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A Generalised Model for Valuing Early Stage Technology

Michael Brand. A Generalised Model for Valuing Early Stage Technology. Palisade Europe User Conference 2008. © 2008 Captum Capital Limited. About Captum…. Formed in 2004 Transatlantic presence Specialised consulting to: Private companies (pre-IPO )

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A Generalised Model for Valuing Early Stage Technology

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  1. Michael Brand A Generalised Model for Valuing Early Stage Technology Palisade Europe User Conference 2008 © 2008 Captum Capital Limited

  2. About Captum… • Formed in 2004 • Transatlantic presence • Specialised consulting to: • Private companies (pre-IPO) • Life science sector (Biotech, Med Dev, Pharma) • Business development, valuation, partnering • MasterClasses in Finance, Leadership • Valuation Masterclass attended by over 350 executives in UK and Europe

  3. Valuing Technology • Technical Risk • Will it work? • Scale up issues • Regulatory hurdles • Market Risk • Customer acceptance • Pricing issues • Competition

  4. Valuing Risk £200,000 0.5 £ X or 0.5 £0 What value of “X” are you indifferent between a fixed sum and playing the game? £1 £1,000 £10,000 £20,000 £50,000 £100,000

  5. Valuing Technology NPV Success Development Cost NPV Failure Early-stage Technology Company

  6. Valuation Parameters • Cash Flow • Probability of achieving cash flow • Discount rate (less uncertain) Cs P (1 – P) Cf t

  7. Stepwise Development Development can fail at any milestone along the development pathway Concept Development Manufacturing Market launch

  8. Drug Discovery Process S S S S F S F F F F

  9. General Value Model Risk Adjusted NPV Development Cost + Risk Adjusted NPV = Risk Adjusted NPV Sales Income

  10. Case: ReJuven8 • Innovative wound care treatment • Demonstrated on animals, limited human trial • Requires manufacturing scale-up for: • Small and Large scale human clinical trials • FDA Approval • Post FDA approval, sales launch This case has been written by Captum Capital Limited for educational purposes only. Any resemblance to any actual person, company, organization or technology is entirely accidental. Data included in this case is for illustration only, and should not be relied on for accuracy.

  11. ReJuven8 Development 0.5 Overall Probability of FDA Approval = 0.15 0.9 1.5 0.6 0.3 1.2 0.4 0.2 0.5 0.7 0.2 Cash Flow $m 0.1

  12. ReJuven8 PreSales Model

  13. Binary Decisions

  14. ReJuven8 Presales NPV

  15. Forecasting Sales Top Down • Total Market Size ($/yr) • Market Share (%) Sales • Price/unit ($/unit) • User Penetration (%) • Potential Users (units) Bottom Up

  16. Market Penetration Verhulst Pearl Equation Pt = K Po ekt K + Po (ekt – 1) Pt K=10 a b c P0=1 Time, t

  17. Adding Post Launch Sales

  18. ReJuven8 Post Sales NPV

  19. Year 1 Sales Distribution

  20. ReJuven8 3 Year Sales

  21. ReJuven8 5 Year Sales

  22. Summary • Model Advantages • Graphical depiction of technology/market risk • Flexible: facilitates development strategy • Intuitive: based on realistic probabilities • Effective communication tool • Downside • Valuing very early stage technology difficult • Most investors are risk adverse (<eNPV) • Requires analytical discipline

  23. Contact Michael Brand e: mjb@captum.com t: +44 (0) 115 988 6154 m: +44 (0) 7980 257 241 Captum Capital Limited Cumberland House 35 Park Row Nottingham NG1 6EE United Kingdom

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