MaRS Best Practices
Series
Special
Valuation
Series
Nov. 12th, 2010
MaRS Best Practices
Special Valuation Series
Friday No...
Disclaimer & Disclosure
The information contained in this presentation has been compiled by Equicom and/or Wayne
Schnarr f...
Valuation and financial
modeling
is a qualitative and numerical
assessment of
risks and potential rewards
 Each biological target, product and
company has a unique set of risks and
potential rewards.
 Despite the uniqueness of...
First,
a little
introduction to
capital markets
Global capital markets
Canadian capital markets
The pharmaceutical industry
Where is valuation important?
 Investing
 Financing
 Partnering
 Selling
Who invests in these companies?
  Angel investors
  Venture capital
  Canada
  US
  Institutional funds
  Canada
  ...
Investors establish valuations
The value of a company is the price the next
investor is willing to pay
  Private company ...
Why would you buy shares of a company?
Mature Healthcare
  Capital gains from an
increase in share
price
  Income from
d...
Why would you buy shares of a company?
Mature Healthcare
  Capital gains from an
increase in share
price
  Income from
d...
Investors also want liquidity
  IPO
  Last one in Canada was IMRIS in late 2007
  Sale or acquisition of the company
 ...
What impacts daily buying & selling?
  Valuation
  Liquidity
  Some institutions may only buy deals
  News flow
  Cli...
Investors in mature companies pay for growth
Investors in mature companies pay for growth
from:
  An increase in sales of...
  Share prices in development stage
biotechnology companies should be impacted by
clinical, regulatory and financial even...
How do stock analysts value a biotechnology company
that is several years from product approval and
profitability?
  Disc...
Now,
the easy part -
number crunching
Financial modeling – the basics
The components of financial modeling in
increasing order of importance are:
The Excel spre...
Financial modeling – create the numbers
The first step is creating the numbers, no matter what
method is going to be used ...
Valuation Tools – How To Analyze The Numbers
  Net Present Value (NPV)
  The preferred valuation tool
  Risk-Adjusted N...
Net Present Value (NPV)
A project or product cash flow analysis that takes into
account the fact that $1 received or spent...
NPV – $100 received in the future
What is the value today of $100 received in
future years (risk-free discount rate of 5%)...
NPV – effect of risk-adjusted discount rates
What is the value today of $1 billion received in
8 years using risk-adjusted...
Using financial models
  These models are usually based on little information
and many assumptions
  The quality of your...
The hard part –
assessing risks
and
potential rewards
Risks & Rewards
  ‘only about 10% of the drugs which enter
human clinical trials will eventually be
approved’
  The deve...
Risks & Rewards: A Balancing Act
  Assessment of risks is much more important at
the earlier stages of the development pr...
Risks & Rewards: Three Stage Process
  Approval Risks
  What are the risks which could impact the
approval of this produ...
  Financial: Capital Markets, Partnerships
  Regulatory
  Manufacturing
  Clinical
  Scientific
Approval Risks
Money is the scarcest asset
  Money has been, and is likely to remain, the
scarcest asset for Canadian healthcare
compani...
Show me the money!
  Canadian healthcare companies have
historically been able to get sufficient funding
from private and...
Show me the money, PLEASE!
  The markets and financing strategies changed
dramatically starting in the fall of 2007
  Fi...
Venture Capital Investment in Canadian Life
Sciences Companies
Source: www.cvca.ca
Year Amount Financings
2004 $463 M 120
...
Investment in Public Development Stage
Canadian Healthcare Companies
Source: Equicom Healthcare Reviews
Quarter
2005-2007
...
Critical Questions
  Does the company have the financial resources
to get to the next critical value-creation event,
with...
Partnering
  Big pharma:
  Has cash and infrastructure
  Needs products
  Small biotech:
  Needs cash and infrastruct...
Risks: Partnering Deal Hurdles
  Buyer’s perspective:
  Buyers see thousands of opportunities every
year
  Buyers are r...
Risks: Partner or Buy? (1)
  When partnership discussions start, an
acquisition is always on the table
  If the junior p...
Risks: Partner or Buy? (2)
  From the potential partner’s (buyer’s)
perspective, partnering is preferred because:
  Ther...
Regulatory Risks: The Critical Question
The critical event prior to generating revenues
from sales is regulatory approval....
Basic Approval Requirements
  Two adequately controlled clinical studies which
have been designed to prove the safety and...
Regulatory Approval Risks (1)
  Therapeutic indication
  Is this the first product which the FDA will
assess for this th...
Regulatory Approval Risks (2)
  Clinical Design
  Are there any differences in clinical design
for this new product vers...
Regulatory Approval Risks (3)
  Standard of Care
  Is there a single FDA-approved standard of
care for the chosen therap...
Regulatory Approval Risks (4)
  Primary clinical endpoint
  Is there a clinical endpoint accepted by the
FDA for proving...
Regulatory Approval Risks (5)
  Statistical analysis
  What are the statistical assumptions used in
the design of the cl...
Regulatory Approval Risks (6)
  Statistical versus clinical significance
  A result can be statistically significant but...
Regulatory Approval Risks (7)
  Safety profile
  The safety hurdle has been raised at the FDA
  The safety concern is h...
Manufacturing Approval Risk (1)
  Manufacturing is a critical regulatory
component
  The manufacturing process has to me...
Manufacturing Approval Risk (2)
  GMP processes must be reproducible and
validated
  Chemical synthesis of small molecul...
Manufacturing Approval Risk (3)
  Manufacturing facilities are expensive
  Small molecules
  API – contract manufacturi...
Scientific Risk
If the answers to the following five questions are
yes, there is probably an acceptable level of
scientifi...
Manufacturing costs
  COGS (cost of goods sold) are an important
component of due diligence conducted by
potential partne...
Market Potential: Two Approaches
  There are two basic approaches to estimating
the market potential for a new product
 ...
Patient-Based Approach (1)
  Estimated incidence of a specific medical
condition in the general population
  Number of p...
Patient-Based Approach (2)
  To go from an estimate of the number of
patients treated annually to a market potential,
you...
Sales-Based Approach
  Some information is available for free
  Financial reports by public companies
  Analyst reports...
  Approval Timing: First-In-Class
  Clinical Data: Best-In-Class
  Competition
  Reimbursement
  Patents
Market Risks
Market Risks: First-In-Class
  Where several new drugs are structurally
related, have the same biological target and
simi...
Market Risks: Best-In-Class
  Where several new drugs are structurally
related and have the same biological target,
best-...
Market Risks: Three Levels of Competition
  There are three levels of competition:
  Currently approved drugs
  Drug ca...
Competition: Currently Approved Drugs (1)
  Currently approved drugs are competition only
if the new drug is attempting t...
Competition: Currently Approved Drugs (2)
  Information sources
  Drugs@FDA http://www.accessdata.fda.gov/
scripts/cder/...
Competition: Drug Candidates (1)
  Information sources:
  www.clinicaltrials.gov
  Analyst reports
  Purchased reports
Competition: Drug Candidates (2)
  Drug candidates at a similar stage of
development can be categorized and the
competiti...
Market Risks: Reimbursement
  Obtaining reimbursement for new drugs and
medical procedures used to be a simple case of
su...
Market Exclusivity: Patents
  The basic patent life is 20 years from date of
filing
  Patent life extension is available...
Patent Risks: Critical Questions
  Are there issued or filed patents which will
provide a period of market exclusivity?
...
Conclusion
Valuation and financial modeling
is a qualitative and numerical assessment of
risks and potential rewards
 Any...
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MaRS Best practices: Valuations in the biotech industry - wayne schnarr

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Speaker: Wayne Schnarr, healthcare consultant and analyst, Equicom, TSX

Canada's biotechnology and cleantech communities have a history of developing world-leading technologies —but for these industries to grow, they must have access to new capital to fund research and development that will allow Canada to maintain its position as a world leader.

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MaRS Best practices: Valuations in the biotech industry - wayne schnarr

  1. 1. MaRS Best Practices Series Special Valuation Series Nov. 12th, 2010 MaRS Best Practices Special Valuation Series Friday Nov 12th @ Noon Raymond King, Senior Manager Toronto Stock Exchange Wayne Schnarr, Analyst, Equicom Toronto Stock Exchange
  2. 2. Disclaimer & Disclosure The information contained in this presentation has been compiled by Equicom and/or Wayne Schnarr from sources believed to be reliable, but no representation or warranty, express or implied, is made by TMX Group, Equicom, its affiliates or any other person as to the accuracy, completeness or correctness. All estimates, opinions and other information in this presentation are subject to change without notice and are provided in good faith but without legal responsibility or liability. Additional information may be available to Equicom or its affiliates that is not reflected in this presentation. This presentation is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction. This presentation is not, and under no circumstances should be construed as, a solicitation to act as a securities broker, dealer or adviser in any jurisdiction. This presentation is prepared for general circulation and to provide an overview of investing in healthcare. This presentation does not consider the investment objectives, financial situation or particular needs of any particular person. Investors should obtain professional advice based on their own individual circumstances before making an investment decision. To the fullest extent permitted by law, neither The TMX Group, Equicom, its affiliates nor any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of or reliance of the information contained in this presentation. Equicom may have advised or provided services to, or may in the future advise or provide services to companies, entities or persons referenced in this presentation.
  3. 3. Valuation and financial modeling is a qualitative and numerical assessment of risks and potential rewards
  4. 4.  Each biological target, product and company has a unique set of risks and potential rewards.  Despite the uniqueness of each product and company, it is possible to establish a general valuation process in biotechnology
  5. 5. First, a little introduction to capital markets
  6. 6. Global capital markets
  7. 7. Canadian capital markets
  8. 8. The pharmaceutical industry
  9. 9. Where is valuation important?  Investing  Financing  Partnering  Selling
  10. 10. Who invests in these companies?   Angel investors   Venture capital   Canada   US   Institutional funds   Canada   US, EU, ROW   Retail investors   Canada   US
  11. 11. Investors establish valuations The value of a company is the price the next investor is willing to pay   Private company – price set by the VC willing to lead the next round   Public company:  Daily basis – set by the next trade  Financing – set by the lead investor
  12. 12. Why would you buy shares of a company? Mature Healthcare   Capital gains from an increase in share price   Income from dividends and distribution
  13. 13. Why would you buy shares of a company? Mature Healthcare   Capital gains from an increase in share price   Income from dividends and distribution Biotechnology   Capital gains from an increase in share price
  14. 14. Investors also want liquidity   IPO   Last one in Canada was IMRIS in late 2007   Sale or acquisition of the company   Breakup of MDS   2009: ViroChem by Vertex   BioChem Pharma, ALI Technologies, ID Biomedical, AnorMED, Arius Research (2008), CryoCath (2008)
  15. 15. What impacts daily buying & selling?   Valuation   Liquidity   Some institutions may only buy deals   News flow   Clinical events which can impact share prices   Development partners   Competitive products   Broad market performance   Sector preferences   Rising resource commodity prices attract high risk money
  16. 16. Investors in mature companies pay for growth Investors in mature companies pay for growth from:   An increase in sales of products or services; and / or   An increase in profitability (earnings per share or eps); and / or   An increase in dividends or distributions.
  17. 17.   Share prices in development stage biotechnology companies should be impacted by clinical, regulatory and financial events   Investors pay for:  Reduced risk; and / or  Increased potential reward. Biotech investors also pay for growth
  18. 18. How do stock analysts value a biotechnology company that is several years from product approval and profitability?   Discounted earnings / cash flow   Comparative valuation   Event-based stock movement Valuations by stock analysts
  19. 19. Now, the easy part - number crunching
  20. 20. Financial modeling – the basics The components of financial modeling in increasing order of importance are: The Excel spreadsheet The assumptions for the spreadsheet What you do with the numbers
  21. 21. Financial modeling – create the numbers The first step is creating the numbers, no matter what method is going to be used to analyze them   Create a large spreadsheet or a series of linked spreadsheets   Horizontal – number of periods over which cash flows will occur (months, quarters, years)   Vertical – all cash flow categories, both expenses and revenues   Fill in all of the boxes
  22. 22. Valuation Tools – How To Analyze The Numbers   Net Present Value (NPV)   The preferred valuation tool   Risk-Adjusted NPV   Risk adjustments can be done here or at the portfolio level   Internal Rate of Return (IRR)   Uses the same spreadsheet and assumptions   Payback Period   Very useful in manufacturing projects   Monte Carlo Simulation   A structured sensitivity analysis
  23. 23. Net Present Value (NPV) A project or product cash flow analysis that takes into account the fact that $1 received or spent in 2010 is worth more than $1 received or spent in the future  NPV = C0 + C1/(1+R)1 + C2/(1+R)2 + … Cn/(1+R)n   C = cash flow in the specified financial period   R = cost of capital (risk free or risk adjusted)
  24. 24. NPV – $100 received in the future What is the value today of $100 received in future years (risk-free discount rate of 5%)? Year NPV 2010 $100.00 2013 $86.38 2018 $67.68 2023 $53.03 2028 $41.55
  25. 25. NPV – effect of risk-adjusted discount rates What is the value today of $1 billion received in 8 years using risk-adjusted discount rates? Rate NPV 10% $466.5 M 15% $326.9 M 20% $232.6 M 25% $167.8 M 30% $122.6 M 35% $90.6 M
  26. 26. Using financial models   These models are usually based on little information and many assumptions   The quality of your financial model will depend upon the quality of your assumptions   Better assumptions result from asking the right questions   They are generally not useful for absolute valuations, unless they are based on historical sales data   What can you do with the financial models?   Compare NPVs for different deal structures for the same product   Compare NPVs and risk profiles for different products
  27. 27. The hard part – assessing risks and potential rewards
  28. 28. Risks & Rewards   ‘only about 10% of the drugs which enter human clinical trials will eventually be approved’   The development of novel healthcare products is a high risk business   Neither big pharma nor stock analysts are good at picking winners   Risk cannot be eliminated   Risk can be mitigated by larger companies through portfolio management   Risks can be assessed
  29. 29. Risks & Rewards: A Balancing Act   Assessment of risks is much more important at the earlier stages of the development process   Assessment of potential rewards, based on product sales, becomes more important as the product progresses through clinical development   The only justification for taking these high risks is the potential large reward from successful product development   Risks and potential rewards change with time and must be continuously assessed and balanced
  30. 30. Risks & Rewards: Three Stage Process   Approval Risks   What are the risks which could impact the approval of this product?   Market Potential   What is the market potential for this product?   Market Risks   What are the risks which could impact the market potential for this product?
  31. 31.   Financial: Capital Markets, Partnerships   Regulatory   Manufacturing   Clinical   Scientific Approval Risks
  32. 32. Money is the scarcest asset   Money has been, and is likely to remain, the scarcest asset for Canadian healthcare companies   Funding must be continuously obtained from two primary sources   Capital markets   Partners   Supplementary funding is also available from other sources   Governments   Disease associations
  33. 33. Show me the money!   Canadian healthcare companies have historically been able to get sufficient funding from private and public capital market sources   Liquidity was also available from periodic IPO windows   In this context, companies preferred to periodically get financing in the public markets and continue development without a partner as long as possible
  34. 34. Show me the money, PLEASE!   The markets and financing strategies changed dramatically starting in the fall of 2007   Financing was more difficult   Valuations plummeted   IPOs were almost impossible   Companies have been forced to consider all strategic and financing options   For many small biotechnology companies, the focus became survival
  35. 35. Venture Capital Investment in Canadian Life Sciences Companies Source: www.cvca.ca Year Amount Financings 2004 $463 M 120 2005 $438 M 100 2006 $493 M 89 2007 $633 M 82 2008 $359 M 86 2009 $215 M 70 2010 (H1) $156 M
  36. 36. Investment in Public Development Stage Canadian Healthcare Companies Source: Equicom Healthcare Reviews Quarter 2005-2007 (average) 2009 2010 Q1 $378.4 $64.5 $115.2 Q2 $270.6 $177.5 $72.7 Q3 $97.3 $103.4 $65.5 Q4 $292.2 $152.8   Total $1,038.5 $498.2 $253.4
  37. 37. Critical Questions   Does the company have the financial resources to get to the next critical value-creation event, with a little breathing room?   If the answer is no, can the company obtain that financing?   If the answer is yes, and the event is positive, can the company then obtain additional funding either from the capital markets or a partner?   Information sources   www.sedar.com   http://www.sec.gov/edgar.shtml
  38. 38. Partnering   Big pharma:   Has cash and infrastructure   Needs products   Small biotech:   Needs cash and infrastructure   Has products   Partnerships will continue to be signed
  39. 39. Risks: Partnering Deal Hurdles   Buyer’s perspective:   Buyers see thousands of opportunities every year   Buyers are risk averse   NIH (not invented here) syndrome by internal R&D teams   Detailed due diligence is expensive   Valuation and deal terms   Seller’s perspective:   Loss of control   Valuation and deal terms
  40. 40. Risks: Partner or Buy? (1)   When partnership discussions start, an acquisition is always on the table   If the junior partner is a private company:   VCs historically have preferred an IPO   Sale of the company is now the preferred option   The sale price can be split into up front cash and success payments   If the junior partner is a public company, it is potentially for sale every day to other SMEs, larger biotechs and big pharmas
  41. 41. Risks: Partner or Buy? (2)   From the potential partner’s (buyer’s) perspective, partnering is preferred because:   There is a lower initial financial risk   There is the same level of control over product development   There are no HR or other problems when shutting down local operations
  42. 42. Regulatory Risks: The Critical Question The critical event prior to generating revenues from sales is regulatory approval. “Is there is a pathway to regulatory approval?” The starting point in assessing regulatory risk is the end of the process – regulatory approval.
  43. 43. Basic Approval Requirements   Two adequately controlled clinical studies which have been designed to prove the safety and efficacy of the new drug for a specific therapeutic indication   A single trial is acceptable for certain diseases such as cancer
  44. 44. Regulatory Approval Risks (1)   Therapeutic indication   Is this the first product which the FDA will assess for this therapeutic indication? If yes, is there a scientific or medical consensus on how to assess the product?   If there have been unsuccessful pivotal studies, was it the product, therapeutic indication or the clinical design?   Is the proposed indication a new monotherapy, an addition to the current therapy or a therapy to be used only when there is no response to current therapies?
  45. 45. Regulatory Approval Risks (2)   Clinical Design   Are there any differences in clinical design for this new product versus clinical trials conducted for approved products?   Are there any differences in clinical design for the Phase 3 study and the preceding Phase 2 study?   If there are differences, what are the justifications for these changes?
  46. 46. Regulatory Approval Risks (3)   Standard of Care   Is there a single FDA-approved standard of care for the chosen therapeutic indication?   Is there more than one FDA-approved standard of care for the chosen therapeutic indication?   If there is not an FDA-approved standard of care, is there a standard of care accepted or approved by the relevant medical groups?   Are there products currently under regulatory review or in pivotal trials which, if approved, would result in a new standard of care?
  47. 47. Regulatory Approval Risks (4)   Primary clinical endpoint   Is there a clinical endpoint accepted by the FDA for proving efficacy in this therapeutic indication?   If not, are there clinical endpoints accepted or approved by the relevant medical groups?   Are there any difficulties in the acquisition or interpretation of these endpoints?   Is the primary clinical objective a superior safety profile and non-inferior efficacy?
  48. 48. Regulatory Approval Risks (5)   Statistical analysis   What are the statistical assumptions used in the design of the clinical trial?   How are patient withdrawals handled?   Is there any history of large placebo effects in this type of clinical trial?
  49. 49. Regulatory Approval Risks (6)   Statistical versus clinical significance   A result can be statistically significant but the clinical benefit can be so small that it may not be clinically significant   For example, is a statistically significant 2- week increase in survival also clinically significant when survival on the current standard of care is about 6 months?   This result may previously have only impacted potential sales but clinical significance is now being discussed at FDA advisory committee meetings
  50. 50. Regulatory Approval Risks (7)   Safety profile   The safety hurdle has been raised at the FDA   The safety concern is highest for drugs which are intended for chronic use and for drugs to treat patients with medical conditions which are not immediately life-threatening
  51. 51. Manufacturing Approval Risk (1)   Manufacturing is a critical regulatory component   The manufacturing process has to meet GMPs   The facility has to meet GMPs and be inspected   Companies may face the following situation   If the process or facility used for Phase 3 / approval is not commercially viable, changes need to be made before significant sales can be developed   However, the cost of getting to a commercially viable process and facility prior to Phase 3 can require substantial scarce resources before knowing whether the product can be approved
  52. 52. Manufacturing Approval Risk (2)   GMP processes must be reproducible and validated   Chemical synthesis of small molecules is usually not a problem   Isolation of natural products from a biomass can usually be controlled   Recombinant manufacturing of proteins is complicated but controllable   Upstream production   Downstream purification   Finished dosage form
  53. 53. Manufacturing Approval Risk (3)   Manufacturing facilities are expensive   Small molecules   API – contract manufacturing   Finished dose – contract manufacturing   Biologics   Capital cost of fermentation or cell culture facilities is enormous   Contract manufacturing is available   Changes in manufacturing scale and facilities can change the clinical activity of a biologic
  54. 54. Scientific Risk If the answers to the following five questions are yes, there is probably an acceptable level of scientific risk.   Do we know how the drug works?   Do we know what causes the disease and how the disease progresses?   Is the drug’s target a key factor in disease progression?   Are the animal models predictive of human results?   Does the preclinical data show that the drug is as effective as or superior to currently approved drugs or drugs currently in clinical development?
  55. 55. Manufacturing costs   COGS (cost of goods sold) are an important component of due diligence conducted by potential partners and investors   Rough guideline for COGS at commercial scale:   COGS for biologics should be less than 10% of the selling price and preferably below 5%   COGS for small molecule products should be less than 5% of the selling price and preferably less than 2%
  56. 56. Market Potential: Two Approaches   There are two basic approaches to estimating the market potential for a new product   The starting point for one approach is the number of patients with the medical condition, which is further refined by considering factors such as the number who are diagnosed, the number who are treated, success of current therapies and disease progression   The starting point for another approach is the sales of drugs currently used to treat patients with this specific or similar medical conditions
  57. 57. Patient-Based Approach (1)   Estimated incidence of a specific medical condition in the general population   Number of patients diagnosed   Unless a patient is diagnosed, they cannot be treated   Diagnosis by disease severity   Treatments for Stage 1 through 4 cancers are dramatically different   Treatment for a specific disease stage   How many patients receive first-line therapy?   How many are cured, how many die and how many relapse and receive second-line therapy?
  58. 58. Patient-Based Approach (2)   To go from an estimate of the number of patients treated annually to a market potential, you need to multiply by the annual drug cost   Information on drug costs can be obtained from various free sources   Some companies do publish an approximate cost per month or course of therapy   Drug benefit formularies (e.g. ODB Formulary)   Government studies (e.g. http://www.nice.org.uk)   Purchased information   http://www.micromedex.com/products/redbook
  59. 59. Sales-Based Approach   Some information is available for free   Financial reports by public companies   Analyst reports   The most detailed information must be purchased and can be very expensive   http://www.imshealth.com/portal/site/ imshealth   http://www.decisionresources.com/   http://thomsonreuters.com/ products_services/healthcare/ healthcare_products/   Canadian data - http://www.broganinc.com/ GWS-BIO
  60. 60.   Approval Timing: First-In-Class   Clinical Data: Best-In-Class   Competition   Reimbursement   Patents Market Risks
  61. 61. Market Risks: First-In-Class   Where several new drugs are structurally related, have the same biological target and similar safety and efficacy profiles, first-in-class (first approved) should have a market advantage   If the new drug is going to be a second or later market entrant, how is it going to take market share?
  62. 62. Market Risks: Best-In-Class   Where several new drugs are structurally related and have the same biological target, best-in-class (superior safety and/or efficacy) should become the class sales leader even when it is not first-in-class   If a new drug is not going to be best-in-class and it will reach the market after the superior product, should product development be terminated?
  63. 63. Market Risks: Three Levels of Competition   There are three levels of competition:   Currently approved drugs   Drug candidates at the same stage of development   Drug candidates at an earlier stage of development
  64. 64. Competition: Currently Approved Drugs (1)   Currently approved drugs are competition only if the new drug is attempting to replace one of the currently approved drugs   Currently approved drugs are not competition if the new drug is going to be used in combination with the currently approved drugs or will be used only after the currently approved drugs no longer provide the desired clinical benefit
  65. 65. Competition: Currently Approved Drugs (2)   Information sources   Drugs@FDA http://www.accessdata.fda.gov/ scripts/cder/drugsatfda/index.cfm   Physicians’ Desk Reference http://www.pdr.net/ home/pdrHome.aspx   Compendium of Pharmaceuticals & Specialties http://www.pharmacists.ca/content/ products/ecps_english.cfm   Textbooks   Courses   Purchased reports
  66. 66. Competition: Drug Candidates (1)   Information sources:   www.clinicaltrials.gov   Analyst reports   Purchased reports
  67. 67. Competition: Drug Candidates (2)   Drug candidates at a similar stage of development can be categorized and the competitive threat assessed with respect to:   The biological target   Drug of the same chemical class, different chemical class or biologic   Comparative safety and efficacy in similar clinical trials   Drug candidates at an earlier stage of development are less important from a risk perspective but their development should be monitored
  68. 68. Market Risks: Reimbursement   Obtaining reimbursement for new drugs and medical procedures used to be a simple case of submitting paperwork   The pharmaceutical industry is fighting constantly to prevent restrictive formularies and comparative therapeutic testing   Launching new medical devises and diagnostics is much easier if the new products can be covered by existing payment codes
  69. 69. Market Exclusivity: Patents   The basic patent life is 20 years from date of filing   Patent life extension is available in the U.S. to account for regulatory delays and compensate for pediatric testing   Data exclusivity now provides periods of exclusivity during which a generic product submission cannot be filed or approved if it relies in any way on the regulatory filings of the originator product
  70. 70. Patent Risks: Critical Questions   Are there issued or filed patents which will provide a period of market exclusivity?   Would the product infringe on other patents (freedom-to-operate)?   Assuming product approval in year 20xy, how much market exclusivity is provided by both patents, patent extensions and data exclusivity?
  71. 71. Conclusion Valuation and financial modeling is a qualitative and numerical assessment of risks and potential rewards  Anybody can crunch the numbers  Better assumptions lead to better numbers  Better assumptions come from asking the right questions
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