholesaler, which will sell to a pharmacist and then to the patients. The state can also apply some tax on drugs.In one word, the manufacturer won’t receive the retail price but the exFactoryprice, which is what will be used in sales forecasts.The breakdown between the manufacturer, the wholesaler, the pharmacist and the state will vary country by country.

79

Retail Price Breakdown

0% 20% 40% 60% 80% 100%

Austria (2008)Belgium (2008)

Denmark (2007)Finland (2007)France (2011)

Germany (2008)Italy (2007)

Portugal (2008)Spain (2010)

Sweden (2007)Switzerland (2011)

AverageMedian

ExFactory Margin Wholesale Margin Pharmacy Margin VAT

Main source: http://whocc.goeg.at/Publications/CountryReports & internal calculations

80

Case StudyExcel spreadsheet structure

81

ExerciseNow you have all the tools to try alone.

82



Product Valuation


Basic Understanding


Introduction


Agenda

83

Net Present Value

84

NPV – Net Present ValueIn 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

Time

InvestmentUSD -2000

0

1 32 4

CashflowYear 1

USD 1000

CashflowYear 2

USD 1000

CashflowYear 3

USD 1000

CashflowYear 4

USD 1000

Cash inflows

Cash outflows

86

NPV – What is the value today?

Time

InvestmentUSD -2000

0

1 32 4

CashflowYear 1

USD 1000

CashflowYear 2

USD 1000

CashflowYear 3

USD 1000

CashflowYear 4

USD 1000

87

NPV – PV FormulaRemember?


(𝟏𝟏 + 𝒊𝒊)𝒏𝒏


88

NPV – Transformation of Future Values in Present Values

Time

InvestmentUSD -2000

0

1 32 4

CashflowYear 1

USD 1000

CashflowYear 2

USD 1000

CashflowYear 3

USD 1000

CashflowYear 4

USD 1000

Let’s take a 10% discount rate

𝑷𝑷𝟏𝟏 = 𝟏𝟏𝟎𝟎𝟎𝟎𝟎𝟎(𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟏𝟏

= 909

𝑷𝑷𝟐𝟐 = 𝟏𝟏𝟎𝟎𝟎𝟎𝟎𝟎(𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟐𝟐

= 826𝑷𝑷𝟑𝟑 = 𝟏𝟏𝟎𝟎𝟎𝟎𝟎𝟎

(𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟑𝟑= 751

𝑷𝑷𝟒𝟒 = 𝟏𝟏𝟎𝟎𝟎𝟎𝟎𝟎(𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟒𝟒

= 683

89

NPV CalculationIt is the sum of the initial investment (negative cashflow) and all the present value of the positive cash flows:

InvestmentUSD -2000

𝑷𝑷𝟏𝟏 = 𝟏𝟏𝟎𝟎𝟎𝟎𝟎𝟎(𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟏𝟏

= 909 𝑷𝑷𝟐𝟐 = 𝟏𝟏𝟎𝟎𝟎𝟎𝟎𝟎(𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟐𝟐

= 826 𝑷𝑷𝟑𝟑 = 𝟏𝟏𝟎𝟎𝟎𝟎𝟎𝟎(𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟑𝟑

= 751 𝑷𝑷𝟒𝟒 = 𝟏𝟏𝟎𝟎𝟎𝟎𝟎𝟎(𝟏𝟏+𝟎𝟎.𝟏𝟏)𝟒𝟒

= 683++ + +

= 1169

90

Exercise – Project ValuationYou are the project manager of a well-established brand of cakes and youwould like to launch a new flavor. You already tested the market withseveral 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 RateThe discount rate consists of 2 elements:

Remember that the discount rate reflects your view.

It will not be the same if your are:◦ the founder of the company◦ a partner looking for a project◦ an investor (VC, business angel,…)

Time value of money•Risk-free rate of return•Return on a US Treasury security withthe same time horizon

•~ 3.5%

Risk premium - standard•All the risks faced by the company(management, currency, market, country, legal, manufacturing)

•~ 5.5-6.5%

Total Discount rate: ~ 9.3%-10.3%

92

20-year US Treasury Yield

93

Risk-adjustedNet Present Value

94

rNPV IntroductionDeveloping a cake is less risky than developing a drug.

NPVs are perfect for normally risky activities but not for valuing drugprojects 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 riskpremium unchanged (and by doing so the discount rate is reasonableand the global value is automatically adjusted with the success rates).

95

NPV vs rNPVNPV rNPVo The discount rate is a “black box”

containing all the riskso The investors’ preferred method

(which are looking for a common ground for the valuation of their holdings)

o Less preciseo Discount rates to use according to

the stage of development:• Preclinical: 55%• After Phase 1: 45%• After Phase 2: 30%• After Phase 3: 20%• Approved: 15%

o The discount rate is separated from the success rate. The cashflows are impacted more precisely.

o The pharma & biotech industries’ preferred method

o More preciseo Discount rates to use according to

the stage of development:• Preclinical: 18-20%• After Phase 1: 17-18%• After Phase 2: 15-17%• After Phase 3: 13-14%• Approved: 10%

Source: Avance.

96

ExampleWe 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%

Source: Tufts University, 2010; Villiger, 2012.

97

ExerciseNow use the success rates given by Nature Biotechnology(Neurology therapeutic area – All indications because classification isnot the same as the previous one).

98

rNPV – Methology SummaryGoal: 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



Product Valuation


Basic Understanding


Introduction


Agenda

100

Product Strategic Fit

101

Product Strategic FitDoes 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 Maximization Balance

StrategicDirection

Right Number of

Projects

104

Goals


StrategicDirection

Right Number of

Projects

Tools: financial models (NPV, rNPV) & scoring modelsResult: rank-ordered list of “Go” and “Hold” projects

105

Goals


StrategicDirection

Right Number of

Projects

Tools: visual charts, portfolio maps(bubble diagrams with the choice of the dimensions will have to fit your company objectives and it will depend on the stage of the company, the product types, the targeted markets,…The bubble size is very often representing the resources used)

Result: vision of balance

106

Goals


StrategicDirection

Right Number of

Projects

Tools: questionsAre all your projects consistent with your business’strategy? Are they in or out the bounds of the defined focus areas (markets and/or technologies)?Does the breakdown of your spending reflect your strategic priorities?

Result: gap analysis between “what should be” and “what is”.

107

Goals


StrategicDirection

Right Number of

Projects

Tools: resource capacity analysisResult: allocation of resourcesDo you have enough of the right resources to handle projects currently in your pipeline?Do you have enough resources to achieve your new product goals (% of your business sales coming from new products)?

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

Lice

nsin

gSt

rate

gy What are the gaps?What can we offer?

Opp

ortu

nity

Iden

tific

atio

n What do we need?Where will we find it?

Lice

nsin

gEv

alua

tion What is the

value to us?

Deal

-Mak

ing

& A

gree

men

t What are my target acceptable risks, returns and responsibilities?

Post

-Dea

l Ana

lysi

s What could be done better next time?

111

Deal Types◦ In-licensing◦ Out-licensing◦ Co-development◦ Co-promotion◦ Asset purchase / Acquisition◦ Collaboration◦ Joint-venture◦ Sublicense◦ Option◦ Alliance◦ Merger ◦ …

112

Deal Due DilligenceEnvironmental Partnering Pressure

EnvironmentalUncertaintyGlobal Competition

Partnering Antecedents

InterdependenceConflictTrustCommitmentOrganizationalCompatibilityTop Management Vision

Partnering Orientation

StrategicOperational

Partnering Implementation

Information SharingTechnology UtilizationStrategic Interface TeamsOrganizational IssuesJoint ProgramsAsset SpecificityJoint Performance Measures

CompetitiveAttainment

Competitive AdvantageCompetitive ParityCompetitiveDisadvantage

BUSINESS PERFORMANCE OUTCOME• Economic

Performance• Patient

Satisfaction • Prescriptor’s

Loyalty• Relationship

Effectiveness

113

Deal StructureAn perfect deal structure should:

◦ Compensate the licensee for taking on the risk◦ Generate payments representative of the value of the product for the

licensor

Inputs for the model should be realistic, understandable and transparent.

Financial deal terms are sometimes given. Some databases like Deloitte Recap and Medtrack are trying to guess the terms. They give you trends and comparables usable to draft a first proposal.

Today, deals are much more back-end loaded than before, meaning by that you will get small upfront but double-digit royalties and commercial milestones.

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 PartneringInterest 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)

Therapeutic Area Total spent(USDm)

Average total deal value (USDm)

Number of deals

Oncology 6576 387 18Infectious diseases 6432 643 10Cardiovascular diseases 3367 561 6Chronic inflammation 3339 477 7Mixed 2470 618 4Injury 1787 596 4Endocrine and metabolic diseases 1710 428 4Platforms 1526 218 8Ophthalmology 1067 534 2Genitourinary diseases 745 373 2CNS 715 358 4Respiratory diseases 540 270 3Blood 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 publishingannual reports on the current state of the industry. Check theirwebsite or subscribe to their newsletter.

118

http://www.currentpartnering.com/

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• Good relationships

◦ By having enough cash through collaboration, you gain credibility and reputation to attract additional partners

Regular stream of cash fromsuccessfully completed milestones

121

Financing

122

IntroductionCapital raised by Life Sciences Companies (USDm)

2014 2013 2012Change

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 Equity) 5’711 4'775 5'382 19.6%

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

http://www.burrillreport.com/article-biotech_industry_shatters_fundraising_records_in_2014.html

IntroductionFinancing & Acquisition Activity in Lifesciences in 2013

Global Venture Capital5%

Global Public Financing

30%

Global Partnering

16%

Global Mergers &

Acquisitions49%

Global IPOs (Initial Public

Offering)9% Global PIPE

(Private Investment

in Public Equity)

6%Global

Follow-ons17%

Global Other Equity

2%

Global Debt Offerings

53%

Global Other Debt13%

Source: Burrill & Company, Biotech Stocks Win Big In 2013, January 2nd, 2014..

124

Global IPOs (Initial Public

Offering)13%

Global PIPE (Private

Investment in Public Equity)

6%

Global Follow-ons16%

Global Other Equity

1%Global Debt

Offerings46%

Global Other Debt18%

IntroductionFinancing & Acquisition Activity in Lifesciences in 2014

Source: Burrill & Company: http://www.burrillreport.com/article-biotech_industry_shatters_fundraising_records_in_2014.html

Global Public Financing

17%

Global Venture Capital

3%

Global Partnering11%

Global M&A69%

125

http://www.burrillreport.com/article-biotech_industry_shatters_fundraising_records_in_2014.html

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 Foundationstats)

◦ Lack of transparency and long lockup periods turned many funds intocapital trap

◦ A lot of institutional investors withdrew their capital and startedtheir 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

Private Investors Public Investors

• Angels & Super Angels• Corporate Venture Capital• Family & Friends• Family Offices & Private Wealth• Foundations, Nonprofit and Patient

Advocacy Groups

• Federal Government• Regional Economic Development

Agencies• Stock Markets

128

IPOor 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 companieslooking 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 & ConsPros Cons

• Access to capital to fund operations• Exit strategy for venture capitalists• Liquidity for management and employees• Stock options to attact employees• Greater public awareness of the company

and its products• Use of the stock for acquisitions

• Compliance and regulatory disclosuresimposed by stock market regulators

• Reporting for sales of securities• Quarterly or half-year financial

statements reporting• Risk of potential liabilities if the company

or its directors do not comply withregulations

• IPO cost: approximately USD 2.5m first year, between USD 0.1 and 1m the yearsafter

• 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

http://www.fiercebiotech.com/story/record-year-biotech-inspires-some-great-expectations-2015/2015-01-06

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

http://www.jan.fuelscher.ch/

Conclusion133

Conclusion –Valuation & Deals Wrap-upValuation check-list to get the most value from your potential partnerby 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


• 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


• 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 isaround 40-60%.

• It will depend on the risk taken by the party and its financial implications.

137


• 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 samedevelopment 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-upDeals 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 justifyeach step in order to gain credibility in the eyes of your potentialpartner.

No one knows as much about your asset as you do.

You are in the best position to substantiatethat value.

139

Thanks for yourattentionAny feedback?

What you liked?

What you don’t like?

What was too long?

What was too short?

140

Non-exhaustive list of references

• Excellent website on bioentrepreneurship: http://www.nature.com/bioent/index.html

• Phrma 2012 profile: http://www.phrma.org/sites/default/files/159/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

http://www.nature.com/bioent/index.html

http://www.phrma.org/sites/default/files/159/phrma_industry_profile.pdf

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