Market Assessment:Great new product or just really cool science?
MaRS BioEntrepreneurship Events SeriesNovember 13, 2006
In the beginning…
At some stage
all great new products
were
“just really cool science”
Learning Objectives
● Commercialization considerations
● Assessment of the commercial path fortechnology/product
● Market assessment for technology/product
● VC considerations of early-stage lifesciences opportunities
In the beginning…
At some stage
all great new products
were
“just really cool science”
The first wave of biotech companies (e.g.Amgen, Biogen, Genentech) were born of theCohen/Boyer recombinant DNA technology
So…
Q: …how does one carry out an assessment todetermine if your “really cool science” hascommercial potential?
A: …unfortunately there is no formula
You are an entrepreneur or you are not…
● Going down the path to commercializingyour technology is determined more by yourstate of mind than decision tree analysis
You are an entrepreneur or you are not…
● However, if and/or when you do go downthe path, there are:
— some considerations— tools to be applied
Considerations
Considerations
● What do you give up by going down acommercial path?
— Examples:• Academic freedom• Ability to publish freely• Curiosity-driven research/activity• Different standard of accountability (commercial
endpoints vs. scientific advancement)• Job security
Considerations
● What do you gain by going down acommercial path?
— Examples:• Potential to see science applied• Potential for significant financial gain• Likely faster pace• Potential for significant financial support• Less threat of political volatility (e.g. grant funding)
Considerations
● If you do go down a commercial path you need toacquire a thorough understanding of what it is youare trying to accomplish
● Some relevant questions:— What product are you trying to develop?— How unique is it? Protectable? Class-leading/peer-leading
science?— What is the market need?— How big is the market opportunity?— What needs to be accomplished to move it from where it
is today to market?— How much capital is required and where will that come
from?— Where will I get help?
You are an entrepreneur or you are not…
Ask yourself these questions – and if you don’tget excited about finding the answers thenyou have the answer…
Considerations
● What product are you developing?— This will hinge on your science and its potential— Have you:
• discovered a novel pathway related to [fill in theblank disease condition]?
• observed an unknown therapeutic effect that can betreated with an existing agent?
• discovered a novel molecule (protein, antibody,chemical) that could have a therapeutic effect?
• Etc.
Considerations
● How unique is it?— Is it class-leading science?— Is it peer-leading science?— Is it patentable? – novel? useful? non-obvious?— Is it protectable?— Do you/will you have freedom-to-operate?
Considerations
Some inventions/technology are closer toproduct than others
However none are products yet! (let alone“great new products”)
Not until a health regulator (FDA, HealthCanada, etc) agrees
Considerations
How do I get there from here?
Drug Discovery and Development Process
Path to Commercialization
Path to Commercialization
Where are you in the process?
Where are you in the process?
How much data do I need?
● How many NOD/SCID mice?
● Knock-ins? Knock-outs?
● Results in relevant animal models?● How many compounds in your lead series?
● What are the MICs?
● Tested in how many different animal species?● How many steps involved in chemical synthesis?
● Scalable? Estimated manufacturing costs?● Long term toxicology results - 10 days? 28 days?
● No effect dose (NOAEL)?
● MTD?● Therapeutic window?
● IND filing?
● How many patients?● Long-term human efficacy data?
● NDA filing?
How much data do I need?
Someone will always want to see more…
Commercialization Risks
● Manufacturing
● Partnering
● Reimbursement
● Regulatory
● Market● Human Resources/Management
● Financing
● Intellectual Property
● Scientific/Technical/Clinical Development
Estimating your Costs
● The product’s pre-clinical/clinicaldevelopment costs will far exceed yourdiscovery costs
● Breakdown your costs:— Key discovery costs— Key pre-clinical costs— Key clinical costs
● Seek third party costing inputs soonerrather than later
Estimating your Costs
● Key Discovery costs (net of HR/personnel)— Lab space/equipment— Biology (e.g. animals)— Chemistry— Patent filings
● Key pre-clinical costs (net of HR/personnel)— Drug substance (formulation, stability)— In vitro testing— Animal toxicity— Animal efficacy— Outsourced expertise (e.g. clin, reg)— Patent filings
● Key Clinical Costs (net of HR/personnel)— =f(# of patients, # of sites, time to endpoint)— Drug substance— Patent filings, patent maintenance
Market Assessment
Key Challenge: Predicting the Future
Market Opportunity
● What disease area are you targeting?
● What is the prevalence of disease?
● What is the incidence of disease?
● What is the projected growth in incidence?
● What are the current state-of-the-arttreatments?
● Who pays for it and how much?
Market Opportunity
● Market segmentation— Type of disease— Acute/chronic— Stage of disease— First-line, second-line, etc.— Hospital/community product— Delivery method (oral, IV, inhalable, injectable,
etc)— Geography— Etc.
Market Opportunity
Competitive Landscape1. Marketed products2. Products in development3. New scientific advancements
What are the technology/product differentiators?— (e.g. efficacy, tox profile, dosing schedule, delivery
method, cost, etc)
● This market analysis becomes more relevant thecloser you are to the market
Market Assessment
Where to find industry numbers
● Examples:— Market Research Publications (Decision Resources, F&S,
etc)— Niche Professional Market Research Analysts (e.g.
contracted clinical/scientific focus group work)— IMS— Windhover, Scrip, ReCap, BioCentury, Bioworld,— Industry and scientific/clinical network (e.g. “thought-
leaders”)— Investment Banking analyst reports— SEC disclosures— Corporate Presentations— Tradeshows— CMS (e.g. Medicare, Medicaid reimbursement numbers)
Key Challenge: Predicting the Future
Catch-22: you need to make the decisionto commercialize before you have themarket data to make a well-informeddecision about whether you should
commercialize
You are an entrepreneur or you are not…
● Going down the path to commercializingyour technology is determined more by yourstate of mind than decision tree analysis
VC Considerations
VC Considerations
● Objective of VC: To generate superior financialreturns across a portfolio of companies
— ~10% net annualized return over public market proxies
● Each investment opportunity should have thepotential for 5+ X return over 3 to 7 years
● VCs are searching for the “New New” thing (i.e.typically undefined territory) to invest in
— High Risk— Pre-product— Pre-revenue
VC Considerations
● In order to evaluate/assess an investmentopportunity – conduct comprehensive due diligence
● Due Diligence should help identify investment risks
● Due Diligence should aid in answering the followingquestions:
— Should we invest - Yes/No? If Yes, on what terms? (structure,amount, valuation, plan and use of proceeds)
● Invest the resources (time/money) in accessing thebest sources of information and perspectives
● Ongoing process – post-investment monitoring
VC Considerations
● Areas of Focus for Due Diligence:— Technical/scientific— Clinical plans/Development path— Intellectual Property – Patentability and FtO— Market Opportunity— People/Management— Financing Needs/Plans— Business Model
VC Challenges
● Making investment decisions with imperfectinformation
— In any early-stage opportunity there are a number ofunknowns – technology, IP, market, people, etc
● The earlier the investment, the less perfect theinformation
— Higher risk, higher return expectation
The Art & Science of Valuation
“Most valuation exerciseswind up being attempts
to defend intuitive decisionsby placing them
in a quantitative framework”
Stelios Papadopoulos, PhD. Managing Director, SG Cowen
Valuation exercises…
Valuation is…
● a forecast of the future value of operating profitsand cash flows
● influenced by many factors— Company, Industry, Macroeconomic
● a function of perspective (buyer/seller)
● , in the context of a completed transaction, anegotiated price between the buyer and the seller
Value Drivers
● Management— Experience, track record, market awareness
● Technology— Uniqueness, strength of IP portfolio, scientific expertise
● Market Opportunity— Need, size, growth rate, competitive position
● Revenue Model— Profit Margins
● Partnerships and Alliances— Venture Investors, Commercial partners
● Stage of Development
Valuation as Art
● Quality of the Management— Track record, experience, market awareness
● Quality of Technology and Scientific team
● Quality of Sponsorship— Venture Investors, Commercial partners
Valuation as Science
Several different quantitative methods to derive avaluation:
1. Discounted Cash Flow2. Comparable Market Data3. Option Pricing Model
Challenges :— Generating a financial model— Accounting for the high level of risk— Venture Capital investors have a high hurdle rate (40+%)
Valuation – NPV relevance
1. Discounted Cash Flow
● Method of converting future cash flow into theirpresent equivalents taking into account:— the timing of the cash flows— the risk associated with the cash flows
● Apply discount rates (to reflect risk plus inflation)— Rule-of-thumb discount rates range from 80+% for Discovery
stage to 10-15% for Market stage
2. Comparable Market Data
● Develop a database of transaction prices andcurrent prices to use as a reference to derive arelative valuation
● Sources for database:— Private company valuations— Public company valuations— Acquisition valuations
3. Option Pricing
● Use a model to value alternatives andopportunities related to a product/technology
— Estimate cash flow for each alternative and opportunity— Apply probabilities to a collection of options, at various
points in time
Factors affecting valuation
● Regulatory issues— Product development: very risky, expensive and
lengthy process
● Cyclical financing environments— As industry matures, cycles should be less volatile
● Esoteric science— Difficult to communicate the value and to
differentiate stories
● In Canada, management and local private/publicequity market (supply/demand) challenges
Picking a Financial Partner (Angel, VC, Corporate)
● Think long-term
● Do your homework (due diligence)
● Interests should be aligned— Growth, management, exit
● “More than money”— Expertise, strategy, recruiting, governance— Highest price may not be from preferred partner/investor – see first
point above
● In good times and in bad— Future funding, patient capital
● Track record of success
● Personal dynamics
Valuation Summary
● Valuation is subjective – price is a negotiatednumber
● Exercise is part art, part science
● Methods provide framework in which to:— assess investment opportunities— gauge sensitivities— Intersecting ranges derived from various methodologies
should increase confidence in the valuation
● VCs have a high hurdle rate
Summary
Drug Discovery and Development Process
Summary
● At some stage all great new products were “reallycool science”
● Being an entrepreneur is a state of mind
● Commercialization process is well-defined(influenced by precedents)
● Predicting the future is difficult— Market assessment exercises become more relevant the
closer the product is to the market— Remember the “Catch-22”
● VCs need their financial reward to becommensurate with the risk
Q&A
Market Assessment:Great new product or just really cool science?
MaRS Events Series November 13, 2006
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