July 2015 NPV Model and Analyzer

Transcription

1 July 2015 NPV Model and Analyzer User Guide for Interactive NPV Analyzer Screen shot from EvaluatePharma.Alpha. non-registered users of EvaluatePharma is prohibited without the prior written consent of EvaluatePharma Ltd.

2 STRICTLY CONFIDENTIAL PAGE 2 07/07/2015 Table of Contents TABLE OF CONTENTS... 2 OVERVIEW... 3 INTRODUCTION... 3 HOW DO I EDIT MY NPV?... 3 OVERVIEW OF MY NPV EDITOR... 5 MY NPV SUMMARY... 6 Overview... 6 Data items... 6 Closing share price... 6 Fix share price... 6 Market capitalisation... 7 NPV (after-tax)... 7 NPV per Share... 7 Latest Shares Outstanding... 7 CHANGING KEY ASSUMPTIONS... 8 CASE STUDIES... 9 CHANGING THE PATENT DATE... 9 CHANGING PEAK SALES SHIFTING THE SALES CURVE BY A SET PERCENTAGE CHANGING MARKET STATUS CHANGING PROBABILITY TO LAUNCH CHANGING ANNUAL USA OR EX USA SALES CHANGING OTHER REVENUES (ROYALTY, CO-PROMOTION, JV) INPUTS CHANGING COST OF SALES CHANGING SG&A SPEND CHANGING R&D, WORKING CAPITAL AND CAPEX INPUTS VALUING A PRODUCT FROM SCRATCH Inputting Annual and Peak Sales for a Product with No Sales Forecast CHANGING THE FIRST INTRODUCTION DATE OR DELAY IN PRODUCT LAUNCH SENSITIVITY ANALYSIS DISCOUNT RATE... 22

3 STRICTLY CONFIDENTIAL PAGE 3 07/07/2015 Overview Introduction The My NPV editor allows users to take any product s NPV as calculated by the NPV Analyzer and change the key assumptions to produce their own customised NPV. The change in the product s NPV can also be expressed in terms of how this would theoretically impact a company s market valuation and share price. The key assumptions users can change include: Sales and other revenues - Peak sales - Product sales (USA & Ex USA) - Shift the sales curve by a set percentage Patent expiry (USA/ Ex USA) First introduction date Cost assumptions - Cost of sales - SG&A - R&D costs - Working capital - Capital expenditures Market status Probability to launch Tax rate Discount rate Model the following types of scenarios to see the impact on NPV, market capitalisation and share price: Potential generic competition Life cycle extension strategies Potential competition Development success or failure Product launch delays How do I edit My NPV? Within a product summary page users can edit the default assumptions of the NPV calculation by clicking on the company for which they want to edit the NPV. NPV assumptions are edited for one company at a time. For the example below using Crestor, users can choose to edit the assumptions for either AstraZeneca or Merck & Co.

4 STRICTLY CONFIDENTIAL PAGE 4 07/07/2015 Example: editing the assumptions (My NPV) on Crestor for AstraZeneca Within the product summary page for Crestor select AstraZeneca

5 STRICTLY CONFIDENTIAL PAGE 5 07/07/2015 Overview of My NPV Editor The My NPV Editor page allows users to change the key assumptions behind the NPV calculation. Users can input their assumptions in the blue cells Select the 'Save & Recalculate' button at the top or bottom right of the page to refresh the NPV calculation To save a new scenario, enter a name in the 'Scenario Name' box and click the 'Add' button Load saved scenarios via the dropdown list at the top of the page Details product name and company being edited My NPV Summary Details the default product NPV, and the implied changes to company share price and market capitalisation as a result of the new NPV My Assumptions Users can save customised NPV assumptions in a new scenario and revisit at a later time Click on [+] Annual Sales Inputs to change the inputs on USA & Ex USA sales Change key NPV inputs by typing inputs into blue cells. Add comments to detail the input change Instructions on how to use page Click on (i) icon to access help files

6 STRICTLY CONFIDENTIAL PAGE 6 07/07/2015 MY NPV Summary The My NPV section is arranged in three columns to allow easy comparison of the default data (first column) versus the My NPV data (second column), derived through the user s changes to the default assumptions. The third column details the change ( MY NPV minus Default ) for each data item. Overview Default Column details the previous close share price, company market valuation and NPV My NPV Column details NPV based on the new user defined assumptions, as well as the new share price and market capitalisation implied by these assumptions Share price based on My NPV user assumption Based on the user-defined assumptions, the share price could be $45.93 (-7.9%) vs. the previous close of $49.85 Market capitalisation based on MY NPV user assumptions Based on user defined assumptions, the market capitalisation is $66,750m (-$5,702m) vs. the previous close of $72,452m Data items Closing share price NPV (after-tax) based on My NPV user assumptions Based on user defined assumptions, the NPV is $4,055m (-58%) vs. the default NPV of $9,757m Default The closing share price from the previous day of trading. My NPV Closing share price plus the change in NPV per share resulting from userdefined alterations to the default assumptions. Share Price ( My NPV ) = Closing Share Price + Change in NPV per share If the default share price has been fixed, the My NPV share price will represent the change in NPV per share from this fixed share price. Share price ( My NPV ) = fixed share price + change in NPV per share Fix share price Allows users to rebase the default share price to a user-defined value and then assess the impact of product NPV changes to that value. The fixed share price can be used when modelling events that may already be included in the share price but not yet included in analyst forecasts. For example, a company announces a favourable patent ruling and the share price increases, reflecting the market s assumption that the product s sales will be better than previously expected. An EvaluatePharma user projects a new sales curve for the product and inputs the assumptions into the NPV Analyzer using the My NPV function. He then fixes the share price at the pre-announcement level and assesses the impact of the new product NPV. He can now compare the actual change in share price to the theoretical change implied by his assumptions, and assess whether the

7 STRICTLY CONFIDENTIAL PAGE 7 07/07/2015 market has reacted appropriately to the announced patent ruling, or perhaps over- or under-reacted. Market capitalisation Default stock market valuation, based on previous closing share price. Calculated by multiplying the share price by the number of shares outstanding. Market capitalisation = share price * shares outstanding My NPV upon changing the NPV assumptions the NPV Analyzer will calculate a My NPV market capitalisation based on changes in the NPV such that: Market capitalisation ( My NPV ) = market capitalisation (Default) + change in NPV NPV (after-tax) Default The sum of the product s annual discounted cash flows (DCF) recognised by the company under review. The DCF includes revenues from product sales, royalties, copromotion and joint venture income, minus costs and taxes, discounted to present day using the default discount rate. NPV = sum of annual DCF (((product sales + royalties + co-promote + JV revenue) (costs + taxes)) * discount rate factor (%)) My NPV The sum of the product s annual discounted cash flows (DCF) recognised by the company under review, as per the My NPV user assumptions. The DCF includes revenues from product sales, royalties, co-promotion and joint venture income, minus costs and taxes, discounted to present day using the My NPV user -defined discount rate. NPV ( My NPV ) = sum of user-defined annual DCF (((product sales + royalties + copromote +JV revenue) (costs + taxes)) * discount rate factor (&)) NPV per Share Default NPV divided by the latest shares outstanding. NPV per share = NPV (after-tax) / latest shares outstanding My NPV My NPV divided by the latest shares outstanding. NPV per share ( My NPV ) = My NPV (after-tax) / latest shares outstanding Latest Shares Outstanding Default The latest reported shares outstanding for the company under review.

8 STRICTLY CONFIDENTIAL PAGE 8 07/07/2015 Changing Key Assumptions The My NPV Editor page allows users to change the key assumptions used in the NPV calculation. Users can input assumptions in the blue cells Select the 'Save & Recalculate >>' button at the top/ bottom right of the page to refresh the NPV calculation Input user assumptions in the blue cell Input a new patent date (inputed 1MAR2009 ) Add a comment Users have the option type in a comment to describe the reasons for the change in assumptions Summary of key assumptions users can change: 1. Patent expiry date 2. Peak sales 3. Shifting the sales curve 4. Annual USA/ Ex USA sales 5. Market status or launch probability 6. Introduction date 7. Tax rate 8. Discount rate

9 STRICTLY CONFIDENTIAL PAGE 9 07/07/2015 Case Studies Changing the Patent Date Within the My NPV editor users can change the following assumptions relating to the patent expiry: Patent expiry date (WW/ USA) Patent expiry date (Ex USA) Change the patent expiry date Notes When changing the patent expiry date (WW/USA), if the Ex-USA date is blank, the WW/ USA date will be used as the patent expiry date for Ex-USA sales When changing a patent date the sales erosion curve applied from the new patent date will be based on EvaluatePharma s erosion algorithms rather than the consensus erosion curve

10 STRICTLY CONFIDENTIAL PAGE 10 07/07/ Patent date changed from outside the consensus forecast range ( ) to within the consensus forecast range ( ) Example: Nexium (AstraZeneca) Scenario models: Potential generic competition Input change: Patent date changed from August 2015 to March 2009 My NPV sales curve vs. default Changing the patent date from 2015 to 2009 causes the sales curve to shift back. Consensus sales after the new patent date are now ignored. Changing the patent date to within the consensus range causes the model to disregard the consensus sales forecast after the new patent date (e.g. March 2009) The sales erosion model will now start from the user-defined patent date When changing a patent date, the sales erosion curve applied from the new date will be based on EvaluatePharma s erosion algorithms rather than the consensus erosion curve. For full details see Guide to Using My NPV Methodology. My NPV report: market valuation impact Impact analysis Reduces Nexium s product NPV by $4,557m or 53%, equivalent to $3.07 per share for AstraZeneca. NPV Analyzer predicts 6.5% share price decline vs. the previous days closing share price

11 STRICTLY CONFIDENTIAL PAGE 11 07/07/ Patent date changed from one date to another outside the consensus forecast range ( ) Example: Kaletra (Abbott Laboratories) Scenario models: Life cycle extension strategy or patent extension Input change: Patent date changed from April 2016 to December 2020 My NPV sales curve vs. default Changing the patent date from 2014 to 2020 causes the sales curve to be projected forward to the new patent date. EvaluatePharma erosion curve then starts from the new patent date. New sales curve to new patent date based on the consensus sales trend in EvaluatePharma sales erosion curve starts from the new patent date My NPV report: valuation impact Impact analysis Adds $1,395m or 40% to Kaletra s Product NPV, equivalent to $0.90 per share for Abbott Laboratories. NPV Analzyer predicts 1.7% share price increase vs. the previous day s close.

12 STRICTLY CONFIDENTIAL PAGE 12 07/07/ Patent date changed from within consensus forecast range ( ) to outside the consensus forecast range ( ) Example: Lexapro (Forest Labs) Scenario models: life cycle extension strategy or patent extension Input change: patent date changed from March 2012 to December 2020 My NPV sales curve vs. default Changing the patent date from 2012 to 2020 causes the sales curve to be projected forward to the new patent date based on the sales in EvaluatePharma erosion curve then starts from the new patent date. Changing the patent date from within the consensus range to outside the consensus range will cause the model to disregard consensus sales forecast after the default patent date (e.g. 2011, 2012, in above example) Patent expiry and de-stocking effect. Lexapro patent expiry occurs on 14 March Brokers forecast a decline in sales in 2011 due to de-stocking ahead of patent expiry. This effect will also be accounted for in the case of a user-defined patent revision, with a new sales curve projected based on consensus data prior to destocking (in the example of Lexapro in 2010) and then accounting for destocking ahead of the new patent date. MY NPV Report: Valuation Impact Impact analysis Adds $3,582m or 151% to product NPV of Lexapro, equivalent to $11.33 per share for Forest Labs. NPV Analyzer predicts 30.3% share price increase vs. the previous day s close.

13 STRICTLY CONFIDENTIAL PAGE 13 07/07/2015 Changing Peak Sales Within the My NPV editor, users can change the assumptions on the Peak Sales (adj) forecast. When changing WW Peak Sales (adj), the consensus forecast will be disregarded beyond the current year (2009) with sales projected to the patent date based on the new peak sales input. Note: consensus peak sales forecast is risk adjusted for the probability to launch, potential withdrawal and competition. Example: Vyvanse (Shire Pharmaceuticals) Scenario models: user expects sales to be higher than consensus Input change: input peak sales of $3bn My NPV sales curve vs. default When changing a Peak Sales (adj), a new sales curve will be projected from the current year to the patent date based on the new input of Peak Sales (adj). When changing a Peak Sales (adj) forecast, a new sales curve will be projected from the current year to the patent date based on the new input of Peak Sales (adj) My NPV report: market valuation impact Impact analysis Adds $1,424m or 39% to product NPV of Vyvanse, equivalent to $2.55 per share for Shire. NPV Analyzer predicts 10% share price increase vs. the previous day s close.

14 STRICTLY CONFIDENTIAL PAGE 14 07/07/2015 Shifting the Sales Curve by a Set Percentage Within the My NPV Editor, users can shift the consensus forecast sales curve by a set percentage. This has the effect of increasing or decreasing the consensus sales in by a set percentage. This will also increase the peak sales projections. Example: shifting the sales curve Example: Vyvanse (Shire Pharmaceuticals) Scenario models: sales beat market expectations; user expects sales to be higher than consensus Input change: input shift in the sales curve of +25% My NPV sales curve vs. default When inputting a +25% sales curve shift, each USA and Ex USA sales point increases by 25%. On inputting a +25% sales curve shift each USA and Ex USA sales point increases by 25% Note: This has the impact of increasing the peak up 25%. WW Peak Sales unadjusted increases from $2.57bn to $3.21bn (+25%)

15 STRICTLY CONFIDENTIAL PAGE 15 07/07/2015 Changing Market Status When changing a product from Phase III to Filed the forecast sales will increase based on the increased probability of the product reaching the market and the cash flows being achieved. For example, in the table below, Product X is currently in Phase III. However, if the product s status is changed to Filed the sales with be adjusted upwards by 27% (75%/95%) based on the increased chance of the product being launched. Status Prob. To Launch Adj Marketed 100% +33% Filed 95% +27% Phase III 75% +0% Changing Probability to Launch Users can modify EvaluatePharma s assumption on the probability to launch. For example, if Product X represents a new drug class, a user might believe that the product merits a lower probability to launch than EvaluatePharma s standard assumption of 75% for Phase III products. The user estimates there is only a 50% chance of reaching the market. This has the impact of reducing the consensus forecast by 33%. Status Prob. To Launch Adj My NPV 50% -33% Phase III 75% +0% Note: changing the market status or probability to launch assumptions for a product will not impact the unadjusted sales for the product as calculated by the NPV Analyzer, as this sales figure already represents a best case scenario, without risk weightings.

16 STRICTLY CONFIDENTIAL PAGE 16 07/07/2015 Changing Annual USA or Ex USA Sales Within the My NPV Editor users can change the assumptions on USA, Ex-USA sales to Any overwrite to sales may impact the projected peak. The peak will be recalculated based on the following rules: 1. Changing sales in Changes to sales prior to the last two years of the consensus forecast period (e.g ), will impact the NPV calculation but will not change the projected peak sales. 2. Changing sales in (last two years of consensus period) These examples need to be changed to reflect the movement in the consensus period since the last draft of the document (was , now ). Changes to sales in , the last two years of the consensus forecast period, will impact the NPV calculation and result in an adjustment the projected peak sales. Projected sales change based on data. Note: The user is responsible for any inconsistencies between consensus forecasts and trend from 2014 to the projected peak. 3. Changing sales in 2015 and beyond (after the consensus forecast period) Changes to sales after the last year of the consensus forecast period (e.g ) will impact the NPV calculation but will not change the projected peak sales.

17 STRICTLY CONFIDENTIAL PAGE 17 07/07/2015 Changing Other Revenues (Royalty, Co-promotion, JV) Inputs Users may change the Other Revenues arising from royalties, co-promotion agreements and joint ventures in the NPV Analyzer. Just as with Annual Sales, such changes may be implemented in a number of ways. Example: Onglyza (Astrazeneca) Users may change the peak sales to a specific value or they can shift it by a fixed percentage. Both these methods will alter the revenue values throughout the forecast period (e.g., from the current year): Peak sales adjusted to new value Input number here to shift peak sales (and sales in all other years) by a fixed percentage Users can also make changes to discreet years by inputting values directly. Changes in revenue in discreet years are made in the blue cells Finally, users can also change the operating margin assumption for the other revenue - throughout the forecast period by changing the default margin percentage, or in specific years by altering the values directly. Change default operating margin assumption for all years. Annual changes in operating margin made here. Changing Cost of Sales The My NPV editor also enables users to customise cost of sales assumptions for products. The NPV Analyzer s cost of sales margin assumption is determined by a product s classification under the Proprietary Level field (e.g. New Molecular Entity, Generic, OTC) and also the geographic market where product sales are generated (USA or Ex-USA). Users can change this assumption using the drop down menu as demonstrated below:

18 STRICTLY CONFIDENTIAL PAGE 18 07/07/2015 Change the product classification field by utilising the drop down menu. Enter a customised cost of sales margin for all years. Enter customised cost of sales margins for discreet years. By changing a product s classification from NDA + Proprietary Drug Delivery to Generic: Branded (anda) the base cost of sales margin in all years is changed from 14% to 25%. Users can also change the cost of margin assumption in all years or only particular years. For more details of the default cost of margin assumptions employed by the NPV Analyzer, see NPV Model and Analyzer User Guide to Methodology available in the Help & Support drop down menu on the EvaluatePharma website. Changing SG&A Spend The NPV Analyzer s My NPV editor provides users considerable flexibility to customise SG&A spend assumptions. Users may alter the default margin assumption in the Established Phase (6 th Year SG&A margin), and can also choose to eliminate the default economy of scale assumptions employed for products that are forecast to achieve certain critical mass thresholds. Example: Multaq (Sanofi-Aventis) Use the drop down menu to activate or disable economies of scale impact during the Established Phase. Changes to the default 5 th Year SG&A Margin impact costs in the Established Phase and also during Launch Phase (since costs during launch phase are a percentage of costs in year 5.

19 STRICTLY CONFIDENTIAL PAGE 19 07/07/2015 Users can also alter the percent by which SG&A costs are front loaded during the launch phase (years -2 to 4): Launch Model Year Year Launch Year Year Year Launch Phase % of 5th Year Spend - Default 10% 50% 50% 100% 100% 100% For more details of the default SG&A spend assumptions employed by the NPV Analyzer, see NPV Model and Analyzer User Guide to Methodology available in the Help & Support drop down menu on the EvaluatePharma website. Changing R&D, Working Capital and Capex Inputs The NPV Analyzer does not make assumptions with regard to R&D, working capital and capital expenditures when calculating NPVs for products. Users who wish to enter their own assumptions for these cash flow items may do so in the My NPV editor. Valuing a Product from Scratch Inputting Annual and Peak Sales for a Product with No Sales Forecast Input a first Introduction date and a Peak Sales (adj) to calculate an NPV for a product. Example: PPL-100 (Merck & Co.) Scenario models: user expects this product to get launched by 30 JUN 2012, with peak sales potential of $1,500m (~$240m risk adjusted peak sale, assuming a 21% probability to launch) Input change: input launch date of 30 June 2012, and a peak sales (adj) of $240m My NPV sales curve vs. default

20 STRICTLY CONFIDENTIAL PAGE 20 07/07/2015 On inputting a peak sales (adj) forecast and a first introduction date the sales curve is generated based on a patent life of 12 years from launch for a new molecular entity. My NPV report: valuation impact The model values the product at $256m.

21 STRICTLY CONFIDENTIAL PAGE 21 07/07/2015 Changing the First Introduction Date or Delay in Product Launch Within the My NPV Editor users can change the first worldwide introduction date. On inputting a new first introduction date the cash flow is either shifted forward or back. Example: Denosumab (AMG 162) (Amgen) Scenario models: potential impact of a delay to launch; quicker than expected approval Input change: first WW introduction date changes from 31 Dec 2009 to 31 Dec 2011 My NPV sales curve vs. default Changing the first worldwide introduction date from 2009 to 2011 causes the sales curve to shift back. Changing the first worldwide introduction date from 2009 to 2011 causes the sales curve to shift back. The sales erosion curve will now start from the new patent date. Potentially 100% of a regulatory delay and 50% of a development delay can be clawed back via the patent term extension. Note: product delays and quicker than expected launches. In the case of most product delays the peak sales potential is negatively impacted by the delay. The delay impacts the NPV via the delay in the cash flows and in the level of the cash flows, as there are less years for sales to grow before patent expiry. The reverse is true when a product hits the market sooner, cash flows are received sooner and peak sales may rise. In the My NPV Editor users can change both the first worldwide introduction date and the peak sales (adj) assumption.

22 STRICTLY CONFIDENTIAL PAGE 22 07/07/2015 Sensitivity Analysis Discount Rate The discount rate is a key input as it determines the time value of money. NPV analysis is highly sensitive to the discount rate used. EvaluatePharma s NPV analysis uses a discount rate based on company size. Users may choose to apply a different discount rate via the My NPV editor. 6.5% for a large company ($30bn+) 9% for a midcap company ($2.5bn - $30bn) 11.5% for a small size cap company ($250m - $2.5bn) 14% for a microcap company ($100m - $250m) 14% of a nanocap company (<$100m) The sensitivity of the NPV to a change in the discount rate is dependent on when the cash flows are achieved. For example, the NPV of a product nearing patent expiry (e.g., Lipitor) will be less sensitive, than a newly launched product (e.g., Vyvanse). Sensitivity analysis (as of December 2009)