BioTech Fundamentals

Walk through drug development process

• Discovery and pre-clinical: identify biological target, develop drug, animal test

• Phase 1: safety and dosing

• Phase 2: efficacy and dosing 

• Phase 3: efficacy and comparison against other drugs

• Submit for approval

• FDA approval

• Phase 4: long term safety monitoring

Biggest risks at each clinical stage:

• Preclinical: drug doesn’t translate from animals to humans

• Phase 1: safety and toxicity issues

• Phase 2: lack of efficacy

• Phase 3: safety issues with large patient population

• Regulatory review: FDA rejects application

• Commercialization: poor adoption and reimbursement

Common reasons biotech companies fail (4):

• Safety issues with drug

• Poor differentiation from competitors

• Patent expiration

• Cash runway problems

Difference between small molecule and large molecule/biologic:

• Small molecule is a chemically synthesized compound, made from scratch

• Large molecule is a modified organism, human molecule, cell etc

Why are biologics harder to replicate than small molecules:

• Biologics use living organisms and are much more chemically complex

• More expensive, more advanced equipment/lab needed

Difference between generic drug and biosimilar:

• Generic is a copy of a small molecule drug and needs to be the exact same chemical copy due to small size and lack of complexity

• Biosimilar is a copy of a biologic and needs to be very biologically similar and serve same purpose but doesn't need to be exact copy due to complex structure 

Why are biosimilars less disruptive than generics:

• Much more complex and harder to manufacture so less companies can make them after patent expiration

• Slower revenue decline for biologics as a result

Explain patent expiry and loss of exclusivity:

• During exclusivity, company has monopoly pricing, high margins, and limited competition

• After expiration, generics or biosimilars enter so increased competition leads to pricing declines, revenue declines, margins drop

What is the difference between patent expiry and loss of exclusivity:

• Patent expiry refers to loss of legal patent expiration, typically 20 years long

• LoE refers to the overall commercial milestone when the drug loses all of its legal and regulatory barriers so the market opens for competition

How long does typical drug patent last:

• Small molecule: 20 years from patent filing, about 8-12 years of commercial exclusivity

  • New chemical entity (NCE) receive 5 years of FDA exclusivity, so the FDA cannot approve certain applications even with no patents

    • Overlaps with the patent period

• Biologic: 20 years from patent filing

  • Gets 12 year FDA exclusivity

* patent controls whether a competitor can legally sell product; FDA exclusivity controls whether the FDA can approve a competitor’s product

How can companies extend patent life:

Patent thicket; new delivery method for drug, new manufacturing method, new indication, new formulation

What aspects of a drug can patents cover:

• Composition of matter / active ingredient

• Formulation

• Manufacturing process

• Delivery method

Walk through rNPV valuation:

• Drug value = expected cash flow x probability of success x discount rate

• Forecast peak sales -> estimate probability of success -> discount to present

Why are discount rates in biotech high (4):

• Risk of clinical failures

• Regulatory risk

• Patent risk: finding ways around patent, eventual patent expiration

• Commercial risk: low reimbursement or adoption

What is probability of technical/overall success (PTS/POS):

• Probability drug successfully reaches approval

• Increases as you go to next phase

Why does a phase 3 biotech company have a higher valuation than phase 1?

• Lower clinical risk

• Higher probability of approval

• Shorter timeline to making revenue

How to forecast revenue for new drug:

• Patients x market share/penetration x price

What factors determine peak sales:

• Size of addressable market, disease prevalence

• Market penetration, amount of competition

• Reimbursement 

• Pricing

Why do large pharma companies acquire biotech companies:

• Pipeline replacement: replace expiring drugs

• Innovation: acquire innovative and breakthrough technology

• Diversification: reduce dependence on one drug

• Lower R&D risk: buying phase 1/2/3 assets instead of discovering internally

What are the major regulatory hurdles:

• Clinical trial success

• FDA approval

• Pricing and reimbursement

Difference between FDA approval and commercialization:

• FDA approval means the drug is effective and can legally be sold

• Commercialization requires physician adoption, insurance coverage, pricing acceptance

How can biotech acquisitions be structured:

• Full acquisition: buyer buys entire company

• Asset acquisition: buyer buys a single/group of assets from company

• Licensing deal: buyer pays upfront cost and milestone payments and royalties

Why use milestone payments in biotech deals:

• Buyer reduces risk by having lower upfront cost

• Milestone payments to reward furthering success of drug and higher probability of success/approval

Why might a biotech company with 0 revenue have a billion dollar valuation:

• Strong assets in their pipeline

• IP value

How would you value a company with multiple drugs:

• Sum of the parts valuation

• Value each asset in pipeline separately and add together

Valuation methods for a drug:

• rNPV: forecast peak sales and growth per year for the patent period -> multiply by probability of success -> discount back to present

• Decision tree: model out outcomes (often binary) -> assign probabilities and value to each -> multiply each probability and value and add together

• Monte carlo simulation: run thousands of scenarios with different assumptions (market share, price, approval/failure, development costs) -> get a confidence level with a range of valuations and a mean/median

• Venture capital: estimate an exit value using peak sales and a multiple -> multiply by probability of success to get risk adjusted exit value -> divide by return VC wants (5x,10x etc) -> valuation today

Revenue generating/mature companies

• Comps: EV/Rev, EV/EBITDA, Price/sales = EqVal/Rev = Share price/rev per share

• Precedent transaction: use past multiples and see acquisition premium

• Sum of the parts: value each asset separately using the above methods (rNPV, monte carlo, decision tree) and add together with debt and subtract cash to get EV