A Generalised Model for Valuing Early Stage Technology Palisade Europe User Conference 2008 Michael...
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Transcript of A Generalised Model for Valuing Early Stage Technology Palisade Europe User Conference 2008 Michael...
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
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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: [email protected]
t: +44 (0) 115 988 6154
m: +44 (0) 7980 257 241
Captum Capital LimitedCumberland House
35 Park Row
Nottingham NG1 6EE
United Kingdom