Approaches to Valuation of Licensing Deals Pharmaceutical ...

1 PHARMADEALSA pproaches toValuation of PharmaceuticalLicensing DealsEdited byNigel Borshell and Taskin Ahmedwith consultants of PharmaVenturesPharmaDeals is a registered Trade Mark of PharmaVentures Ltd, Florey House, Oxford Science Park, Oxford OX4 4GP UKTelephone: +44 (0) 1865 332 700 Fax: +44 (0) 1865 332 737E-mail: to Valuation of Pharmaceutical Licensing DealsPharmaceutical Licensing Deals rarely, if ever, involve a simple one time payment, but encompass multiple payments and royalities, and require long-term cooperation. Value is created as the potential new drug becomes more likely to reach the market and revenue becomes a less distant hope. As each hurdle in the long research and development process is successfully overcome, the risk that the project will fail reduces. Consequently the value increases.

2 The Valuation of a deal can be the most challenging aspect in the deal negotiation and this guide equips the reader with current methodologies to calculate value. This Guide explains: the principles of deal Valuation how to use reliable methods for valuing Pharmaceutical and biotech projects the essential framework for understanding and calculating the value of the project today and how that value can be built over time the potential components of deal structures as well as determining appropriate levels of risk how to develop deal structures and agree terms that are acceptable to both sidesApproaches to Valuation of Pharmaceutical Licensing DealsEdited byNigel Borshell and Taskin Ahmedwith consultants of PharmaVentures LtdApproaches to Valuation of Pharmaceutical Licensing DealsCopyright 2012 PharmaVentures LtdPublished by PharmaDeals, Imprint of PharmaVentures LtdFlorey House, Oxford Science Park, Oxford, OX4 4GP.

3 2012 PharmaVentures LtdPublished May 2012 Published by PharmaDeals, Imprint of PharmaVentures LtdFlorey House, Oxford Science Park, Oxford, OX4 4GP, UKISBN 978-0-9568270-5-0 ElectronicISBN 978-0-9568270-6-7 PrintedCataloguing-in-Publication data applied copyright and intellectual property rights in this report and its contents belong to PharmaVentures Ltd. Distribution and commercialisation rights are solely vested in PharmaVentures Ltd. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express permission in writing of PharmaVentures Ltd. Enquiries concerning the sale and reproduction of this title, including translation rights, should be sent to PharmaDeals, at the address given above.

4 Disclaimer: PharmaVentures Ltd does not accept any responsibility or liability for any damage or loss arising from the direct or indirect use of this work, and all warranties, expressed or implied are disclaimed. This report has been prepared based on information taken from a variety of sources including public domain sources deemed to be reliable by PharmaVentures Ltd, PharmaVentures proprietary databases and is complemented by the experience and judgement of PharmaVentures consultancy team. While every effort has been made to ensure the accuracy and completeness of this report, PharmaVentures cannot accept liability for errors or omissions. Material contained in this report is for general information only and is not intended to be relied upon by individuals or companies in making (or refraining from making) any specifi c investment or alliance decisions.

5 For detailed information contact PharmaDeals at the address given above. PharmaVentures Ltd 2012 Approaches to Valuation of Pharmaceutical Licensing DealsContents1 Introduction .. Dealmaking in the Pharmaceutical Industry .. Understanding Value Creation .. Purpose of the Report .. 92 Valuation Methods .. Integrated Methodologies .. Why Use eNPV and Benchmarking? .. Other Methods .. Internal Rate of Return .. Payback .. Real Options .. Introduction to Benchmarking .. Feasibility .. Data Gathering .. Avoid the Benchmarking Pitfalls .. Approximate Valuation .. Refinement of the Valuation .. Example Deals : Cancer .. Phase I Benchmarking Example .. Phase II Benchmarking Example.

6 Phase III Benchmarking Example .. Summary .. 294 Expected Net Present Value .. The Basics .. Cash Flows .. Relevant Costs .. Real vs. Nominal Figures .. Opportunity Cost/Time Value .. Example NPV Calculation .. Risk of R&D Failure .. Decision Tree Analysis .. Example eNPV Calculation .. eNPV Summary .. Example Valuation .. Input Data and Assumptions .. The Spreadsheet model .. More Complex Models .. binomial model .. Further Refinement of the eNPV model .. Sensitivity Analysis .. Monte-Carlo Simulation .. Option Contracts Which Method to Use? .. 555 Agreement Structure .. Value Split .. Risk Sharing .. deal Components.

7 Upfront Payments .. R&D Funding .. License Fees .. Milestones .. Royalties .. Shared Costs or Benefi ts .. Equity .. Preferences (utility) .. Example deal Structure .. 646 Valuation of Technologies .. Drug Delivery Technology .. Enabling Technology .. Enhancing Technology .. Extension of Patent Life .. Drug Discovery Technology .. Example: Valuation of Delivery Enhancement .. 747 Conclusion .. 79 Appendices .. Example Benchmarking Deals : Cancer .. Reference deal Tables .. 924 PharmaVentures Ltd 2012 Approaches to Valuation of Pharmaceutical Licensing DealsFigures1 Total Licensing activity in the Pharmaceutical industry .. 72 Average upfront and headline value by year and phase.

8 83 Integrated Valuation methods .. 104 binomial lattice modelling of Brownian movement in value .. 145 eNPV decision-tree model with scenario analysis for commercial risk .. 156 Ideal benchmarking deal cluster .. 197 Non-ideal benchmarking cluster .. 198 PharmaDeals v4 Agreements Database .. 219 Example Pharmaceutical deal valuationforce field .. 2410 Attrition by phase and therapeutic area .. 4011 Example decision tree .. 4012 Pharmaceutical product decision 4113 Example decision tree .. 4214 Monte-Carlo simulation for PRI-123 .. 5315 The effect of time and risk on the valueof deal components .. 5616 A rough guide to NPV split ratios .. 5717 Frequency of equity investment as financial component .. 6218 Enhanced revenues due todelivery technology .. 6919 Enhancement of patent life.

9 7020 Drug discovery decision tree model .. 7221 Extended drug discovery decisiontree model .. 7222 Drug discovery eNPV model .. 7323 Value of the PRI-123 delivery technology .. 785 PharmaVentures Ltd 2012 Approaches to Valuation of Pharmaceutical Licensing DealsTables1 Pros and cons of benchmarkingand DCF-based methods .. 112 Benchmarking methodology overview .. 173 Sources of benchmarking information .. 224 Useful websites .. 225 Approximate benchmark Valuation .. 236 Refined benchmark Valuation .. 257 Phase I small molecule Deals .. 268 Phase II small molecule Deals .. 279 Phase III small molecule Deals .. 2810 Cost of capital (COC) forpharmaceutical firms .. 3611 Example NPV calculation part 1:Contribution .. 3712 Example NPV calculation part 2:NPV .. 3813 Selected examples of data sources providing estimates for success and attrition in drug development.

10 3914 Example eNPV calculation .. 4215 Cumulative probabilities .. 4216 Example Valuation summary .. 4317 eNPV spreadsheet Valuation of PRI-123 .. 4418 Quarterly eNPV spreadsheet for PRI-123 .. 4819 Valuation of PRI-123 using the binomial method .. 5020 Sensitivity analysis of the PRI-123 model .. 5221 PRI-123 deal structure and eNPV share .. 6522 PRI-123 eNPV Valuation and deal structure spreadsheet model .. 6623 eNPV model for enhancedPRI-123 formulation .. Exelixis and Sanofi .. Onyx Pharmaceuticals and Ono Pharmaceutical .. Array BioPharma and Genentech .. Amgen and Takeda .. Seattle Genetics and Millennium .. Pfizer and AVANT .. Spectrum Pharmaceuticalsand TopoTarget .. Astellas and AVEO Pharmaceuticals .. Active Biotech and Ipsen .. Discovery and Preclinical Phase I Deals .