managing money managing success - 05.10.2016

May 10, 2016 © UniTechAdvisors, LLC Eric Vieira PhD

Managing Money Managing Success

The Language of Finance & Accounting

• Budgets • Capital • Cash • Costs • Cost of Capital • Cost of Goods Sold • Direct Costs • Discount Rate • Discounted Cash

Flows • EBITDA • Equity

• Expenses • Facilities &

Administration ( F&A rates)

• Fringe Benefits • Indirect Costs • Interest Rate • Internal Rate of

Return • Liabilities • Loss • Net Present Value • Opportunity Costs

• Probability of technical success

• Profits • Revenue • Revenue Projections • Return on Investment • Risk • Royalty • S,G, and A • Time Value of Money

The Black-Scholes pricing formula for call options

Call option: is an agreement that gives an investor the right, but not the obligation, to buy a stock, bond, commodity or other instrument at a specified price within a specific time period.

Shows the expected benefit of purchasing the underlying outright

Provides the current value of paying the exercise price upon expiration

Mathematical Operations

Add (+) Subtract (-) Multiply (*) Divide (/)

Add (+)

Probability & Statistics

Subtract (-) Multiply (*) Divide (/)

Add (+)

‘For all else, there’s a calculator for that

book·keep·ing /ˈbo͝okˌkēpiNG / noun: bookkeeping the activity or occupation of keeping records of the financial affairs of an individual or business, and part of the process of accounting.

Budgeting your life Grad School

(20s-30s) Income $28,000

$1,500 $100 $130

EXPENSES, monthly

$23,700

Expenses, annually + taxes $28,554

ANNUAL SAVINGS (LOSS), Net $(554)

Rent/Mortgage+ Utilities

Phone Childcare

Transportation Student Loans

Debt Incidentals

EXPENSES, annually

$35 $60

$1,975

Budgeting your life Grad School

(20s-30s) Post-Grad (30s-40s)

Income $28,000

$1,500 $100 $130

EXPENSES, monthly

$23,700

Expenses, annually + taxes $28,554

ANNUAL SAVINGS (LOSS), Net $(554)

Rent/Mortgage+ Utilities

Phone Childcare

Transportation Student Loans

Debt Incidentals

EXPENSES, annually

$35 $60

$1,975

$160,000

$3,200 $400 $200

$101,400

$156,000

$4,000

$2000 $1000

$500 $350 $800

$8,450

Setting up a lab

YR1 YR2 YR3 Salary PI (50%) $50K $50K $50K

Tech (100%) $35K $35K $35K Student (100%) $25K $25K

Fringe (35% F/S, 15% Stu) $30K $34K $34K

Reagents $10K $15K $15K

Equipment $15K

TOTAL DIRECT Cost $140K $159K $159K

F & A / Indirect Cost (56%) $70K $89K $89K

Modified Total Direct Cost $125K $159K $159K

TOTAL NEED $210K $247K $247K

Setting up a lab

YR1 YR2 YR3 YR4 Salary PI (50%) $50K $50K $50K $65K

Tech (100%) $35K $35K $35K $40K Student (100%) $25K $25K $50K

Fringe (35% F/S, 15% Stu) $30K $34K $34K $44K

Reagents $10K $15K $15K $20K

Equipment $15K $20K

TOTAL DIRECT Cost $140K $159K $159K $239K

F & A / Indirect Cost (56%) $70K $89K $89K $123K

$125K $159K $159K $219K

TOTAL NEED $210K $247K $247K $362K

Modified Total Direct Cost

Running a company

YR1 YR2 YR3… Revenues

Product Sales

Licensing Income $35K $45K $60K Contract Services $50K $80K

$100K $150K $300K $10K $20K $120K

$116K $180K $434K

Earnings before I,T,D,A $(56K) $(85K) $(234K)

PROFIT (LOSS) $(56K) $(85K) $(294K)

Expenses

Research & Development

Sales, General & Administration

$6K $10K $14K Costs of Goods Sold

TOTAL REVENUE

TOTAL EXPENSES

$60K $95K $140K

Running a company

YR1 YR2 YR3… …YR6 Revenues

Product Sales $1,800K Licensing Income $35K $45K $60K $75K

Contract Services $50K $80K $100K

$100K $150K $300K $400K $10K $20K $120K $300K

$116K $180K $434K $1,188K

Taxes $130k

Earnings before I,T,D,A $(56K) $(85K) $(234K) $787K

PROFIT (LOSS) $(56K) $(85K) $(294K) $656K

Expenses

Research & Development

Sales, General & Administration

$6K $10K $14K $488K Costs of Goods Sold

TOTAL REVENUE

TOTAL EXPENSES

$60K $95K $140K $1,975K

Regeneron Pharmaceuticals Income Statement – YR 2015 10-K

fore·cast /ˈfôrˌkast / verb gerund or present participle: forecasting to predict or estimate a future event or trend.

Market models informs future sales

Disease Market Model (Top Down Approach)

US Population (#)

Target Population (#)

Market Share (%)

Penetrated Market (#)

Annual Cost of Therapy ($)

Annual Product Sales ($)

US Population (#)

Market Share (%)

Income Statement

Product Sales

Licensing Revenue

S,G & A

Earnings/Losses per Share

US Population (#)

Market Share (%)

Income Statement

Product Sales

Licensing Revenue

S,G & A

Earnings/Losses per Share

fi·nan·cial mod·el·ling / fəˈnan(t)SHəl,fīˈnan(t)SHəl / /ˈmädliNG / Adjective gerund or present participle: modelling the task of building an abstract representation (a model) of a real world (financial) situation.

Total Population % of pop >65 yrs of age

# of pop >65 yrs of age

Product Sales

Disease X prevalence (%)

# patients w/ Disease X % treated w/ drugs

# treated patients

% market share of Drug 451

# patients treated w/ Drug 451

Ann. Cost of Rx (MFG price; $)

Modelling Disease

Product Sales

# treated patients

Modelling Disease

Product Sales

# treated patients

Modelling Disease

Product Sales

# treated patients

10% 4.8M

3.6M 0%

0 $800

Modelling Disease

Product Sales

# treated patients

10% 4.8M

3.6M 0%

0 $800

17% 56M

10% 5.6M

4.2M 10%

0.4M $880

Modelling Disease

Product Sales

# treated patients

10% 4.8M

3.6M 0%

0 $800

17% 56M

10% 5.6M

4.2M 10%

0.4M $880

19% 66M

10% 6.6M

4.9M 20% 1M

Modelling Disease

Product Sales

# treated patients

10% 4.8M

3.6M 0%

0 $800

17% 56M

10% 5.6M

4.2M 10%

0.4M $880

19% 66M

10% 6.6M

4.9M 20% 1M

21% 74M

10% 7.4M

5.6M 40%

2.2M $950

$2,112M

Modelling Disease

Product Sales

# treated patients

10% 4.8M

3.6M 0%

0 $800

17% 56M

10% 5.6M

4.2M 10%

0.4M $880

19% 66M

10% 6.6M

4.9M 20% 1M

21% 74M

10% 7.4M

5.6M 40%

2.2M $950

$2,112M

21% 79M

10% 7.9M

5.9M 60%

3.6M $950

$3,386M

Modelling Disease

Product Sales

# treated patients

10% 4.8M

3.6M 0%

0 $800

17% 56M

10% 5.6M

4.2M 10%

0.4M $880

19% 66M

10% 6.6M

4.9M 20% 1M

21% 74M

10% 7.4M

5.6M 40%

2.2M $950

$2,112M

21% 79M

10% 7.9M

5.9M 60%

3.6M $950

$3,386M

22% 82M

10% 8.2M

6.2M 15%

0.9M $80

Future Product Sales

($‘000)

val·u·a·tion /ˌvalyəˈwāSH(ə)n / noun: valuation; plural noun: valuations an estimation of something's worth, especially one carried out by a professional appraiser.

Expected Value & Royalties

Product Sales

$2,112M

$3,386M

Cost of Goods Sold (COGS)

Product Sales

$2,112M

$3,386M

Product Sales, Net $0 $279M $845M $1,901M $3,048M $67M

Royalty Rate (8% of Net Product Sales)

Product Sales

$2,112M

$3,386M

Royalty Payments $0 $22M $68M $152M $244M $5M

Royalty Rate (8% of Net Product Sales)

Product Sales

$2,112M

$3,386M

Lifetime (20+ yrs) Total Net Product Sales: $30B

Lifetime Total Royalty Payments: $2B

Lifetime Total Inventor Share: $0.6B

Year 0 $100.00Year 1 $50.00Year 2 $30.00Year 3 $100.00 $20.00

Year 0 $100.00 $86.38 $92.11Year 1 $50.00Year 2 $30.00Year 3 $115.76 $100.00 $20.00

Year 0 $100.00 $100.00 $86.38 $86.38 $92.11 $92.11Year 1 $105.00 $90.70 $50.00 $47.62Year 2 $110.25 $95.24 $30.00 $27.21Year 3 $115.76 $115.76 $100.00 $100.00 $20.00 $17.28

Scenario 3Scenario 2Scenario 1

Scenario 1 Scenario 2 Scenario 3

Future Value Present Value

Assume: Interest Rate (i) = 5% Discount Rate (r) = 5%

FV=PV*(1+i)^n PV=FV/(1+d)^n PV={FV1/(1+d)^1} + {FV2/(1+d)^2} + {FV3/(1+d)^3}

Time Value of Money

Year 0 $100.00Year 1 $50.00Year 2 $30.00Year 3 $100.00 $20.00

Year 0 $100.00 $86.38 $92.11Year 1 $50.00Year 2 $30.00Year 3 $115.76 $100.00 $20.00

Year 0 $100.00 $100.00 $86.38 $86.38 $92.11 $92.11Year 1 $105.00 $90.70 $50.00 $47.62Year 2 $110.25 $95.24 $30.00 $27.21Year 3 $115.76 $115.76 $100.00 $100.00 $20.00 $17.28

Scenario 3Scenario 2Scenario 1

Scenario 1 Scenario 2 Scenario 3

Future Value Present Value

Assume: Interest Rate (i) = 5% Discount Rate (r) = 5%

FV=PV*(1+i)^n PV=FV/(1+r)^n PV={FV1/(1+r)^1} + {FV2/(1+r)^2} + {FV3/(1+r)^3}

Time Value of Money

Net Present Value

2015 2020 2025 2030 2035 2040

Net Present Value (r=25%) $0 $7M $7M $5M $3M $0.02M

Lifetime Total, Royalty Payments: $2B

via Discounted Cash Flows (DCF)

Net Present Value (via DCF): $100M

de·ci·sion-mak·ing / dəˈsiZHən / /ˈmākiNG / noun: decision-making the action or process of making decisions, especially important ones.

Cash Flow Curve

Break-even Point

Net cash flow

Product Launch

20 yrs

Profits

Investment

Regeneron Pharmaceuticals Cash Flows

($‘000)

Regeneron Pharmaceuticals

($‘000)

Net Cash Flows

Expected Value

Net cash flow

Time 20 yrs

Project A

Project B

Profits of Project B are projected to be 35% > than the projected profits of Project A

? What do you do ? © UniTechAdvisors, LLC 45

SCENARIO ANALYSIS

• Definition: A performance measure that allows the comparison of investment opportunities

ROI = Gain from Investment – Cost of Investment

Cost of Investment =

Profit

Investment

Return on Investment

Profit

Investment

Project A $6.0B - $0.5B

$0.5B =

Project B $8.0B - $0.6B

$0.6B =

$0.5B =

$0.6B =

Profit

Investment

$0.5B =

$0.6B =

$0.5B =

$0.6B =

11X return

12X return

Project A

Project B

$6.0B - $0.5B

$8.0B - $0.6B

Profit

Investment

$0.5B =

$0.6B =

11X return

12X return

$0.5B =

$0.6B =

Project A

Project B

$6.0B - $0.5B

$8.0B - $0.6B

Probability of Technical Success

Hit -> Approval = 4% p{TS}

Hit -> Approval = 4% p{TS} Phase I -> Approval = 12% p{TS}

Hit -> Approval = 4% p{TS} Phase I -> Approval = 12% p{TS} Phase II -> Approval = 20% p{TS}

Hit -> Approval = 4% p{TS} Phase I -> Approval = 12% p{TS} Phase II -> Approval = 20% p{TS} Phase III -> Approval = 56% p{TS}

Considering Risk

Net cash flow

Time 20 yrs

Project A

Project B

Project B has a 10% chance of success, while Project A has a 20% chance of success.

PROBABILISTIC VALUATION

Profit

Investment

Considering Risk

$6B*(.20) - $0.5B

$0.5B =

$8B*(.10) - $0.6B

$0.6B =

Project A

Project B

Profit

Investment

Considering Risk

$6B*(.20) - $0.5B

$0.5B =

$8B*(.10) - $0.6B

$0.6B =

$0.5B =

$0.6B =

1.4X return =

Project A

Project B

(a loss)

Profit

Investment

Considering Risk

$6B*(.20) - $0.5B

$0.5B =

$8B*(.10) - $0.6B

$0.6B =

$0.5B =

$0.6B =

Project A

Project B

1.4X return

(a loss)

Profit

Investment

Considering IRR / Hurdles

$6B*(.20) - $0.5B

$0.5B =

$8B*(.10) - $0.6B

$0.6B =

$0.5B =

$0.6B =

Project A

Project B

Internal Rate of Return … Hurdle Rate : Growth => 1.8X

1.4X return

(a loss)

in·vest /inˈvest/ verb gerund or present participle: investing expend money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property, or by using it to develop a commercial venture.

Assets Debt

Making an Investment

Assets Debt

Assets

Liabilities

Shareholder Equity

Balance Sheet

Mortgage (Debt)

Down payment + principal payments

on mortgage

Mortgage (Debt)

on mortgage

$1000K $800K

Mortgage (Debt)

on mortgage

$1000K $800K

$1300K

$600K ($200K+$100K+$300K)

Interest

Mortgage (Debt)

on mortgage

$1000K $800K

$850K $700K

$1300K

Interest

$600K ($200K+$100K+$300K)

Mortgage (Debt)

on mortgage

$1000K $800K

$850K $700K

$1300K

Interest

Debt/Equity Ratio

$600K ($200K+$100K+$300K)

D/E=400%

D/E=117% D/E=467%

The Language of Finance & Accounting

• Budgets • Capital • Cash • Costs • Cost of Capital • Cost of Goods Sold • Direct Costs • Discount Rate • Discounted Cash

Flows • EBITDA • Equity

• Expenses • Facilities &

Administration ( F&A rates)

• Fringe Benefits • Indirect Costs • Interest Rate • Internal Rate of

Return • Liabilities • Loss • Net Present Value • Opportunity Costs

• Probability of technical success

• Profits • Revenue • Revenue Projections • Return on Investment • Risk • Royalty • S,G, and A • Time Value of Money

Resources

• How to Read a Financial Report (2014) by John Tracy • At the Helm: Leading Your Laboratory, Second Edition (2010)

By Kathy Barker • Entrepreneurial Finance, Third Edition: Finance and Business

Strategies for the Serious (2014) by Steven Rogers and Roza Makonnen

• Commercializing Successful Biomedical Technologies: Basic Principles for the Development of Drugs, Diagnostics and Devices (2011) by Shreefal S. Mehta

• Biotechnology Valuation: An Introductory Guide (2008) by Karl Keegan

• Getting to Yes: Negotiating Agreement Without Giving In (2011) by Roger Fisher, Bruce Patton (Editor), William Ury

• The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup (2013) by Noam Wasserman

Resources

• Investopedia (www.investopedia.com) • NIH Grants & Funding site (www.grants.nih.gov/oer.htm) • Daily Worth (www.dailyworth.com)

WEBSITES

University/Medical Centers • Grants & Contracts Office {pre-award} • Office of Research & Projects Administration {post-award}

NYC Small Business Services (SBS)

• NYC Business Solutions centers NY Public Library

• Science, Industry and Business Library (SIBL)- 34th street

LOCAL ADMINISTRATORS & SUPPORT

Stay in touch… Eric Vieira, PhD www.linkedin.com/in/ericvieira @emvieira00

THANK YOU!

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