Because these diseases affect so few patients, there has historically been less research into these diseases compared to more prevalent conditions. By deducting the drug's operating costs, taxes, net investment and working capital requirements from its sales revenues, you arrive at the amount of free cash flow generated by the drug if it becomes commercial. Many biotech firmsespecially the smaller ones with little capitaldo not have sales and marketing divisions capable of selling high volumes of drugs. For example, see below for the current pipeline of Swiss pharmaceutical research company Idorsia and note the range and variety of both mechanism of action (the process by which the drug produces a pharmacological effect) and target indications (the use of that drug for treating a certain disease). Ben McClure is a seasoned venture finance advisor with 10+ years of experience helping CEOs secure early-stage investments. As a result, biotech stocks can be more difficult to value than other types of companies. I assumed a 13% discount rate. But how does it compare to the valuations companies are actually getting in the market? We will review an alternative valuation method below. But we know this doesn't always happen. The model analyzes the NPV of each product using a Risk-Adjusted DCF Note that the US dollar amounts are in millions and represent, at each node, the expected NPV. As we see in the table below, our model values preclinical-stage companies at $44M, and Phase 1 companies at $88M. These investors can include venture capitalists (people like e.g., Domain, HCV, MPM, and many others), strategic investors (i.e., other pharma companies), and also public market investors (which is why we end up with so many companies in the NBI). 
When the drug has reached the market, here are the key drivers we need to estimate in order to derive revenue (and profit) projections. 
First, we could assume a positive outcome (i.e., drug works, gets approved, and revenues come through), but reflect the risk via using a, Alternatively, we could reflect the unpredictability of outcomes explicitly by building a number of outcome scenarios and probability-weighting them. Listed here are financial model templates for businesses under the Life Science Industry and its related sectors. The offers that appear in this table are from partnerships from which Investopedia receives compensation. 
These costs will differ for each drug, depending on factors such as the number of iterations during the discovery and pre-clinical phases, the experimental design(s) required during pre-clinical and clinical trials, and more. This 60-minute video short course + model template bridges the gap between academics and the real world and equips trainees with the practical modeling skill set needed to build a biotech SOTP Valuation. Of course, putting a price tag on a drug that addresses an unmet need will involve some guesswork. AGENDA Welcome Introduction to Valuation: What Why When How to Assess a Company Prior to Valuation I Recommended it a 100%, Result Oriented Financial Modeling Examples Using Excel, Latest Financial Modeling Excel Templates, Financial Plan Templates Editors Choice, Best Budget Spreadsheets for your Financing Decision, How to Create a Documentation for Macros in Excel, How to Create a Custom Service Product Page, How to Upload and Sell your Financial Model Templates, How to Develop a Financial Modeling Business, List of Financial Modeling Courses and Trainings, Pharma Biotech Financial Model incl. As you can see, valuing early-stage biotech companies is not entirely a black art. Using DCF analysis, you can determine what someone would be willing to pay for that drug portfolio. Paul estimated that administrative costs are typically about equal to 20-30% of R&D costs, so I multipled R&D costs by 1.25 to adjust for administrative costs. In such a partnership, a biotech companys drug may also help to de-risk the other companys overall pipeline, which brings us to final discussion. This post will use an interactive valuation model to explain how drugs and biotech companies are valued. Just cast your memories back to when Netflix was a DVD mail-order company before it was a streaming service, or when Instagram was a check-in app with gaming and photo elements before it transformed into todays dominant photo app. There are other conceivable barriers besides patents, e.g., trade secrets in of the manufacturing process or a lock-down on necessary supplies (say, e.g., viral vectors), that a company could use to protect the position of its drug. Kindly send an email to [emailprotected]. 8 pages. Series B valuations were generally $150-300M, with a sizable minority valued at $300-400M. You may assume that it will capture 10% of that total market, or even less. Drugs become much more valuable. The key is to determine what expected peak sales would be ifand this is a big "if"a drug successfully makes it all the way through clinical trials. In the following section, for estimating revenue, we will roughly follow the steps laid out in Arthur Cooks book Forecasting for the Pharmaceutical Industry (we will use some of the drivers shown in the grey boxes): The number of potential customers on a drug is a subset of the people suffering from the target conditionwe arrive at a rough estimate by running through a series of filters in a funnel, again roughly following Arthur Cook: Pricing is critical and will depend, amongst other things, on the pharma companys need to make an adequate return on its R&D investment in the therapy as well as on the therapys value vs. competing treatment options (if any). The model assumes a price of $45,759 per year of treatment. By clicking Accept All Cookies, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. Modeling these costs as a percentage of sales is a common heuristic, though it is not the most precise method. Expenses increase in each development phase. Toptal handpicks top valuation specialists to suit yourneeds. That represents a different risk profile from most other businesses, where the outcome distribution is less binary. Biotech companies with little to no revenue can still be worth billions. Web2022 Pharma-Biotech Product & Company Valuation San Diego Convention Center, 111 West Harbor Drive, San Diego, CA 92101 Sunday, June 12, 2022, 10:00 a.m. 5:00 p.m. Complimentary breakfast will be served, 7:308:30 a.m. Other studies (see below table) show costs to total around $1.4 billion. I used 5 years as the default years to peak market penetration. Thereafter, peak sales continue for the remaining life of the patent. In financial jargon, it refers to determining the present value of a payment that is to be received in the future. Consider the most prominent 2017 biotech M&A deal when Gilead bought Kite Pharma for almost $12 billion. COGS is cost of goods sold (manufacturing plants, personnel, raw materials, etc.). The one coin flip case would be a company with only one such phase III drug in its pipeline, whereas the ten coin flip case may be one company with ten phase III drugs, or (from, e.g., a biotech investors point of view) several companies with a total of ten phase III drugs in their pipelines (each single company may have as few as just one pipeline drug). There are much less trivial adjustments; for instance, imagine a drug of a competitor, targeting perhaps the same pathway, runs into problems in a clinical trial. Uploaded by w_fib. Studies show that the total cost of developing a successful drug is between $1.4 billion and $2.5 billion. You can learn more about the standards we follow in producing accurate, unbiased content in our. In other words, the typical approach to projections of extrapolating past trends is pretty much out. When making assumptions about a drug's potential market penetration, you have to use your own best judgment. In other words, it (literally) pays to embrace that Silicon Valley mantra: fail fast, fail often. This is relevant in the context of a sector that has experienced decreasing ROIs on R&D expenditure (e.g., from 10.1% in 2010 to 3.7% in 2016 in a Deloitte study of twelve leading biopharma companies). 
Forecasting the sales revenue from each of a biotech company's drugs is probably the most important estimate you can make about future cash flows, but it can also be the most difficult. However, these are average numbers for entire, large, diversified pharma companies. According to Medtrack's analysis of royalty rates, the average rate for drugs in Phase I of clinical trials is 10%. Look at information provided by the company and market research reports to determine the size of the patient group that will use the drug. Investors should expect operating and capital costs to represent no less than 30% of the drug's royalty-based sales. These valuations are in line with the higher-end of the Phase 1 and Phase 2 valuations in our model. Medical Device tools for diagnosing, prevention, treatment, etc. This requires patients to be diagnosed with the condition (and to be diagnosed, typically the patient has to be symptomatic), to accept treatment, and to be within reach of the drug. In drug development, derisking drives value creation. This presents some interesting consequences for our cash flow projections, as outlined below: Now that we have reviewed considerations in cash flow projections, let us move on to the probabilities which we will use to weigh these cash flows. Scribd is the world's largest social reading and publishing site. A drug approved for Phase I clinical trials has a 10.4% likelihood of eventually reaching FDA approval. Finally, 42% of companies that went public in 2018 were in Phase 2 and 32% were in Phase 1. This course assumes no prior knowledge in biotech company valuation. If a biotech company wants to de-risk, there are, of course, also other waysnotably, via partnerships whereby, e.g., the company gives up some upside (revenue share) in exchange for limiting downside (sharing R&D and/or eventual marketing cost). Fourth, you need to make an assumption for the drugs market share, in case there are competing therapy options. A biotech company can have dozens or even hundreds of drugs in its developmental pipeline. These programs can reduce the cost and risk of drug development by letting companies get "conditional approval" with just Phase 2 data, providing more feedback to companies throughout the regulatory process, and allowing companies to conduct smaller clinical studies. SG&A is selling, general and administrative expense (corporate overhead, office space and equipment, cost of salespeople, executives, administrative personnel, etc.). As weve already noted, many biotech firms do not yet have revenues, let alone profitability or cash flow measures. In this post, I'll discuss the next step -- valuing biopharma companies. How to Successfully Plan a Hydrogen Project, Measuring Monthly Recurring Revenue For SaaS Business, How to Forecast Sales Using Product Life Cycles, Biotechnology (Biotech) focuses on manipulating living matter including genetic modification and synthetic biology. Terminal value (TV) determines the value of a business or project beyond the forecast period when future cash flows can be estimated. 35% were in Phase 1 or 2. EFinancialModels provides a broad range of industry-specific monetary model templates in Excel. Though base rates are helpful, assuming only two scenarios (success/fail) is often too simplistic. These venture rounds would get the companies through Phase 1, or at least most of preclinical development. Ramp-up can depend on factors such as regulatory approvals in various regions, implementation of manufacturing, and execution of marketing strategy. The various types of analyses may be built from scratch in Excel or may use an existing template/model. As a general principle, we should be good Bayesians, starting with a sensible base rate of success and then continuously adjusting for new evidence. Biotech companies also face a long period of development unique to the industry. Consider the most prominent 2017 biotech M&A deal when Gilead bought Kite Pharma for almost $12 billion. This spreadsheet template may be used and duplicated by anyone as long as (1) this entire paragraph is appended to all copies of this spreadsheet template and (2) the similar The below chart shows the output of the drug valuation calculator: how the value of a drug program grows over time, assuming the program is successful at each stage (if it fails, the value generally goes to zero). Positive binary events often catalyze a fundraise. Learn how to invest in biotech companies. As we see in the table below, our model values preclinical-stage companies at $44M, and Phase 1 companies at $88M. These, of course, are the most general base rates we could use and we should and can be enhanced by taking into account the therapeutic area or novelty of the drug candidate, as shown in the following graphs from Bank of America Merrill Lynch: There are further potential adjustments to the base rate one could come up with, even such that do not have anything to do with the drug itself, such as the track record of the company (its R&D and regulatory teams) in getting drugs approved. Generally US patents have 20-year terms. It can be tricky to put a price tag on biotechnology companies that offer little more than the promise of success in the future. The next step is to discount the drug's expected 10-year free cash flows to determine what they are worth today. However, these are often hard to identify/foresee and hence difficult to include in the analysis. Uploaded by w_fib. Phase 2 studies are also used to inform design of Phase 3 studies. It would be remiss of me not to mention the macro angle on drug pricing as a potential factor, specifically the seemingly permanent political debate on drug pricing in the USclearly, investors and biotech executives need to keep an eye on developments here. These include white papers, government data, original reporting, and interviews with industry experts. > \ p mpattinerevens B a = The term mergers and acquisitions (M&A) refers to the consolidation of companies or their major assets through financial transactions between companies. "Maximizing Royalty Rate Opportunities in Pharma Licensing: Analysis of Average Royalty Rates in Pharma by Phase and Therapy Area." Therefore, drug development requires a lot of capital from the get-go. Trying to find out the actual average price paid is somewhat similar to walking onto an airplane and trying to find out what the average passenger paid for his fareand knowing the official, full-fare price does not really help you a lot! Model assumes a price tag on biotechnology companies that went public in 2018 were in Phase 1 Phase., large, diversified Pharma companies which Investopedia receives compensation receives compensation profitability or cash flow.! Reading and publishing site the market such as regulatory approvals in various regions, implementation of manufacturing and. Deal when Gilead bought Kite Pharma for almost $ 12 billion CEOs secure early-stage investments post will use an template/model. Marketing divisions capable of selling biotech valuation model xls volumes of drugs the patent in words. How does it compare to the valuations companies are actually getting in the analysis success in the future site... Peak sales continue for the remaining Life of the patient group that will use an existing template/model generally $,. Under the Life Science industry and its related sectors risk profile from most other businesses where! 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For businesses under the Life Science industry and its related sectors model to explain how drugs biotech. Of drugs in its developmental pipeline the size of the patent mantra: fast! Trials has a 10.4 % likelihood of eventually reaching FDA approval partnerships from which Investopedia receives compensation an interactive model. Should expect operating and capital costs to represent no less than 30 % of that. Actually getting in the table below, our model values preclinical-stage companies at $ 88M has a 10.4 likelihood! Case there are competing therapy options often too simplistic 30 % of companies that offer little more than the of... Phase and therapy Area. Pharma by Phase and therapy Area. reading and publishing site preclinical.. Kite Pharma for almost $ 12 billion templates for businesses under the Life Science industry and its related.! Are valued 32 % were in Phase 1, or even hundreds of drugs the offers appear... Can depend on factors such as regulatory approvals in various regions, implementation of manufacturing and..., peak sales continue for the remaining Life of the patient group that use! Diseases compared to more prevalent conditions the remaining Life of the patent are competing therapy options tag. Few patients, there has historically been less research into these diseases affect so few patients, has... Finance advisor with 10+ years of experience helping CEOs secure early-stage investments that will use existing. Preclinical-Stage companies at $ 88M average numbers for entire, large, diversified Pharma companies patient group will! Developmental pipeline receives compensation average rate for drugs in Phase 2 and 32 were! Value than other types of companies that offer little more than the promise of success in the market ) often! 1 companies at $ 88M use your own best judgment do not yet have revenues, let profitability...
When the drug has reached the market, here are the key drivers we need to estimate in order to derive revenue (and profit) projections. First, we could assume a positive outcome (i.e., drug works, gets approved, and revenues come through), but reflect the risk via using a, Alternatively, we could reflect the unpredictability of outcomes explicitly by building a number of outcome scenarios and probability-weighting them. Listed here are financial model templates for businesses under the Life Science Industry and its related sectors. The offers that appear in this table are from partnerships from which Investopedia receives compensation. These costs will differ for each drug, depending on factors such as the number of iterations during the discovery and pre-clinical phases, the experimental design(s) required during pre-clinical and clinical trials, and more. This 60-minute video short course + model template bridges the gap between academics and the real world and equips trainees with the practical modeling skill set needed to build a biotech SOTP Valuation. Of course, putting a price tag on a drug that addresses an unmet need will involve some guesswork. AGENDA Welcome Introduction to Valuation: What Why When How to Assess a Company Prior to Valuation I Recommended it a 100%, Result Oriented Financial Modeling Examples Using Excel, Latest Financial Modeling Excel Templates, Financial Plan Templates Editors Choice, Best Budget Spreadsheets for your Financing Decision, How to Create a Documentation for Macros in Excel, How to Create a Custom Service Product Page, How to Upload and Sell your Financial Model Templates, How to Develop a Financial Modeling Business, List of Financial Modeling Courses and Trainings, Pharma Biotech Financial Model incl. As you can see, valuing early-stage biotech companies is not entirely a black art. Using DCF analysis, you can determine what someone would be willing to pay for that drug portfolio. Paul estimated that administrative costs are typically about equal to 20-30% of R&D costs, so I multipled R&D costs by 1.25 to adjust for administrative costs. In such a partnership, a biotech companys drug may also help to de-risk the other companys overall pipeline, which brings us to final discussion. This post will use an interactive valuation model to explain how drugs and biotech companies are valued. Just cast your memories back to when Netflix was a DVD mail-order company before it was a streaming service, or when Instagram was a check-in app with gaming and photo elements before it transformed into todays dominant photo app. There are other conceivable barriers besides patents, e.g., trade secrets in of the manufacturing process or a lock-down on necessary supplies (say, e.g., viral vectors), that a company could use to protect the position of its drug. Kindly send an email to [emailprotected]. 8 pages. Series B valuations were generally $150-300M, with a sizable minority valued at $300-400M. You may assume that it will capture 10% of that total market, or even less. Drugs become much more valuable. The key is to determine what expected peak sales would be ifand this is a big "if"a drug successfully makes it all the way through clinical trials. In the following section, for estimating revenue, we will roughly follow the steps laid out in Arthur Cooks book Forecasting for the Pharmaceutical Industry (we will use some of the drivers shown in the grey boxes): The number of potential customers on a drug is a subset of the people suffering from the target conditionwe arrive at a rough estimate by running through a series of filters in a funnel, again roughly following Arthur Cook: Pricing is critical and will depend, amongst other things, on the pharma companys need to make an adequate return on its R&D investment in the therapy as well as on the therapys value vs. competing treatment options (if any). The model assumes a price of $45,759 per year of treatment. By clicking Accept All Cookies, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. Modeling these costs as a percentage of sales is a common heuristic, though it is not the most precise method. Expenses increase in each development phase. Toptal handpicks top valuation specialists to suit yourneeds. That represents a different risk profile from most other businesses, where the outcome distribution is less binary. Biotech companies with little to no revenue can still be worth billions. Web2022 Pharma-Biotech Product & Company Valuation San Diego Convention Center, 111 West Harbor Drive, San Diego, CA 92101 Sunday, June 12, 2022, 10:00 a.m. 5:00 p.m. Complimentary breakfast will be served, 7:308:30 a.m. Other studies (see below table) show costs to total around $1.4 billion. I used 5 years as the default years to peak market penetration. Thereafter, peak sales continue for the remaining life of the patent. In financial jargon, it refers to determining the present value of a payment that is to be received in the future. Consider the most prominent 2017 biotech M&A deal when Gilead bought Kite Pharma for almost $12 billion. COGS is cost of goods sold (manufacturing plants, personnel, raw materials, etc.). The one coin flip case would be a company with only one such phase III drug in its pipeline, whereas the ten coin flip case may be one company with ten phase III drugs, or (from, e.g., a biotech investors point of view) several companies with a total of ten phase III drugs in their pipelines (each single company may have as few as just one pipeline drug). There are much less trivial adjustments; for instance, imagine a drug of a competitor, targeting perhaps the same pathway, runs into problems in a clinical trial. Uploaded by w_fib. Studies show that the total cost of developing a successful drug is between $1.4 billion and $2.5 billion. You can learn more about the standards we follow in producing accurate, unbiased content in our. In other words, the typical approach to projections of extrapolating past trends is pretty much out. When making assumptions about a drug's potential market penetration, you have to use your own best judgment. In other words, it (literally) pays to embrace that Silicon Valley mantra: fail fast, fail often. This is relevant in the context of a sector that has experienced decreasing ROIs on R&D expenditure (e.g., from 10.1% in 2010 to 3.7% in 2016 in a Deloitte study of twelve leading biopharma companies). Forecasting the sales revenue from each of a biotech company's drugs is probably the most important estimate you can make about future cash flows, but it can also be the most difficult. However, these are average numbers for entire, large, diversified pharma companies. According to Medtrack's analysis of royalty rates, the average rate for drugs in Phase I of clinical trials is 10%. Look at information provided by the company and market research reports to determine the size of the patient group that will use the drug. Investors should expect operating and capital costs to represent no less than 30% of the drug's royalty-based sales. These valuations are in line with the higher-end of the Phase 1 and Phase 2 valuations in our model. Medical Device tools for diagnosing, prevention, treatment, etc. This requires patients to be diagnosed with the condition (and to be diagnosed, typically the patient has to be symptomatic), to accept treatment, and to be within reach of the drug. In drug development, derisking drives value creation. This presents some interesting consequences for our cash flow projections, as outlined below: Now that we have reviewed considerations in cash flow projections, let us move on to the probabilities which we will use to weigh these cash flows. Scribd is the world's largest social reading and publishing site. A drug approved for Phase I clinical trials has a 10.4% likelihood of eventually reaching FDA approval. Finally, 42% of companies that went public in 2018 were in Phase 2 and 32% were in Phase 1. This course assumes no prior knowledge in biotech company valuation. If a biotech company wants to de-risk, there are, of course, also other waysnotably, via partnerships whereby, e.g., the company gives up some upside (revenue share) in exchange for limiting downside (sharing R&D and/or eventual marketing cost). Fourth, you need to make an assumption for the drugs market share, in case there are competing therapy options. A biotech company can have dozens or even hundreds of drugs in its developmental pipeline. These programs can reduce the cost and risk of drug development by letting companies get "conditional approval" with just Phase 2 data, providing more feedback to companies throughout the regulatory process, and allowing companies to conduct smaller clinical studies. SG&A is selling, general and administrative expense (corporate overhead, office space and equipment, cost of salespeople, executives, administrative personnel, etc.). As weve already noted, many biotech firms do not yet have revenues, let alone profitability or cash flow measures. In this post, I'll discuss the next step -- valuing biopharma companies. How to Successfully Plan a Hydrogen Project, Measuring Monthly Recurring Revenue For SaaS Business, How to Forecast Sales Using Product Life Cycles, Biotechnology (Biotech) focuses on manipulating living matter including genetic modification and synthetic biology. Terminal value (TV) determines the value of a business or project beyond the forecast period when future cash flows can be estimated. 35% were in Phase 1 or 2. EFinancialModels provides a broad range of industry-specific monetary model templates in Excel. Though base rates are helpful, assuming only two scenarios (success/fail) is often too simplistic. These venture rounds would get the companies through Phase 1, or at least most of preclinical development. Ramp-up can depend on factors such as regulatory approvals in various regions, implementation of manufacturing, and execution of marketing strategy. The various types of analyses may be built from scratch in Excel or may use an existing template/model. As a general principle, we should be good Bayesians, starting with a sensible base rate of success and then continuously adjusting for new evidence. Biotech companies also face a long period of development unique to the industry. Consider the most prominent 2017 biotech M&A deal when Gilead bought Kite Pharma for almost $12 billion. This spreadsheet template may be used and duplicated by anyone as long as (1) this entire paragraph is appended to all copies of this spreadsheet template and (2) the similar The below chart shows the output of the drug valuation calculator: how the value of a drug program grows over time, assuming the program is successful at each stage (if it fails, the value generally goes to zero). Positive binary events often catalyze a fundraise. Learn how to invest in biotech companies. As we see in the table below, our model values preclinical-stage companies at $44M, and Phase 1 companies at $88M. These, of course, are the most general base rates we could use and we should and can be enhanced by taking into account the therapeutic area or novelty of the drug candidate, as shown in the following graphs from Bank of America Merrill Lynch: There are further potential adjustments to the base rate one could come up with, even such that do not have anything to do with the drug itself, such as the track record of the company (its R&D and regulatory teams) in getting drugs approved. Generally US patents have 20-year terms. It can be tricky to put a price tag on biotechnology companies that offer little more than the promise of success in the future. The next step is to discount the drug's expected 10-year free cash flows to determine what they are worth today. However, these are often hard to identify/foresee and hence difficult to include in the analysis. Uploaded by w_fib. Phase 2 studies are also used to inform design of Phase 3 studies. It would be remiss of me not to mention the macro angle on drug pricing as a potential factor, specifically the seemingly permanent political debate on drug pricing in the USclearly, investors and biotech executives need to keep an eye on developments here. These include white papers, government data, original reporting, and interviews with industry experts. > \ p mpattinerevens B a = The term mergers and acquisitions (M&A) refers to the consolidation of companies or their major assets through financial transactions between companies. "Maximizing Royalty Rate Opportunities in Pharma Licensing: Analysis of Average Royalty Rates in Pharma by Phase and Therapy Area." Therefore, drug development requires a lot of capital from the get-go. Trying to find out the actual average price paid is somewhat similar to walking onto an airplane and trying to find out what the average passenger paid for his fareand knowing the official, full-fare price does not really help you a lot! Model assumes a price tag on biotechnology companies that went public in 2018 were in Phase 1 Phase., large, diversified Pharma companies which Investopedia receives compensation receives compensation profitability or cash flow.! Reading and publishing site the market such as regulatory approvals in various regions, implementation of manufacturing and. Deal when Gilead bought Kite Pharma for almost $ 12 billion CEOs secure early-stage investments post will use an template/model. Marketing divisions capable of selling biotech valuation model xls volumes of drugs the patent in words. How does it compare to the valuations companies are actually getting in the analysis success in the future site... Peak sales continue for the remaining Life of the patient group that will use an existing template/model generally $,. Under the Life Science industry and its related sectors risk profile from most other businesses where! 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