Valuation in Life Sciences. Third edition

Transcription

1 Valuation in Life Sciences Third edition

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3 Boris Bogdan Ralph Villiger Valuation in Life Sciences A Practical Guide Third edition 123

4 Dr. Boris Bogdan Avance, Basel GmbH Bäumleingasse Basel Switzerland boris.bogdan@avance.ch Ralph Villiger Avance, Basel GmbH Bäumleingasse Basel Switzerland ralph.villiger@avance.ch ISBN e-isbn DOI / Springer Heidelberg Dordrecht London New York Library of Congress Control Number: c Springer-Verlag Berlin Heidelberg 2007, 2008, 2010 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMXDesign GmbH, Heidelberg Printed on acid-free paper Springer is part of Springer Science+Business Media (

5 Foreword to the First Edition Capital, whether it originates from venture, public equity, private, or government sources, continues to be biotech s source of sustenance. In fact, access to financing can make or break a company, regardless of whether it has Nobel Prize winning science or a top-flight business school management team. In order to attract capital there has to be a value proposition that is sufficiently engaging and well constructed that will not only capture the imagination of investors but also make them want to ultimately invest. This book recognizes that there is no consent on how to apply valuation methodologies in life sciences. One of the complicating factors is that, compared to other industries, valuation of biotech innovation is much more demanding. The long year development and clinical trials process still represents the main risks faced by any biotech company. Added to that is the fact that getting a drug across the regulatory goal line and receiving Food and Drug Administration approval (or other regulatory agency approval in the United States or elsewhere in the world) for marketing is no longer good enough. Since the biotechnology industry is not isolated from the major influences affecting the overall healthcare industry, the reality of de facto healthcare cost controls will mean a significant reduction in peak sales for individual drugs. Science will no longer be the deciding factor; payor agents will play a far more activist role via reimbursement criteria, co-payment arrangements and similar rationing technologies. Reimbursement planning starts with clinical planning. At the dawn of the biotechnology industry, early investors had very few metrics with which to base and compare their investment decisions and valuations of such fledgling companies as Amgen and Genentech were negotiated events. Investors bought into the hopes, dreams and expectations that the scientists and entrepreneurs were selling. Fast forward to today and the industry is still extolling those same hopes and dreams that its innovation can make a difference meet an unmet medical need with a breakthrough therapeutic; create better crops; improve the environment, or protect the population from the threat of bioterrorism.

6 VI Foreword to the First Edition By and large, the investment community and capital markets have liked what they have heard. For the comparatively short 30-plus year history, this industry has attracted almost $400 billion. Capital continues to flow into biotechnology companies at incredible rates and this year alone we predict that a new milestone will be reached for the industry with $40 billion being invested in the United States alone. We have come a long way in a very short space of time. Those of us who fund innovative, but relatively immature enterprises not only have to recognize the best-in-class companies but also understand how the future will unfold in the light of constant technology change. The maturing industry that is now melding its scientific entrepreneurship with the needs and culture of its larger commercial reality is an ever-increasing challenge. In the early days, the dream of an emerging biotechnology company was to become a fully integrated pharmaceutical company and lever its intellectual property portfolio into a stream of blockbuster drugs. To demonstrate how dramatically this business model and landscape can change the focus on a one-size fits-all blockbuster drug is a strategy that may have run its course. The best selling drug of 2020 is somewhere between the bench and pre-clinic trials but who knows if big pharma, as we know it, will develop it. The successful companies of the future will be those that marry both molecular diagnostics with targeted drugs and deliver effective personalized therapies. We are witnessing an unprecedented rate of evolution and transformation in the life sciences and healthcare. We are in an era of personalized medicine where the promise is compelling for the future of health care personalized medicine offers earlier and more precise diagnoses, treatments tailored to the individual, reduction of side affects and adverse reactions to drugs, breakthroughs in treatment, and ultimately prevention of major diseases such as cancer, diabetes and Alzheimer s. On the other side of the ledger the move to a more personalized, predictive and preventive medicine (the three P s ) world that will revolutionalize the health care system, as we know it today, is challenging pharmaceutical and biotechnology companies alike to adapt. Up until recently, their focus has been on the discovery of blockbuster drugs. Now, with the convergence of IT and genomics, smarter drug delivery and labs on a chip are moving us down an inevitable path towards targeted personalized medicines away from blockbusterology and spotting early warning signs of impending health problems. Science is leading into a promising realm of new technologies such as theranostics, responder/non-responder effect of biomarkers, molecular diagnostics and the re-emergence of genomics and proteomics companies in an era of tougher regulations governing the safety of drugs with payors looking to decrease the costs of health care.

7 Foreword to the First Edition VII Creating a successful and profitable biotechnology enterprise is therefore just as complicated as the genetic and cellular innovations that the company is trying to commercialize. Conservative estimates tell us that a biotech company will need close to $2 billion (according to recent estimates) and at least years before any patient receives its novel drug therapy and returns on this massive investment can be generated. Along the way, the company will face many challenges: For its product numerous and stringent regulatory hurdles; for the corporation fickle financial markets; product competition; rapidly changing technologies; and difficulties in recruiting and retaining skilled staff. Taking all these factors into account small wonder that the chance of bringing a drug to market is about 1 in 1000! Thus, as investors, we are taking a chance, it s true, but we view this as a very necessary investment in the future of mankind and that gives us courage. Also, there is an opportunity for moving the science forward into commercialization, and for creating value. This, of course, requires a tremendous amount of due diligence and dogged research, but those of us who have stayed with this industry for decades know that the effort is well worth it. While, as investors we have the courage to be part of a better future our investment decisions have to be tempered with reality and on arriving at appropriately calculated valuations of the company s worth after all investment comes at a price to the entrepreneur. As a long-time investor in life sciences and someone who has been involved in the process of valuation for many years this is where the rubber meets the road in the deal making process. Tension on both sides of the negotiation table might be ameliorated if there was one agreed on set of rules about what a piece of technology or biotech companies are actually worth. The claim is made that the process of valuation in biotechnology is one part science and one part art. I would argue that there is a third essential ingredient, and perhaps the most important, and that is passion. Without it the biotechnology industry, perhaps would never have come into being. Any assistance that can help us figure out, in a more rational way, the complexity of the value proposition will help both communities at the bargaining table reach more realistic valuations is welcomed. A company s value lies in its potential to generate a stream of profits in the future. Profits can be generated from sales of drugs, services but also from upfront, milestone and royalty payments. All valuation exercises are based on determining a company s future, which requires many assumptions such as: the state of the market targeted and the potential share obtainable; the

8 VIII Foreword to the First Edition company s intellectual property and its freedom to operate; third, the ability of management to deliver on the business plan; and fourthly, the absolute size of the financing and what s needed to get to the next value inflection point. There is no magic bullet when it comes to valuation and it has remained a black box process for even the most seasoned investment professionals. The authors have, therefore, done an admirable job in setting out a roadmap for valuation in life sciences. They take us from this often times subjective operation to the more rational scientific process. The detailed worked examples are particular helpful in reducing the process into a more practical operation. This text will become a useful addition to the reference shelves of both the entrepreneur and investment professional alike and must reading for anyone contemplating raising investment capital. G. Steven Burrill, November 2006 CEO, Burrill & Company San Francisco

9 Table of Contents Introduction...1 The Life Sciences Industry...2 Academia...2 Biotech...3 Pharma...4 Valuation...5 The Role of Valuation...5 Current Problems in Valuation...6 Basics of Valuation...11 Introduction...11 Fundamentals...11 Cash Flows...11 Discounting...13 Valuation Methods...29 Discounted Cash Flows Valuation...29 Decision Tree...32 Real Options...36 Difference Between Real Options and Financial Options...59 Valuation of Financial Options...60 Valuation in Life Sciences...67 Fundamentals...67 Drug Development...67 Medical Device Development and Approval...70 Cost...72 Success Rates...74 Time...76 Peak Sales...77

10 X Table of Contents Discounting...96 Volatility Project Valuation Project Valuation: DCF Project Valuation: Decision Tree Project Valuation: Real Options Simulations of Projects Sensitivity Analysis and Sensitivity-Simulations License Contract Valuation Fundamentals of Licensing Valuation of License Contracts: DCF Valuation of License Contracts: Real Options Advanced Topics in Project and License Contract Valuation Early-Stage Licensing with Possible Sublicensing Simulation of License Contracts Discovery and Preclinical License Deals: What s Realistic? How to Read a Deal The Virtual Company Model Negotiating License Deals Valuing License Contracts with Multiple Indications Valuing Projects with Multiple Markets Technology Valuation and Feed Rate IP Valuation Pipeline Valuation Portfolio Management Introduction Qualitative Approaches Quantitative Approaches Optimal Portfolio Structure Company and Stock Valuation Introduction to Company Valuation Theory Interpretation of Valuation Results Simulation on Company Level Case Company Valuation Stock Valuation Advanced Company Valuation Mergers and Acquisitions Other, Less Serious Approaches...293

11 Table of Contents XI Exercises Introduction Exercises Solutions Case Studies Introduction Case Study Case Study Case Study Case Study References Index...365

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13 Abbreviations BLA CAPM CNS CVS DCF DF EMEA ESOP EUT FDA GIT IND IP IPR IRR MCPM M&A NCE NDA NME NPV PDE PMA rnpv ROV R&D VBA WACC Biologics license application Capital asset pricing model Central nervous system Cardiovascular system Discounted cash flows Discount factor European medicines control agency Employee stock options plans Expected utility theory Food and drug administration Gastrointestinal tract Investigational new drug Intellectual property Intellectual property rights Internal rate of return Market-derived capital pricing model Mergers and acquisitions New chemical entity New drug application New molecular entity Net present value Partial differential equations Pre-market approval Risk adjusted net present value Real options valuation Research and development Visual basic for applications Weighted average cost of capital