Market Assessment:
Great new product or just really cool science?
MaRS BioEntrepreneurship Events Series
November 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 for
technology/product
● Market assessment for technology/product
● VC considerations of early-stage life
sciences 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 the
Cohen/Boyer recombinant DNA technology

So…
Q: …how does one carry out an assessment to
determine if your “really cool science” has
commercial potential?
A: …unfortunately there is no formula

You are an entrepreneur or you are not…
● Going down the path to commercializing
your technology is determined more by your
state of mind than decision tree analysis

You are an entrepreneur or you are not…
● However, if and/or when you do go down
the path, there are:
— some considerations
— tools to be applied

Considerations

Considerations
● What do you give up by going down a
commercial 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 a
commercial 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 to
acquire a thorough understanding of what it is you
are 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’t
get excited about finding the answers then
you 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 the
blank disease condition]?
• observed an unknown therapeutic effect that can be
treated 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 to
product than others
However none are products yet! (let alone
“great new products”)
Not until a health regulator (FDA, Health
Canada, 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
● Scientific/Technical/Clinical Development
● Intellectual Property
● Financing
● Market
● Human Resources/Management
● Regulatory
● Reimbursement
● Partnering
● Manufacturing

Estimating your Costs
● The product’s pre-clinical/clinical
development costs will far exceed your
discovery costs
● Breakdown your costs:
— Key discovery costs
— Key pre-clinical costs
— Key clinical costs
● Seek third party costing inputs sooner
rather 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-art
treatments?
● 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 Landscape
1. Marketed products
2. Products in development
3. 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 the
closer 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 decision
to commercialize before you have the
market data to make a well-informed
decision about whether you should
commercialize

You are an entrepreneur or you are not…
● Going down the path to commercializing
your technology is determined more by your
state of mind than decision tree analysis

VC Considerations

VC Considerations
● Objective of VC: To generate superior financial
returns across a portfolio of companies
— ~10% net annualized return over public market proxies
● Each investment opportunity should have the
potential 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 investment
opportunity – conduct comprehensive due diligence
● Due Diligence should help identify investment risks
● Due Diligence should aid in answering the following
questions:
— 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 the
best 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 imperfect
information
— In any early-stage opportunity there are a number of
unknowns – technology, IP, market, people, etc
● The earlier the investment, the less perfect the
information
— Higher risk, higher return expectation

The Art & Science of Valuation

Valuation exercises…
“Most valuation exercises
wind up being attempts
to defend intuitive decisions
by placing them
in a quantitative framework”
Stelios Papadopoulos, PhD.
Managing Director, SG Cowen

Valuation is…
● a forecast of the future value of operating profits
and cash flows
● influenced by many factors
— Company, Industry, Macroeconomic
● a function of perspective (buyer/seller)
● , in the context of a completed transaction, a
negotiated 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 a
valuation:
1. Discounted Cash Flow
2. Comparable Market Data
3. 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 their
present 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 and
current prices to use as a reference to derive a
relative valuation
● Sources for database:
— Private company valuations
— Public company valuations
— Acquisition valuations

3. Option Pricing
● Use a model to value alternatives and
opportunities 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/public
equity 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 negotiated
number
● 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 “really
cool 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 be
commensurate with the risk

Q&A

Market Assessment:
Great new product or just really cool science?
MaRS Events Series November 13, 2006