Archive | November, 2012

Prospect Pipeline Development for Product and Service Providers

30 Nov

by Brian Gajewski, VP of Sales, Life Science Nation

The uncharted nature of emerging biotech makes it an extremely difficult space to navigate. New start-ups are not initially on the industry radar screen and big pharma projects are buried in the corporate maze. Product and service marketers typically spend 20% to 30% of their time generating new leads and qualifying prospects. CRO marketers often comment to Life Science Nation staff that an inordinate amount of time is required because the marketers are looking for the proverbial needle in the haystack—active biotechs and small projects within big pharma firms who are interested in their particular niche product or service. Regardless of whom your target is, life science marketers spend an enormous amount of time trying to find good prospects.

Conversely, emerging biotechs and big pharma have a difficult time sourcing reliable, top-quality product and service providers. Traditionally these entities have three ways for their internal staff to ferret out and vet these providers: word of mouth, information portals like Google, and partnering conferences. Still, it’s a time-consuming, brute force effort. The well-known data and information providers in the life science industry do little to help these marketers. None really track the small projects at big pharma well, and most small start-ups do not have enough size to fit the tracking metrics of the large data houses, so they are overlooked. Life Science Nation solves this “sourcing dilemma” by offering a platform integrated with a life science ontology that enables marketers – with just a few clicks – to effectively and efficiently connect with emerging biotechs and “small” big pharma projects.

Life Science Nation gathers data on more than 24,000 life science organizations, including biotech, pharma, medtech, service providers and suppliers, public/nonprofit organizations, and life science investors. Regional biotech clusters, economic development councils and life science conference show providers contribute to and utilize the database to maintain their online membership directories, and leverage the sourcing platform to gain visibility. This grass-roots aggregation allows LSN to identify and add emerging companies to the database very early on in their start-up cycle.

Life Science Nation offers the best of both worlds with its comprehensive coverage of all the large and small companies in the life science industry—whether that is keeping up to date with the large players or finding the latest small, innovative companies that will be the stars of tomorrow.

Valuation – What You Need to Know

27 Nov

By Patrik Frei & Benoît Leleux

Valuing a company has always been more art than science. In this article, we provide a basic outline of how to conduct a proper valuation exercise and present two common methods used to value an early stage biotech company.

Gauging value

A company’s value lies in its potential to generate a stream of profits in the future. All valuation exercises are thus based on envisioning a company’s future, relying almost entirely on educated guesses. Value is based on assumptions as to what a company’s future may look like, what important milestones will have to be met and strategic decisions taken. These assumptions are grounded in three fundamental factors: first, the state of the market targeted by the company; second, the principle elements of a company’s science and technology; and third, the ability of management to deliver on the business plan. We would recommend that every valuation start with a systematic and rigorous testing of a company’s economic, technological and managerial hypotheses in combination with the following two key approaches:

• Primary valuation, which is based on such fundamental information as projected future free cash flow (FCF) and costs of capital;

• Secondary valuation, which is based on comparable information, where valuation is done by analogy to other similar companies.

With a good understanding of the above two approaches, an entrepreneur is already well equipped to tackle the negotiations that will ultimately determine the deal valuation.

Fundamental valuation

The most common approaches to primary valuation in the corporate finance literature are generically referred to as the discounted cash flow (DCF) methods, whereby a company is valued at the present value of the future cash flows it will be able to generate. These methods are conceptually robust but can prove difficult to implement in high uncertainty environments, such as those of early-stage biotech firms. Typical problems include highly uncertain and distant positive cash flows, a business model based on many assumptions and a difficult risk profile. Corporate finance theory indicates that the value of any asset is equal to the present value of its future cash flows. Therefore, in principle, all that is needed is (i) to estimate the expected future cash flows of the business, and (ii) to discount back to the present all these future cash flows, using a discount rate consistent with the level of risk in the project. In practice though, problems emerge at every step of this process. First, projecting performance for several years into the future is a process seen by many as too speculative to be useful. Second, selecting a forecasting horizon for the future cash flows (5 years, 10 years or 20 years) is purely arbitrary and leaves open the question of the residual value of the business at the end of that horizon. Third, obtaining an appropriate discount rate for an early-stage, privately held company presents difficulties.

Projecting cash flows into the future is never an easy endeavor, especially for smaller, high-growth life science firms. The key data used for valuation is the FCF. According to Copeland, Koller and Murrin (1), “[FCF] is a company’s true operating cash flow.” In other words, the FCF refers to the cash flows free of (or before) all financing charges related to the corporate debts. These cash flows include all necessary fixed asset investments and working capital needs, as both are normally needed for a viable business. The FCF is estimated through the financial projections of the business plan. Depending on the available information and the time frame needed for a steady revenue flow, a forecast period of 5 or 10 years is most commonly used.

Table 1The easiest approach to determining the most appropriate discount rate in a DCF is one that would use the stage of development of the company, which can be determined by the drug development stage of products in the pipeline as proxies for risk (see Table 1). For example, a company that is generating leads without further developed products would be considered a seed stage company and a discount rate of between 70%–100% would be used. Although conceptually a bit loose, the method is surprisingly reliable. Several factors typically influence the risk profile of a biotech company. Once identified, the risk factors can then be used to determine the discount rate within the ranges provided in Table 1. The discount rate to be used in a DCF calculation depends on the degree to which a company fulfills each of the criteria. As the discount rate is critical in determining value, it is appropriate to spend time in meticulously assessing each criterion and to investigate the sensitivity of the results to the various parameters.

Comparable valuation

The comparable method is also known as a “secondary” valuation method because it uses the market value of comparable companies or transactions as reference points. The method relies on available key figures, such as earnings, sales, number of employees, number of PhD’s or R&D expenditures, to estimate value. In a sense, secondary valuation makes the assumption that these comparable companies have been properly valued, and can serve as benchmarks when assessing a company. For example, if a comparable public company is valued at $1,000 with R&D expenditures of $500, for a price/R&D ratio of 2, then the private company to be valued with R&D costs of $200 would, by analogy, be worth an estimated $400.

Closing remarks

Humility and realism are the two key attributes of the prospective company valuator. Humility is needed to recognize that the exercise is primarily about envisioning the future, and that the exercise is fraught with uncertainty. Realism will help to understand that the inherent uncertainties do not constitute an excuse for sloppy estimates of the valuation components. Whether the valuation is done explicitly (as in the DCF methods) or implicitly (as in the comparable methods), either method will give an accurate valuation if carried out by experienced valuators.

Although the valuation methods described here are routinely used by investors, we offer three important cautionary remarks to help the newcomer to watch for typical pitfalls. First, investors often refer to pre- and post-money valuations: pre-money is the value before the investment is included; post-money is the value including the new investment. Thus, pre-money value + investment = post-money value. Investors routinely play with different figures and company data. Numbers are their daily business and they may try to use them to their advantage.

Second, don’t enter into negotiations without having completed your homework. Management needs to master the figures and numbers and have clearly laid out its expectations about pre- and post-money value and the corresponding value of its shares. Only with preparation and a good understanding of valuation drivers can management establish itself as a credible partner in front of investors.

And third, valuation is not everything. The investment contracts that accompany investments can easily take away everything that was given in a rich valuation, by imposing drastic restrictions on the future conduct and wealth of the founders. Similarly, a company must feel comfortable with its investors because they will share the same bed, figuratively, for a long time to come. It would thus be foolish to maximize the short-term share price if it is at the cost of the long-term value creation potential of the company. Never lose track of the fact that a financing round is just a means to an end, not the end itself!

Patrik Frei is the CEO of Venture Valuation

This story was reprinted with some modification from the Building a Business section of the Bioentrepreneur. Web portal: (http://www.nature.com/bioent), 21 June 2004, doi:10.1038/bioent814.

1. Copeland, T. , Koller, T. & Murin, J. Valuation: Measuring and Managing the Value of Companies.(John Wiley & Sons, New York, 2000).

2. Frei, P. & Leleux, B. Valuating the company. In Starting a Business in the Life Sciences—from Idea to Market. (Luessen, H. (ed.).) 42–55 (Edition Cantor Verlag, Aulendorf, Germany, 2003).

Family Offices’ Direct Investment in Life Sciences — The Perfect Storm

27 Nov

By Max Klietmann, VP of Research, Life Science Nation

In the wake of the turbulence caused by the financial collapse and global recession, family offices have become discouraged by the performance of their allocations in alternative asset classes such as hedge funds and private equity. As fund managers struggle to justify handsome management fees for poor performance, many sophisticated family offices are beginning to take their alternative allocations in-house. Though many in the space predicted this to be a natural trend given the circumstance, circumstances aside, this is a trend which is better aligned with the ultimate mission of the family office when strategically deployed in life sciences. The convergence of several defining characteristics of family office investors and the recent developments in life sciences are creating a perfect storm that will surely change the industry in a major way.

To begin, lets consider the primary mission of a family office: to maintain a family legacy through capital preservation and philanthropic engagement. This dual mandate is the major differentiator for family offices versus any other investor group. It is for this reason that the life sciences are so appealing.

Life sciences constitute one of the single best performing sectors available to investors. The industry is growing at an unprecedented pace, and it is one of the only sectors that were able to maintain strong positive growth throughout the recession. According to one large multi-family office in Boston, a significant portion of client assets that were allocated to alternatives are now being deployed directly. However, due to the sophistication of the family office investor, this capital behaves much differently than angel capital and is truly globally oriented.

Another reason that life sciences are so appealing is that from a philanthropic perspective, investment in life sciences provides an opportunity to allocate capital in a much more productive manner than via foundations or charities. Without question, those organizations are extremely valuable, but they simply cannot compete with the potential social impact of a breakthrough scientific discovery. This is especially true when one considers that many family office’s philanthropic mandates are influenced directly by health conditions prevalent in the family.  It becomes a compelling argument to invest directly in emerging technologies targeted at treating or eradicating those diseases.

Finally, there is the overall theme of investing with a legacy in mind. Life sciences are a field committed to finding the solutions to many of society’s gravest ailments. It is natural for family offices to desire to be a part of something on the scale of life sciences in that it provides potential for them to create a lasting impression on the world in their name.

About Life Science Nation

Life Science Nation (LSN) is a sourcing platform for market intelligence and prospect pipeline development in the life science arena. LSN enables life science professionals to generate a list of qualified global targets that are a fit for their company’s products, services, and fundraising efforts.

As a leading B2B source for decision-maker contacts in the life science industry, the LSN platform has more than 24,000 life-science organizations worldwide, including biotechnology, pharmaceutical, medical technology, service providers, suppliers, nonprofits, and life science investors. The LSN platform utilizes the most extensive research and data mining techniques to provide deep insight into target markets, top-tier accounts, and global business opportunities and help clients earn a measurable ROI on their marketing investment.

Contact

To learn more about Life Science Nation please contact,

Life Science Nation

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Boston, MA 02108

Phone: +1 (617) 600-0668

Email: info@lifesciencenation.com