The science of valuation

Valuation can appear more art than science.
Extended timelines and the chances of success, plus numerous other risk factors, make valuation difficult – particularly in the life sciences.
BUT, valuing your business can help:

  • Day-to-day, in focussing everyone on the assumptions, risks and what it takes to maximise value;
  • During fundraising, in providing a basis for negotiation.

Numerous methodologies exist; you need something that can stand up to scrutiny in the same way that your science can.
Cash flow valuations are the gold-standard, used by both Big Pharma and VCs; other methods are used to sense-check.

Understanding value is vital for the big decisions, and can help you in many important ways, for example:

  • —Fund raising
    • —Understanding whether your company is fundable and/ or licensable.
    • —Control the amount you give away in return for funding.
    • —Help investors understand your business in a richer way, enabling them to see what their return could be on exit.
  • —Evaluating and negotiating licensing deals.
  • —Acquiring companies/ assets to build your own company.

—However it can also help with tactical and strategic management:

  • —Determine the optimal way to fund growth: equity, debt, licensing or selling.
  • —Enable you and your team (senior managers and board) to manage towards increasing value in the most cost efficient way.
  • —Assessing value of programs
    • —Selecting and prioritising
    • —Budgeting and monitoring
  • —Investor relations: Helping your investors understand the case.
  • —To inform management decisions and frame the conversations that matter.

We believe that there are 7 main factors to consider to ensure that your valuation remains credible. And of course we will help you with assessing these.

  1. A robust consideration of all main income and cost streams. Understanding the target patient population or customer segment, who will pay for your product or services – and whether what they are likely to pay is sufficient to run a business – are critical first steps.
  2. A realistic assessment of the development journey. A developed understanding of the technical and regulatory journey, likely timings and costs.
  3. Consideration of major risks and their impact on cash flows.
  4. To NPV or not NPV. Net Present Value is a very important measure of value. But this measure ignores alternative outcomes, the size of capital risked, whether the return on that risk makes sense versus other possible investments, or the likelihood of achieving that return. Decision / outcome trees and probability adjusted NPVs are often crucial in these circumstances – and certainly big pharma uses these when evaluating possible targets.
  5. Are your assumptions clear? Particularly the factors which make a material difference to the outcome. And…
  6. Sensitivity analysis. What happens if one of the key assumptions change? You need to test this.
  7. Portfolio analysis. Where there are multiple products and/or services to evaluate it may be useful to take a step back and consider the overall portfolio. Essentially you are looking to determine the likely range of outcomes rather than many specific outcomes that are all added up. 
We hope you find this checklist useful as a way of improving your own business valuations. This is an area in which Integral Finance has a good deal of experience, so please get us involved if you want more information or assistance.



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