Commercial opportunity
- definition of target profile
- in-depth assessment of disease market and medical needs
- assessment and forecast of incidence and prevalence
- detailed analysis of competitors
- determination of a product’s optimal price range and likely market share, including TPCASM (Target Profile Conjoint Analysis) by taking advantage of the resources available from Bioscience Valuation’s affiliate
 Bioscience Market Research
- sales forecast until patent expiry using DMMSM (Dynamic Market Modeling)
R&D strategy and development risk
- review and analysis of R&D strategy
- R&D risk evaluation, comparison with benchmarks
- optimization of the development strategy using decision trees, comparison with alternative development plans
- structuring of the development process
Cash-flows
- assessment of project-related cash in and outflows, including R&D, marketing and production related costs
- probability adjustment of cash flows
- determination of a company's cost of capital
- calculation of risk-adjusted net present values ('NPVs')
- calculation of likely value increase upon reaching pre-defined milestones
The first step in all project valuations is a clear and concise definition of the final product’s target profile. It forms the basis for all assessments of commercial opportunities as well as for the evaluation of commercial and R&D risks. A target profile describes a project as a set of attributes that are related to efficacy, safety, tolerability, formulation and price. A project team may define up to three target profiles – ideal, realistic, minimal – resulting in three distinct evaluations that allow managers to assess the impact of different profiles on value.
The profiles are carved out in relation to a particular indication and the perceived medical need. In this context, incidence and prevalence data are reviewed. At this stage the team also discusses price and potential market share of a drug. The discussion is usually backed by secondary market research and can, depending on prevailing uncertainties and budget, also rely on primary market research and conjoint analyses such as our TPCASM (services offered by Bioscience Market Research). The project team itself typically includes the project manager, marketing, R&D, regulatory, CMC and finance. The presence of several functions ensures a common understanding and acceptance of the target profile which is important to guarantee a consistent evaluation process. Bioscience Valuation has access to all relevant databases and can complement a team’s assessment by providing valuable information.
The role of competitors is often underestimated. While project teams usually compare their development candidates with already marketed products, the analysis of competing drugs that are still in development is often not performed in great detail. Therefore, the potential market impact of future drugs is not considered, leading to an overestimation of the own drug’s sales potential.
Bioscience Valuation, together with its affiliate Bioscience Market Research, has established a routine to assess the effect of competing drugs once they are launched – and to adjust sales based on a competitor’s likely influence on market share and chance to reach the market (DMMSM, Dynamic Market Modeling). The result is a realistic appraisal of a drug’s sales potential.
After the market assessment the expert team focuses on a project’s R&D strategy. First, decision points are defined for a particular development plan. Those are typically related to major milestones and could entail ‘go’ or ‘no go’ decisions depending on the outcome of the study or phase considered. The decision points are illustrated in decision trees.
Decision trees are extremely useful to communicate the risk structure and the decision logic of a project, and they serve as structuring elements to include a project's option value in financial analyses. The team assigns a success probability to each decision point taking advantage of the knowledge and expertise of the whole organization as well as benchmark figures. Bioscience Valuation moderates the process and supports the discussion by providing additional, non-confidential information from the wealth of knowledge accumulated from other assignments and Bioscience Valuation’s databases.
If alternative development concepts exist and a decision in favor of one of them is due, models can be developed for all development alternatives and the value-maximizing development strategy can be identified. Furthermore, the team is encouraged to think about ways to reduce development risk, and the ideas generated can be analyzed and may, once implemented, reduce the risk of project failure.
The results of the market and R&D assessments are finally integrated in a cash flow spreadsheet. The costs of R&D, production and marketing are determined and all cash flows are risk-adjusted. Before a project's NPV is calculated the team, guided by Bioscience Valuation, discusses the discount rate that should be applied. Often firms account for unsystematic risk by making arbitrary adjustments of the discount rate which may lead to incorrect results.
Bioscience Valuation offers two different model set-ups in order to calculate a project’s NPV. One possibility is to represent R&D uncertainty with discrete probability distributions and commercial uncertainty with continuous distributions; this approach takes advantage of sophisticated Monte Carlo simulation methods and provides the optimal solution to complex valuation problems with multiple sources of uncertainty. Alternatively, a less advanced model can be programmed and uncertainties are modeled as pessimistic, most-likely, and optimistic scenarios. Independent of the complexity of the model, Bioscience Valuation always advises its clients to assess the increase in value when certain milestones are reached; this information may entail changes in project prioritization, timing of licensing efforts, or timing and likelihood of success for financial rounds. Our project models allow management to test individual managerial actions and potential alternative strategies and assess their impact on a project’s value. Various scenarios can be compared; the actions and strategies that create the highest value are then selected. Thus, our models are a valuable prerequisite to implementing value-driven project and portfolio management.
Because NPV-based valuation depends on forecasting future cash flows, the quality of the input data is critical for the validity of the model. Bioscience valuation takes great care in researching those variables that are critical for the valuation. Bioscience Valuation subscribes to all relevant databases that are needed for estimating R&D risk and commercial potential. We also maintain a large network of independent experts that support us in our analyses. Finally, Bioscience Valuation conducts primary market research (together with its affiliate Bioscience Market Research) in order to get more specific information or to validate important assumptions.
How do we obtain credible assumptions?
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