valuation of early-stage technologies industry perspective · 2.npv (net present value). 3.rnpv...
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Noordwijk, April 29, 2011
Valuation of Early-Stage Technologies
Industry Perspective
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HEADLINESI promise you EUR 100 in a year if Holland becomesfootball European champion (odds: 13%*).
Starter
How much should you pay?
*Source: Oddschecker.de
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In 13% of the cases
you receive EUR 100.
In 87% of the cases
you receive EUR 0.
Starter
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Your expected payoff is :
13% x 100 + 87% x 0 = EUR 13.
You then discount this value, because you only get it in a year, so maybe EUR 12.
Starter
And if I gave you EUR 1,000,000 in case they win?
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In 1 (1988) out of 13 cases you receive EUR 100 (8%).
In 12 of 13 cases you receive EUR 0.
Your expected payoff is :
1/13 x 100 + 12/13 x 0 = EUR 8.
With a little discount maybe EUR 7.
Alternative Calculation - Historical
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• Risk matters:
• We don’t pay the full price.
• We are not even ready to pay the “fair” price.
• Past is not indicative:
• Today’s team is different.
• Historical odds are different than current odds.
2 important consequences
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• Market Method vs. Forecast Method
• Market odds and historical odds
• Forecast vs. Risk (Probability that it happens)
• Apply the odds
• How?
What’s the link to valuation?
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It is essential to incorporate risk in the valuation. Butwhat is risk?
•Product fails in R&D.
•Development takes an all different path.
•Forecast is wrong/uncertain.
2 main tasks:
•Get the forecast
•Quantify the risk
Early-Stage = Risky
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We see three main methods:
1.Comparables (market derived values).
2.NPV (net present value).
3.rNPV (risk-adjusted net present value).
Risk in valuation
• Comparables to determine the market’s appetite.
• Forecast-based method to emphasise differences.
• Always use 1 and (2 or 3)!
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Input Parameters – Success Rates
Probability of success 11%
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rNPV
Sum of all risk adjusted discounted cash flows.
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rNPV
Sum of all risk adjusted discounted cash flows.
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rNPV
Sum of all risk adjusted discounted cash flows.
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rNPV
Sum of all risk adjusted discounted cash flows.
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NPV vs. rNPV
Some prefer including risk in discount rate instead of using success rates.
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Not every industry is the same
Drug development industry is very well organised.•Development follows clear paradigm.•Statistical data available (success rates).
• Attrition is very high.•Product sales available.
The pharmaceutical industry invented rNPV.•Uses valuable data on risk.•Better quantifies risk.•More objective.
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Not every industry is the same
• Very few industries have success rates.• Mostly risk is included in discount rate.
Always compare what the discount rate would correspond to in terms of success rate! Example: Medical Device
Certain CF Uncertain CF(in size)
5% 10%?
Uncertain CF
?
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Discount rate
In every industry different, because of differences in:•Competition.•Regulation.•Timelines.•Life Cycles.
In drug development:•With success rates (rNPV): 7% - 20%.•Without success rates (NPV): 7% - 80%.
Sources: 1.Rodman-Renshaw2.Survey Avance-Biostrat3.Pepperdine
4. Frei/Leleux (Nature Biotech)5. William Sahlman, HBS6. Damodaran
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Best Practice
Compare a market derived value (observed transaction) and a forecast based model.
Problem: observable transactions are usually in later stage.
Example: Biovex
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Example: Biovex
• Biovex: British biotech company, in January 2011 acquired by Amgen for USD 425 mn + USD 575 mn in milestones (= USD 1,000 mn). Main product was Oncovex in phase 3 trials.
• Client has a product similar product in phase 1.
• What can we conclude from this deal?
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Example: Biovex
1. The value of the deal is about USD 510 mn.
2. Calculating back (client is about 6 years and two phases behind) we derive a value of USD 70 mn at phase 1.
3. We can also determine more or less what sales potential the two parties (Biovex and Amgen) expected from such a product.
$ 425 mn
$ 510 mn
Phase 3Phase 2Phase 1
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Example 2
Licensor: Kyowa Hakko Kirin (Jp)Licensee: Amgen (USA)
Year: 2008License: Worldwide except Asian countriesIndications: Lymphoma, Allergic RhinitisCompound MAB, Phase 1
Upfront: USD 100 MioMilestones: up to USD 420 Mio (development, approval, and sales)Royalties: double digit
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Example 2
First Remarks:• High upfront compared to rest of milestones (incl. 2 indications)• Double digit royalties for Phase 1 deal indicates high sales potential
Even if we backload the deal and keep it minimal we get:
Sales Upfront Ph 2 Ph 3 NDA Launch/ Sales
Roy Value Share
IRR Amgen
Roy/ Deal
USD 1 bio 100 10 20 40 350 10% 58% 15.9% 22%
USD 2 bio 100 10 20 40 350 10% 31% 22.2% 39%
We can conclude with certainty that Amgenexpects high sales. Even with minimal royaltiesUSD 2 bio do not seem high (VS, Roy/Deal).
AmgenMilestonesRoyalties
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Book
Valuation in Life Sciences
Springer Verlag, 2010
3rd edition