Fashion drugs 70 FDA 10, 18 Feed rate 173, 194 most likely 238 Financial option valuation 57 Financial options 36 Fund raising 5

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1 References AUTM (2005) AUTM U.S. Licensing Survey: FY (Survey summary of the AUTM U.S. Licensing Survey: FY 2004) Black, F. and Scholes, M. (1973). The Pricing of Options and Corporate Liabilities Journal of Political Economy, 81, Burrill&Company (2005) BioCentury Report 2005 CDER (2004) Measures of Pharma Industry s New Drug Output, Ernst&Young (2006) Beyond Borders: Global Biotechnology Report Kaushik, A. (1991). On the computation of continuous time option prices using discrete approximations, Journal of financial and quantitative analysis, (26)4. Kaushik, A. (1995). Option pricing trees, The Journal of Derivatives, Vol 2 No 4. Kola, I. and J. Landis (2004). Can the pharmaceutical industry reduce attrition rates? Nat Rev Drug Discov 3(8): Lehman Brothers (2003) Assessing Patent Risk and Company-specific Exposure to Generics, e. Ma, P. and R. Zemmel (2002) Value of novelty? Nat Rev Drug Discov. 1(8): Markowitz, H. M. (1952). Portfolio Selection Journal of Finance 7, McNulty, J. and Yeh, T., Schulze, W. and Lubatkin, M. (2002). What s your real cost of capital? Harvard Business Review, October 2002, Sharpe, P. and Keelin, T. (1998). How SmithKline-Beecham makes good resource allocation decisions Harvard Business Review, March/April 1998,

2 242 References Villiger, R. and Bogdan, B. (2005). Getting real about valuations in biotech Nature Biotechnology, April 2005, Villiger R. and Bogdan, B. (2005). Valuing Pharma R&D The Catch-22 of DCF Journal of Applied Corporate Finance, Spring 2005 Villiger, R. and Bogdan, B. (2005). What s biotech really worth? Scrip Magazine, June 2005, Villiger, R. and Bogdan, B. (2006). Pitfalls of Valuation Journal of Commercial Biotechnology, April 2006,

3 Index 510(k) 18 A Actelion 66, 207 Analysis of simulations 102 Anti-dilution clauses 201 Anti-stacking 109 Approval Phase 11 Arbitrage 58 Asset allocation 184 Astra Zeneca 66 AUTM 2 Avastin 208 Average drug Development Costs 13 Average duration of drug development 16 B Balance sheet 190 Basics of valuation Cash flows 21 Discounted cash flow valuation 32 Discounting 23 Real options 34 Valuation methods 32 Berna Biotech 66 Beta 26, 28, 65 Bextra 181 Binomial tree 87, 123 Peak sales 45 Solving the end nodes 51 Spanning the tree 47 Working back the tree 53 Working back the tree to the root 55 Binomial Tree Probability distribution 51 Biologics New approvals 3 Biotech 2 Biotech companies Sublicensing 129 Black, Fisher 57 Black-Scholes formula 7, 57 Black-Scholes Formula 62 Brownian motion 60 C Calculation of end nodes 45 Calculation of generic conracts 140 Call-back option 108 Cancer drugs Multiple indications 160 Capital asset pricing model 26 CAPM 7, 28, 65, 198 Cash flow size 22 Cash flow statement 22 Cash flows Discounting 82 Probability 81

4 244 Index Cash flows from financing activities 21 Cash flows from investing activities 21 Cash flows from operations 21 Cash flows probability 91 Cash flows size 90 Cash flows timing 91 CE-mark 18 Change in liquidity 22 Clinical phase 1 trials 10 Clinical phase 2 trials 11 Clinical phase 3 trials 11 Co-development 109 Co-marketing 109 Company valuation 188 Accounting value 190 Asset based 191 Building blocks 192 Cash balance 202 Cash flow based 191 cash flows 192 Discount rate 198 Feed rate 197 Financial statements 196 Income based 191 Market based 191 Methods 190 Risk profile 202 Simulations 204 Tax 197 Value 202 Value development 202 Company Valuation Case study 204 Cash 194 Debt 195 Fixed assets 194 Fundraising 188 IPO 189 Licensing 188 M&A 188 Projects 194 Taxes 195 Technology 194 Unallocated costs 194 Company value development Change in discount rate 203 Clinical trial results 203 Comparison of DCF and real options 39 Comparison of participation rates 152 Comparison of real options resolution methods 42 Convertible bond 200 Convertible debt 200 Co-promotion 109 Copyrights 174 Cost 12 Cost of capital 25 COX-2 inhibitors 181 Cumulative Milestone 218, 229 Sales 218, 229 D DCF 6, 21, 32, 75, 79 Managment flexibility 35 Sensitivity analysis 92 DCF vs. ROV 91 Debt 199 Payoff profile 199 Development costs 7 Dicounting 91 Dilution 189, 199, 201 DiMasi 12 Discount rate 7, 65, 94, 198

5 Index 245 Discounted cash flow valuation 32 Discounting 65 CAPM 65 Continuous compounding 24 Discrete compounding 24 Expected return 24 MCPM 65 Risk 24 Theory and Reality 65 Time value 23 Disease category average sales 16 Disease category median sales 17 Diversification 31 Drug development costs Approval 13 Clinical phase 1 13 Clinical phase 2 13 Clinical phase 3 13 Lead optimisation 12 Preclinical 12 Drug Development Duration 15 Drug development success rates 14 E Efficient frontier 184 EMEA 10 Employee stock option 201 Equity 108 Estimation of peak sales 71 Excel Goal Seek 223 IRR 223 Expected Utility Theory 68 F Fashion drugs 70 FDA 10, 18 Feed rate 173, 194 most likely 238 Financial option valuation 57 Financial options 36 Fund raising 5 G Game theory 187 Genentech 66, 208 Generic contract calculation 139 Generic contracts 141 Global biotech financing 3 Growth rate 45, 93 H Hamilton-Jacobi-Bellmann equation 63 Hedging 57 Hit identification 9 Hurdle rate 33 I Income statement 196 IND 11 Internal rate of return 33, 217 Investors 189 IP 2 IP valuation Accounting 174 Fundraising 174 Licensing 174 Litigation 174 M&A 174 IP valuation techniques 176 Cost based 176

6 246 Index Income based 176 Market based 176 IRR 97, 217 K Kaushik 168 L Lead optimisation 10 Leverage 199, 200 License contract Case study real options 122 License contract valuation 105 Value share licensee-licensor 119 License contract valuation DCF 118 Licensee 118 Licensor 118 Manual for real options 122 Real options 120 Spanning the tree 123 Working back the tree 123 License contracts Case study two parties 115 Cash flows 112 DCF valuation 112 Discount rate 113 Valuation with DCF 114 License fees 107 Licensing 5, 6 Biotech 110 Pharma 110 Universities 109 Value share 111 Life saving drugs 70 M M&A 5, 6 Margin 81 Market asset disclaimer 62 Market capitalisation 206 Market portfolio 26 Market risk premium 27 Market-derived capital asset pricing model 28 Markowitz 26, 184 MCPM 7, 28, 65, 198 Medical device development (k) 19 Class I device 18 Class II device 18 Class III device 18 Premarket approval 19 Medimmune 66 Merck 66, 181 Milestones 106 Multi-dimensional trees 164 Multiple indications 160 Correlation of indications 169 DCF 161 Real options 162 Success rates 169 Multiple markets 171 N Nash, John 187 Negotiation Sublicensing 136 Negotiation deadlock 131 Net present value 32 New biotech drug approvals in the US 3 Novartis 181 NPV 32

7 Index 247 O Operating expenses 81 P Partial differential equation 42 Patent valuation 174 Patents 174 Peak sales 7, 93 Indication 162 Peak Sales 16, 71 Peak sales estimate 46 Pfizer 181 Pharma 3 Pharma R&D 4 Phase 1V trials 12 Pipeline Correlation 181 Pipeline simulation 181 Pipeline valuation 181 PMA 19 Portfolio management 5, 183, 184 Qualitative approach 185 Quantitative approaches 185 Post-development volatility 71 Post-money valuation 190 Preclinical Testing 10 Pre-commercialisation 71 Prexige 181 Probability of cash flows 23 Project valuation 73, 77 Analysts 73 Business developers 73 Case study DCF 77 Case study real options 85 Cash flows 75 DCF 75 Discount rate 76 Investors 73 R Portfolio managers 73 Project managers 73 Real option manual 83 Real options 83 R&D funding 106 Ratchets 201 Reach-through royalties 107 Real option valuation 21 Theory 34 Real options 6, 7 Balck-Scholes formula 57 Binomial tree 43 Binomial tree formulae 47 Binominal tree 86 Compound options 36 Difference to financial options 57 Finite differences 39 Formula 39 Management flexibility 35 Market conditions 36 Option to abandon 36 Option to expand 36 Option to grow 36 Option to switch 36 Options to defer 36 Project valuation 83 Resolution methods 39 Sensitivity analysis 92 Simulations 39 Strategic management tool 38 Trees 39 Valuation of end nodes 88 Volatility 69 Working back the tree 88 Redemption 107 Replicationg portfolio 57

8 248 Index Research institutions Licensing 129 Resource allocation 186 Right of first look 108 Risk adjusted net present value 32 Risk free interest rate 23 Risk profile 97 Risk-neutral probability 60 rnpv 32 Royalties 107 S Sales curve 91 Schering 66 Scholes, Myron 57 Sensitivity analysis Discount rate 93 Growth rate 93 Margin 93 Peak sales 93 Success rates 93 Sharpe 184 Sharpe ratio 26 Simulation Clinical success 98 Portfolio 97 Simulation of license contracts 128 Simulation of scenarios 100 Simulations 96, 204 Company value 97 Excel 98 Peak sales 98 Real options 103 Thresholds 103 Simulations in Excel 96 Stacked royalties 107, 128 Stackelberg game 187 Standard sales curve 79 Stock valuation 206 Scenario analysis 211 Stock Valuation 188 Structure of license contracts 105 Sublicensing 108, 129 Calculation of participation rates 136 DCF theory 133 Negotiation 136 Participation rate 135 Real option valuation manual 145 Sublicensing parameters 130 Success rate 7 Success rates 13, 94, 161 Discount 236 T Take-over 220 Target identification 9 Target validation 9 Taxes 197 Technology transfer 4 Technology transfer managers 133 Technology valuation 172 Terminal value 197 The role of valuation 4 Time of cash flows 23 Time steps half-yearly 216 Trademarks 174 Tree for multiple indications 164 U Uncertainty 29

9 Index 249 Underlying of the binomial tree 45 Universities 2 Upfront payment 106 US Licensing Universities 2 V Valuation Current problems 6 Input parameters 7 Interpretation of results 8 Methods and methodology 6 Valuation basics 21 Valuation in Life Sciences 65 Valuation of financial options 58 Value at risk 97 Value Drivers 12 Value sharing 111 Veletri 207 Vioxx 181 Volatility 45, 69, 86 Competition 70 General state of the economy 70 Regulation 70 W WACC 25, 26, 193, 199 Worst case scenario 97

Index 367. F Fashion drugs 102 FDA 69, 70 Feed rate 234, 262 most likely 328 Financial option valuation 59 Financial options 38 Fund raising 5

Index 367. F Fashion drugs 102 FDA 69, 70 Feed rate 234, 262 most likely 328 Financial option valuation 59 Financial options 38 Fund raising 5 References AUTM (2005) AUTM U.S. Licensing Survey: FY 2004. (Survey summary of the AUTM U.S. Licensing Survey: FY 2004) Black, F. and Scholes, M. (1973) The Pricing of Options and Corporate Liabilities