CASE BRIEF
Strategic Value Creation.
Enabling Strategic Value Creation through Partnering and IPO for a Biotech Therapeutic Area Leader
INDUSTRY CHALLENGES
As an emerging therapeutic area leader with a portfolio of next-generation biopharmaceuticals, our Client was entering second-level diligence by more than one multinational strategic partner.
Our Client’s leadership, Board, and founders were all seasoned executives from industry and top-tier venture firms, and had negotiated many successful partnerships, transactions, and exits. As a team, and with external advisory from an investment bank, they developed and maintained product, portfolio, and enterprise valuations based upon comparables, for reference and use in financings, business development, and strategy.
Although internal consensus on the valuations had been achieved, our Client CEO and CFO had, upon consideration, developed a nagging uncertainty about the numbers. As seasoned executives, they recognized that valuations based on comparables have limitations of competitive advantage when negotiating, because everybody knows and uses the same comparables. This was especially relevant to their lead product, which had clear blockbuster potential. They also recognized that the comparables methodology, although sufficient for many fairness opinions and financially-driven transactions, was primarily driven by- and created exposure to- volatile market conditions, and that it lacked the ability to capture the many nuances of biopharmaceutical product performance and safety that, in the hands of expert multinational commercial teams, can tip product uptake for great gains in market share. Also relevant to value were their proprietary product platform methodologies, which served to introduce certain development efficiencies and to de-risk their programs with families of closely-related molecular entities. In short, they wanted higher levels of fundamental insights for greater assurance that they would not be leaving money on the table.
TEAM ACHIEVEMENT
Having delivered success with our Client executive leadership in prior strategic transactions and exits, we were invited to present our approach at their US headquarters. We presented our integrated, technology-enabled approach, plan, models, and qualifications, and our firm was engaged immediately.
As usual, we launched a secure, collaborative team portal for sharing project status, milestones, documentation, and alerts. And to properly build the valuation models from program and enterprise fundamentals, we reviewed all the key program documentation, including company financials and forecasts, capital structure, and product development study results.
To develop full and fundamental visibility on value, we pursued two related methodologies. First, equity was valued using operating free cash flow forecasts and FCFE methods. In addition, equity was valued using operating free cash flow forecasts and real options methods, which properly increase valuation by properly accounting for spending that goes to zero in the event of program failure or discontinuation. To account for uncertainty in product performance and safety, we developed base-case and upside-case scenarios for each methodology. And to account for uncertainty in market conditions, we reported enterprise value for a range of earnings multiples, consistent with such tables provided by sell-side equity analysts.
Upon technical diligence, we concluded that our Client’s lead compound had not yet been synthesized or tested, and that all preclinical summary development reports to date were drafted with a conflation of data from a family of similar compounds and data from hypothetical performance targets. Communicating our findings with diplomacy, we reworked the program plans, forecasts, and budgets, and developed comprehensive and realistic target product profiles upon which our valuation models could be premised.
To enrich our work with our Client’s business development team and to substantiate our operating free cash flow forecasts, we configured and loaded the clinivation Prospectus platform for a complete understanding of the competitive dynamics of each of the therapeutic areas at issue. Upon working closely with our Client’s business development team, we concluded that their internal product revenue forecasts could not be reconciled with potential or addressable markets, realistic penetration models, industry actuals, or analyst consensus estimates. Communicating our findings with diplomacy, and under great pressure from active diligence in progress with multinational partners, we reworked the product market and revenue forecasts for the leading pipeline products in several therapeutic areas. As is our practice, our analysis was fully-documented and included multiple bottom-up and top-down sources for all critical estimates.
Our operating free cash flow forecasts included realistic strategic partnering scenarios, and integrated actuals, benchmarks, and estimates of development timelines and expenses, capital structure and cost-of-capital forecasts, milestone payments, revenue splits, royalties, operating expenses and margins, international tax rates, asset terminal values, and other values by product, and by territories including the U.S., Europe, Japan, and Rest-of-World.
Throughout the engagement, we worked closely and individually with our Client executive leadership, our Client team, and our Client Board of Directors. And we aligned our workflow and deliverables with their daily needs, many of which arose from the ongoing diligence of strategic partners, organizational and program realignments, and input from the Board.
Including the internal program and forecast rework, we advanced from initial engagement to final deliverables in fewer than 7 weeks. Our Client CEO and CFO expressed gratitude for the transformative level of insights and negotiating power which our work provided.
IMPACT: BUSINESS GROWTH AND INNOVATION
Our Client completed major strategic partnerships with multinational industry leaders, completed a successful initial public offering, and has achieved a market capitalization in excess of $1billion.
