1 Value Assessment of Development-Stage Assets Pharmaceutical Products, Medical Devices, and Related Intellectual Property Frank S. Castellana, M.D., Eng.Sc.D

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Value Assessment of Development-Stage Assets

Pharmaceutical Products, Medical Devices, and Related Intellectual Property

Frank S. Castellana, M.D., Eng.Sc.D.Knollwood Partners, LLC

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Objectives

• Demonstrate how one can determine the risk adjusted value of pharmaceutical and medical device assets from a Product (or Licensing Transaction) Income Statement and a deterministic risk model of the product development and commercialization process

– Review key features of the development and commercialization process for pharmaceutical products and medical devices

– Discuss in detail the FDA regulated clinical evaluation phases of the development program

– Present a risk model which is derived from our understanding of the development process and the probability of success associated with each of its stages

– Demonstrate how the risk model can be integrated into the Product Income Statement (or Licensing Transaction Income Statement) to determine a risk-adjusted Net Present Value (NPV) of future cash flows associated with product sales

Rationale:

• Understand the impact of development risk on product value• Ensure the optimal allocation of available resources – Portfolio Management• Provide an unbiased approach to licensing and portfolio transactions

The Medical Product Development Process

4

The Product Development Continuum

Pharmaceutical

Medical Device

Product Development

Product Commercialization

Customer Need

Commercial Opportunity

Activities - Costs - Timelines

Risk Value

Time

5

ProductDiscovery

NewProduct

Opportunity

MarketAnalysis

Clinical and Technology

Assessments

TargetProductProfile

ProjectedProduct

Sales

DevelopmentPlan

RiskModel

Manufacturing Plan

RiskAdjustedProduct

Value

ProjectedClinical

Performance

Medical and Market Assessments

RiskAdjustedProductIncome

Statement

ValuationDevelopment

Strategy and Planning

MarketModel

RiskAdjustedLicensing

Income Statement

RiskAdjusted

DealValue

Three Integrated Phases of the Product Development and Commercialization Process

Portfolio Management

EP

EP

EP

6

ProductDiscovery

NewProduct

Opportunity

ProjectedProduct

Sales

DevelopmentPlan

RiskModel

Manufacturing Plan

RiskAdjustedProduct

Value

ProjectedClinical

Performance

RiskAdjustedProduct

P&L




P&L

RiskAdjusted

DealValue


MarketAnalysis

MarketModel



Assessments


Medical Assessment Target Product Profile

EP

EP

EP

7

Therapeutic targetsClinical performance - safety / efficacyCost of therapy – direct / indirectImpact on disease managementReimbursement environment

Therapeutic targetsAnticipated performanceAnticipated cost of therapy

MarketedProducts

Assessment

CompetitivePipeline

Assessment

Safety MetricsEfficacy MetricsPharmacokineticsConvenience MetricsDirect Product CostIndirect Cost Impact


Minimum / Desired Performance Characteristics Required

for Clinical and Market Success

Medical Assessment Target Product Profile

Preclinical

Clinical

Commercial

EEP

8

ProductDiscovery

NewProduct

Opportunity

ProjectedProduct

Sales

DevelopmentPlan

RiskModel

Manufacturing Plan

RiskAdjustedProduct

Value

ProjectedClinical

Performance

RiskAdjustedProduct

P&L




P&L

RiskAdjusted

DealValue


MarketAnalysis

MarketModel



Assessments


Market Analysis Market Model

EP

EP

EP

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Market Analysis Market Model

Patient dynamicsTherapeutic categoriesMarketed productsSales and Share dynamicsPipeline products

Therapeutic categoriesProduct sales and market sharePricingCompetitive dynamicsReimbursement

Disease incidenceDisease prevalencePercent diagnosedPercent treatedPercent compliant Therapeutic targets

Products in development by stageAnticipated performanceAnticipated cost of therapyProjected regulatory filing and launch datesProjected sales and market share

MarketedProducts

Assessment

PatientDemographics

CompetitivePipeline

Assessment

MarketModel

E

10

DevelopmentPlan

ProjectedClinical

Performance

Development Strategy and Planning


ProductDiscovery

NewProduct

Opportunity

ProjectedProduct

Sales

RiskModel

Manufacturing Plan

RiskAdjustedProduct

Value

RiskAdjustedProduct

P&L

Valuation


P&L

RiskAdjusted

DealValue


MarketAnalysis

MarketModel



Assessments

Product Discovery New Product Opportunity

EP

EP

EP

11

Measure Performance vs the Target Product Profile

New Product Opportunity

Projected Clinical

Performance


Development Strategy and

Planning

Projected performance characteristics do not meet minimum criteria for clinical

and commercial success

Projected performance characteristics meet or exceed

minimum criteria for clinical and commercial success

YES

NO

Projected Product

Sales

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For minimum profile

For desired Profile

Projected Clinical Performance Projected Sales and Share

SafetyEfficacyDosingPharmacokineticsConvenienceCost of therapy

PreclinicalStudies

and AnimalModel Results

MarketModel

ProjectedSales and

MarketShare


ProjectedClinical

Performance

EEP

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The Regulated Preclinical / Clinical Development Program

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Clinical Development of Pharmaceuticals and Medical Devices

• Regulated by the US Food and Drug Administration (FDA)

• Key Elements:

- Preclinical Development

- IND Regulatory Filing

- Phase I Clinical Trials - 20-100 Healthy Volunteers

- Phase II Clinical Trials - 100-500 Patient Volunteers

- Phase III Clinical Trials - 1000-5000 Patient Volunteers

- NDA Regulatory Filing

- FDA Advisory Panel Meeting

- NDA Regulatory Approval

- Product Launch

- Phase IV Post Marketing Studies (safety, efficacy, comparative performance)

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Activity Activity TimeDuration Duration Duration

(days) (months) (months)

Preclinical Studies (GLP) 730 24.0 Phase I Clinical Trials 149 4.9 Phase II Clinical Trials 364 12.0 Phase III Clinical Trials 730 24.0 NDA Submission to NDA Approval 364 12.0 NDA Approval to Product Launch 0 0.0 78.0

2004 2005 2006 2007 2008 2009 2010Preclinical Studies (GLP)Phase I Clinical TrialsPhase II Clinical TrialsPhase III Clinical TrialsNDA Submission to NDA ApprovalLaunch

12/31/05

07/01/09 06/30/1007/01/10 07/01/10

03/01/06 02/28/0705/01/07 04/30/09

Start End

06/30/0502/01/0501/01/04

Clinical Development Process and Critical Path

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Development Plan Drivers

Preclinical ProgramProcess DevelopmentClinical ProgramRegulatory StrategyManufacturing StrategyLife Cycle Management

Regulatory Requirements

ReimbursementEnvironment Timelines

Cost

NewProduct

Opportunity


DevelopmentPlan

E

17

The Risk Model

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DevelopmentPlan

RiskAdjustedProduct

P&L

Valuation


P&L

Manufacturing Plan

ProjectedClinical

Performance

ProductDiscovery


NewProduct

Opportunity


ProjectedProduct

Sales

RiskModel

RiskAdjustedProduct

Value

RiskAdjusted

DealValue


MarketAnalysis

MarketModel



Assessments

Risk Model

EP

EP

EP

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• Overview– A deterministic (vs stochastic) approach designed to account for our understanding of the

development process and the risk associated with each of its stages

– An approach that permits the determination of• Product (and/or Licensing Transaction) value as a function of stage of development, and• Incremental benefits associated with incremental investment

• Methodology– Modular representation of all or part of the Development Process starting with the

Preclinical Program and ending with achievement of the Expected P&L

– Probability of success assigned to each Development Module based on the analysis of available data

• Industry averages adjusted for available data• Expert panels / SAB where appropriate

– Overall probabilities calculated at each stage of development for:• The likelihood of reaching each successive stage (to determine Risk Adjusted

Development Expense), and• The likelihood of achieving the Expected P&L (to determine Risk Adjusted Operating

Income)

– Risk free cost of money is used to calculate Net Present Values

Risk Model

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Clinical Development ProcessActivities, Timelines and Probability of Success

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Risk Model

Probability of Success P1 P2 P3 P4 P5 P6

Probability of Reaching

At Start of Preclinicals 100.0% P1 P1*P2 P1*P2*P3 P1*P2*P3*P4 P1*P2*P3*P4*P5

At Start of Phase I 100.0% 100.0% P2 P2*P3 P2*P3*P4 P2*P3*P4*P5

At Start of Phase II 100.0% 100.0% 100.0% P3 P3*P4 P3*P4*P5

At Start of Phase III 100.0% 100.0% 100.0% 100.0% P4 P4*P5

At Submission of NDA 100.0% 100.0% 100.0% 100.0% 100.0% P5

Probability of Achieving Projected P&L

At Start of Preclinicals P1*P2*P3*P4*P5*P6

At Start of Phase I P2*P3*P4*P5*P6

At Start of Phase II P3*P4*P5*P6

At Start of Phase III P4*P5*P6

At Submission of NDA P5*P6

At Launch P6

Milestones

Preclincial Testing

Phase I Clinical Trials

Phase II Clinical Trials

Phase III Clinical Trials

NDA Submission

Achieve P&L

Phase IClinical Trials

Phase IIClinical Trials

Phase IIIClinical Trials

PreclinicalDevelopment



Achieve Projected P&L



NDA Approval

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Risk Model

Probability Success 85.0% 30.0% 50.0% 70.0% 90.0% 100.0% 80.0%

Probability of Reaching

Start of Preclinical 100.0% 85.0% 25.5% 12.8% 8.9% 8.0% 8.0%

Start of Phase I 100.0% 100.0% 30.0% 15.0% 10.5% 9.5% 9.5%

Start of Phase II 100.0% 100.0% 100.0% 50.0% 35.0% 31.5% 31.5%

Start of Phase III 100.0% 100.0% 100.0% 100.0% 70.0% 63.0% 63.0%

Submission of NDA 100.0% 100.0% 100.0% 100.0% 100.0% 90.0% 90.0%

Launch 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 80.0%

Probability of Achieving

Start ED to Projected P&L 6.4%

Start P-I to Projected P&L 7.6%

Start P-II to Projected P&L 25.2%

Start P-III to Projected P&L 50.4%

Submit NDA to Projected P&L 72.0%

Launch to Projected P&L 80.0%

Achieve Projected P&L 80.0%

MilestonesPhase IClinical Trials



PreclinicalDevelopment



Achieve Projected P&L



NDA Approval Launch

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Valuation


P&L

RiskAdjustedProduct

Value

DevelopmentPlan

RiskAdjustedProduct

P&L

Manufacturing Plan

ProjectedClinical

Performance

ProductDiscovery


NewProduct

Opportunity


ProjectedProduct

Sales

RiskModel

RiskAdjusted

DealValue


MarketAnalysis

MarketModel



Assessments

Risk Model Risk Adjusted Product Income Statement

EP

EP

EP

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Risk Model Risk Adjusted Product Income Statement

Operating Cash FlowNet Present Value

Development expenseFixed sales expenseFixed marketing expenseManufacturing expenseG&A allocation

AdvertisingPromotionSales Force

ProductIncome

Statement

FixedExpense

DirectProductExpense

ProjectedSales and

Gross Margin

RiskModel

(Development and Sales Achievement)

RiskAdjusted

Product Income Statement

E

EP

25

Valuation

RiskAdjustedProduct

P&L

RiskAdjusted

DealValue


P&L

RiskAdjustedProduct

Value

DevelopmentPlan

Manufacturing Plan

ProjectedClinical

Performance

ProductDiscovery


NewProduct

Opportunity


ProjectedProduct

Sales

RiskModel


MarketAnalysis

MarketModel



Assessments

Risk Model Risk Adjusted Licensing Transaction Income Statement

EP

EP

EP

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Risk Adjusted Sales

Risk Adjusted Development Expense to Deal Signing

LicensingDeal

Structure Risk Adjusted Deal Specific Payments

Royalty on Net Sales

Risk AdjustedMilestone Payments

Upfront Payment

RiskAdjustedLicensingIncome

Statement

RiskAdjustedProduct

P&L

Risk Model Risk Adjusted Licensing Transaction Income Statement

E

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ProjectedProduct

Sales


P&L


Valuation

RiskAdjustedProduct

P&L

RiskAdjustedProduct

Value

DevelopmentPlan

Manufacturing Plan

ProjectedClinical

Performance

ProductDiscovery


NewProduct

Opportunity


RiskModel

MarketAnalysis

MarketModel



Assessments

Risk Adjusted P&L Risk Adjusted Value

RiskAdjusted

DealValue

EP

EP

EP

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Risk Adjusted Product / Licensing Income Statement Risk Adjusted Value

RiskAdjustedOperating

Income

Risk FreeCost of Money

NPV

RiskAdjusted

Product Income Statement

RiskAdjustedProductValue

RiskAdjustedLicensingIncome

RiskAdjustedLicensing Income

Statement

RiskAdjusted DealTransaction

Value

NPV

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Valuation Model – Required Input and Data Sources

Required Input Data Source

Projected Sales Market Model / Analog Products

Anticipated Gross Margin Manufacturing Strategy

Development Critical Path Agency Requirements / Predicate Compounds

Development Expense (including CAPX) Development Plan (as above)

Other Fixed Expense Industry Averages (for product class)

Direct Product Expense Industry Averages (for product class)

Risk Model Parameters Scientific Staff / Advisory Board – Due Diligence

Licensing Transaction Deal Terms Deal Comparables Analysis

P&L Requirements

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Year 1 Year 2 Year 3 Year 4 Year 5

Product 1

Product 2

Product 3

Technology

Other Assets

Por

tfolio

Val

ue

Portfolio ManagementValue as a Function of Key Development Milestones

Preclinical

Preclinical

Phase II Phase III NDA

Phase I Phase II

Phase I Phase II

Phase III

Phase I

CGRInvestment ReturnManagement

Ass

et P

ortfo

lio

••••

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Thank you

Documents

1 Value Assessment of Development-Stage Assets Pharmaceutical Products, Medical Devices, and Related Intellectual Property Frank S. Castellana, M.D., Eng.Sc.D