Market Assesment: Great New Product or Just Really Cool Science?


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Part of the MaRS BioEntrepreneurship series
Speaker: Kelly Holman
 Managing Director
, Genesys Capital Partners Inc

* Realistically assess commercial readiness of the technology
* Forecast and value addressable market opportunity for your technology
* Understand how financiers evaluate early stage biotech opportunities

To download the audio presentation:

For the event blog summary and Q+A:

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Market Assesment: Great New Product or Just Really Cool Science?

  1. 1. Market Assessment: Great new product or just really cool science? MaRS BioEntrepreneurship Events Series November 13, 2006
  2. 2. In the beginning… At some stage all great new products were “just really cool science”
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. Considerations
  9. 9. 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
  10. 10. 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)
  11. 11. 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?
  12. 12. 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…
  13. 13. 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.
  14. 14. 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?
  15. 15. 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
  16. 16. Considerations How do I get there from here?
  17. 17. Drug Discovery and Development Process
  18. 18. Path to Commercialization
  19. 19. Path to Commercialization Where are you in the process?
  20. 20. Where are you in the process?
  21. 21. 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?
  22. 22. How much data do I need? Someone will always want to see more…
  23. 23. Commercialization Risks ● Scientific/Technical/Clinical Development ● Intellectual Property ● Financing ● Market ● Human Resources/Management ● Regulatory ● Reimbursement ● Partnering ● Manufacturing
  24. 24. 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
  25. 25. 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
  26. 26. Market Assessment
  27. 27. Key Challenge: Predicting the Future
  28. 28. 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?
  29. 29. 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.
  30. 30. 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
  31. 31. Market Assessment
  32. 32. 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)
  33. 33. 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
  34. 34. 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
  35. 35. VC Considerations
  36. 36. 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
  37. 37. 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
  38. 38. 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
  39. 39. 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
  40. 40. The Art & Science of Valuation
  41. 41. 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
  42. 42. 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
  43. 43. 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
  44. 44. 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
  45. 45. 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+%)
  46. 46. Valuation – NPV relevance
  47. 47. 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
  48. 48. 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
  49. 49. 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
  50. 50. 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
  51. 51. 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
  52. 52. 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
  53. 53. Summary
  54. 54. Drug Discovery and Development Process
  55. 55. 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
  56. 56. Q&A
  57. 57. Market Assessment: Great new product or just really cool science? MaRS Events Series November 13, 2006