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
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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 2006 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, 2(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, 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 B. Bogdan, R. Villiger, Valuation in Life Sciences, 3rd ed., DOI / , Springer-Verlag Berlin Heidelberg 2010
2 364 References 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) 71 A Actelion 98, 279 Analysis of simulations 140 Anti-dilution clauses 272 Anti-stacking 149 Approval Phase 70 Arbitrage 60 Asset allocation 246 Astra Zeneca 98 AUTM 2 Avastin 280 Average drug Development Costs 74 Average duration of drug development 76 B Balance sheet 258 Basics of valuation Cash flows 11 Discounted cash flow valuation 29 Discounting 13 Real options 36 Valuation methods 29 Berna Biotech 98 Beta 18, 20 Bextra 243 Binomial tree 125, 163 Peak sales 47 Solving the end nodes 53 Spanning the tree 49 Working back the tree 55 Working back the tree to the root 57 Binomial Tree Probability distribution 53 Biologics New approvals 3 Biotech 3 Biotech companies Sublicensing 169 Black, Fisher 59 Black-Scholes formula 7, 59 Black-Scholes Formula 64 Brownian motion 62 C Calculation of end nodes 47 Calculation of generic conracts 179 Call-back option 149 Cancer drugs Multiple indications 218 Capital asset pricing model 18 CAPM 8, 19, 269 Case Study Sublicensing 203 Cash 262 Cash flow size 12 Cash flow statement 12 Cash flows Discounting 112 Probability 111 Uncertainty 21 Cash flows from financing activities 11 Cash flows from investing activities 11
4 366 Index Cash flows from operations 11 Cash flows probability 129 Cash flows size 128 Cash flows timing 129 CE-mark 70 Change in liquidity 12 Clinical phase 1 trials 69 Clinical phase 2 trials 69 Clinical phase 3 trials 70 Co-development 149 Co-marketing 150 Company valuation 255 Accounting value 258 Asset based 258 Building blocks 260 Cash balance 273 Cash flow based 260 cash flows 260 Discount rate 269 Feed rate 265 Financial statements 263 Income based 260 Market based 260 Methods 258 Risk profile 273 Simulations 275 Value 273 Value development 273 Company Valuation Case study 275 Cash 262 Debt 263 Fixed assets 262 Fundraising 255 IPO 256 Licencing 256 M&A 256 Projects 261 Taxes 263 Technology 261 Unallocated costs 263 Company value development Change in discount rate 274 Clinical trial results 273 Comparison of DCF and real options 41 Comparison of participation rates 192 Comparison of real options resolution methods 44 Convertible bond 271 Convertible debt 271 Co-promotion 150 Copyrights 236 Cost 72 Cost of capital 15 COX-2 inhibitors 243 Cumulative Milestone 308, 319 Cumulative Sales 308, 319 D DCF 7, 11, 29, 30, 105, 109 Managment flexibility 37 Sensitivity analysis 130 DCF vs. ROV 129 Debt 270 Payoff profile 270 Decision Tree 32 Development costs 7 Dicounting 129 Dilution 256, 269, 272, 290 DiMasi 72 Discount rate 7, 132, 269 Discounted cash flow valuation 29 Discounting 96 Continuous compounding 14 Discrete compounding 14 Expected return 14 MCPM 97 Risk 14 Theory and Reality 96 Time value 13 Disease category average sales 78 Disease category median sales 78 Diversification 23 Drug development costs Approval 74
5 Index 367 Clinical phase 1 73 Clinical phase 2 73 Clinical phase 3 73 Lead optimisation 73 Preclinical 73 Drug Development Duration 76 Drug development success rates 75 E Efficient frontier 246 EMEA 69 Employee stock option 272 Equity 148 Estimation of peak sales 77 Excel Goal Seek 313 IRR 313 Expected Utility Theory 99 F Fashion drugs 102 FDA 69, 70 Feed rate 234, 262 most likely 328 Financial option valuation 59 Financial options 38 Fund raising 5 G Game theory 249 Genentech 98, 280 Generic contract calculation 179 Generic contracts 181 Global biotech financing 3 Growth rate 47, 131 H Hamilton-Jacobi-Bellmann equation 64 Hedging 59 Hit identification 68 Hurdle rate 31 I Income statement 263 IND 69 Inflation 16 Internal rate of return 31, 307 Investors 256 IP 2 IP valuation Accounting 236 Fundraising 236 Licensing 236 Litigation 236 M&A 236 IP valuation techniques 238 Cost based 238 Income based 238 Market based 238 IRR 135, 307 K Kaushik 229 L Lead optimisation 68 Leverage 269, 271 License contract valuation 146 DCF 159 Licensee 159 Licensor 158 Manual for real options 162 Real options 160 Spanning the tree 163 Value share licensee-licensor 160 Working back the tree 163 License contracts Case study real options 163 Case study two parties 155 Cash flows 153 DCF valuation 152 Discount rate 154 Valuation with DCF 155
6 368 Index License fees 148 License Negotiation 214 Licensing 5, 7 Biotech 151 Pharma 151 Universities 151 Value share 152 Life saving drugs 102 M M&A 5, 7, 290 Margin 111 Market asset disclaimer 64 Market capitalisation 278 Market portfolio 18 Market risk premium 18 Market-derived capital asset pricing model 20 Markowitz 18, 246 MCPM 8, 20, 97, 269 Medical device development (k) 71 Class I device 71 Class II device 71 Class III device 71 Premarket approval 71 Medimmune 98 Merck 98, 243 Milestones 147 Multi-dimensional trees 224 Multiple indications 218 Correlation of indications 230 DCF 219 Real options 223 Success rates 230 Multiple markets 232 N Nash, John 249 Negotiation Sublicensing 176 Negotiation deadlock 171 Net present value 30 Novartis 243 NPV 30 O Operating expenses 111 Out-licensing Sublicensing 201 P Partial differential equation 44 Patent valuation 236 Patents 236 Peak sales 7, 131 Indication 223 Peak Sales 77, 80 Bottom-up calculation 80 Peak sales estimate 48 Pfizer 243 Pharma 4 Pharma R&D 4 Phase 1V trials 70 Pipeline Correlation 243 Pipeline simulation 243 Pipeline valuation 243 PMA 72 Portfolio management 5, 245, 246 Qualitative approach 247 Quantitative approaches 248 Post-development volatility 102 Post-money valuation 257 Preclinical Testing 68 Pre-commercialisation 102 Prexige 243 Probability of cash flows 13 Project valuation 103, 107 Analysts 103 Business developers 103 Case study DCF 107 Case study real options 123 Cash flows 105 DCF 105 Discount rate 106
7 Index 369 Investors 103 Portfolio managers 103 Project managers 103 Real option manual 121 Real options 121 R R&D funding 147 Ratchets 272 Reach-through royalties 148 Real option valuation 11 Theory 36 Real options 7 Balck-Scholes formula 59 Binomial tree 45 Binomial tree formulae 49 Binominal tree 124 Compound options 38 Difference to financial options 59 Finite differences 41 Formula 41 Management flexibility 37 Market conditions 37 Option to abandon 38 Option to expand 38 Option to grow 38 Option to switch 38 Options to defer 38 Project valuation 121 Resolution methods 41 Sensitivity analysis 130 Simulations 41 Strategic management tool 40 Trees 41 Valuation of end nodes 126 Volatility 100 Working back the tree 126 Redemption 147 Replicationg portfolio 59 Research institutions Licensing 169 Resource allocation 249 Right of first look 149 Risk adjusted net present value 30 Risk Aversion 24 Risk free interest rate 13 Risk profile 135 Risk-neutral probability 62 rnpv 30 Royalties 147 S Sales curve 129 Schering 98 Scholes, Myron 59 Sensitivity analysis Discount rate 131 Growth rate 131 Margin 131 Peak sales 131 Success rates 131 Sharpe 246 Sharpe ratio 18 Simulation Clinical success 136 Portfolio 135 Simulation of license contracts 194 Simulation of scenarios 138 Simulations 134, 275 Company value 135 Excel 136 Peak sales 136 Real options 141 Thresholds 141 Simulations in Excel 134 Stacked royalties 148, 194 Stackelberg game 249 Standard sales curve 109 Stock valuation 278 Scenario analysis 282 Stock Valuation 255 Structure of license contracts 146 Sublicensing 149, 169, 201 Calculation of participation rates 176
8 370 Index Case study 203 DCF theory 173 Negotiation 176 Participation rate 175 Real option valuation manual 185 Sublicensing parameters 170 Success rate 7 Success rates 74, 132, 219 Discount 326 T Take-over 310 Target identification 67 Target validation 68 Taxes 266 Technology transfer 5, 207 Sublicensing 207 Technology transfer managers 173 Technology valuation 233 Terminal value 265 Terminal Value 17 The role of valuation 5 Time of cash flows 13 Time steps half-yearly 306 Trademarks 236 Tree for multiple indications 224 U Uncertainty 21 Market Uncertainty 21 Technical Uncertainty 21 Underlying of the binomial tree 47 Universities 2 Upfront payment 147 US Licensing Universities 2 V Valuation Current problems 6 Input parameters 7 Interpretation of results 8 Methods and methodology 7 Valuation basics 11 Valuation in Life Sciences 67 Valuation of financial options 60 Value at risk 135 Value Development Discount Rate 273 Success Rate 273 Value Jump 23 Value sharing 152 Veletri 279 Vioxx 243 Virtual company 201 Volatility 47, 100, 124 Competition 102 General state of the economy 102 Regulation 102 W WACC 15, 16, 261, 269 Worst case scenario 135
Fashion drugs 70 FDA 10, 18 Feed rate 173, 194 most likely 238 Financial option valuation 57 Financial options 36 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
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