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Advanced Biotech Investment Valuation: Tools and Strategies for CFOs

This CFO Roundtable presentation, held in Vancouver on September 12, 2002, focuses on valuation methodologies critically important for biotech investments. Attendees will explore innovative modeling tools and frameworks, including the Biotech (ENPV) model, discounted cash flow analysis, and decision tree modeling. The session emphasizes the unique challenges of valuing small biotech firms, which often lack extensive earnings history and comparable firms, and introduces practical solutions to effectively assess potential growth, risks, and financing strategies.

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Advanced Biotech Investment Valuation: Tools and Strategies for CFOs

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  1. CFO Roundtable - Valuing Biotech

  2. Tools for Valuing Biotech Investments BC Biotech - CFO RoundtableVancouver, B.C. September 12, 2002 Alan Greer Greer Consulting ag@greerconsult.com (604) 682-6943 CFO Roundtable - Valuing Biotech

  3. Today’s Presentation • Purpose • introduce/discuss innovative modeling tools for technology valuation • Outline • Biotech Valuation Needs / Approaches • The Biotech (ENPV)Model • Further Discussion CFO Roundtable - Valuing Biotech

  4. R&D program design; financing, M&As; licensing/partnering agreements; and strategy development. Biotech Valuation Needs • TOOLS: • discounted cash flow (NPV) • expected value / decision trees • simulation • real options analysis CFO Roundtable - Valuing Biotech

  5. Limits to Traditional Valuation • Valuation requires: • Long history of earnings/market prices • Current financial statements that reflect underlying assets • Peer group of readily comparable (traded) firms • BUT, small biotech firms: • No earnings history • IP asset value not on companies books • Seek novel technology with no/few comparisons CFO Roundtable - Valuing Biotech

  6. Valuation of Fundamentals • Fundamental value is function of • Cash flows generated by asset • Life of asset • Expected growth • Riskiness of cash flows CFO Roundtable - Valuing Biotech

  7. Modeling Approaches Option Pricing FLEXIBILITY (STAGED INVESTMENTS) Decision Tree Analysis (Expected NPV) Monte Carlo Simulation RISK / UNCERTAINTY Discounted Cash Flow (Net Present Value) LONG TIMEFRAME CFO Roundtable - Valuing Biotech

  8. Growth and uncertainty CFO Roundtable - Valuing Biotech

  9. Biotech ENPV Model • Spreadsheet-based (Microsoft Excel) • Model has common analytical "engine"; can drive different applications: • STRATEGY model • compares different scenarios re. timing of licensing • DEAL model • compares deal terms offered by two parties • Illustrative examples • key model data/results altered to camouflage confidential information CFO Roundtable - Valuing Biotech

  10. Key Model Assumptions CFO Roundtable - Valuing Biotech

  11. 50% prob. of $ 100 M sale $90 MPROFIT 20% probability of success 50% prob. of $20 M sale Invest $10 M in research for new product $10 M PROFIT 80% prob. of failure Expected Value • Probability-weighted average of possible outcomes EXPECTED VALUE = 80% X -$10 M + 10% X $90 M + 10% X $10 M = $2 M $10 M LOSS CFO Roundtable - Valuing Biotech

  12. 75% 100% 90% 67.5% 33.8% 28.7% 85% 50% 75% 25% 90% 15% 50% 25% 10% Drug Development 21.5% CFO Roundtable - Valuing Biotech

  13. 100% 90% 67.5% 33.8% 28.7% Modeling Cash FlowDrug Development Risk factors CFO Roundtable - Valuing Biotech

  14. 100% 90% 67.5% 33.8% 28.7% Modeling Cash FlowDrug Development (Expected Value) CFO Roundtable - Valuing Biotech

  15. 100% 67.5% 33.8% 28.7% 21.5% 90% Modeling Cash FlowDevelopment & Commercialization Risk factors CFO Roundtable - Valuing Biotech

  16. 100% 67.5% 33.8% 28.7% 90% Modeling Cash Flow Development & Commercialization (Expected Value) 21.5% CFO Roundtable - Valuing Biotech

  17. Modeling Cash Flow Development & Commercialization (Expected Present Value) Divide by (1+discount rate)year CFO Roundtable - Valuing Biotech

  18. Modeling Cash Flow Development & Commercialization (Expected Present Value) ENPV = $57 m CFO Roundtable - Valuing Biotech

  19. Monte Carlo Simulation CFO Roundtable - Valuing Biotech

  20. Monte Carlo Simulation CFO Roundtable - Valuing Biotech

  21. Strategy Model Scenarios CFO Roundtable - Valuing Biotech

  22. Results: Strategy Model CFO Roundtable - Valuing Biotech

  23. Results: Strategy Model CFO Roundtable - Valuing Biotech

  24. Deal Model • Models licensing negotiation between two parties: • Pharma X • Biotech X • Early stage deal with provisions for • License fees, milestones, research funding; • Allocation (%) development costs, profit-sharing; • Royalty rates, brackets. • Compares competing offers and different assumptions of both sides CFO Roundtable - Valuing Biotech

  25. Deal Model Inputs CFO Roundtable - Valuing Biotech

  26. Summary - ENPV Allocation ENPV to Biotech X ENPV to Pharma X 200 150 100 50 0 50 100 150 200 Biotech X Offer Straight Licensing Joint Development Pharma X Offer Straight Licensing Joint Development Results: Deal Model CFO Roundtable - Valuing Biotech

  27. Limits of Models “All models are wrong. Some are useful.” George Box • Forecasting uncertainty • Modeling error • Spreadsheet error CFO Roundtable - Valuing Biotech

  28. Uncertainty and flexibility CFO Roundtable - Valuing Biotech

  29. Underlying asset Product (with patent protection) Exercise price Cost of next phase Volatility Technical (private) - development risk Market (public) – competition/price risk Time limit Patent life Types of options Defer - delay/advance research for compound Abandon- option to abandon prior to full commitment of funds; Learning- Invest in additional research re. alternative indications, comparison with other drugs Growth/strategic - platform/pipeline with future unforeseen potential Biotech real options CFO Roundtable - Valuing Biotech

  30. Summary Biotech (ENPV) Model: • fundamental (cash flow) basis for valuation • allows for scenario comparison / tailoring of assumptions • uses expected value & Monte Carlo methods to assess risk/uncertainty • customizable to suit different business needs (e.g., deals, strategy, financing) • easily adapted to other biotech applications (e.g. tools, medical devices) CFO Roundtable - Valuing Biotech

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