A Generalised Model for Valuing Early

Stage Technology

Palisade Europe User Conference

2008

Michael Brand

© 2008 Captum Capital Limited

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About Captum…• Formed in 2004

• Transatlantic presence

• Specialised consulting to:– Private companies (pre-IPO)– Life science sector (Biotech, Med Dev, Pharma)– Business development, valuation, partnering

• MasterClasses in Finance, Leadership– Valuation Masterclass attended by over 350

executives in UK and Europe

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Valuing Technology

• Technical Risk– Will it work?– Scale up issues– Regulatory hurdles

• Market Risk– Customer acceptance– Pricing issues– Competition

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Valuing Risk

£ X£200,000

£0

0.5

0.5or

What value of “X” are you indifferent between a fixed sum and playing the game?

£1

£1,000

£10,000

£20,000

£50,000

£100,000

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Valuing Technology

Early-stage Technology Company

Development Cost

NPV Success

NPV Failure

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Valuation Parameters

• Cash Flow• Probability of achieving cash flow• Discount rate (less uncertain)

Cs

Cf

P

(1 – P)

t

f

ts

r

CP

r

PCeNPV

)1(

)1(

)1(

t

7

Stepwise Development

Concept Development Manufacturing Market launch

Development can fail at any milestone along the development pathway

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Drug Discovery Process

Pre-Clinical

Phase 1 Phase 2 Phase 3 FDA

S

F

S

S

SS

FF

FF

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General Value Model

Risk Adjusted NPV =

Risk Adjusted NPV Sales Income

Risk Adjusted NPV Development Cost

+

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Case: ReJuven8

• Innovative wound care treatment• Demonstrated on animals, limited human trial• Requires manufacturing scale-up for:

– Small and Large scale human clinical trials– FDA Approval

• Post FDA approval, sales launch

This case has been written by Captum Capital Limited for educational purposes only. Any resemblance to any actual person, company, organization or technology is entirely accidental. Data included in this case is for illustration only, and should not be relied on for accuracy.

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ReJuven8 Development

Scale up CT1 CT2 FDA

0.7

0.4

0.6

0.9

0.5

0.1

1.2

0.2

1.5

0.2

0.5

0.3

Cash Flow $m

Overall Probability of FDA Approval = 0.15

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ReJuven8 PreSales Model

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Binary Decisions

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ReJuven8 Presales NPV

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Forecasting SalesTop Down

Bottom Up

• Total Market Size ($/yr)

• Market Share (%)

• Price/unit ($/unit)

• User Penetration (%)

• Potential Users (units)

Sales

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Market PenetrationPt = K Po ekt

K + Po (ekt – 1)

P0=1

K=10

Pt

Time, t

a b c

k

a = 2

b = 1

c = 0.5

Verhulst Pearl Equation

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Adding Post Launch SalesReJuven8 Sales Forecast

0

2

4

6

8

10

1 2 3 4 5

Year

Net

Cas

h Fl

ow $

m

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ReJuven8 Post Sales NPV

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Year 1 Sales Distribution

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ReJuven8 3 Year Sales

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ReJuven8 5 Year Sales

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Summary• Model Advantages

– Graphical depiction of technology/market risk– Flexible: facilitates development strategy – Intuitive: based on realistic probabilities – Effective communication tool

• Downside– Valuing very early stage technology difficult– Most investors are risk adverse (<eNPV)– Requires analytical discipline

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Contact

Michael Brande: mjb@captum.com

t: +44 (0) 115 988 6154

m: +44 (0) 7980 257 241

Captum Capital LimitedCumberland House

35 Park Row

Nottingham NG1 6EE

United Kingdom