In March 2009, Sangeeta Puran, Senior Associate, of Mayer Brown International, London, UK completed a study examining the methods used to value drug development programs. The study was conducted by interviewing individuals in the UK for a period of four months from a representative sample of twelve leading industry participants, including small biotech business development, large pharma and large biotech business development, financial analysts and venture capitalists. Overall, according to the study, most participants tended to only use the more conventional tools of rNPV and comparables, with only a few participants (namely pharma participants) using other methodologies on a regular basis. At Accuserve, we use rNPV extensively for biotechnology valuations and have built a body of models with industry wide stats that help us better approximate drug development times and operating costs incurred in different phases of development. We also have been able to input ODTC offsets and accelerated development time frames to compare and contrast various drug development cycles. Needless to say, this experience comes over a period of time.
Turing to using comparables, during the study, one participant commented that everything was in a bit of a muddle. Another participant opined that prices are being eroded and that there are 3 key factors:
- the public biotech/pharma market currently has a very low value
- biotech companies are desperately running out of cash
- everyone is saying values are slipping and values are slipping
Given this environment, we at Accuserve, strongly recommend that companies use a bidding process to license out their innovations. We believe that good quality assets will still get good prices but the ones at the bottom are probably not going to exchange hands that easily. Generally, even if we get at a fair market value, we have seen that in auction processes the bids invariably end up higher for good quality assets. This is especially true given that there are not very many Phase III projects around. The demand for technologies that can potentially migrate to Phase III is going to remain high.
According to the report: Upfront payments were the most heavily negotiated. Upfront payments typically are negotiated based on comparables. The two things for which data is extensively available out there are upfront fees and so called 'biovalue deal' value, according to the report, Accuserve also has felt the same in that we have more access to upfront payments and biovalue deal data. Needless, to say milestone payments can be inputted into the model by looking at financial statements.
Clearly, the participants were apprehensive about using comparables blindly and wanted to rely on more concrete information such as upfront payments and biovalue deal.
The other methods, in our experience, and according to the report are used in very limited fashion, except by large pharma buyers, who have an army of analysts to throw at the valuation.
In our opinion, rNPV if properly modeled out continues to be an appropriate method to arrive at a fair price for the assets. The caveat here is that in an auction type environment, prices generally tend to get higher than the fair value.