1. September 12, 2002CFO Roundtable - Valuing Biotech

2. September 12, 2002CFO Roundtable - Valuing Biotech Tools for Valuing Biotech Investments Alan Greer Greer Consulting ag@greerconsult.com (604) 682-6943 BC Biotech - CFO Roundtable Vancouver, B.C. September 12, 2002

3. September 12, 2002CFO Roundtable - Valuing Biotech Today’s Presentation Purpose Purpose introduce/discuss innovative modeling tools for technology valuation introduce/discuss innovative modeling tools for technology valuation Outline Outline 1. Biotech Valuation Needs / Approaches 2. The Biotech (ENPV) Model 3. Further Discussion

4. September 12, 2002CFO Roundtable - Valuing Biotech Biotech Valuation Needs R&D program design; R&D program design; financing, M&As; financing, M&As; licensing/partnering agreements; and licensing/partnering agreements; and strategy development. strategy development. TOOLS: – discounted cash flow (NPV) – expected value / decision trees – simulation – real options analysis

5. September 12, 2002CFO Roundtable - Valuing Biotech Limits to Traditional Valuation Valuation requires: Valuation requires: Long history of earnings/market prices Long history of earnings/market prices Current financial statements that reflect underlying assets Current financial statements that reflect underlying assets Peer group of readily comparable (traded) firms Peer group of readily comparable (traded) firms BUT, small biotech firms: BUT, small biotech firms: No earnings history No earnings history IP asset value not on companies books IP asset value not on companies books Seek novel technology with no/few comparisons Seek novel technology with no/few comparisons

6. September 12, 2002CFO Roundtable - Valuing Biotech Valuation of Fundamentals Fundamental value is function of Fundamental value is function of Cash flows generated by asset Cash flows generated by asset Life of asset Life of asset Expected growth Expected growth Riskiness of cash flows Riskiness of cash flows

7. September 12, 2002CFO Roundtable - Valuing Biotech LONG TIMEFRAME RISK / UNCERTAINTY FLEXIBILITY (STAGED INVESTMENTS) Modeling Approaches Discounted Cash Flow (Net Present Value) Decision Tree Analysis (Expected NPV) Option Pricing Monte Carlo Simulation

8. September 12, 2002CFO Roundtable - Valuing Biotech Growth and uncertainty

9. September 12, 2002CFO Roundtable - Valuing Biotech Biotech ENPV Model Spreadsheet-based (Microsoft Excel) Spreadsheet-based (Microsoft Excel) Model has common analytical "engine"; can drive different applications: Model has common analytical "engine"; can drive different applications: STRATEGY model STRATEGY model compares different scenarios re. timing of licensing compares different scenarios re. timing of licensing DEAL model DEAL model compares deal terms offered by two parties compares deal terms offered by two parties Illustrative examples Illustrative examples key model data/results altered to camouflage confidential information key model data/results altered to camouflage confidential information

10. September 12, 2002CFO Roundtable - Valuing Biotech Key Model Assumptions RESEARCH / DISCOVERY No. of compounds / year of discovery Annual cost & no. of years of funding Scenario 1 Compounds: ABCDE …Scenario 9 Compounds: ABCDE DEVELOPMENT risks (% continuing to next phase) costs per phase duration (years) COMMERCIALIZATION Prices/dosage, market size / share Costs (marketing, admin, etc.) DEAL TERMS License fees, FTE funding, milestone payments Royalty rates/brackets Development / Profit % Opt Out provisions

11. September 12, 2002CFO Roundtable - Valuing Biotech Expected Value Probability-weighted average of possible outcomes Probability-weighted average of possible outcomes 80% prob. of failure 20% probability of success Invest $10 M in research for new product 50% prob. of $ 100 M sale 50% prob. of $20 M sale $10 M LOSS $10 M PROFIT $90 M PROFIT EXPECTED VALUE = 80% X -$10 M + 10% X $90 M + 10% X $10 M = $2 M

12. September 12, 2002CFO Roundtable - Valuing Biotech Drug Development 90% 75% 50% 85% 75% 10% 25% 50% 15% 25% 90%67.5%33.8%28.7% 21.5% 100%

13. September 12, 2002CFO Roundtable - Valuing Biotech Modeling Cash Flow Drug Development 100%90%67.5%33.8%28.7% Risk factors

14. September 12, 2002CFO Roundtable - Valuing Biotech Modeling Cash Flow Drug Development (Expected Value) 100%90%67.5%33.8%28.7%

15. September 12, 2002CFO Roundtable - Valuing Biotech Modeling Cash Flow Development & Commercialization 100% 90% 67.5%33.8%28.7% 21.5% Risk factors

16. September 12, 2002CFO Roundtable - Valuing Biotech Modeling Cash Flow Development & Commercialization (Expected Value) 21.5% 100% 90% 67.5%33.8%28.7%

17. September 12, 2002CFO Roundtable - Valuing Biotech Modeling Cash Flow Development & Commercialization (Expected Present Value) Divide by (1+discount rate) year

18. September 12, 2002CFO Roundtable - Valuing Biotech Modeling Cash Flow Development & Commercialization (Expected Present Value) ENPV = $57 m

19. September 12, 2002CFO Roundtable - Valuing Biotech Monte Carlo Simulation

20. September 12, 2002CFO Roundtable - Valuing Biotech Monte Carlo Simulation

21. September 12, 2002CFO Roundtable - Valuing Biotech Strategy Model Scenarios Compare ENPVs for 9 licensing scenarios: Deal Now Phase 2 Deal Phase 3 Deal No Deal Joint fund thru Phase 2 Straight license Joint fund thru Phase 3 Joint fund thru Phase 3 Straight license Joint fund thru Commercialization Self fund throughout

22. September 12, 2002CFO Roundtable - Valuing Biotech Results: Strategy Model

23. September 12, 2002CFO Roundtable - Valuing Biotech Results: Strategy Model

24. September 12, 2002CFO Roundtable - Valuing Biotech Deal Model Models licensing negotiation between two parties: Models licensing negotiation between two parties: Pharma X Pharma X Biotech X Biotech X Early stage deal with provisions for Early stage deal with provisions for License fees, milestones, research funding; License fees, milestones, research funding; Allocation (%) development costs, profit-sharing; Allocation (%) development costs, profit-sharing; Royalty rates, brackets. Royalty rates, brackets. Compares competing offers and different assumptions of both sides Compares competing offers and different assumptions of both sides

25. September 12, 2002CFO Roundtable - Valuing Biotech Deal Model Inputs

26. September 12, 2002CFO Roundtable - Valuing Biotech Results: Deal Model Summary - ENPV Allocation 20015 0 100505005050 150200200 Straight Licensing Joint Development ENPV to Pharma X Biotech X Offer Pharma X Offer ENPV to Biotech X Straight Licensing Joint Development

27. September 12, 2002CFO Roundtable - Valuing Biotech Limits of Models “All models are wrong. Some are useful.” George Box Forecasting uncertainty Forecasting uncertainty Modeling error Modeling error Spreadsheet error Spreadsheet error

28. September 12, 2002CFO Roundtable - Valuing Biotech Uncertainty and flexibility

29. September 12, 2002CFO Roundtable - Valuing Biotech Biotech real options Underlying asset Underlying asset Product (with patent protection) Exercise price Exercise price Cost of next phase Volatility Volatility Technical (private) - development risk Market (public) – competition/price risk Time limit Time limit Patent life Types of options Defer - delay/advance research for compound Abandon - option to abandon prior to full commitment of funds; Learning - Invest in additional research re. alternative indications, comparison with other drugs Growth/strategic - platform/pipeline with future unforeseen potential

30. September 12, 2002CFO Roundtable - Valuing Biotech Summary Biotech (ENPV) Model: fundamental (cash flow) basis for valuation fundamental (cash flow) basis for valuation allows for scenario comparison / tailoring of assumptions allows for scenario comparison / tailoring of assumptions uses expected value & Monte Carlo methods to assess risk/uncertainty uses expected value & Monte Carlo methods to assess risk/uncertainty customizable to suit different business needs (e.g., deals, strategy, financing) customizable to suit different business needs (e.g., deals, strategy, financing) easily adapted to other biotech applications (e.g. tools, medical devices) easily adapted to other biotech applications (e.g. tools, medical devices)