1
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
2
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
ValuationDevelopment
Strategy and Planning
RiskAdjustedLicensing
P&L
RiskAdjusted
DealValue
Portfolio Management
MarketAnalysis
MarketModel
Medical and Market Assessments
Clinical and Technology
Assessments
TargetProductProfile
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
TargetProductProfile
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
ValuationDevelopment
Strategy and Planning
RiskAdjustedLicensing
P&L
RiskAdjusted
DealValue
Portfolio Management
MarketAnalysis
MarketModel
Medical and Market Assessments
Clinical and Technology
Assessments
TargetProductProfile
Market Analysis Market Model
EP
EP
EP
9
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
TargetProductProfile
ProductDiscovery
NewProduct
Opportunity
ProjectedProduct
Sales
RiskModel
Manufacturing Plan
RiskAdjustedProduct
Value
RiskAdjustedProduct
P&L
Valuation
RiskAdjustedLicensing
P&L
RiskAdjusted
DealValue
Portfolio Management
MarketAnalysis
MarketModel
Medical and Market Assessments
Clinical and Technology
Assessments
Product Discovery New Product Opportunity
EP
EP
EP
11
Measure Performance vs the Target Product Profile
New Product Opportunity
Projected Clinical
Performance
TargetProductProfile
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
12
For minimum profile
For desired Profile
Projected Clinical Performance Projected Sales and Share
SafetyEfficacyDosingPharmacokineticsConvenienceCost of therapy
PreclinicalStudies
and AnimalModel Results
MarketModel
ProjectedSales and
MarketShare
TargetProductProfile
ProjectedClinical
Performance
EEP
13
The Regulated Preclinical / Clinical Development Program
14
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)
15
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
16
Development Plan Drivers
Preclinical ProgramProcess DevelopmentClinical ProgramRegulatory StrategyManufacturing StrategyLife Cycle Management
Regulatory Requirements
ReimbursementEnvironment Timelines
Cost
NewProduct
Opportunity
TargetProductProfile
DevelopmentPlan
E
17
The Risk Model
18
DevelopmentPlan
RiskAdjustedProduct
P&L
Valuation
RiskAdjustedLicensing
P&L
Manufacturing Plan
ProjectedClinical
Performance
ProductDiscovery
Development Strategy and Planning
NewProduct
Opportunity
TargetProductProfile
ProjectedProduct
Sales
RiskModel
RiskAdjustedProduct
Value
RiskAdjusted
DealValue
Portfolio Management
MarketAnalysis
MarketModel
Medical and Market Assessments
Clinical and Technology
Assessments
Risk Model
EP
EP
EP
19
• 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
20
Clinical Development ProcessActivities, Timelines and Probability of Success
21
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
Phase IClinical Trials
Phase IIClinical Trials
Achieve Projected P&L
Phase IIIClinical Trials
Phase IIIClinical Trials
NDA Approval
22
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
Phase IIClinical Trials
Phase IIIClinical Trials
PreclinicalDevelopment
Phase IClinical Trials
Phase IIClinical Trials
Achieve Projected P&L
Phase IIIClinical Trials
Phase IIIClinical Trials
NDA Approval Launch
23
Valuation
RiskAdjustedLicensing
P&L
RiskAdjustedProduct
Value
DevelopmentPlan
RiskAdjustedProduct
P&L
Manufacturing Plan
ProjectedClinical
Performance
ProductDiscovery
Development Strategy and Planning
NewProduct
Opportunity
TargetProductProfile
ProjectedProduct
Sales
RiskModel
RiskAdjusted
DealValue
Portfolio Management
MarketAnalysis
MarketModel
Medical and Market Assessments
Clinical and Technology
Assessments
Risk Model Risk Adjusted Product Income Statement
EP
EP
EP
24
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
RiskAdjustedLicensing
P&L
RiskAdjustedProduct
Value
DevelopmentPlan
Manufacturing Plan
ProjectedClinical
Performance
ProductDiscovery
Development Strategy and Planning
NewProduct
Opportunity
TargetProductProfile
ProjectedProduct
Sales
RiskModel
Portfolio Management
MarketAnalysis
MarketModel
Medical and Market Assessments
Clinical and Technology
Assessments
Risk Model Risk Adjusted Licensing Transaction Income Statement
EP
EP
EP
26
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
27
ProjectedProduct
Sales
RiskAdjustedLicensing
P&L
Portfolio Management
Valuation
RiskAdjustedProduct
P&L
RiskAdjustedProduct
Value
DevelopmentPlan
Manufacturing Plan
ProjectedClinical
Performance
ProductDiscovery
Development Strategy and Planning
NewProduct
Opportunity
TargetProductProfile
RiskModel
MarketAnalysis
MarketModel
Medical and Market Assessments
Clinical and Technology
Assessments
Risk Adjusted P&L Risk Adjusted Value
RiskAdjusted
DealValue
EP
EP
EP
28
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
29
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
30
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
••••
31
Thank you