Updated: Jan 2, 2022
Here are key aspects to consider when evaluating the value of a pharmaceutical platform or asset for continued development, purchase, sale or license.
Some background: My experience is derived from working with universities and small pharmaceutical companies. As a result, my feedback is skewed toward earlier-stage assets (non-commercial) in a limited portfolio. For what I understand, larger pharmaceutical companies tend to introduce more complexity, as these organizations manage multiple portfolios and operate vertically down the value chain. Otherwise worthy assets may be sold off or shelved for reasons beyond simple valuation, including general strategy, fixed assets utilization, mergers and acquisitions, lifecycle management, etc. These examples won't be discussed here in detail.
Last, I tried to arrange these steps in chronological order, but many of theses elements need to be done simultaneously. Here are my 12 key steps for pharma asset evaluation:
1. Understand what you are developing
A valuation model can be applied to a portfolio or asset, biologic or small molecule, new chemical entity (NCE) or 505(b)(2) product, diagnostic or pharmaceutical (or combination product), to name a few examples. Understanding the product being developed means knowing what will be ultimately valued, whether it be composition of matter IP, market dominance from manufacturing or marketing exclusivity, or a new way of delivering an approved active pharmaceutical ingredient (API). Know if you are the innovator or sponsor (or both), at what stage you can add value, and what is the corresponding development and commercialization strategy to get to the next inflection point.
2. Research your competition
There are a number of ways to research your competition. First, a developer should know how their offering compares with the standard of care for a particular indication, class, or mechanism of action (MOA). I couple primary research, such as speaking with key opinion leaders (KOLs), with secondary research from reading recent review articles from PubMed or presentations from scientific conferences like AAIC for Alzheimer’s. Paid subscription database services like PharmaIntelligence provide insight on how your product is differentiated, assuming all goes to plan in preclinical and clinical development. One major tool I use is the Target Product Profile (TPP), a matrix that can objectively compare two pharmaceutical assets on various dimensions like price, dosing, efficacy, delivery, and safety (i.e. side effects).
3. Consider your regulatory pathway
Depending on your business model, defining the right regulatory pathway can shave years off your development plan. One example is the 505(b)(2) pathway, where a new formulation for an API is pursued to reduce clinical timeline yet allow for three years marketing exclusivity. The Orange Book is a good way to see which APIs are going off patent to determine opportunities to create differentiated therapies with less upfront investment. Other aspects of regulatory affairs include geography as a go-to-market strategy. Typically clinical trials will need to be repeated in some jurisdictions, like Japan, so drugs may be launched in the US first, followed by European markets as the European Medicines Agency (EMA) and FDA have a collaborative agreement.
4. Discover your limiting steps
After the initial drug development period and the Investigational New Drug (IND) application is approved, clinical trials can be the most time consuming aspect of drug development. This is heavily indication-depending, as chronic diseases may require more longitudinal studies. To account for this, many times a financial model incorporates an adjusted risk rate for each period of clinical trials, as adjusted by drug type and indication. Other factors that can speed up or slow down this process include chemistry, manufacturing, and control (CMC) or even patient recruitment, especially if the indication is for an Orphan disease (a rare disease).
5. Define your patient population
This is a tricky area that usually funnels down from the total market opportunity into a specific initial patient population. Epidemiological data can be used to stratify the intended patient population by procedure, cases, and geography. For instance, a class of drugs may target a protein that encodes for a gene that can cause multiple genetic conditions. A large patient population can potential benefit, but as certain patent cohorts are selected and clinical trials proceed, only a small subset may benefit substantially over the standard of care. Likewise, dosing may be too cumbersome leading to reduced medication adherence.
6. List the fundamental variables
In any financial model there are fundamental variables that are usually listed out on the top of the model or a separate tab. This includes model-related and epidemiological information like a discount rate, risk rates, inflation rate, adoption rate and peak penetration. Other variables to consider are price per treatment, number of cases per year or disease prevalence, depending on acute or chronic treatments. Finally, there will be licensing variables around anticipated flat or tiered royalties, lump sum milestone payments, sublicense royalties, license/patent fees, amongst other asset- or platform-specific elements.
7. Identify the pathway to commercial product
Another key aspect is knowing where you are in the development timeline. Are you the innovator company looking to out-license or sell the company after Clinical Phase IIB? Are you a university looking for a preclinical company to take your lead compounds to IND? Or are you a global pharmaceutical company looking to in-license a biologic for a neurological disorder to complement your geriatric portfolio? Which party is taking the next step in development and when is about knowing your resource limitations, from cash reserves to marketing personnel to distribution channels.
8. Understand the exit
There are a few ways to look at the valuation, including internal rate of return (IRR) when performing portfolio management and in-licensing activities, and net present value (NPV) when determine an assets valuation, which can also wrap up into an intellectual property portfolio (IPP) or even company valuation. The timing of the exit is important too and should be factored alongside development timeline, overall risk, and lifespan of patent protection, assuming Hatch-Waxman extensions and marketing exclusivity, if applicable. After determining an internal NPV, it is always good to take a peek a recent comparable deals that are frequently announced through newsletters like FierceBiotech, paying attention to company size, indication, and stage.
9. Know your revenue
Depending on whether you are the sponsor or innovator, revenue is generated from a variety of sources, including product sales, lump sum payments, and running royalties. For the former, you can estimate sales by looking at comparables as reimbursed by the Centers of Medicare and Medicaid (CMS). For uninsured payers I would call at least three local pharmacies and average the cost of the medication. For new indications with few comparables, you can estimate the savings to a hospital system by looking at the improvement in outcomes like survival rate and reduction of length of hospital stay. For innovators, revenue is typically generated through out-licensing a technology package. These companies will want to look at comparable licensing deals through the Licensing Executives Society (LES), which will give you an idea on royalties and milestone payments that can be coupled with product revenue from sales of product.
10. Know your costs
All companies will have overhead associated with administration and facility-related costs. Depending on the stage of the asset, these costs will become more project-specific. As an innovator, consider costs associated with patent filing and prosecution, license fees if in-licensed (i.e. from an originator like a University), small batch manufacturing or synthesis, animal studies, and initial regulatory fees. As a sponsor, there are pass-through royalties and technology access fees, but also costs associated with CMC, patient recruitment, and eventually marketing and sales. Understanding your costs will give you an idea on whether a particular activity should be outsourced or kept in-housed. As noted above, one can control costs by planning ahead and knowing what limiting factors may occur along the development timeline.
11. Create multiple models
It is a good idea to create a version of your model for variations in your TPP (think good, bad, neutral positioning) as well as variations in your exit strategy. For example, you may have the right tissue concentration and overall exposure to allow for once a day dosing from your preclinical PK/ADME studies. As this translates to humans, you notice the efficacy decreases for an unforeseen reason and so the dosing regimen turns to twice daily. This can affect sales if your nearest competitor is once daily when you factor in convenience. Another variation of your model can come from whether you out-license after Phase IIa versus later on in clinical trials. Knowing the risks and benefits at each stage will determine what results in an acceptable ROI for your asset.
12. Challenge your assumptions
Last of all, it is one thing to create a model and circulate that among management. It is another to involve clinical teams, regulatory, sales, manufacturing and incorporate quotes from third parties like contract research organizations. Involve consultants that have worked on multiple models that can provide honest feedback from outside the organization. Keep in mind that a financial model is a living organism that can grow and change over time from your internal programs and the external environment. Revising the model should be a quarterly practice and more frequent if you have an active portfolio or licensing strategy.