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Production / Manufacturing |
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Financial Modelling And Evaluation Of Transgenic Manufacturing
Publication Date January 2004
Publisher CredoLegal
Product Type Strategic Report
Pages 29
ISBN Number not applicable
Product Code CRE008
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Summary
The use of financial models is critical for assessing the value of a transgenic manufacturing company (TM). These models must be tailored to reflect the unique features and risks associated with both the biotech and pharmaceutical industries, which are clients of transgenic manufacturing companies.
A model should consider such things as the number of transgenic drug products a TM is developing, the stage of development of those products (including an assessment of any available information related to the likelihood of success of the products and an estimate of when the products will reach the market), the company`s burn rate (when developing transgenic product lines), the company`s cash on hand and/or access to capital (including partnerships or strategic alliances), the company`s ability to purify proteins and produce clinical grade material, its regulatory capability, its ability to market and distribute the transgenic versions of drug products, etc.
Additionally, since transgenic manufacturing companies derive their revenues mainly from sales generated during the commercial period, there must be an assessment of future events, including the potential market size (number of patients and price per treatment), the length of the product's life cycle, the likelihood and timing of the introduction of competing products into the marketplace, and changing government regulations related both to product approval and to the protection of intellectual property.
Once a product is marketed, the revenues, costs and product potential can be estimated with comparative ease. But, given the long time period between idea inception, regulatory approval and product marketing, as well as the small number of ideas that ultimately result in a marketable product, it is rare that this valuation problem will arise. There is significant uncertainty over whether the company will ever market a transgenic version of a given product.
The valuation method selected should be appropriate for the transgenic manufacturing company. For biotech valuation, there are three main approaches that are generally appropriate: (1) discounted cash flow analyses, (2) Monte Carlo models, and (3) option pricing models. It is beneficial to perform more than one type of valuation, as the results can be compared against each other. If the results are divergent, the assumptions made in the models may require revaluation.
We have developed an analysis tool that can be used for project valuation. The model is based on a DCF analysis, including risk-adjusted cash-flow analysis. The DCF model is divided into two stages of company development. The first period is from the present to FDA approval of a current therapeutic protein under development (Clinical Period) and the second period is from commercialization until patent expiration (Commercial Period). After generic substitution, the company will generate steady free cash flow, which roughly equates to the period from the year after patent expiration to perpetuity. This report will give full description of our method as well as several new methods and approaches to use, when valuing transgenic manufacturing. To evaluate fixed assets like transgenic plants and/or animals we need to:
- Understand the economic, agronomic, and bioprocessing characteristics of the transgenic plants and/or animals;
- Understand the underlying markets;
- Classify and enumerate all operating options;
- Determine optimal decision making policy in the face of price movements and the physical state of assets;
- Express these factors clearly before we can proceed with pricing; and
- Produce efficient, stable and interactive computational tools to assist in the valuation process.
Another important issue to consider when valuing TM companies is the timing and amount of direct costs associated with manufacture and transgenic system development, that is, the level and rate of expenditure required for research and development (R&D) of the transgenic product line. Comparing a company`s costs (technology and product specific development) to its cash on hand and funds otherwise available is an important exercise when assessing the risk. A company needs to have access to sufficient capital resources in order to sustain the levels of investment required in transgenic product development before a product will reach the market. An NPV`s sensitivity to time and to the size of the initial investment is substantial in transgenic manufacturing, as in all drug development and manufacturing.
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Content
Chapter 1. Introduction to transgenic manufacturing valuation
Purification issue
Uncertainties linked to biotechnology industry
Valuation approaches for transgenic manufacturers
Chapter 2. DCF and risk-adjusted free cash flow analysis
Assumptions
Key assumptions
Calculation of project discount rates
Key product assumptions
Other assumptions and calculation of sample antibody platform model
Chapter 3. Real option valuation of transgenic manufacturing
Introduction
Scaling-up/line development as an expansion option/compound option
List Of Figures
Figure I. Investment per phase of drug discovery development for one succesful drug (in $ million) Source: Infinity Pharmaceuticals
Figure II. The structure of the compound option
List Of Tables
Table I. Revenue model (an example)
Table II. Example of transgenic manufacturing WACC inputs and calculation
Table III. Revenue lines in relation to compound success of the targeted drug
Table IV. Cost assumptions.
Table V. The full commercialization of transgenic plant and/or animal technology and unlimited upside of the venture actually require the investments in expansion at least.
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