Category: Reports and analyses

Venture Valuation together with KPMG and EuropaBio has published its most recent report at BIO in San Francisco in June 2016. The data for the cluster analysis is from Biotechgate (www.biotechgate.com), the global Biotech and Life Sciences database. According to the report, there are three types of European countries attractive to locate key value drivers of life science companies

1. Countries with strong clusters of life science companies and an attractive tax and business environment
2. Countries that have significant clusters of life science companies in their jurisdictions, but lack the benefits of an attractive business environment
3. Countries which have attractive business and tax regimes without the support of a strong domestic biopharmaceutical industry

 
All three types of countries can offer appealing opportunities for hosting certain key value drivers of life science companies.

Life Sciences clusters in Europe Report 2016, 80 pages, 2’975kB

See our exclusive 2015 analysis we did for the Genesis conference (organized by our partner Onenucleus).

Download cluster report »

What makes a European Life Science site attractive to foreign investors? Together with KPMG Switzerland Venture Valuation has published this second edition statistic and extensive numbers on the European Biotechnology, Medical Technology and Pharma environment. The data is based on Biotechgate, the global Life Sciences database.

Site Selection for Life Sciences Companies in Europe 2015: 68 pages, 4’362kb

Venture Valuation presented a preview of its new report together with KPMG “Site Selection for Life Sciences Companies: Cluster Report 2015” in January at three locations including during JPMorgan in San Francisco, in Singapore and Taipei in February. The new report will be published in May 2015.
For a copy of the key slides, please see here »

Big acquisitions like the recent purchase by Roche, Switzerland of Intermune, USA or AbbVie‘s successful USD 54bn bid for Shire, Ireland, are very good examples of how valuation metrics work and also show that often its not just about price. In case of AbbVie/Shire, potential tax saving was probably the key deal driver. In the case of Roche/Intermune, the pharma company will spend USD 8.4 bn to acquire one product which has been approved in Canada and Europe but not yet in the US.

The lead product of InterMune is called Esbriet, for the treatment of Idiopathic pulmonary fibrosis (IPF), which affects about 100’000 people in the U.S. and around 5 million worldwide. Esbriet has been approved in Europe and Canada, but not yet in the U.S., but analyst expect approval as early Q4 2014. It is not clear what cases IPF (which builds up scar tissues in the lung). Patients often die within three to five years after diagnosis and there currently is no treatment available. Analyst assume that Esbriet could potentially also treat other tissue scarring diseases in the liver and kidney.

Product valuation
The valuation of a biotechnology company can be done in several ways. There is no right methodology and it makes sense to approach things from different perspectives. A gold standard in the industry is the risk adjusted net present value or rNPV. This valuation approach is based on the classical discounted cash flow with some special adjustments for the biopharma sector.

The rNPV calculation can be split into 4 different elements:

1. Development phase;
2. Market phase;
3. Risk adjustment;
4. Discounting to present value.

 

With these four parts it becomes possible to built a free cash flow model looking 15 years into the future. For Esbriet the patent expiry will already happen in 7 years, but we would still consider a 15 year period, however with generic competition after this patent protection period.

Development phase:
The development phase is looks at the cost and timeline for brining the product to the different markets. In the case of Intermunes Esbriet, the product is already approved in the EU and Canada and for the US it is in the process of registration. As such there might be some additional registration costs in the US to be considered, and the product could be expected to be on the market within one year. Additionally, if we later consider other markets such as Japan/Asia, South America and other emerging markets, typically where Roche already sells its respiratory products, the costs for additional registration in these markets and also the timeframe until when market entry can be expected, should also be considered.

Market phase:
For the market phase, it is important to consider the prevalence (how many patients actually have the disease), the pricing of the drug in the different markets, the competition and again based on the development timelines, the time when the product can be sold on the different markets.
The prevalence is estimated to be 13 to 20 per 100,000 people worldwide with around 100’000 affected in the US for IPF. Currently the pricing in Canada/Europe for Esbriet is around USD 40’000 per patient per year. Analysts estimate Esbriet could reach peak sales of over USD 1 bn per year, making it a blockbuster drug. In terms of competition, German Boehringer Ingelheim is in the process of registration of a new therapy called nintedanib which is expected to get a decision by the FDA in Q1 2015.

Based on this information, a revenue projection can be generated taking into account prevalence, pricing and competition. Obviously, one can use different scenarios, apply different prices and different market shares for different markets. However, it should be clear despite all the calculations and scenarios, at the end its all based on the assumptions and expectations. Valuation is not a precise science, but rather an art.

Risk:
Compared with a discounted cash flow valuation the risk in an rNPV is split into two parts 1) product specific attrition risk (risk adjustment) and 2) the general business risk (discounting).

Risk adjustment:
For the risk adjustment it is possible to use historical information of the success rate for a product in a specific indication, to move successfully from one phase to the next. Table 1 shows the average success rate for respiratory diseases. So from lead optimization to the market, the chance to be successful is 12%. To sucessfuly complete phase II clinical trial is 41%. Based on this standard assumption, Esbriet has a 100% chance in Europe/Canada reaching the market – as it is already approved – and a 77% chance in the US. One can assume with an approval in Europe/Canada that the chance in the US could be higher, but there is still no guarantee.

Average Success rates Respiratory
Lead optimisation	Preclinical	Phase I	Phase II	Phase III	FDA/EMEA	Cumulative
70%	65%	63%	41%	60%	77%	12.0%

 

The yearly cash flows can now be risk adjusted according to their likelihood based on the success rates. Generally, the likelihood for the cost of the current phase (i.e. registration) is 100% as the company needs to spend the money to know if it will pass the phase successfully. As such the revenues in the US could be adjusted with a 77% likelihood or risk adjustment.

Discounting to present value
The next step would be to take the general business risk into account and calculate the present value of the future expected risk adjusted cash flows. For this, a discount rate is used. The discount rate can vary from below 10% to over 26% depending on the company involved. The discount rate reflects the cost of capital and the general business risk. The cost of capital and the general business risk is substantially lower for big pharma companies versus a small biotech company. As a result a big pharma company may be able to pay a higher price for a product / company because their cost of capital and associated business risk is much lower.

For the Roche / InterMune case it is possible to assume a discount rate of below 10% for Roche versus a discount rate of around 15% for InterMune. This, together with the distribution network / know synergies allows Roche to offer a substantial premium over the market share price.

The purchase price of USD 8.3bn is still substantial for a “one trick pony” company (only one major product). Consequently, Roche must expect to be able to launch the product also in other markets and achieve peak sales north of USD 1 bn over a considerable time.

The price that is being paid for a company or a product can vary depending on the acquisition party. Price is in the eyes of the beholder. Valuation can help to provide a basis for negotiations, but price is not equal to value.

Click to see the article published in the GoingPublic Magazin ››

September 2014: Financing is an ongoing challenge for all Biotech companies. Without sufficient resources, products cannot be advanced in the development. Scarce resources help companies to focus as it is more important to bring one or two products into the clinic than advancing five different programs in pre-clinical development. But many European companies are struggling to raise sufficient capital even for their lead products and financing remains a key limiting factor for European biotechs.

If we compare financing in Europe with the US, we can see that private therapeutic and diagnostic companies in the US in Q2 2014 had the highest amount of money raised in the last three years with USD 1.6bn. However, in Europe the USD 262 m raised in Q2 2014 is below the 3 year average of around USD 340m per quarter. So that is six times more investments into private therapeutic Biotech companies in the US versus Europe where both regions account for about the same number of companies (963 in the USA and 814 in Europe according to Biotechgate).

If we consider the number of financing rounds, one notices that over the past 3 years, the average number of financing rounds per quarter was 24 in Europe and 44 in the US. So the average amount raised by a US private therapeutic company is USD 31m versus USD 14m in Europe. Thus, European companies have to spend more time with fundraising as on average they receive only half the amount per round compared with their US peers.

So how can European companies increase their chances to attract sufficient resources? There are different ways to finance innovation:

Services
Many companies are offering services based on their technology platform or know-how to have sufficient income to keep the company going. Even though this can be an interesting way to survive, most often the income and profit margin is not sufficient to fund pre-clinical or clinical work. Thus, this could be helpful in early stages of development or to bridge a period where no investment can be found. However, it often distracts the company from focusing on real value creation – advancing their lead product.

Licensing Income
Venture Valuation recently published an article in Nature Biotechnology 32, 617–619, (2014) based on data from its Biotechgate deals database looking at the difference between big pharma and SMEs in the upfront payments. It was shown that the up-front amount is sensitive to the stage of the product and that on average big pharma would pay higher amounts than small and mid-size biotech companies (SMEs). Thus out-licensing a product can be a very interesting source of capital, more so if big pharma is the partner. If the company can out-license a second or third product and try to keep the rights on its lead product for as long as possible then this is most promising. Investors often focus on the lead product and do not put a lot of value on products further down the pipeline. This effect can be seen when analyzing the value increase of publicly listed companies that out-license 3^rd or 4^th products in their pipeline. So choosing the right partner and the right strategy is crucial.

Equity and Grant Funding:
Equity funding through VCs is the classic way of financing a therapeutic biotech company. However, there are also different strategies and sources for equity and grant financing.

     a) Is Orphan saving Biotech?
Orphan drugs have been en vogue for a while. However, early 2014 has been a record financing that puts drugs for small patient population even more on the map. In Q1 2014, over 60% of the financing in European Biotech have gone to companies that have a lead Orphan drug product. Over USD 170 m of the recorded USD 257 m in European Biotech financing have been done by orphan focused companies. Dutch UNIQURE raised USD 91 m and French Txcell raised USD 22 m in an IPO, but also Swedish Wilson Therapeutics raised USD 40 m this year from VCs. So is Orphan saving the Biotech industry? It does certainly look like it’s an interesting investment possibility for Venture Capital investors. Of the current 43 brand blockbusters, 18 were approved solely for orphan, so this shows the big potential.
Never the less, Orphan drugs provide great opportunities for Biotechs in terms of raising capital / IPOs, by out-licensing to big pharma but also for M&A exits. The recent merger of BioAlliance Pharma SA, France with Topotarget A/S, to become Onxeo – The Orphan Oncology Innovator, underlines this trend.

     b) Alternative equity/grant funding
When fundraising for a company, it is helpful to think outside the box and try to identify alternative funding sources. Just going for the obvious VC investor is not good enough. The company’s strategy, amount of required funding or business model may not fit the initial targeted venture capital investor. There are a number of other sources available like Business Angel Groups, Corporate Venture Capital, Endowments/Foundations, Family Office/Private Wealth Funds, Government Organizations, Hedge Funds and Private Equity. The key is actually to be able to identify such investors. They may not be an obvious choice and often stay in the background. So there are different ways to identify such investors: 1) check your peers to see where money is coming from. Who has made recent investment/provided grants in the area that you are active in. Maybe not direct competitors, but peer groups. 2) Use support provided by local government organisations. Many countries provide companies with support in accessing capital. There are also a number of European initiatives such as Fit for Health 2.0 (www.fitforhealth.eu) that help companies attract grants and private funding. 3) Use information sources like Biotechgate which has a database with thousands of life sciences investors interested in investing in various aspects of the industry or use websites of business angels and venture capital associations. In any case of fundraising, quality is far more important than quantity.

At the end, fundraising is a key task of management of every biotech company. Resources (time and finance) have to be allocated for the fundraising process. Only a professional approach will lead to success. Relying on chances and the hope that investors will knock on your door, materialize only seldom. Plan enough time for the fund-raising – it will not happen overnight and have a plan B (and C) available so you are not totally dependent on having the money in the bank tomorrow – which puts the company in a very bad negotiation position. Know your strengths, but also your weaknesses and know how to overcome them. Be aware of the value of the company and how much equity you are willing to give away for the amount you are looking for. Use as much as possible non diluting financing such as grants. Know how much money you are raising and what you will do with the money. At the end, an investment will put the investor into the same boat as the company, both looking to bring the company to success. So choosing an investor is like getting married – its an important decision.

Author: Dr. Patrik Frei, CEO Venture Valuation
September 2014
Also published in European Biotechnology: http://www.hornonline.com/books/european_biotechnology/#18

 

Venture Valuation recently published an article in Nature Biotechnology 32, 617–619, (2014) based on data from its Biotechgate deals database looking at the difference between big pharma and SMEs in the upfront payments and number of deals. Read more here (Nature Biotechnology) To get access to Biotechgate, please contact us here.

Source: Nature Biotechnology, 32, 617–619, (2014), doi:10.1038/nbt.2946, Published online 08 July 2014

Marketing alliances between well-known brand names and consumer products have long been a tradition for example Michael Jackson and Pepsi or George Clooney and Nespresso. Soccer clubs are also dependent on sponsor income and are working with many different industries like telecoms, airlines and insurances. Now prestigious Manchester United (Man U) has signed a marketing deal with a Korean Pharma company Cho-A Pharm. The logo of Man U will be placed on the Koreans OTC products which include nutraceuticals and dietary supplement products. Will this become a new trend in pharma advertising? Well, other companies like Novartis have already sponsored soccer clubs for a number of years. Novartis has been FC Basels main sponsor since 2004, which is the home town of the club and some of the key shareholders of Novartis have been very active in the club. In Brazil, J&J is actually one of the key partners and the logo omnipresent of the championship. It is estimated that the sponsorship costs J&J around USD 75m. The company is using the event to promote consumer products, medical devices/diagnostics and pharmaceutical businesses.

Two OTC companies in the US, LifeVantage and Herbalife are sponsoring US teams (Real Salt Lake and LA Galaxy). Therefore OTC products that are bought by consumers without prescription can certainly benefit more from such marketing alliances. But also other sports are benefiting from such collaborations: UK Pro Bono Bio is the official supplier to top English premiership rugby club, Saracens. Rugby seems to be an ideal sport where pharma products can be very helpful.

However, there are also companies like Roche which explicitly are not involved in any sponsoring of professional or semiprofessional sports activities. Companies will probably have to approach with caution bearing in mind the regulations we have already seen imposed on tabacco and alcohol advertising.

Is it a coincidence that BIO in San Diego is taking place at the same time as the Fifa World Cup in Brazil? With it being four hours behind Brazil and delegates attending from all of the participating countries of the world cup, I suspect a very high interest in the games. Certainly, an exhibition booth with soccer games on will attract an additional crowd; hopefully J&J has thought about this as well. So could this be the start of a new alliance between Pharma / Biotech and Soccer.

Orphan drugs have been en vogue for a while. However, in the last quarter there has been a record financing that has put drugs for small patient populations on the map even more. In Q1 2014, over 60% of the financing in European Biotech has gone to companies that have a lead orphan drug product. Over USD 170 m of the recorded USD 269 m in European Biotech financing has been done by orphan focused companies. Dutch UNIQURE raised USD 91 m and French Txcell raised USD 22 m in an IPO, but also Swedish Wilson Therapeutics raised USD 40 m last quarter from VCs.
 
So is orphan saving the Biotech industry? It does certainly look like an interesting investment possibility for Venture Capital investors. Even though the (initial) target patient population is very small, orphan is very attractive due to the following reasons:

• High price of up to EUR 400’000
• Less competition, fast-tracked, lower-cost late-stage development and marketing
• Market size: USD 127bn by 2018 (16% of total prescription)
• Gross profit margins of over 80% (industry average 16%)

 
Of the current 43 brand blockbusters, 18 were approved solely for orphan so this shows the big potential. As an example Novartis Gleevec originally targeted 9,000 patients for chronic myelogenous leukemia which was later approved for non-orphan gastrointestinal stromal tumors with over 120,000 patients. This seems to be the strategy of many companies – developing the drug for an orphan indication and later expanding it into non-orphan. Also, orphan markets are more suited for biotech companies, as they are based on small communities around patient organizations. Big Pharma has to be very careful in working with such organizations and showing the required commitment and interest. For a Biotech company with its full focus just on one orphan indication, this is much easier.
 
Never the less, orphan drugs provide great opportunities for Biotechs in terms of raising capital / IPOs, by out-licensing to Big Pharma but also for M&A exits. If you are interested in learning about deal terms in orphan drugs, please have a look at Biotechgate Deal Report on this topic here.