The valuation process

The first step in the valuation process is to define your product profile and set out the overall framework for the product. The next step is to define the development risk tree based on the profile of your product. You are then ready to look into the market potential for your product, taking into account the competitive landscape. The obtained market is converted into revenue, and you are able to add your expenses and deal terms, where relevant. After entering the assumptions the tool calculates a NPV and a risk-adjusted NPV (rNPV) and run various scenarios and sensitivity analyses.

I. Product profile

You start by defining the profile of your product(s) in order to be able to create the development scenarios, set out market assumptions, etc. The product profiles can include descriptions of targeted disease(s), mode of action, efficacy, safety, dosing, marketing effort, competitive environment, advantages of the product over current treatment(s) etc.

II. Overall framework

The next step is to set up the overall framework for the project or company valuation. You must define the discount rate, the simulation period, the tax rate, the number of indications and markets, whether it is an in-licensing, out-licensing or stand-alone valuation, etc. However, you can go back and modify these settings at any time if required.

III. Development trees

You must then define the development risk trees based on the profile of your product(s). You will need information about the cost and timeframe for each development phase and the probability of getting to the next development phase. You could either use our predefined benchmark development trees or we can support you with benchmark data for your specific product, enabling you to create suitable development trees.

IV. Market for your product

The next step is to define the key assumptions for the markets. Your starting point for each market could be the population, the number of patients, the units, the revenue or other. You are then able to add rates for the prevalence/incidence, the diagnosis and the treatment, the disease severity, the second line treatment or something else defined by you depending on you starting point. Each market can have specific assumptions, and the assumptions can be changed over the given time period. This would give you the targeted market for your product(s).

V. Competitive landscape

After estimating your targeted markets you must model your product against competitors by defining the launch date, the peak market share, uptakes and market events per market. Market uptake can either be predefined (pick list) based on S-curves etc., or defined/entered by you. Market events could be new competitors entering the market, expansion of labeling, patent expiry, etc. After defining the competitive landscape you end up with the obtained market. 

VI. Converting obtained market to revenue

Once the obtained market has been determined, you must convert this (if not already defined by revenue) to revenue by taking into account the dosing, the compliance, the persistence and the price. The compliance refers to the patients’ behavior in taking the prescribed dose per day, while the persistence refers to the patients continuing with the therapy. The assumptions for dosing, compliance and persistence are highly flexible and can be defined for each market. The estimated volume is then converted into revenue by adding a price. The price can be changed over the given time period.

VII. Expenses

For each market you will have to add the related costs like M&S expenses and COGS. You can either set a fixed revenue percentage for each cost group or make specific estimates for each year. You could also use various functions to estimate the cost e.g. the sales expenses can be estimated based on the number of various sales staff needed for each market and the coefficient of utilization during the given time period.

VIII: Deal-making (only for in-licensing and out-licensing)

You have now created the total value of the project and are ready to split the value between you and your partner(s). You simply need to enter the development and sales milestones, the royalties by percentage, any revenue/cost-sharing or costs covered by your partner(s) as well as the markets related to your partner(s). You do not need to create any formulas to handle your deal terms as the model is geared to handle development and sales milestones, tiered up royalty rates, profit split, co-promotion, mark-ups etc.

IX: rNPV and sensitivity analysis

After entering the assumptions you will be able to see not only a full profit & loss and cash flow for you and your partners but also the NPV and the risk-adjusted NPV (rNPV) of your project/portfolio. You are also able to see the value split between you and your partner(s). The sensitivity analysis, including a tornado diagram, will show you the effect of changing one or more of the assumptions, and the scenario analysis will show you the outcome of up to 10 different scenarios. You can easily play around with the deal terms to set the optimal terms for you and your partner(s) or any other assumptions used.