Valuing a Pharmaceutical Company This course is presented in London on: 27 February 2018, 13 November 2018

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1 Valuing a Pharmaceutical Company This course is presented in London on: 27 February 2018, 13 November 2018 The Banking and Corporate Finance Training Specialist

2 Course Objectives Participants will: Get to grips with the pharma business model with many illustrations Gain an understanding of the conventional models and their general strengths and weaknesses Learn about how conventional valuation models are challenged by the pharma model Understand the valuation process through real life examples and case studies Explore the Course general Overview principles and strategic analysis of the relative strengths and weaknesses of the business Learn how to work with Excel to bring it all together Develop an understanding of basic tips and tricks for constructing an Excel-based valuation which is comprehensive, coherent, consistent and flexible Background of the trainer The trainer regularly covers the entire spectrum of topics under the general headings of financial accounting, reporting, management, analysis and communication. His interests range from the technical detail of IFRS and GAAP accounting to the dark arts of impression management in the front half of company reports. He has a special interest in the use of KPIs and of alternative underlying or pro forma performance measures for communication with investors. He also provides specialised training in financial modelling and valuation, and in the effective presentation and communication of financial information. Prior to becoming a trainer, he had worked as a group finance manager for one of the UK s leading industrial and commercial real estate investment companies, and then subsequently as the treasurer of a subsidiary of Deutsche Bank. Course Overview If the business model of the modern pharmaceutical industry did not already exist, management consultants and business schools would surely have invented it as a fictional basis for exploring the challenges posed by a perfect storm of every conceivable risk and uncertainty. It is perhaps doubtful whether investors, managers and analysts would have believed that any business model embodying such a perfect storm would be sustainable and therefore worth studying at all were it not for the fact that in the pharmaceutical industry, real life really is stranger than fiction. Nowhere are all the risks and uncertainties confronting the pharmaceutical industry more clearly or comprehensively exposed to view than in the process of valuation. This one-day intensive workshop begins with an in-depth analysis of the pharma business model itself, and then explores in detail the theoretical and practical barriers to the application of the most widely employed valuation metrics and methods. It locates common pitfalls, and shows how a judicious selection of horses for courses can help us to establish at least a conditional range for possible valuations in different contexts.

3 The course is intensive rather than advanced, in the sense that it is strongly interactive in tone and structure (Excel-based exercises figure prominently, especially in the second half), yet it assumes no more than a basic understanding of financial statements and of a few of the most widely used measures of financial performance and condition, such as return on capital and p/e ratio. As the participants are being asked to unlearn much of their previously unchallenged conventional wisdom, those who come to the table with less inherited baggage might even have an advantage! Course Content Review of the pharma business model, with copious illustrations Long, unpredictable and variable life-cycles of individual products, from discovery, through pre-clinical and clinical development, to launch and eventual patent expiry Low correlation in timing and amount of costs and revenues Imperfect diversification of product portfolios (in terms of product numbers, sizes, types, and stages in life-cycle) Exposure to a wide range of long-term uncontrollable factors demographic, epidemiological, scientific ( looking for needles in haystacks ), political, geopolitical and economic Uncomfortably close and unusually complex relationship with government (healthcare policy and priorities, regulation, pricing regime, overall demand) High risk of unforeseen technical failure, and costly and protracted lawsuits Little freedom to plan for long term, in face of constant threat from opportunistic predators Overview of conventional models: their general strengths and weaknesses, when they work best and when they work least well Primary models NPV based on Free Cash Flow (FCF) Comparables and benchmarking Book-based models Market multiples Secondary refinements Sensitivity and scenario analysis Decision tree analysis and real options Monte Carlo analysis How conventional valuation models are challenged by the pharma model, as for instance: Data samples and populations (e.g. on overall amounts and timings of costs and revenues) too small, heterogeneous and idiosyncratically distributed to be statistically useful Conventional measures of mean and dispersion inoperable Genuine comparability, between companies, between deals, and between therapies, unduly elusive in practice

4 Conventional modelling techniques unable to accommodate shifting levels of risk through the product life-cycle: inapplicability of standard CAPM and dividend-based model of expected returns Lack of informed market consensus on criteria for analysis Chronic tendency towards optimism in management commentary, e.g. on value of pipeline, stage of development, timing of launch and subsequent success in market Shortcomings of the accounting regime in: capturing relevant costs and accommodating mismatch in timing of costs and revenues reaching consensus on intangible assets resolving problems of business combinations Finding a way forward General principle: do as much work as possible before confining one s brain in the fixed confines of an Excel spreadsheet! Strategic analysis of the relative strengths and weaknesses of the business to be valued and of the sector(s) in which it operates, using a standard framework such as Porter s Five Forces Bottom-up approach: refining institutional FCF into product-specific FCFs, using Bottom-up estimates of revenue and costs based on demographic, epidemiological and other factors: Product-specific rnpvs (risk-adjusted NPVs), instead of entity-wide NPV, with individual discount factors calibrated according to (i) costs, (ii) revenues and (iii) risks appropriate to individual major product characteristics at each stage of its life-cycle Top-down approach: sense-checking the difference between (a) market EV and (b) sum of the product rnpvs from the bottom-up approach, by seeking possible reasons for positive differences (e.g. pipeline, well-struck balance between diversification and internal synergy, bargaining power in M&A market) negative difference (e.g. accident-prone management, above-average vulnerability to competitors, predators and government) Bringing it all together 1: Working with Excel Basic tips and tricks for constructing an Excel-based valuation that is at once comprehensive, coherent, consistent and flexible The template must be appropriate to the case, facilitating comparison with comparable cases and highlighting differences with contrasting cases Line and column descriptions must indicate relationship between values: Go and look at the formulae is no way to treat grown-up readers Assumptions (and variations of assumptions) must be highlighted Sources and relative reliability of different data inputs must be highlighted Top-level results must be summarised on front sheet, and indicate not only a point value but a range of values, as well as an indication of the principle parameters for the range Bringing it all together 2: Constructing a pharma valuation

5 Participants will work in small groups on a comprehensive valuation exercise under the close supervision of the trainer, who will help resolve individual problems while acting as a channel for sharing each group s insights and experiences with the class as a whole. The workshop concludes with presentations by one or more of the groups to the class as a whole, in an exercise designed not only to give them self-confidence in their technical skills but also to enhance their ability to communicate their findings to colleagues. What Redcliffe s clients are saying about the course; Course material were interactive and independent Interesting practical insight, discussions and examples Case study very relevant 9:00-17:00 London Standard Price: VAT Membership Price : VAT Delivering this course in-house for you to a number of participants could be very cost effective.