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
1
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
2
The Medical Product
Development Process
The Product Development Continuum
Customer
Need
Activities - Costs - Timelines
Pharmaceutical
Medical Device
Product
Development
Product
Commercialization
Risk
Value
Commercial
Opportunity
Time
4
Three Integrated Phases of the Product
Development and Commercialization Process
Medical and
Market Assessments
Clinical and
Technology
Assessments
Development
Strategy and Planning
Target
Product
Profile
Product
Discovery
New
Product
Opportunity
Valuation
EP
Risk
Model
Development
Plan
EP
Projected
Clinical
Performance
Market
Analysis
Market
Model
Manufacturing
Plan
Risk
Adjusted
Product
Income
Statement
Risk
Adjusted
Licensing
Income
Statement
Projected
Product
Sales
Risk
Adjusted
Product
Value
Risk
Adjusted
Deal
Value
EP
Portfolio Management
5
Medical Assessment
Medical and
Market Assessments
Clinical and
Technology
Assessments
Target
Product
Profile
Target Product Profile
Development
Strategy and Planning
Valuation
New
Product
Opportunity
Development
Plan
Risk
Model
Projected
Clinical
Performance
Manufacturing
Plan
Risk
Adjusted
Product
P&L
Risk
Adjusted
Licensing
P&L
Projected
Product
Sales
Risk
Adjusted
Product
Value
Risk
Adjusted
Deal
Value
Product
Discovery
EP
EP
Market
Analysis
Market
Model
EP
Portfolio Management
6
Medical Assessment
Target Product Profile
Therapeutic targets
Clinical performance - safety / efficacy
Cost of therapy – direct / indirect
Impact on disease management
Reimbursement environment
Marketed
Products
Assessment
EP
E
Competitive
Pipeline
Assessment
Target
Product
Profile
Safety Metrics
Efficacy Metrics
Pharmacokinetics
Convenience Metrics
Direct Product Cost
Indirect Cost Impact
Preclinical
Clinical
Commercial
Therapeutic targets
Anticipated performance
Anticipated cost of therapy
Minimum / Desired
Performance Characteristics Required
for Clinical and Market Success
7
Market Analysis
Medical and
Market Assessments
Clinical and
Technology
Assessments
Target
Product
Profile
Market Model
Development
Strategy and Planning
Valuation
New
Product
Opportunity
Development
Plan
Risk
Model
Projected
Clinical
Performance
Manufacturing
Plan
Risk
Adjusted
Product
P&L
Risk
Adjusted
Licensing
P&L
Projected
Product
Sales
Risk
Adjusted
Product
Value
Risk
Adjusted
Deal
Value
Product
Discovery
EP
EP
Market
Analysis
Market
Model
EP
Portfolio Management
8
Market Analysis
Market Model
Therapeutic categories
Product sales and market share
Pricing
Competitive dynamics
Reimbursement
Marketed
Products
Assessment
E
Patient
Demographics
Market
Model
Disease incidence
Disease prevalence
Percent diagnosed
Percent treated
Percent compliant
Competitive
Pipeline
Assessment
Patient dynamics
Therapeutic categories
Marketed products
Sales and Share dynamics
Pipeline products
Therapeutic targets
Products in development by stage
Anticipated performance
Anticipated cost of therapy
Projected regulatory filing and launch dates
Projected sales and market share
9
Product Discovery
Medical and
Market Assessments
Clinical and
Technology
Assessments
Target
Product
Profile
New Product Opportunity
Development
Strategy and Planning
Valuation
New
Product
Opportunity
Development
Plan
Risk
Model
Projected
Clinical
Performance
Manufacturing
Plan
Risk
Adjusted
Product
P&L
Risk
Adjusted
Licensing
P&L
Projected
Product
Sales
Risk
Adjusted
Product
Value
Risk
Adjusted
Deal
Value
Product
Discovery
EP
EP
Market
Analysis
Market
Model
EP
Portfolio Management
10
Measure Performance vs the Target Product Profile
Projected performance
characteristics do not meet
minimum criteria for clinical
and commercial success
NO
New Product
Opportunity
Projected
Clinical
Performance
Projected
Product
Sales
Target
Product
Profile
YES
Development
Strategy
and Planning
Projected performance
characteristics meet or exceed
minimum criteria for clinical and
commercial success
11
Projected Clinical Performance
Projected Sales and Share
Market
Model
EP
E
Preclinical
Studies
and Animal
Model Results
Projected
Clinical
Performance
Safety
Efficacy
Dosing
Pharmacokinetics
Convenience
Cost of therapy
Projected
Sales and
Market
Share
For minimum profile
For desired Profile
Target
Product
Profile
12
The Regulated Preclinical /
Clinical Development Program
13
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)
14
Clinical Development Process and Critical Path
Preclinical Studies (GLP)
Phase I Clinical Trials
Phase II Clinical Trials
Phase III Clinical Trials
NDA Submission to NDA Approval
NDA Approval to Product Launch
Start
End
Activity
Duration
(days)
01/01/04
02/01/05
03/01/06
05/01/07
07/01/09
07/01/10
12/31/05
06/30/05
02/28/07
04/30/09
06/30/10
07/01/10
730
149
364
730
364
0
2004
2005
2006
2007
Activity
Duration
(months)
Time
Duration
(months)
24.0
4.9
12.0
24.0
12.0
0.0
78.0
2008
2009
2010
Preclinical Studies (GLP)
Phase I Clinical Trials
Phase II Clinical Trials
Phase III Clinical Trials
NDA Submission to NDA Approval
Launch
15
Development Plan Drivers
Regulatory
Requirements
Reimbursement
Environment
E
New
Product
Opportunity
Development
Plan
Target
Product
Profile
Timelines
Preclinical Program
Process Development
Clinical Program
Regulatory Strategy
Manufacturing Strategy
Life Cycle Management
Cost
16
The Risk Model
17
Risk Model
Medical and
Market Assessments
Clinical and
Technology
Assessments
Target
Product
Profile
Development
Strategy and Planning
Valuation
New
Product
Opportunity
Development
Plan
Risk
Model
Projected
Clinical
Performance
Manufacturing
Plan
Risk
Adjusted
Product
P&L
Risk
Adjusted
Licensing
P&L
Projected
Product
Sales
Risk
Adjusted
Product
Value
Risk
Adjusted
Deal
Value
Product
Discovery
EP
EP
Market
Analysis
Market
Model
EP
Portfolio Management
18
Risk Model
• 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
19
Clinical Development Process
Activities, Timelines and Probability of Success
20
Risk Model
Preclinical
Development
Phase I
Phase I
Clinical
Clinical Trials
Trials
Phase II
Phase II
Clinical
Clinical Trials
Trials
Phase III
Phase III
Clinical
Clinical Trials
Trials
NDA
Approval
Clinical
P1
P2
P3
P4
P5
P6
Probability of Reaching
Preclincial
Testing
Phase I
Clinical Trials
Phase II
Clinical Trials
Phase III
Clinical Trials
NDA
Submission
Achieve P&L
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
Milestones
Probability of Success
Phase III
Trials
Achieve
Projected P&L
Probability of Achieving
Projected P&L
At Start of Preclinicals
At Start of Phase I
At Start of Phase II
At Start of Phase III
At Submission of NDA
At Launch
P1*P2*P3*P4*P5*P6
P2*P3*P4*P5*P6
P3*P4*P5*P6
P4*P5*P6
P5*P6
P6
21
Risk Model
Preclinical
Development
Phase I
Phase I
Clinical
Clinical Trials
Trials
Phase II
Phase II
Clinical
Clinical Trials
Trials
Phase III
Clinical
Clinical Trials
NDA
Approval
Clinical
Trials
Trials
85.0%
30.0%
50.0%
70.0%
Start of Preclinical
100.0%
85.0%
25.5%
Start of Phase I
100.0%
100.0%
30.0%
Start of Phase II
100.0%
100.0%
Start of Phase III
100.0%
100.0%
Submission of NDA
100.0%
Launch
100.0%
Milestones
Probability Success
Phase III
Phase III
Launch
Achieve
Projected P&L
90.0%
100.0%
80.0%
12.8%
8.9%
8.0%
8.0%
15.0%
10.5%
9.5%
9.5%
100.0%
50.0%
35.0%
31.5%
31.5%
100.0%
100.0%
70.0%
63.0%
63.0%
100.0%
100.0%
100.0%
100.0%
90.0%
90.0%
100.0%
100.0%
100.0%
100.0%
100.0%
80.0%
Probability of Reaching
Probability of Achieving
Start ED to Projected P&L
Start P-I to Projected P&L
Start P-II to Projected P&L
Start P-III to Projected P&L
Submit NDA to Projected P&L
Launch to Projected P&L
Achieve Projected P&L
6.4%
7.6%
25.2%
50.4%
72.0%
80.0%
80.0%
22
Risk Model
Risk Adjusted Product Income Statement
Medical and
Market Assessments
Clinical and
Technology
Assessments
Target
Product
Profile
Development
Strategy and Planning
Valuation
New
Product
Opportunity
Development
Plan
Risk
Model
Projected
Clinical
Performance
Manufacturing
Plan
Risk
Adjusted
Product
P&L
Risk
Adjusted
Licensing
P&L
Projected
Product
Sales
Risk
Adjusted
Product
Value
Risk
Adjusted
Deal
Value
Product
Discovery
EP
EP
Market
Analysis
Market
Model
EP
Portfolio Management
23
Risk Model
Risk Adjusted Product Income Statement
Fixed
Expense
Development expense
Fixed sales expense
Fixed marketing expense
Manufacturing expense
G&A allocation
EP
E
Projected
Sales and
Gross Margin
Product
Income
Statement
Direct
Product
Expense
Risk
Model
(Development and
Sales Achievement)
Advertising
Promotion
Sales Force
Risk
Adjusted
Product Income
Statement
Operating Cash Flow
Net Present Value
24
Risk Model
Risk Adjusted Licensing Transaction Income Statement
Medical and
Market Assessments
Clinical and
Technology
Assessments
Target
Product
Profile
Development
Strategy and Planning
Valuation
New
Product
Opportunity
Development
Plan
Risk
Model
Projected
Clinical
Performance
Manufacturing
Plan
Risk
Adjusted
Product
P&L
Risk
Adjusted
Licensing
P&L
Projected
Product
Sales
Risk
Adjusted
Product
Value
Risk
Adjusted
Deal
Value
Product
Discovery
EP
EP
Market
Analysis
Market
Model
EP
Portfolio Management
25
Risk Model
Risk Adjusted Licensing Transaction Income Statement
Upfront Payment
Licensing
Deal
Structure
Risk Adjusted
Milestone Payments
Risk Adjusted Deal
Specific Payments
Royalty on Net Sales
Risk
Adjusted
Licensing
Income
Statement
Risk
Adjusted
Product
P&L
E
Risk Adjusted Sales
Risk Adjusted Development
Expense to Deal Signing
26
Risk Adjusted P&L
Medical and
Market Assessments
Clinical and
Technology
Assessments
Target
Product
Profile
Risk Adjusted Value
Development
Strategy and Planning
Valuation
New
Product
Opportunity
Development
Plan
Risk
Model
Projected
Clinical
Performance
Manufacturing
Plan
Risk
Adjusted
Product
P&L
Risk
Adjusted
Licensing
P&L
Projected
Product
Sales
Risk
Adjusted
Product
Value
Risk
Adjusted
Deal
Value
Product
Discovery
EP
EP
Market
Analysis
Market
Model
EP
Portfolio Management
27
Risk Adjusted Product / Licensing Income Statement
Risk
Adjusted
Product Income
Statement
Risk
Adjusted
Operating
Income
NPV
Risk Adjusted Value
Risk
Adjusted
Product
Value
Risk Free
Cost of Money
Risk
Adjusted
Licensing
Income
Statement
Risk
Adjusted
Licensing
Income
NPV
Risk
Adjusted Deal
Transaction
Value
28
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
29
Portfolio Management
Value as a Function of Key Development Milestones
Management
Return
CGR
Portfolio Value
Investment
Asset Portfolio
Year 1
Product 1
Preclinical
Product 2
Phase I
Product 3
Year 2
Year 3
Phase I
Phase II
Preclinical
Phase I
Year 4
Year 5
Phase II
Phase
III
Phase III
NDA
Phase II
••
••
Technology
Other Assets
30
Thank you
31