Michael Brand
A Generalised Model
for Valuing Early
Stage Technology
Palisade Europe User
Conference
2008
© 2008 Captum Capital Limited
About Captum…
• Formed in 2004
• Transatlantic presence
• Specialised consulting to:
– Private companies (pre-IPO)
– Life science sector (Biotech, Med Dev, Pharma)
– Business development, valuation, partnering
• MasterClasses in Finance, Leadership
– Valuation Masterclass attended by over 350
executives in UK and Europe
2
Valuing Technology
• Technical Risk
– Will it work?
– Scale up issues
– Regulatory hurdles
• Market Risk
– Customer acceptance
– Pricing issues
– Competition
3
Valuing Risk
£X
0.5
£200,000
0.5
£0
or
What value of “X”
are you indifferent
between a fixed sum
and playing the
game?
£1
£1,000
£10,000
£20,000
£50,000
£100,000
4
Valuing Technology
NPV Success
Development
Cost
Early-stage
Technology
Company
NPV Failure
5
Valuation Parameters
• Cash Flow
• Probability of achieving cash flow
• Discount rate (less uncertain)
P
(1 – P)
Cs
(1  P)C f
PCs
eNPV 

t
(1  r )
(1  r )t
Cf
t
6
Stepwise Development
Development can fail
at any milestone along
the development
pathway
Concept
Development
Manufacturing
Market launch
7
Drug Discovery Process
PreClinical
Phase 1 Phase 2 Phase 3 FDA
S
S
S
S
F
S
F
F
F
F
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General Value Model
Risk Adjusted NPV Development Cost
Risk Adjusted NPV =
+
Risk Adjusted NPV Sales Income
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Case: ReJuven8
• Innovative wound care treatment
• Demonstrated on animals, limited human trial
• Requires manufacturing scale-up for:
– Small and Large scale human clinical trials
– FDA Approval
• Post FDA approval, sales launch
This case has been written by Captum Capital Limited for educational purposes only. Any resemblance to
any actual person, company, organization or technology is entirely accidental. Data included in this case is
for illustration only, and should not be relied on for accuracy.
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ReJuven8 Development
Scale up
CT1
CT2
FDA
0.5
Overall Probability of FDA Approval = 0.15
1.5
1.2
0.4
0.6
0.9
0.3
0.2
0.5
0.7
0.2
Cash Flow $m
0.1
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ReJuven8 PreSales Model
12
Binary Decisions
13
ReJuven8 Presales NPV
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Forecasting Sales
Top Down
• Total Market Size ($/yr)
• Market Share (%)
Sales
• Price/unit ($/unit)
• User Penetration (%)
• Potential Users (units)
Bottom Up
15
Market Penetration
Verhulst Pearl Equation
Pt
Pt = K Po ekt
K + Po (ekt – 1)
K=10
k
a
P0=1
b
c
a=
2
b=
1
c=
0.5
Time, t
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Adding Post Launch Sales
Net Cash Flow $m
ReJuven8 Sales Forecast
10
8
6
4
2
0
1
2
3
4
5
Year
17
ReJuven8 Post Sales NPV
18
Year 1 Sales Distribution
19
ReJuven8 3 Year Sales
20
ReJuven8 5 Year Sales
21
Summary
• Model Advantages
– Graphical depiction of technology/market risk
– Flexible: facilitates development strategy
– Intuitive: based on realistic probabilities
– Effective communication tool
• Downside
– Valuing very early stage technology difficult
– Most investors are risk adverse (<eNPV)
– Requires analytical discipline
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Contact
Michael Brand
e: mjb@captum.com
t: +44 (0) 115 988 6154
m: +44 (0) 7980 257 241
Captum Capital Limited
Cumberland House
35 Park Row
Nottingham NG1 6EE
United Kingdom
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