bv--chempharma 19dec2014 (da final)

Business ValuationPRESENTER: DAVID ABERCROMBIE, PHD, BCA

PRESENTED TO: CHEMPHARMA

EAC VALUATIONS LLC1450 E BOOT RD, 500-BWEST CHESTER, PA 19380610-687-5855EACVALUATIONS.COM

EAC Valuations LLC 19 December 2014

Objectives What is a Business Valuation?

Who performs a valuation? Why would a valuation be needed?

What methods are used to calculate value? Reconciliation of Values

Valuation of Intellectual Property

EAC Valuation Case Study

Questions


What is a Business Valuation?

“The act or process of determining the value of a business enterprise or ownership interest therein.”

-- International Glossary of Business Valuation Terms


Who Performs a Business Valuation? Generally performed by certified valuator from the following

organizations: National Association of Certified Valuation Analysts (CVA)

American Institute of Certified Public Accountants (ABV)

American Society of Appraisers (ASA)

International Society of Business Appraisers (BCA)

Proper valuations should follow organizational standards: AICPA issued SSVS-1 for Business Valuation Standards effective 6/1/2008

NACVA Standards Equivalent to AICPA

Uniform Standards of Professional Appraisal Practice

FIRREA recognizes USPAP as the generally accepted appraisal standards


Why is a Business Valuation needed?

Bank Financing

Mergers and Acquisitions

Ownership disputes

Business Planning

Estate and Gift Tax

Marital/Business dissolution

Family Limited Partnerships

Purchase Price Allocation (ASC 805)

Goodwill Impairment (ASC 360)

Buy/Sell agreements

Reorganization and bankruptcies

Deferred/Incentive Compensation


Business Valuation Methods

The following methods can be used in conjunction or separately to value an enterprise:

Asset Approach Book value Method

Adjusted Net Asset Method

Income Approach Capitalization of Earnings

Discounted Cash Flow

Market Approach Direct Market Data Method

Public Guideline Companies


Business Valuation Example Objective: Value 10% ownership in Steel Widget Inc as of 12/31/2013

Define the Valuation Purpose: IRS Gift Tax

The current state of the business defines the Premise of Value: Going Concern Value

The purpose defines the Standard of Value: Fair Market Value

Steel Widget’s shareholder agreement, the standard and premise of value, and professional experience indicates the reported value will be: Non-Control, Non-Marketable, Voting


Asset Approach Under going concern premise of value, this approach typically

provides a ‘floor’ value

Assets and liabilities are assigned fair market values as of the valuation date (12/31/2013)

Best for businesses with large tangible asset base or generate losses

For profitable operations this method does not address earnings

Equipment appraisal may be needed to ensure accuracy

Yields a “Control, Non-Marketable” value


Income Approach In the simplest terms the income approach calculates value as:

Benefit Stream divided by Risk

Benefit Stream defined as: Net Cash Flow to Equity or Net Cash Flow to Invested Capital

Risk Defined as: Cost of Equity or Weighted Average Cost of Capital (WACC)

Two approaches: Capitalization of Earnings – Linear earnings

Discounted Cash Flow – Non-linear earnings

Can yield a “Control” or “Non-Control” value

Yields a “Marketable” value


Weighted Average Cost of Capital Includes company’s

cost of debt

Provides weighted required

return to equity and debt holders

Cost of Debt 5.00%

Tax Rate 35.00%

After-tax Cost of Debt 3.25%

Risk-Free Rate 3.50%

Equity Risk Premium 6.70%

x Beta 1.30

+ Industry Adjusted Premium 8.71%

+ Size Premium 6.03%

+ Company Specific Risk 1.00%

= Cost of Equity 19.24%

Capitalization Structure

Debt (Market Value) 25%

Equity (Market Value) 75%

WACC 15.24%EAC Valuations LLC 19 December 2014

Capitalization of Earnings Example Determine benefit stream

Weighted Average, Average or Last Fiscal Year

12/31/2009

12/31/2010

12/31/2011

12/31/2012

12/31/2013

$200,000 $25,000 $150,000 ($20,000) $180,000 7% (1/15) 13% (2/15) 20% (3/15) 27% (4/15) 33% (5/15)

Straight Average $107,000

Weighted Average $101,333 No Trend Define risk, utilize proper discount rate

Convert discount rate to capitalization rate by subtracting long term growth rate


Discount Rate 19.24% Average $107,000

Less: LTG 3.00% x LTG 3.00%

= Cap Rate 16.24% = NCFE $110,210

Multiplier x 6.16

100% Equity Value $678,633

Discounted Cash Flow Example Calculate future cash flows based upon detailed projections


12/31/2014 12/31/201512/31/2016

12/31/2017

12/31/2018

Projected $80,000 $120,000 $100,000 $140,000 $130,000

Present Value 0.916 0.768 0.644 0.540 0.453

@ 19.24% $73,262 $92,161 $64,409 $75,623 $58,890

Residual Value: $133,900

Capitalization Rate: 16.24% Sum of Present Value: $ 364,345

Future Value: $824,507Terminal Value: $ 373,504

Present Value Factor: 0.453 100% Equity Value: $ 737,849

Terminal Value: $373,504 Rounded: $ 740,000

Market Approach Similar concept as Income Approach

Benefit (Revenue, EBITDA, EBIT, Cash Flow)

Risk (P/Rev, P/EBITA, P/EBIT, P/CF)

Two approaches: Direct Market Data Method

Use past private company transactions as a multiple, which defines risk

Yields a “Control, Non-Marketable” value

Public Guideline Company Method

Use public guideline companies multiples, which defines risk

Can yield a “Control” or “Non-Control” value

Yields a “Marketable” value


Reconciliation of Methods Review results from applied methods

Often a valuator will give weightings to various methods


Method Value DLOM ValueWeighting

Adjusted Net Assets $355,000 N/A $355,000 0%

Capitalization of Earnings $678,633 30% $475,043 100%

Discounted Cash Flow $737,849 30% $516,495 0%

Direct Market Data $559,982 N/A $559,982 0%

Public Guideline $4,250,000 30% $2,975,000 0%

100% Equity Value Conclusion: $475,04310% Equity Value (Rounded) $47,500 Non-Control, Non-Marketable

WHAT COMPRISES A BUSINESS VALUATION? (HOW DOES IP FIT?) When valuing a business we generally value it as a whole

This value reflects the value of all the assets which the business owns

This value can then be allocated into three classes of assets


Net Tangibles Assets(Inclusive of all liabilities)

IDENTIFYING INTELLECTUAL PROPERTY


WHY VALUE IP?


• M&A transactions; when disposing of business or acquiring a business asset - understand the value of specific intellectual property to ensure the best result in that transaction• Required that intellectual property in acquisitions be valued and

amortized over their assessed useful life

• Tax consolidation for corporate groups • Restructuring Transactions; Intellectual Property Valuations

are important in certain restructuring transactions• Litigation Proceedings; often when intellectual property

protection is breached it is important to understand the value prior to seeking compensation under litigation

VALUATION METHODOLOGIES There are three generally accepted valuation methods

utilized to value Intellectual Property: Market based – comparable market transactions Cost based – historic costs or replacement cost devoted

to the intangible asset overtime Future earnings based – expected future economic

benefits; relief of royalty savings


Valuation Case Study

EAC Valuations LLC 28 October 2014

A case study that demonstrates valuation of an early-stage pharma company that is pre-revenue, with purchased assets that is looking for partners to share drug development costs

EAC Valuation Case Study Small start-up pharma company acquired assets from major

pharmaceutical company that sold these assets for strategic reasons

Assets included patents, inventory, documentation, know-how, and assigned contracts

Purchase agreement called for an upfront payment and remainder to be paid to seller upon meeting milestone of dosing first patient in Phase 3 clinical trial

Additional royalties were to be paid dependent upon level of products sold worldwide


EAC Valuation Case Study Valuation assignment for EAC Valuations involved

providing the total enterprise value and the value of assets of the business including 5 patents and 2 patent applications (at time of valuation)

Valuation was intended to be used as a basis for further negotiation with other pharma companies desired as partners to complete development through commercialization


EAC Valuation Case Study Appraisal assignment started with valuation of

financial information from sales and earnings forecasts for multiple pipeline products that were based upon the acquired assets

The second part of the assignment was to value the patents that were part of the transaction


EAC Valuation Case Study Determination of value was based upon an income

approach Valuation used projections of the total monetary

benefits expected to accrue from sales over projected period

Monetary benefits were discounted to net present value over the projection period

Initial discount rate (WACC) developed based upon corporate risk and capital structure compared to reference companies


Weighted Average Cost of Capital Includes company’s

cost of debt

Provides weighted required

return to equity and debt holders

Cost of Debt 4.39%

Tax Rate 40.00%

After-tax Cost of Debt 2.63%

Risk-Free Rate 3.13%

Equity Risk Premium 6.70%

x Beta 0.56

+ Industry Adjusted Premium 3.75%

+ Size Premium 0.50%

+ Company Specific Risk 2.00%

= Cost of Equity 9.38%

Capitalization Structure

Debt (Market Value) 12.6%

Equity (Market Value) 87.4%

WACC 8.53%EAC Valuations LLC 19 December 2014

EAC Valuation Case Study Biotech/pharma early-stage companies have challenging features for

entrepreneurs/investors Very long time to market (typically 10 years or more)

Very high levels of risk (fewer than 1% of drug candidates will make it to market)

Large amounts of capital continually needed to move most technologies forward

Compared to many other assets, investors need to take on more risk, hold illiquid investments, and wait longer for a return – therefore require a higher rate of return

High risk = a high Cost of Capital► Evidence shows that the Cost of Capital for venture backed early-stage

companies in Life Sciences is 20% or higher


EAC Valuation Case Study A revised discount rate was calculated based upon

the WACC and based upon additional risk factors (“project development delay” factors)

Additional discounting of the income stream was based upon a probability analysis in which probable product development time delays were estimated

Time delay in development = loss of revenue= increased risk to the company and investors

The increased risk is captured in the cost of capital (discount rate)




Cost of Capital = 8.53% (base-line, build-up calculation; previous slide)

Cost of capital = 24.4%

Additional risk factors considered due to project development delays

EAC Valuation Case Study The new discount rate was applied to projected

cash flows to calculate the present value of all pipeline projects

The value of the projects was summed to provide a total enterprise value


EAC Valuation Case Study The next part of the valuation assignment was to

determine the contribution from the acquired patents to the total enterprise value

The indicated value for the group of patents is based upon royalty savings (relief from royalty); the royalty rate is estimated at 33% of sales revenue




Patents

0.0% FutureTotal Attributable Royalty Adjusted Mid-Year* Present

Projected Revenues Savings for Taxes PWF ValueGrowth FYE Months Period* Revenues 100.00% 33.0% 40.0% 24.4% Indication

- 12/31/12 12.0 1.0 0.0$ 0.0 - - - - - 12/31/13 24.0 2.0 0.0$ 0.0 - - - - - 12/31/14 36.0 3.0 0.0$ 0.0 - - - -

nmf 12/31/15 48.0 4.0 83.1$ 83.1 27.0 16.0 0.4657 7.0 3.00 12/31/16 60.0 5.0 249.2$ 249.2 82.0 49.0 0.3744 18.0 2.23 12/31/17 72.0 6.0 555.6$ 555.6 183.0 110.0 0.3009 33.0 1.76 12/31/18 84.0 7.0 976.3$ 976.3 322.0 193.0 0.2419 47.0 1.58 12/31/19 96.0 8.0 1,539.8$ 1,539.8 508.0 305.0 0.1945 59.0 1.40 12/31/20 108.0 9.0 2,160.4$ 2,160.4 713.0 428.0 0.1563 67.0 1.32 12/31/21 120.0 10.0 2,852.5$ 2,852.5 941.0 565.0 0.1257 71.0 1.21 12/31/22 132.0 11.0 3,461.5$ 3,461.5 1,142.0 685.0 0.1010 69.0 1.13 12/31/23 144.0 12.0 3,925.8$ 3,925.8 1,296.0 778.0 0.0812 63.0 1.12 12/31/24 156.0 13.0 4,390.1$ 4,390.1 1,449.0 869.0 0.0653 57.0 1.11 12/31/25 168.0 14.0 4,861.5$ 4,861.5 1,604.0 962.0 0.0525 51.0 1.10 12/31/26 180.0 15.0 5,333.0$ 5,333.0 1,760.0 1,056.0 0.0422 45.0 1.64 12/31/27 192.0 16.0 5,690.1$ 5,690.1 1,878.0 1,127.0 0.0339 38.0 1.03 12/31/28 204.0 17.0 5,847.2$ 5,847.2 1,930.0 1,158.0 0.0273 32.0 1.02 12/31/29 216.0 18.0 5,947.2$ 5,947.2 1,963.0 1,178.0 0.0219 26.0 1.00 12/31/30 228.0 19.0 5,947.2$ 5,947.2 1,963.0 1,178.0 0.0176 21.0 0.28 12/31/31 240.0 20.0 1,486.8$ 1,486.8 491.0 295.0 0.0142 4.0

Sum of Present Values 708

Tax Amortization Benefit Factor 0.1174

Indicated Fair Value 802$

Rounded: 800$

Intangible Asset Premium

Cumulative

EAC Valuation Case Study Patent valuation procedure -

Assumed revenue stream is 100% attributable to acquired patent-related products

The projected sales were adjusted down annually by the percentage of patents expiring in a given year

The modified revenue streams were multiplied by the percentage royalties to calculate the pre-tax royalty savings

These values are adjusted by the reciprocal of the tax rate and further by the present value factor to arrive at the annual royalty savings

The sum of annual savings, with application of the tax amortization benefit factor calculation, provided a value for the patents


EAC Valuation Case Study Summary of Fair Market Value Conclusions

XYZ Company Patents & Applications for Composition of Matter .................. $800 Million

Patent/App Number File Date US Application 1111 (Aug XX, 20XX)

US Application 1112 (July XX, 20XX)

US Patent 8,113,XXX (Dec XX, 20XX)


XYZ Company Patents for Manufacturing Methods & Formulation ................ $300 Million US Patent 8,115,XXX (Aug XX, 20XX)

US Patent 8,116,XXX (June XX, 20XX)


API & XYZ Company Inventory ..................................................................... $5.0 Million

Intangible Business Value ............................................................................. $1,400 Million

Total Value.................................................................................................... $2,500 Million


Conclusion Business Valuation is the process of determining the value of a business

enterprise or ownership interest therein (definition)

There are 3 approaches possible –

Income approach – value = cash flow/risk (discounted cash flow method)

Asset Approach – book value (w/ adjustments) of company assets

Market Approach – value based upon comparable private and/or public companies

Intellectual property is an intangible asset that can be valued and contribute to the overall enterprise value of a company

Discount rates are a measure of the risk of a company = cost of capital = what an investor would expect to earn from an investment in the company


Questions?EAC VALUATIONS LLC

1450 E BOOT RD, 500-B

WEST CHESTER, PA 19380

[email protected]

610-687-5855 X104


About EAC Valuations LLCEAC Valuations has provided in-depth and trusted appraisals and valuation reports since 1971. Located 20 miles northwest of Philadelphia, near Valley Forge, our assignments have taken us around the world, and next-door. We have completed more than 10,000 appraisals for clients ranging from multi-national, multi-billion dollar Fortune 100 companies and financial institutions, to privately held local manufacturing and services companies.

Our highly qualified, certified and experienced appraisers can exceed expectations for a wide range of appraisal needs meeting IRS, FASB, IFRS, USPAP, and FIRREA requirements, encompassing appraisals of industrial and commercial real estate, machinery & equipment, intangible assets, and complete business enterprise valuations.


Contact Info:

David Abercrombie, BCA

EAC Valuations LLC

1450 E Boot Road, Suite 500-B

West Chester, PA 19380

610-687-5855 x104

[email protected]

www.eacvaluations.com

bv--chempharma 19dec2014 (da final)

Documents

business valuation methods

business valuation presenter

valuation purpose

standard of value

concern value

valuation date

reported value

chempharma eac valuations