Early Stage Biotech Program And Company Valuation: A Holistic And Strategic Approach To Minimizing The Impact Of Risk
- Ed Saltzman, Executive Chairman, Cello Health BioConsulting, Previously Defined Health
- Dennis J. Purcell, Founder and Senior Advisor, Aisling Capital LLC
- Sapna Srivastava, PhD
EARLY STAGE BIOTECH PROGRAM AND COMPANY VALUATION: A HOLISTIC AND STRATEGIC APPROACH TO MINIMIZING THE IMPACT OF RISK
A longstanding tenet of valuation of pre-clinical and early clinical stage biotech companies has been that aside from the track record of management (and perhaps the founders), there exist only 2 significant drivers: 1) the nature and innovativeness of the science (which drives valuation at inception) and 2) the degree of “de-risking” in clinical development. This biotech valuation model has long been rooted in the high development attrition rate associated with therapeutic innovation. While the specifics vary, it is fair to say that each succeeding successful stage of clinical development, from early to mid to late, is thought to incrementally de-risk the science by advancing progress towards eventual regulatory approval. Typically, these valuation jumps are most closely associated with achievement of three major milestones: IND filing, P2B proof of concept and P3 success.
VALUE CAN BE STRENGTHENED WITH EARLY DEMONSTRATION OF CLINICAL & COMMERCIAL RELEVANCE (PROOF OF RELEVANCE)
In 2009, Defined Health (now known as Cello Health BioConsulting) challenged the conventional thinking about biotech value inflection by noting an additional potential valuation driver achievable through compelling demonstration of Proof of Relevance (PoR) well prior to achievement of human Proof of Concept. PoR is the demonstration in pre-clinical or early clinical development that a program has the potential to deliver a clinically and commercially relevant value proposition to all stakeholders. In the 10 years since we brought forth the concept of PoR and expounded upon the strategy by which it could be achieved, the early stage deal environment has been transformed and many of the most successful early stage biotechs have identified and executed on PoR strategy to drive higher valuations earlier in clinical development than previously thought possible.
THE INDUSTRY IS NOW FACING INCREASED RISK IN COMMERCIAL LAUNCH & MARKET ACCESS
Recently, it has become clear to us that the connection between clinical development de-risking and valuation has been drastically altered by today’s increased market access challenges. The magnitude and accelerating intensity of this impact, coupled with a steadily increasing roster of new products that have disappointed commercially, means investors’ fear of commercial risk, even for products touted as breakthroughs, now frequently exceeds their concern over development attrition. Savvy investors now increasingly “sell on the launch” which, in turn, depresses valuations of supposedly late stage de-risked companies. Unfortunately, it has been our experience that many management teams and boards of early stage biotech companies remain unaware or unconcerned about the impact the commercial struggles of their more grown up cousins have on their own cost of capital. The result for many of these companies is the formidable and frustrating challenge of a ramped-up cash burn that comes with the transition from pre-clinical to clinical development that is not at least somewhat offset by increases in valuation. Even worse, this situation can persist after initial clinical de-risking milestones have been achieved. This modern “valley of death” for early stage biotechs can prove difficult or even impossible to escape.
THE GOOD NEWS…
The good news is that effective solutions exist as long as companies prioritize early strategy as much as clinical development. This applies to all early stage companies but is especially the case for platform companies where there are multiple choices of platform development in terms of disease, target and indication. As a general rule, it is almost never too early to begin these processes. Indeed, “waiting for data” and thinking it is sufficient to just hit the endpoints is a certain recipe for value destruction if the target or indication being pursued is not one investors desire and value. In thinking through strategic choices, objectivity and minimizing tunnel vision can be critical. In our experience, many early stage companies prioritize diseases because of what their science and intellectual capital can do as opposed to what they should do, which is prioritize what the science supports, yes, but also what the investors and the market want and will value. Again, early engagement is crucial!