Pharmaceutical Product Development, Financial Modeling, and Analysis.






Case Studies





Factors to Consider in the Relief from Royalty Method to Valuing Pharmaceutical Patents


  • Product / Service / Project Valuation

SG Systems works hand-in-hand with the client's in-house or consulting experts to develop extraordinarily robust, user-friendly, and transparent valuation models.


Market Model


Pharmaceutical product development covers a wide spectrum from preclinical test to clinical development, on to product launch issues and other activities related to pharmaceutical product development.Our first effort is to develop a market model.  This begins by working with the product developers to determine the end-users' profiles.  For pharmaceutical products this often revolves around the targeted indications and expected drug label.  Then epidemiology data is compiled and extrapolated and winnowed down.  Incidence and prevalence rates are layered, if necessary. Distribution channels and market access are areas that require close scrutiny.  The aforementioned items along with a variety of other variables help us derive our realistic market model.


For more details see Case Study: Market Model


Revenue Model


Once we have a robust market model we need to determine how much market share the product can command.  Market share not only depends on how 'great' the product is, but how much 'greater' it is in comparison to marketed competitive products, how much it costs in relation to these other products, when and if the product comes off patent protection, and many other factors which are all interrelated.  It is the accurate modeling of all of the interrelated variables that creates a viable revenue model. 


Valuing and Structuring Pharmaceutical Licensing Agreements


For more details see Case Study: Revenue Model


Expense Model


Pharmaceutical product valuation modeling.OK, so now you have a good feel for how much revenue the product can turn in the expected market.  Now we need to build up the associated expense model.  This is often the most complex portion of the total product or project valuation.  Many variables enter the fray and are often interdependent on each other in regards to magnitude.  Cost of Goods Sold [COGS] is certainly a Variable Cost [VC] and is directly dependent on the amount of expected product sales.  Whereas Clinical Trials [CTs] are more or less considered to be a Fixed Cost [FC] for the project.  The handling and calculating of the myriad of expenses is a crucial step in the valuation process.  Make a mistake here and you could either severely underestimate the required capitalization or pinch the projected profit margins and lose investors. 


For more details see Case Study: Expense Model


Deal Terms / Licensing & Partnering


Many major trade-off decisions, for example licensing versus in-house product distribution, are made within the expense model.  Deal terms are ironed out within the expense model.  When should milestones be paid?  How much should each of those milestones be?  What, if any, upfront payments should be made?  If licensing, what are the various royalty rates and thresholds?  These are very critical items that need to be modeled in a very accurate, transparent, and easy to use form.  Otherwise do you really know the cards that you can play when making a deal?  The more information at your disposal that is clear, easy to understand, and relevant will provide you with a significant level of competitive advantage.  And if you don't have this competitive advantage, your 'partner' certainly will.  See our Licensing and Partnering page for more details.


Cash Flow Model


The cash flow model is often times placed at the tail end of the expense model or sometimes built up as a separate entity.  It is in the cash flow model where we essentially determine taxable income, the overall tax effect of the product with all of the carry-forward tax benefits, net income, the overall cash flow, capitalization requirements, terminal values, and finally a Net Present Value [NPV] of the project.  All of the milestones, paid out or received, need to be accounted for by adding back or subtracting out the amortized milestones along with other non-cash items [i.e. CapEx].  In addition, the working capital items such as 'inventory held' and 'accounts receivable' need to be accounted for.


We also build in a NPV Split to determine whether or not the deal is fair to both you and your partner.  The NPV Split essentially is a build up of the partner's expected revenues versus expected expenses.  Much of the partner information derived empirically or by other means.  See our Licensing and Partnering page for more details.


If you know the enemy and know yourself, you need not fear the result of a hundred battles.  -- SunTzu




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