c Healthcare Valuing and Licensing Intellectual Property Richard Williams 9 May 2001
Agenda Exploitation of intellectual property The licence route- why and when? Choosing a partner Practical considerations Valuing licensing deals Case studies- 3 licence deals Valuation of a biotech company - ReNeuron plc
Exploitation of IP Provides a monopoly of 20 years to reward innovation... but has no value unless it can be exploited Need for exploitation Further clinical development and regulatory approval Manufacturing and distribution Sales and marketing infrastructure The pharmaceutical market has huge barriers to entry 3 potential strategies for Biotech Become a FIPCO (e.g. Celltech) Co-development / co-promotion (e.g Warner Lambert / Pfizer- Lipitor) Out-license worldwide rights/ rights outside domestic market (Eisai/Pfizer)
The licence route- why? The average development cost of each approved drug is ~$500m Biotech has Intellectual property, often through founders Innovative technologies and nimbleness of a small organisation Biotech lacks Clinical trial and regulatory expertise Manufacturing capacity Sales & marketing infrastructure to provide route to market Money! Big Pharma needs to inlicense because... Pipeline gaps Wall Street expectations of growth 40% of all approvals from 1963-1999 were in-licensed
When to license? Why early? Reduction in cash burn: VC money is very expensive (30-40% plus IRR) Can accelerate a drug programme Depends on your business model e.g. focus on lead discovery Why late? You took the risk- you get the reward Reduced clinical development costs for partner Valuations are risk adjusted for stage of development Pharma always looking for late stage products that are closer to launch
Choosing a partner Some points to consider The therapeutic fit of the partner (e.g. BMS and oncology) Non-cash benefits of the partnership (e.g. reputation) Expertise in progressing drugs through regulatory approvals Commitment to funding R&D programme Access to well developed distribution network-geographic coverage Strong rapport between licensor and licensee - long term relationship Deal offered
Practical Considerations Strength, validity and enforceability of patent position is KEY Realism with regard to uniqueness of IP Regulatory hurdles, time scale and development costs (funding) Split of risks and rewards between the parties Structure of payments between up-front and milestone payments and royalties Geographical area and indications covered by the agreement Non-exploitation provisions and agreed timescales The need for professional advice- David v Goliath
Valuation methodology - How large is the cake? Assumptions Value of the IP = Sales potential - exploitation costs Requires key assumptions Sales potential Calculation of the total sales generated by the drug in its lifetime Calculated as market size x expected market share Top down and bottom up approach used Manufacturing costs Vary depending on complexity of the process Approximately 10-15% of sales revenue for small molecules, greater for biologics
Valuation methodology - How big is the cake? Assumptions Sales and marketing costs 2 elements: -direct costs of maintaining sales force -margin for know-how - existing knowledge, expertise and industry contacts Industry average expenditure is 20-30% of sales Future expenditure in clinical development depends on stage of development extra margin for know-how in regulatory approval
Valuation of licensing deals Determine sales potential Marketing and sales contribution Evaluate clinical development and manufacturing contribution Divide pie among investors and inventors Determine fair royalty percentage 100% 25% 25% 10% 2% 38% 11.3% 26.7% Market Discounted Marketing and potential sales sales costs potential Source: Nature Biotechnology Marketing and sales knowhow margin Manufacturing costs plus know-how margin Clinical development know-how 'Pie' to be divided between partners Return on clinical development costs Margin for drug intellectual property
Valuation methodology - How big is the cake? Discount rate Discount rate to apply Average Pharma WACC ~9-11% Average Biotech WACC ~14% plus... Risk adjustment for stage of development Preclinical Phase I Phase II Phase III FDA Approval Probability of Approval 1-5% 20% 30% 50% 90% Attrition rate (No. compounds) ~250 5 3 2 1
Valuation methodology - Who gets the cake? Both partners must make an adequate return on investment - not a one shot deal Final value often depends on soft factors Relative bargaining position of the two parties Requirement to fill pipeline v. requirement for cash Know-how of the Pharma partner Biotech s need for credibility Competitive process What is value? What someone is prepared to pay!
Licensing Agreement I: Celltech / Pharmacia Rheumatoid Arthritis / Crohn s disease - CDP-870 Celltech s humanised monoclonal antibody (CDP-870) in phase II trials licensed to Pharmacia for use in RA Celltech received: Upfront payment $50 million Projected milestones $75 million Profit share( 30% RA; 50% Crohns) Estimated ~ $100-150 million Retained rights to Crohn s disease indication Drug would be 4 th TNF-a antagonist on the market Pharmacia has first class sales force in RA - 30% market share Competitive advantage - manufacturing cost (can be produced in bacteria
Licensing Agreement II: AstraZeneca/ Cyclacel CYC103- anticancer program Cyclacel s anticancer research stage genome target program licensed to AstraZeneca Companies to jointly develop peptidomimetic anti cancer drugs in a 2 year program Cyclacel to receive $12m in initial and milestone payments Undisclosed royalties Terms of the collaboration Cyclacel to focus on computational chemistry and virtual screening AZ to focus on high-throughput screening, lead optimisation and clinical development
Licensing Agreement III Amgen/ Guilford Pharmaceuticals Neuroimmununophilins Guilford s neurotrophic agents for multiple target indications including Parkinson s, Alzheimer s and stroke licensed to Amgen Guilford to receive: $15m cash signing payment $13.5m over 3 years for R&D expenses Up to $392m in milestone payments double digit royalties on product sales Potential US co-promotion rights for one product/ possible right to conduct Phase I and II trials for one product in one indication Amgen paid $15m for equity stake in Guilford and $5m in warrants for common stock Amgen to provide all clinical development, manufacturing and worldwide marketing
Valuation of a biotech company One approach - Reneuron plc
Case Study: ReNeuron plc Background European leader in stem cell technology for treatment of neurodegenerative diseases IP estate: Worldwide exclusive license for CINES - Conditional Immortalisation of Neuroepithelial Stem Cells Method for temperature control of cell division Inlicensed neurins (treatment of pain) from Novo Nordisk (Denmark) Company founded in 1997 with funding from Merlin Ventures IPO on London Stock Exchange in November 2000 Typical biotech - long on innovation and IP, short on resources
Case Study: ReNeuron plc Stem Cells Building blocks of all tissues and organs Recent advances in understanding of adult neural stem cells CINES: a method for replacement of diseased cells no ethical issues regarding repeated use of foetal tissues intend to develop tailor-made cell lines for stroke, Parkinson s, Alzheimer s First human trials scheduled for end 2001 in stroke victims No product revenues estimated before 2007
ReNeuron plc Revenue Model Short term Out licensing of brain stem cells for drug discovery (CNS diseases) Medium term In licensed neurins, in phase II clinical trials Long term Implantation of stem cells for neurodegenerative diseases No product revenues until ~2007, so. how is this valued?
Case Study: ReNeuron plc Funding History Funding Round Date Finance Provider Funds Raised Post-money Valuation Start up 1998 Merlin 5 million 11.3 million IPO 2000 Institutions 19.6 million 66.1 million Further financing from European Commission Bridge financing facility from WestLB
Case Study: ReNeuron plc Valuation methodology - WestLB (house broker) In GBP000 Probability Success 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Stem Cells Royalties 5% 18,599 24,705 50,698 73,971 Milestones 25% 1,250 750 2,750 1,250 3,500 2,000 4,250 4,500 Royalties payable 5% (1,488) (1,976) (4,057) (5,918) Development Costs 100% (1,866) (2,083) (1,658) (375) (1,050) (1,275) (600) (825) Risk Adjusted Income (1,866) (833) (908) 2,375 200 2,225 18,511 26,154 51,141 68,053 Neurins Royalties 15% 74 166 292 458 Milestones 50% 290 832 2,274 2,842 568 Development Costs 100% (2,955) (3,356) (4,800) (3,999) Risk Adjusted Income (2,955) (3,066) (4,800) (3,167) 2,274 2,916 166 860 458 Total Risk adjusted Income (4,821) (3,899) (5,708) (792) 2,474 2,225 21,427 26,320 52,001 68,511 Central costs 100% (6,700) (5,143) (5,265) (5,454) (5,652) (5,860) (6,078) (6,307) (13,791) (19,141) Risk adjusted NOPAT (11,521) (9,042) (10,973) (6,246) (3,178) (3,635) 15,349 20,012 38,211 49,370 Terminal multiple NPV @ 14% 7 88,514
ReNeuron plc Post-IPO valuation ReNeuron floated in November 2000 Market cap peaked at 77m in January 2001 (currently 44m) Clinical trials are yet to start- the company s valuation continues to be based purely on the perceived value of its IP 230 220 RENEURON HOLDINGS - UNADJUSTED PRICE FROM 2/11/00 TO 30/4/01 DAILY 210 200 190 180 170 160 150 140 130 120 NOV DEC JAN FEB MAR APR Source: DATASTREAM
Conclusions The pharmaceutical industry has huge barriers to entry - Biotech needs Pharma Pharma needs Biotech - pipeline gaps and Wall St expectations Enables Biotech to exploit IP and share the risks of drug development Problems of valuing IP Reliability of assumptions/estimates Uncertainties of outcomes of clinical trials Impact of soft factors Possible to calculate the value of IP, BUT ultimately depends on how much a partner is prepared to pay
Conclusions (continued) Historically, deals stuck by Big Pharma have been tipped in their favour Stronger balance sheets Biotechs have finite cash resources but the balance is changing! To get the best deal, Biotech needs to. be selective in choosing its partner try to maintain competitive pressure in the licensing process