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



Part of the MaRS BioEntrepreneurship series ...

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

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For the event blog summary and Q+A:



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

  • 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