Biotechnology Valuation


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Table of Contents

Acknowledgements xi

1 Introduction 1

Biotechnology Background 5

2 Traditional Valuation Methods 11

The Value of a Company 11

Accounts – Providing the Data for Valuation Analysis 12

The Income Statement 13

Balance Sheet 17

Cash Flow Statement 20

Income Statement Multiples 22

Balance Sheet Multiples 26

Summary 27

Discounted Cash Flow Analysis 27

Net Present Value 27

Constructing the DCF 28

Projecting the Cash Flow Stream 29

Choosing a Discount Rate 30

Other Thoughts 37

3 The Drug Development Process 39

The Drug Development Process 40

Drug Discovery and Research 44

Pre-Clinical Development 44

Clinical Trials 48

What Investors Should Look For When Analysing Clinical Trials 56

Conclusion 59

The Regulatory Process 59

Regulation in the US 60

Regulation in Europe 63

The Label 64

Timelines for Approval 65

Post Approval 65

Investment Lessons 66

Case Study #1 66

4 Biotechnology Company Valuation 69

Data Collation 71

NPV of the Pipeline 75

Calculations 80

Sensitivity Analyses 86

DCF of Whole Company 92

EBIT DCF of Products 97

Comparables Valuation 99

NPVs are Additive 101

Using all the Tools Available to Reach a Valuation Conclusion 101

Market Models 104

Conclusion 105

Appendix 1 106

Example 1 106

Example 2 108

Example 3 108

Appendix 2 116

Biosimilar Update 116

5 Decision Trees and Real Options 119

Decision Trees 120

Discount Rate 124

Deriving Scenarios 125

Conclusion 125

Decision Tree Example 126

Real Options 126

Valuing Options 129

Estimation of the Input Variables 138

Conclusions 139

6 Biotechnology Investing 141

Types of Healthcare Investment 141

Biotechnology Sector Evolution 143

Biotechnology Investment Cycles 145

Biotechnology Business Models 152

Focus on People 154

Cash 155

Product Pipeline 155

Commercial Risks 156

Newsflow 158

Lessons from Biotech Investing 160

7 Early-stage Valuation 161

Private Valuation 162

Discounted Cash Flow Method 166

Comparable Valuation 168

Venture Capital Method 170

Discount Rates 173

Conclusion 173

Glossary 175

References 189

Index 193

About the Author

KARL KEEGAN is currently a managing director and global head of life sciences equity research at CanaccordAdams, a global investment bank focussing on small to mid cap companies. Karl has been a financial analyst covering the biotechnology sector for over eleven years and has previously worked at Dresdner Kleinwort Benson, UBS and Banc of America. Karl and his team have been consistently highly ranked in institutional surveys throughout his career. Prior to embarking on his finance career, Karl completed postdoctoral assignments in the US and UK and worked in the pharmaceutical industry both as a bench scientist and in strategic planning. Dr. Keegan holds a BSc in Pharmacology from University College Dublin, Ireland, MPhil and PhD degrees in Pharmacology from University of Cambridge, UK and MSc in Finance from London Business School, UK. A native of Dublin, Ireland, he now lives in Kent, UK.

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