Valuing Biotechnology Companies Neil J. Beaton, CPA/ABV/CFF, CFA, ASA Alvarez & Marsal Valuation Services, LLC October 9, 2017
Agenda: Foundations Valuation Techniques Unique Aspects to Consider
Foundations
How many medicines are created each year?
Much can change in a decade
Consumers will continue to spend on New Drugs
Pricing Pressure has been good for Consumers
Pharma Spending Continues to Grow
BioTech Companies are Big Spenders on R&D
VCs have augmented Corporate Investment
And for good reason
How many medicines make it? Only 0.4% make it from here 12% make it from here..
Clinical Trials have become more Complex
However, all is not lost with a failure
Valuation Techniques for BioTech Companies: 1. Risk-Adjusted NPV 2. Benchmarking 3. Decision Tree Analysis
Setting the Stage for a New Drug
Valuation Parameters New Diabetes Drug
Valuation Parameters Diabetes Drug, cont.
Revenue Forecast Diabetes Drug
Contribution Margin Diabetes Drug
Contribution Margin Diabetes Drug, cont.
Value Profile Diabetes Drug
Value Profile Diabetes Drug, cont.
Revenue Benchmarking of Product Launches
Series A Financing Analysis, cont.
Series B Financing Analysis Assumes aggregate Series A and B financing of $400mm Acme employees are issued new shares to maintain 15.0% fully-diluted ownership post-financing Assumes InvestCo contributed $25mm in Series A round InvestCo targeting 51% fully-diluted ownership post Series B financing
Series B Financing Analysis, cont.
IPO Analysis 100% Primary Offering for 25.0% Fully-diluted Ownership ($ in millions)
Diagnostic IPOs Have Delivered Mixed Results
DCF Valuation of the Acme Supply Agreement and Total Pre-Money Valuation Based on discounted value of total reagent and sequencer discount provided by InvestCo for Clinical Validation Includes seven years of cash flows, discounted to December 31 using mid-year convention No terminal value included Assumes 75% discount to reagents and 50% discount to sequencers Does not include potential tax benefits
DCF Valuation of the Acme Supply Agreement and Total Pre-Money Valuation
Decision Tree Method This method explicitly captures contingent decisions and outcomes, i.e., "nodes" at which the success or failure of a project is in question Decision trees are most appropriate when there are sequential decisions to be made, and these decisions depend on whether technological, financial, regulatory and/or market risks are successfully resolved This method is very disciplined; however, an options-based model (sometimes used in combination with decision trees) can be a better choice when market risk is present
Decision Tree Example Development-Stage Medical Device Company Portfolio of patent / patent applications; utilized in single product In design phase (beta or prototype); not yet cleared FDA hurdles Management s forecast shows only the cash flows once commercially launched
Decision Tree Example, cont. COMMERCIAL STAGE 2x13 2x14 2x15 2x16 2x17 2x18 2x19 2x20 2x21 2x22 2x23 2x24 2x25 MARKET SIZE ASSUMPTIONS: Number of Doses / Procedures 100 120 144 173 207 249 299 358 430 516 619 Growth in Number of Doses / Procedures NA 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Unit Price Per Dose / Procedure $ 500 $ 500 $ 500 $ 500 $ 400 $ 400 $ 400 $ 300 $ 300 $ 300 $ 300 Growth in Unit Price Per Dose / Procedure NA 0.0% 0.0% 0.0% -20.0% 0.0% 0.0% -25.0% 0.0% 0.0% 0.0% ANNUAL REVENUE IN SELECTED MARKET $ 50,000 $ 60,000 $ 72,000 $ 86,400 $ 82,944 $ 99,533 $ 119,439 $ 107,495 $ 128,995 $ 154,793 $ 185,752 SUBJECT GROSS ROYALTY REVENUE: Estimated Market Share 4.0% 8.0% 16.0% 32.0% 48.0% 36.0% 27.0% 20.3% 10.1% 5.1% 2.5% ESTIMATED GROSS ROYALTY REVENUE $ 2,000 $ 4,800 $ 11,520 $ 27,648 $ 39,813 $ 35,832 $ 32,249 $ 21,768 $ 13,061 $ 7,836 $ 4,702 Cost of Goods Sold 5.0% 100 240 576 1,382 1,991 1,792 1,612 1,088 653 392 235 GROSS PROFIT 1,900 4,560 10,944 26,266 37,822 34,040 30,636 20,679 12,408 7,445 4,467 OPERATING EXPENSES: Sales & Marketing 20.0% - 912 2,189 5,253 7,564 6,808 6,127 4,136 2,482 1,489 893 General & Administration 10.0% - 456 1,094 2,627 3,782 3,404 3,064 2,068 1,241 744 447 Production 30.0% 570 1,368 3,283 7,880 11,347 10,212 9,191 6,204 3,722 2,233 1,340 Research & Development 10.0% - 456 1,094 2,627 3,782 3,404 3,064 2,068 1,241 744 447 TOTAL OPERATING EXPENSES 70.0% 570 3,192 7,661 18,386 26,476 23,828 21,445 14,476 8,685 5,211 3,127 Earnings Before Interest & Taxes (EBIT) 1,330 1,368 3,283 7,880 11,347 10,212 9,191 6,204 3,722 2,233 1,340 Blended Statutory Income Taxes (Benefit) 34.0% (452) (465) (1,116) (2,679) (3,858) (3,472) (3,125) (2,109) (1,266) (759) (456) NET INCOME (LOSS) $ 878 $ 903 $ 2,167 $ 5,201 $ 7,489 $ 6,740 $ 6,066 $ 4,095 $ 2,457 $ 1,474 $ 884
Decision Tree Example, cont. Develop Pre-Launch Expenditures DEVELOPMENT STAGE 2x13 2x14 2x15 OTHER INCOME $ - $ - $ - DEVELOPMENT EXPENSES: Sales, General & Administrative 1,250 2,000 2,500 Clinical Trials 500 2,500 - Research & Development 1,250 1,000 1,000 TOTAL DEVELOPMENT EXPENSES 3,000 5,500 3,500 DEVELOPMENT STAGE LOSSES $ (3,000) $ (5,500) $ (3,500) Probability Cumulative Milestone MILESTONE PROBABILITY ESTIMATES: of Success Probability Costs 1) Feasibility Design Review 65.0% 65.0% $ (3,000) 2A) Successful Clinical Trial @ 3 Months - 510(k) Approval 95.0% 95.0% (3,000) 2B) Successful Clinical Trial @ 6 Months 75.0% 71.3% (3,000) 2C) Long-Term Efficacy @ 12 Months 75.0% 53.4% (3,000) $ (12,000)
Decision Tree Example, cont. Model DCF Assuming Commercialization
Decision Tree Example, cont. Model Pre-Launch Decision Nodes PHASE I: FEASIBILITY DESIGN REVIEW PHASES II, III, IV: CLINICAL TRIALS 501(k) APPROVAL EFFICACY COMMERCIALIZATION COST OF EACH PHASE DECISION: Sales, General & Administrative $ 1,250 $ 4,500 Clinical Trials 500 2,500 Research & Development 1,250 2,000 PRE-TAX COST OF PHASE DECISION 3,000 9,000 Blended Statutory Income Taxes 34.0% (1,020) (3,060) AFTER TAX COST OF PHASE DECISION 1,980 5,940 Present Value Factor (midpoint of phase) 2.6% 0.9872 0.9809 PRESENT VALUE OF COST OF PHASE DECISION $ 1,955 $ 5,827
Decision Tree Example, cont. Model Discounted Pay-offs at Each Decision Node
Unique Aspects to Consider Regulatory Issues Capturing the Risk of Failure at the appropriate time and in the appropriate place in the model IP Risk Divergent Venture Capital/Corporate Interests
Questions???