Pharmaceutical and Biotechnology cash flow analysis, cash flow modeling, product valuation, portfolio optimization, licensing negotiations, and production forecasts.






Case Studies





Case Studies

  • Cash Flow Model / NPV / Capitalization

Cash flow valuation with terminal value calculations and capitalization requirements for pharmaceutical products

This cash flow model case study is based on a real world, but sanitized financial valuation of a patented, early stage pharmaceutical oncology drug cocktail.


The cash flow model itself is relatively simple.  The innovation comes in the understanding and modeling of future events in an accurate and user friendly manner.  The results of the cash flow analysis is a realization of the capitalization requirements of the venture, the potential profitability of the firm, and valuation of the company today and in the future.  In addition, we can readily see what the licensing and partnering effects of a deal might be and what items are most sensitive to changing the balance of an agreement.  We talk more about deal terms and deal structuring in our Licensing and Partnering page.


The basics of the cash flow model require that we start with our net income, which is derived from the end of our expense model.  We then add back amortized and depreciated receipts or payments.  The next step is to rectify all of the non-cash items such as the amortization and depreciation values that were used to determine our net income.  We also need to account for other working capital items such as change in current assets [i.e. inventory] and current liabilities [i.e. accounts receivable].  We finally sum the working capital requirements with the net income and amortized and depreciated receipts or payments to get the cash flows over time.


Terminal value calculation in relation to pharmaceutical valuationOnce we establish our cash flows we need to derive a terminal value to accurately value the product.  This is simply illustrated in a formula in the image on the right where 'CFend' is the final cash flow of our model, 'g' is the terminal growth rate, and 'r' is our cost of capital.  Of course, expert opinion has a great deal of impact on the terminal growth rate and depends on what stage the product is in.  If the model ends while the product is in the growth stage, the terminal growth rate will probably be a positive value.  Respectively, if the model ends during product maturity or decline, the growth rate could be flat to negative.


A simple cumulative sum of expected cash flows will determine the capitalization requirements of the firm and is an invaluable tool when working on garnering additional funding.


We can finally calculate our NPVs over time.  This is a good way to illustrate how the value of the firm varies over time and can help target a time frame where the value of the product is at a maximum.


Contact SG Systems for more information or to arrange a consultation.


Pharmaceutical net present value modeling




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