Perspectives On Biotechnology Valuations PBIRG PreConference Education Series

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Perspectives On Biotechnology Valuations PBIRG
Pre-Conference Education Series May 22,
2004 Mike Grey
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SGX Technology Platform
Structure-Guided Drug Discovery

• FAST
• Fragment-based approach
• Generates high quality novel leads
• Highly integrated process
• Leverages SGX Target to Structure technologies
• Target-to-Structure Technologies
• Protein engineering
• High-throughput crystallization
• Parallel, HT co-crystallization
• SGX-CAT beamline at APS

HT Structure Determination SGX-CAT _at_ APS
synchrotron
HT Protein Production and Crystallization
HT Co-Crystallization
FAST Lead Generation
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Case Study
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Prospect Genomics

• SGX acquired Prospect Genomics on May 4 2001
• Located in San Francisco
• Benefits to SGX
• Technology
• Computational biology
• Computational chemistry
• Provided the basis for FAST
• People
• Stephen Burley CSO
• Jeff Blaney VP Lead Discovery
• High-profile scientific advisors
• Consideration
• Mixture of preferred and common stock
• 35 held in escrow

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Valuation Approach

• Two-step process
• Determine the fair value of the preferred and
  common stock issued in the transaction
• Determine the fair value of the intangible assets
  acquired
• Valuation approaches considered
• Market approach
• Income approach
• Cost approach

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Market Approach

• Subject Company Transaction Method
• Price for arms-length transactions for same
  property
• Guideline Publicly-Traded Company Method
• Comparison with publicly-traded company
• Guideline Transaction Method
• Comparison with other MA transactions
• Subject Company Transaction Method used to value
  the stock by comparison with other stock issued
  by SGX and adjusting the valuation by taking
  account of the differences in rights under the
  different classes of stock
• Proximity to Series C financing completed by SGX
  in September 2000

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Income Approach

• Two-step process
• Project the total monetary benefits expected to
  accrue from the property
• Discount the monetary benefits at a discount rate
  that reflects the degree of risk associated with
  realizing the projected benefits
• Used in the valuation of in-process technologies
  acquired

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Cost approach

• Assumes a business interest is worth the value of
  its underlying assets (at a minimum)
• Most relevant when
• Significant proportion of a companys assets are
  liquid
• Most of a companys value resides in its fixed
  assets
• Used in the analysis of the assembled workforce
  and certain licenses acquired

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Valuation of Intangible Assets

• License agreements
• Cost approach
• Assembled workforce
• Cost approach
• In-process technology
• DCF approach
• 40 discount rate
• Goodwill
• Residual

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Was It Successful?

• Technology fully subsumed in SGX
• Key part of the value driver for SGX in the
  future
• Facility closed and activities consolidated in
  San Diego resulting in cost savings
• Stephen Burley a scientific founder of PGI joined
  SGX as CSO

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General Observations
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Types of Technology

• Bottleneck easing
• Disruptive
• Free standing

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Bottleneck Easing

• Adapts well to partners existing processes, E.G.
• ADME technologies
• Molecular biology tools
• Target validation technology
• Lower-risk, lower-margin activity
• Typically valued on basis of costs saved by the
  partner
• Requires product focus and streamlined operations

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Disruptive

• Broadly applicable technology
• Departs from traditional processes
• Provides large gains in efficiency
• Examples
• Millennium in its technology heyday
• Combinatorial chemistry
• FAST
• Valuation ranges widely
• Often initially very high supply and demand
• Later can be on a cost-plus basis
• Typically downstream consideration is available

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Free Standing

• Complemented if necessary by existing techniques
  can independently deliver products, E.G.
• Drug delivery technology
• Pharmacogenomics to identify diagnostics
• Valuation derives from the value of the product
  flow

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Technology Trends

• Pilot studies
• Acquisition based on data rather than promise
• Good technology internalized by Pharma
• Many undergo rapid commoditization
• Out of favor with VCs
• Implications for Pharma