Biotech Business Plan – Biotech companies with little or no revenue can still make billions. Consider the biotech M&A deal of 2017, when Gilead bought Keith Farman for nearly $12 billion. Keith had more than $600 million in accumulated shortfalls at the time of the deal, but he also had CAR-T cell therapies that treat cancer. This article examines how to evaluate such pipelines. In addition, a risk-adjusted NPV evaluation method, multiple drug candidate portfolios, and how investor or buyer characteristics affect pricing.
Raphael is a crypto-hedge fund partner. He previously founded and left a fintech company and worked as a banker and equity investor.
Biotech Business Plan
If you have an interest or experience in the biotech field, it’s no surprise that biotech companies with little or no revenue are still worth billions. Consider the biotech M&A deal of 2017, when Gilead bought Keith Farman for nearly $12 billion. At the time of the deal, Keith was still unprofitable with more than $600 million in accumulated deficit, but it was also heavily involved in CAR-T cell therapies that treat cancer. The dragon wasn’t necessarily unusual. 80% of the companies in the Nasdaq Biotech Index (NBI) have no revenue; More than 150 companies with a market capitalization of more than 250 billion dollars. And average biotech capital investment has more than doubled over the past decade, from $4.6 billion in 2005 to $12.9 billion in 2015. As an institutional equity investor, it’s clear that investors can’t just pile on. Rather, the pipeline is often used to demonstrate the company’s value.
Team:tau Israel/human Practices
This article examines how to evaluate such pipelines for biopharmaceutical companies, especially in pharmaceutical companies (and companies that are not focused on other health devices than drug development). Let’s start with how the valuation of biotech companies differs from the valuation of other assets. We then focus on the risk-adjusted NPV valuation method and conclude by discussing some related topics: (i) how to think about a portfolio of multiple drug candidates and (ii) how investor or buyer characteristics affect valuation.
Drug development is expensive. A popular study involves the total cost of developing a successful drug (usually
Number of failed attempts) exceeded $2.5 billion. Other studies (see chart below) show the costs to total around $1.4 billion. This number is lower than the $2.5 billion estimate above, because the latter includes an estimate of the opportunity cost of invested capital, while the former represents only out-of-pocket costs.
Therefore, drug development requires a lot of capital from the beginning. Simply put, it is almost impossible to start a pharmaceutical company, so it needs investors at different times from the beginning and in the development cycle. These investors can be venture capitalists (like Domain, HCV, MPM and many others), strategic investors (ie other pharmaceutical companies), as well as public market investors (which is why we at NBI have reached out to so many companies). Biotech fundraising is easily a text in its own right, but both investors and founders/biotech executives must control valuation – even though an approved and commercialized product may be years away.
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A timely note: If you’re reading this from Asia, you’re probably aware that the Hong Kong Stock Exchange recently allowed biotech companies to go public without earnings or profits, which requires the valuation we discuss in this article.
Biotech companies are not your typical gadget manufacturers that you learn to value in your MBA and/or CFA courses. Read on to understand some of the unique characteristics of the industry.
As we’ve seen, many biotech companies don’t yet have revenue, let alone profitability or cash flow metrics. In fact, the cash flow before the drug is approved will be very negative. This means that “standard” valuation multiples such as EV/EBITDA or P/E are less relevant. There are some alternative multiples such as EV/invested R&D, which is essentially a cost-based valuation. The comparative valuation method is another popular method that uses public market comparisons or comparable M&A transactions. It is not often applied because most biotech companies are specialized, which allows for a comparative analysis of limited use. An alternative assessment method is reviewed below.
Even for established biotech companies, estimates must still be built from scratch because past earnings are unique, rather than based on past experience/data within the company or data from other similar companies as a guide to valuations. In other words, the conventional approach of extracting past trends is out of the question. For example, take a look at Swiss drug discovery company Edorsia’s current program below, and consider both mechanism of action (the process by which the drug produces its pharmacological effect) and target specification (use of the drug for a specific disease). .
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Biotech companies also expect a long period of growth that is unique in the industry. Following regulatory approval, the typical time frame for a new drug is eight years from the time an investigational new drug (IND in US) is submitted for market entry, as shown in the figure below. During those eight years, the process follows structured stages of research, testing and FDA review, during which the drug may fail.
Simply put: the drug is ultimately effective or not in the treatment. Even if it is effective, regulatory bodies may or may not approve it. Before being approved, drugs go through structured processes (preclinical and clinical trials), fail at every point – and once they fail, the process is usually irreversible. This represents a different risk profile than most other businesses, where the outcome distribution is less binary. In Silicon Valley, it is often difficult to “turn around” the wrong medicine. Of course, failure is a possible outcome for early-stage, non-biotech startups, but if a startup fails, the consequences are far-reaching: your new mobile app can get thousands or tens of millions of downloads. along with the effects on earnings, cash flows and value. And when non-biotech startups run into trouble, they regularly adjust their business models to survive. Think back to when Netflix was a DVD mail-order company before it was a streaming service, or before Instagram became the go-to app with gaming and photo elements into today’s mainstream photo app.
Consequently, we must reflect this particular risk profile in our valuation analysis, for example when generating discounted cash flow (DCFF) and selecting the appropriate discount rate. In general, there are two ways to do this.
Risk-adjusted net present value contains two main components: projected cash flows and probabilities. First, we will approach the forecast of cash flows belonging to the scenarios and then to the scenario of different scenarios.
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As mentioned earlier, because drugs are unique, these cash flow projections must be built from scratch. First, let’s look at a typical stylized cash flow profile, then go through each of the cash flow factors.
In the early years, the only outflow is due to the drug’s R&D costs. These costs vary for each drug, such as during the discovery and pre-clinical stages, the experimental design(s) required during pre-clinical and clinical trials, etc. This basically includes the years that show the outflow in the chart above.
Here are the key factors we need to consider to get revenue (and profit) projections after the drug enters the market. Note that we can obviously extend this framework to more complex consumption drivers, but we’ll focus on the most important drivers in this overview article. In the next section, we’ll follow the steps outlined in Arthur Cook’s forecasting book to estimate revenue (we’ll use some of the drivers shown in the gray boxes).
The number of customers who use the drug is the target group of people with the disease – roughly following Arthur Cook, a rough estimate was obtained by conducting fungi in a series of filters.
Team:toulouse Insa Ups/entrepreneurship
Pricing is critical and depends, among other things, on the drug company’s desire to obtain an adequate return on its R&D investment in the treatment and the price of the treatment relative to competing treatment options (if any).
It is difficult to find reliable price information even for existing drugs, but you can find some information on websites like Drugbank or many paid information providers. Note that there is often a large difference in
Medicines and the average price actually paid (average price discounts – for example by one conference panel member at 45) are estimated by (mostly non-public) negotiations between interested parties, including drug companies;
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