Transaction Strategy: Is rNPV Overvalued?
By Vasilios Kofitsas
The underlying premise at Back Bay Life Science Advisors is that any accurate asset or company valuation must be derived from a fundamental understanding of the scientific, clinical, and commercial aspects of the financial models in use. Disciplined deal-making also considers external factors: the specific strategic fit and competitive intensity regarding any company or asset. For all these reasons, we deploy several methodologies to evaluate clinical-stage programs.
Too often, however, complexity and nuance are lost in favor of a simple decision-making tool: risk-adjusted net present value (rNPV). When positioned appropriately, with fundamentally defensible assumptions, rNPV can be a critical guidepost to set internal expectations ahead of a deal as well as to facilitate negotiations by setting up an understanding of the key value drivers and tactics expected from the parties across the table. For many life science deals, however, rNPV can become the main consideration rather than one of many parameters to be included in the holistic evaluation that must accompany effective decision-making.
When used appropriately, rNPV considers both critical quantitative measures of a program’s commercial opportunity and synergies between the transacting parties. The M&A advisory team at Back Bay Life Science Advisors, building on intensive primary research evaluating not only our client’s perspectives but also opposing views which might surface during diligence, performs this analysis across a broad range of commercial assumptions, probability adjustments, and discount rates. rNPV is one way of summing up the many possible scenarios and their likelihoods, allowing the client to set expectations pre-deal and evaluate the contemplated offers (i.e., perceived value from counterparties, share of rNPV, etc.) and to negotiate based on data—whether to increase aggregate dollars, for example, or revise upfront and milestone payments.
There are limitations to this analysis. For example, it is not particularly sensitive to consideration of crucial market issues (i.e., bull/bear market), the attractiveness of mechanism (have the key players placed their bet elsewhere?), any history of failures in the indication, and the mechanism, structure and value of previous transactions of comparable assets.
When out-licensing/selling a program, companies must, therefore, consider key qualitative issues beyond rNPV including:
Non-dilutive capital that, if structured appropriately, can allow for significant money in upfront and near-term milestones while allowing for participation in the upside
Enabling of the growth strategy through the capital received in a transaction such as the funding of additional pipeline assets and/or building an infrastructure (i.e., R&D, commercial) that can position the company for additional financing, as needed, at a higher valuation
Validation of program/technology by large pharma/biotech providing additional value to the company’s approach
Partnership fit/chemistry between the respective teams both in daily interactions as well as the alignment of clinical pathway goals
Confidence in the partner’s resources and ability to move the program forward, thereby increasing the probability of achieving milestones in a structured transaction
Similarly, there are several factors beyond rNPV that need to be considered when in-licensing/acquiring a clinical stage program(s):
News flow created by the further development and commercialization of the program can drive value
Pipeline synergies between the acquired program and current programs – does the new program create multiple shots on goal? Access to new patient populations? Protection against failures in a pipeline asset? Complementarity for combined trials or combination products?
The strength of the relationship with the target particularly in the context of the initial transfer of the program as well as future interactions in joint steering committees
The potential for future partnerships on other assets the target company holds, as well as the perception within the emerging biotech community who will look to selectively partner programs at some point in the development cycle (i.e., “position as the partner of choice”)
For our transactional assignments, Back Bay is often asked about rNPV, and of course, we provide the analytics to inform our clients on potential value – a topic that is discussed with management and in boardrooms across our industry. Our underlying premise—and the essence of our function as an integrated strategic consulting and investment banking firm—is that scientific analysis and commercial diligence, performed with rigor and objectivity, creates a data-driven framework from which optimized deals can be constructed and negotiated with the strength that only comes from thoroughly validated positions. When arriving at a “go/no-go” transaction decision, the “intangibles” outlined above are vital components of this framework.