Value Assessment of Development-Stage Assets Pharmaceutical Products, Medical Devices, and Related Intellectual Property

1. Value Assessment of Development-Stage AssetsPharmaceutical Products, Medical Devices, and Related Intellectual Property Frank S. Castellana, M.D., Eng.Sc.D. Knollwood Partners, LLC

2. Objectives • Demonstrate how one can determine the risk adjusted value of pharmaceutical and medical device assets from a Product (or Licensing Transaction) Income Statement and a deterministic risk model of the product development and commercialization process • Reviewkey features of the development and commercialization process for pharmaceutical products and medical devices • Discuss in detail the FDA regulated clinical evaluation phases of the development program • Present a risk model which is derived from our understanding of the development process and the probability of success associated with each of its stages • Demonstrate how the risk model can be integrated into the Product Income Statement (or Licensing Transaction Income Statement) to determine a risk-adjusted Net Present Value (NPV) of future cash flows associated with product sales • Rationale: • Understand the impact of development risk on product value • Ensure the optimal allocation of available resources – Portfolio Management • Provide an unbiased approach to licensing and portfolio transactions

3. The Medical Product Development Process

4. The Product Development Continuum Customer Need Activities - Costs - Timelines Product Development Product Commercialization Pharmaceutical Medical Device Risk Value Commercial Opportunity Time

5. Three Integrated Phases of the Product Development and Commercialization Process Medical and Market Assessments Valuation Development Strategy and Planning EP Development Plan Clinical and Technology Assessments Product Discovery New Product Opportunity Risk Model Target Product Profile EP Risk Adjusted Product Income Statement Manufacturing Plan Projected Clinical Performance Risk Adjusted Licensing Income Statement Projected Product Sales Market Model Market Analysis Risk Adjusted Deal Value Risk Adjusted Product Value EP Portfolio Management

6. Medical Assessment Target Product Profile Medical and Market Assessments Valuation Development Strategy and Planning Development Plan Clinical and Technology Assessments Product Discovery New Product Opportunity Risk Model EP Target Product Profile EP Manufacturing Plan Risk Adjusted Product P&L Projected Clinical Performance Risk Adjusted Licensing P&L Market Model Projected Product Sales Market Analysis Risk Adjusted Deal Value Risk Adjusted Product Value EP Portfolio Management

7. Medical Assessment Target Product Profile Marketed Products Assessment Therapeutic targets Clinical performance - safety / efficacy Cost of therapy – direct / indirect Impact on disease management Reimbursement environment EP Safety Metrics Efficacy Metrics Pharmacokinetics Convenience Metrics Direct Product Cost Indirect Cost Impact Competitive Pipeline Assessment Target Product Profile Preclinical Clinical Commercial E Therapeutic targets Anticipated performance Anticipated cost of therapy Minimum / Desired Performance Characteristics Required for Clinical and Market Success

8. Market Analysis Market Model Medical and Market Assessments Valuation Development Strategy and Planning EP Development Plan Clinical and Technology Assessments Product Discovery New Product Opportunity Risk Model Target Product Profile EP Manufacturing Plan Risk Adjusted Product P&L Projected Clinical Performance Risk Adjusted Licensing P&L Market Model Projected Product Sales Market Analysis Risk Adjusted Deal Value Risk Adjusted Product Value EP Portfolio Management

9. Market Analysis Market Model Marketed Products Assessment Therapeutic categories Product sales and market share Pricing Competitive dynamics Reimbursement Patient Demographics Market Model E Patient dynamics Therapeutic categories Marketed products Sales and Share dynamics Pipeline products Disease incidence Disease prevalence Percent diagnosed Percent treated Percent compliant Therapeutic targets Products in development by stage Anticipated performance Anticipated cost of therapy Projected regulatory filing and launch dates Projected sales and market share Competitive Pipeline Assessment

10. Product Discovery New Product Opportunity Medical and Market Assessments Valuation Development Strategy and Planning EP Development Plan Clinical and Technology Assessments Product Discovery New Product Opportunity Risk Model Target Product Profile EP Manufacturing Plan Risk Adjusted Product P&L Projected Clinical Performance Risk Adjusted Licensing P&L Market Model Projected Product Sales Market Analysis Risk Adjusted Deal Value Risk Adjusted Product Value EP Portfolio Management

11. Measure Performance vs the Target Product Profile Projected performance characteristics do not meet minimum criteria for clinical and commercial success NO Target Product Profile New Product Opportunity Projected Clinical Performance Development Strategy and Planning YES Projected Product Sales Projected performance characteristics meet or exceed minimum criteria for clinical and commercial success

12. Projected Clinical Performance Projected Sales and Share Market Model EP E Preclinical Studies and Animal Model Results Projected Clinical Performance Projected Sales and Market Share For minimum profile For desired Profile Safety Efficacy Dosing Pharmacokinetics Convenience Cost of therapy Target Product Profile

13. The Regulated Preclinical / Clinical Development Program

14. Clinical Development of Pharmaceuticals and Medical Devices • Regulated by the US Food and Drug Administration (FDA) • Key Elements: • Preclinical Development • IND Regulatory Filing • Phase I Clinical Trials - 20-100 Healthy Volunteers • Phase II Clinical Trials - 100-500 Patient Volunteers • Phase III Clinical Trials - 1000-5000 Patient Volunteers • NDA Regulatory Filing • FDA Advisory Panel Meeting • NDA Regulatory Approval • Product Launch • Phase IV Post Marketing Studies (safety, efficacy, comparative performance)

15. Clinical Development Process and Critical Path

16. Development Plan Drivers Regulatory Requirements Reimbursement Environment Timelines Preclinical Program Process Development Clinical Program Regulatory Strategy Manufacturing Strategy Life Cycle Management Development Plan E New Product Opportunity Target Product Profile Cost

17. The Risk Model

18. Risk Model Medical and Market Assessments Valuation Development Strategy and Planning EP Development Plan Clinical and Technology Assessments Product Discovery New Product Opportunity Risk Model Target Product Profile EP Manufacturing Plan Risk Adjusted Product P&L Projected Clinical Performance Risk Adjusted Licensing P&L Market Model Projected Product Sales Market Analysis Risk Adjusted Deal Value Risk Adjusted Product Value EP Portfolio Management

19. Risk Model • Overview • A deterministic (vs stochastic) approach designed to account for our understanding of the development process and the risk associated with each of its stages • An approach that permits the determination of • Product (and/or Licensing Transaction) value as a function of stage of development, and • Incremental benefits associated with incremental investment • Methodology • Modular representation of all or part of the Development Process starting with the Preclinical Program and ending with achievement of the Expected P&L • Probability of success assigned to each Development Module based on the analysis of available data • Industry averages adjusted for available data • Expert panels / SAB where appropriate • Overall probabilities calculated at each stage of development for: • The likelihood of reaching each successive stage (to determine Risk Adjusted Development Expense), and • The likelihood of achieving the Expected P&L (to determine Risk Adjusted Operating Income) • Risk free cost of money is used to calculate Net Present Values

20. Clinical Development Process Activities, Timelines and Probability of Success

21. Risk Model

22. Risk Model

23. Risk Model Risk Adjusted Product Income Statement Medical and Market Assessments Valuation Development Strategy and Planning EP Development Plan Clinical and Technology Assessments Product Discovery New Product Opportunity Risk Model Target Product Profile EP Manufacturing Plan Risk Adjusted Product P&L Projected Clinical Performance Risk Adjusted Licensing P&L Market Model Projected Product Sales Market Analysis Risk Adjusted Deal Value Risk Adjusted Product Value EP Portfolio Management

24. Risk Model Risk Adjusted Product Income Statement Fixed Expense Development expense Fixed sales expense Fixed marketing expense Manufacturing expense G&A allocation EP Risk Adjusted Product Income Statement Projected Sales and Gross Margin Risk Model (Development and Sales Achievement) E Product Income Statement Operating Cash Flow Net Present Value Direct Product Expense Advertising Promotion Sales Force

25. Risk Model Risk Adjusted Licensing Transaction Income Statement Medical and Market Assessments Valuation Development Strategy and Planning EP Development Plan Clinical and Technology Assessments Product Discovery New Product Opportunity Risk Model Target Product Profile EP Manufacturing Plan Risk Adjusted Product P&L Projected Clinical Performance Risk Adjusted Licensing P&L Market Model Projected Product Sales Market Analysis Risk Adjusted Deal Value Risk Adjusted Product Value EP Portfolio Management

26. Risk Model Risk Adjusted Licensing Transaction Income Statement Upfront Payment Licensing Deal Structure Risk Adjusted Milestone Payments Risk Adjusted Deal Specific Payments Royalty on Net Sales Risk Adjusted Licensing Income Statement E Risk Adjusted Product P&L Risk Adjusted Sales Risk Adjusted Development Expense to Deal Signing

27. Risk Adjusted P&L Risk Adjusted Value Medical and Market Assessments Valuation Development Strategy and Planning EP Development Plan Clinical and Technology Assessments Product Discovery New Product Opportunity Risk Model Target Product Profile EP Manufacturing Plan Risk Adjusted Product P&L Projected Clinical Performance Risk Adjusted Licensing P&L Market Model Projected Product Sales Market Analysis Risk Adjusted Deal Value Risk Adjusted Product Value EP Portfolio Management

28. Risk Adjusted Product / Licensing Income Statement Risk Adjusted Value Risk Adjusted Product Income Statement Risk Adjusted Operating Income Risk Adjusted Product Value NPV Risk Free Cost of Money Risk Adjusted Licensing Income Statement Risk Adjusted Licensing Income Risk Adjusted Deal Transaction Value NPV

29. Valuation Model – Required Input and Data Sources P&L Requirements

30. Portfolio Management Value as a Function of Key Development Milestones Investment Management Return CGR Portfolio Value Preclinical Phase I Phase II Phase III Phase I Phase II Phase III NDA Preclinical Phase I Phase II Asset Portfolio • • • •

31. Thank you