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GoingPublic Life Sciences 3/14 - Setting a Price for Acquisitions

Biotech Product Valuation

GoingPublic „Biotechnologie 2014“164 Biotech&Börse Big acquisitions like the recent purchase by Roche, Switzer- land of InterMune, USA or AbbVie’s successful USD 54 billion bid for Shire, Ireland, are very good examples of how valuation metrics work and also show that often its not just about price. In case of AbbVie/Shire, potential tax saving was probably the key deal driver. In the case of Roche/InterMune, the pharma company will spend USD 8.4 billion to acquire one product which has been approved in Canada and Europe but not yet in the US. The lead product of InterMune is called Esbriet, for the treatment of Idiopathic pulmonary fibrosis (IPF), which affects about 100,000 people in the US and around 5 mil- lion worldwide. Esbriet has been approved in Europe and Canada, but not yet in the US, but analyst expect approval as early Q4 2014. It is not clear what cases IPF (which builds up scar tissues in the lung). Patients often die within three to five years after diagnosis and there cur- rently is no treatment available. Analysts assume that Esbriet could potentially also treat other tissue scarring diseases in the liver and kidney. Product valuation The valuation of a biotechnology company can be done in several ways. There is no right methodology and it makes sense to approach things from different perspec- tives. A gold standard in the industry is the risk adjusted net present value or rNPV. This valuation approach is based on the classical discounted cash flow with some special adjustments for the biopharma sector. The rNPV calculation can be split into 4 different ele- ments: 1. Development phase; 2. Market phase; 3. Risk adjustment; 4. Discounting to present value. With these four parts it becomes possible to build a free cash flow model looking 15 years into the future. For Esbriet the patent expiry will already happen in 7 years, but we would still consider a 15 year period, however with generic competition after this patent protection period. Development phase: The development phase looks at the cost and timeline for bringing the product to the different markets. In the case of InterMunes Esbriet, the product is already approved in the EU and Canada and for the US it is in the process of registration. As such there might be some additional registration costs in the US to be considered, and the product could be expected to be on the market within one year. Additionally, if we later consider other markets such as Japan/Asia, South America and other emerging markets, typically where Roche already sells its respira- tory products, the costs for additional registration in these markets and also the timeframe until when market entry can be expected, should also be considered. Market phase: For the market phase, it is important to consider the pre- valence (how many patients actually have the disease), the pricing of the drug in the different markets, the com- petition and again based on the development timelines, the time when the product can be sold on the different markets. The prevalence is estimated to be 13 to 20 per 100,000 people worldwide with around 100,000 affected in the US for IPF. Currently the pricing in Canada/Europe for Esbriet is around USD 40,000 per patient per year. Ana- Setting a Price for Acquisitions Biotech Product Valuation By Dr. Patrik Frei, CEO, Venture Valuation AG Dr. Patrik Frei