New Drug Opportunity Assessments Strat Planning For Future Success

New Drug Opportunity Assessment
Process

Creating Strategic Planning Tools For Future
Product Commercial Success

Why Conduct Early Stage Opportunity Assessments and Valuations?
Very often, Business Development, Marketing and Strategic Planning Groups need an
early read on opportunities, but don’t have time or budget for extensive market research.
Early stage pharma and diagnostic company business planning
Prep for investor presentations
In-licensing evaluations
R&D evaluations and portfolio planning

We present a step by step opportunity assessment and valuation process through a case
study using actual historical data and a fictitious new drug candidate for the treatment of
Clostridium Difficile Associated Disease (C.Diff.).

Benefits of employing this process:
Quickly weed out projects with very low probability of commercial success
Constructs a framework for deeper dive assessments to validate and refine assumptions when
greater market knowledge is needed before making go/no go decisions
Supports clinical development and commercialization strategic planning
Reduces overall costs:
Leverages information you know up front or can gain through secondary data sources
Identifies key unanswered market related questions that impact future commercial success
Limits need for primary market research and additional advisory board meetings to address
key unanswered market related questions
Copyright © 2009. Pharmacision LLC, www.rapid-insights.com,
info@pharmacision.com 2

CDiff New Product Opportunity Assessment Case Study
CDiff NewProd Concept
IV compound with non-clinical data showing potential to provide effective therapy for the
treatment of refractory Clostridium Difficile Associated Disease (CDiff)

Disease Description
Infectious diarrhea caused by antibiotic use and disruption of normal flora
Can lead to significant morbidity and mortality, especially in elderly
Growing problem in hospitals

Treatment
Stop antibiotics
Metronidazole or Vancomycin
New compounds in development

Unmet medical need
Emergence of hypervirulent strains with high recent growth in number of hospital CDiff cases
Recurring cases hard to resolve
High documented opportunity costs

CDiff NewProd medical opportunity
Presumed Hospital use due to IV status
Limited outpatient use due to anticipated future competition

Need
Initial evaluation of out-licensing opportunity for CDiff NewProd
Position with investors to raise additional capital

Assessment and Valuation Process

Construct Addressable Market Projections
Addressable market = CDiff hospital market
Explore Current trends with available data sources
Make assumptions on future trends with available info:
Lit searches, prior advisory board feedback, existing market research
These assumptions will greatly influence sales projections!
500k to 700k Projected Clostridium Difficile US Inpatient Hospital
800,000 Discharges By 2018 Projected Launch Year
700,000

600,000
Actuals Projected
500,000

400,000

300,000

200,000

100,000 Source: HCUP Nationw ide Inpatient Sample, 2005, Agency for
Healthcare Research and Quality; Pharmacision LLC projection
0
1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

Segment, Quantify, and Prioritize Target Markets
2018 Market Projections Based on Current Patient Distributions
Current (2005) Prevalence of Inpatient CDAD cases ( All listed ICD-9-CM diagnoses)
Age Group
0 - 17 yrs
Prevalence
20,000
% Total Pts
3%
Identify target
18 - 64 yrs
65+ yrs
170,000
410,000
28%
68%
Estimate 600,000 patient addressable
market size in
Total 600,000 100% market size
Source: 2005 HCUP Nationwide Inpatient Sample, Agency for Healthcare Research and Quality
2018
Disease Stage Breakdown
Mild Moderate
Map and
Age Group
(resolve upon
DC antibiotics)
(metronidazole/ Prolonged (Last
Vanco effective) > 10 days)
Severe
(Complications) Identify
All Ages 25% 35% 30% 10% 100%

0 - 17 yrs 25% 35% 30% 10% 100%
Segments
18 - 64 yrs
65+ yrs
25%
25%
35%
35%
30%
30%
10%
10%
100%
100%
within target
Sources:
Kyne et al, Factors associated with prolonged symptoms and severe disease due to C Difficile, Age and
market
Ageing 1999;28:107-113)
Quantify
Target Market Projection (Severity Approach)
Mild Moderate segments
(resolve upon (metronidazole/ Prolonged (Last Severe
Age Group DC antibiotics) Vanco effective) > 10 days) (Complications) Totals
Prioritize
0 - 17 yrs
18 - 64 yrs
5,000
42,500
7,000
59,500
6,000
51,000
2,000
17,000
20,000
170,000
Segments
65+ yrs 102,500 143,500 123,000 41,000 410,000
Total 150,000 210,000 180,000 60,000 600,000


Refine Segments Further Based on New Prod Value
Prioritize targets based on assumptions of where your new drug
will have greatest hypothesized value proposition for patients
CDiff NewProd has greatest value in severe and Prolonged/
complicated hospital C. Diff cases
CDiff NewProd has Less value, but still may be viable option
if C. Diff case is prolonged, but uncomplicated
Target Market Projection
Severe Prolonged with Relapses
High Unmet Moderate
High Unmet need need Unmet Need
First Relapse/
complications
+ Multiple
Age Group Severe Total Prolonged relapses
Prolonged/ Prolonged/
Severe Complicated Unomplicated

0 - 17 yrs 2,000 6,000 828 5,172
18 - 64 yrs 17,000 51,000 9,792 41,208
65+ yrs 41,000 123,000 36,900 86,100
Total 60,000 180,000 47,520 132,480

Estimate Level of Unmet Need and Make Price Assumptions
Segment target CDiff Expected Severity

market Prolonged/ Prolonged/ Low
Age Uncomplicated Complicated Severe Potential

Explore opportunity
0 - 17 yrs Mild Moderate Severe
costs & unmet needs Extreme
by segment 18 - 64 yrs Mild Severe Severe
Extreme
Make pricing 65+ yrs
Low
Moderate Severe Severe
High
assumptions based on Potential Potential

estimated NewProd Hospital Incremental Cost Increase Due to Cdiff
added potential Prolonged/ Prolonged/ Low
clinical value Age Uncomplicated Complicated Severe Potential

For CDiff NewProd, 0 - 17 yrs neg $1,391 $6,567

we assume $3,000 18 - 64 yrs neg $6,567 $20,459
per course of Tx as a
65+ yrs $1,391 $6,567 $20,459
fair market price that Low High
Potential Potential
will max profits (NPVs) Sources: Kyne et al, Health Care Costs and Mortality Associated
info@pharmacision.com 8 with Nosocomial Diarrhea Due to C Diff. Clin Inf Dis.
2002;34:346-53., Pharmacision modeling

Estimate Market Potential at Launch
Map out size of opportunity by segment

CDiff NewProd Market Potential Map
2018 Market Size (000s)
Prolonged/ Prolonged/ Low

0 - 17 yrs 5 1 2

18 - 64 yrs 41 10 17

65+ yrs 86 37 41
Low High
Potential Potential

Addressable Annual Target Market Size: 240,000

Highest Potential Annual Target Market Size: 190,000

Estimate Peak Market Penetration
Estimate level of peak use within each segment
Factor in NewProd value prop., current and future competition
These assumptions will greatly impact product sales projections!
CDiff NewProd Projected Market Shares*
Prolonged/ Prolonged/ Low

0 - 17 yrs 0% 0% 25%

18 - 64 yrs 0% 10% 30%

65+ yrs 10% 25% 35%
Low High
Potential Potential

*Estimates of steady-state market shares after initial launch uptake

Calculate Peak Patient Estimates From Assumptions
Project NewProd peak use
Projected Peak CDiff NewProd Patients* (000s)
Prolonged/ Prolonged/
Age Uncomplicated Complicated Severe Total

0 - 17 yrs 0 0 1 1

18 - 64 yrs 0 1 5 6

65+ yrs 9 9 14 32

Totals 9 10 20 39
*Assume actual peak patients will be higher when accounting for population growth


Estimate Probability of Success
Factor in risk and probabilities of success
Approval
Commercial success

Prob of
Stage Time (Yrs) Success*
Pre-Clinical 2 40%
Phase I/IIa 2 65%
Phase IIb 2 44%
Phase III 3 65%
Approval 1 80%
Cum Total 10 6%

*Sources: DiMasi 2001, Kola 2004, Avance
* For Immunology drugs in development


Development Timeline and Costs
Create general estimates of development costs and timeline based
on historical data and comparable drug development programs
Drug Development Timeline and Risks
IND submission File NDA

Pre-Clinical
Testing Phase I Phase II Phase III NDA Review Total
Years 1.5 1.5 2 3.5 1.5 8.5

Expected Costs
($ millions) in 2007$ $2 $13.5 $28.3 $81.2 $2.5 $127

20 to 100 100 to 500 1,000 to 5,000
Test Population healthy subjects patients patients n/a n/a
Confirm
Evaluate effectiveness,
Determine efficacy, optimal monitor adverse
safety and dosing, side reactions from
Purpose dosage effects long-term use
n/a n/a
Sources:
Risks in new drug development: Approval success rates for investigational drugs ; Clin Pharmacol Ther 2001;69:297-307.
The Drug Discovery, Development and Approval Process , PHRMA website
R&D Costs and Returns by Therapeutic Category ; Drug Information Journal, Vol 38, 2004.


Make Sales Ramp Up Projections
Estimate uptake over product life cycle

% Peak Pt Share by year since launch

100.00
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15


NewProd Post-Launch R&D and Marketing Expense Assumptions
Make “Best Guess” incremental Post-launch costs for:
Regulatory commitments
Driving initial product trial, usage, and brand loyalty
Yr 2018 ($000s)
Post-launch R&D Phase IV (per year costs, run for 2 years) $5,376
Marketing
Advertising and Promotion (campaign and collateral material dev) $5,376
Advocacy Development $3,360
Promotional Medical Education $5,376
Continuing Medical Education $3,360
Publications (peer reviewed and trade publications) $4,032
Sales Training $1,344
Public Relations $1,344
Conventions $2,016
Professional Media (journal ads) $2,688
Direct to Consumer Media (print, limited TV and on-line) $0
Market Access (Pricing, reimbursement, pharmacoeconomics) $3,360
Market Research and competitive intelligence $1,344
Sampling program (samples, packaging, shipping) $0
Total Marketing Expenses $33,598
Source: Pharmacision LLC, MedThink Communications, Cutting Edge. US Launch: Phase IIIa, Phase IIIB
and Launch Year Brand Commercialization

NewProd Post-Launch Sales Force Expense Assumptions
Make “Best Guess” incremental Post-launch costs for:
Driving initial product trial, usage, and brand loyalty
Sales Force Projected Costs
Rep Capacity
Bed Size # Hospitals Hospitals/Rep Reps required
200 - 400 1,000 15 65
401+ 600 10 60
Sales Force FTEs Required 125

# Reps needed: 125
#MSLs needed: 15
# mgrs needed 20

Cost per rep($2008): $220,000
Cost per mgr/MSL($2008): $300,000
Total Sales Force Cost in 2008: $38,079,085
2008 FTE Cost (assume costs shared with two other critical care specialty products): $12,693,028
2008 2018
Incremental Sales Force Cost $12,693 $17,058
Source: Pharmacision estimates

Total Marketing and Sales: $37,693 $50,656
Marketing and Sales Cost Budget Growth Rate: 3.00%

Combine Mkt Assumptions and Cost Projections in a Modeling Exercise
Create tool to support decision making

“Box” to combine all assumptions and evaluate outputs
Estimated Cost of Goods per course of therapy
R&D, marketing and sales expenses
Pricing
Growth curves
Peak sales
Profitability and break even points
NPV (Net Present Value: the value of expected cash flows starting in the present time period
through the life of the product once launched)
rNPV* (risk adjusted Net Present Value: NPV when you factor in probabilities of success)
Licensor/licensee valuations
Term sheet evaluations
Investor returns

“What-if” scenario planning

Starting point for more sophisticated analyses:
Real options
Monte Carlo
*rNPV can serve as a good valuation measure for a drug development
project

Pre-Launch Risk Adj Incremental Cash Flow Assumptions and Model
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Year1 Year 2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10
Pre-Clinical Pre-Clinical Phase I/IIa Phase I/IIa Phase IIb Phase IIb Phase III Phase III Phase III NDA
Transition Rate 100% 40% 100% 65% 100% 44% 100% 100% 65% 80%
G&A and R&D Costs ($000s) $775 $775 $850 $850 $4,386 $4,386 $12,200 $12,200 $12,200 $2,000
Discount Rate Small Pharma 18%
Discount Rate Pharma Licensor 11%
Probability of Occurring 100% 100% 40% 40% 26% 26% 11% 11% 11% 7%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Patient Estimates
Expected Peak Patient Total Over Product Life
Cycle (est. at launch)
Population Growth Factor*
% Peak Patient Totals (uptake curve)
Projected US Patient Totals on NewProd

Revenues

Average Revenue per Course of Therapy $3,000 $3,120 $3,245 $3,375 $3,510 $3,650 $3,796 $3,948 $4,106 $4,270
Annual rate of price increases: 4.00%
Projected US Revenues ($000s):

Cost of Goods Sold

Avg Cost per Course of Therapy (COT) $427 $444 $462 $480 $500 $520 $540 $562 $584 $608
COGS inflation 4%
COGS
Gross Margin
Gross Profit($000s):

Operating Expenses
G&A and R&D $775 $775 $850 $850 $4,386 $4,386 $12,200 $12,200 $12,200 $2,000
Sales, Marketing Ops, CME $25,328
Annual inflation for SM&CME 3% (Increase years 2 - 8, decrease yrs 9 - 15)
Total Operating Expenses ($000s) $775 $775 $850 $850 $4,386 $4,386 $12,200 $12,200 $12,200 $27,328

Effective Tax Rate 26%
Pre-Tax Earnings ($000s) ($775) ($775) ($850) ($850) ($4,386) ($4,386) ($12,200) ($12,200) ($12,200) ($27,328)
Effective Tax Rate 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Probability of Occurring 100% 100% 40% 40% 26% 26% 11% 11% 11% 7%

Risk Adjusted Net Cash Flows ($000s) ($775) ($775) ($340) ($340) ($1,140) ($1,140) ($1,396) ($1,396) ($1,396) ($2,032)

Post-Launch Risk Adj Incremental Cash Flow Assumptions and Model
2008 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Year1 Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 Yr7 Yr8 Yr9 Yr10
Pre-Clinical Launch mid-year Market Market Market Market Market Market Market Market Market
Transition Rate 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
G&A and R&D Costs ($000s) $775
Discount Rate Small Pharma 18%
Discount Rate Pharma Licensor 11%
Probability of Occurring 100% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%

2008 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Patient Estimates
Expected Peak Patient Total Over Product Life
Cycle (est. at launch) 39,000 39,780 40,576 41,387 42,215 43,059 43,920 44,799 45,695 46,609
Population Growth Factor* 2.000%
% Peak Patient Totals (uptake curve) 5% 24% 50% 76% 91% 97% 99% 100% 95% 90%
Projected US Patient Totals on NewProd 1,773 9,557 20,288 31,444 38,377 41,739 43,485 44,658 43,367 41,934

Revenues

Average Revenue per Course of Therapy $3,000 $4,441 $4,618 $4,803 $4,995 $5,195 $5,403 $5,619 $5,844 $6,077 $6,321
Annual rate of price increases: 4.00%
Projected US Revenues ($000s): $7,872 $44,139 $97,444 $157,068 $199,370 $225,510 $244,342 $260,965 $263,558 $265,049

Cost of Goods Sold

Avg Cost per Course of Therapy (COT) $427 $632 $657 $684 $711 $739 $769 $800 $832 $865 $900
COGS inflation 4%
COGS $1,120 $6,282 $13,870 $22,356 $28,377 $32,098 $34,778 $37,144 $37,513 $37,725
Gross Margin 86% 86% 86% 86% 86% 86% 86% 86% 86% 86%
Gross Profit($000s): $6,752 $37,856 $83,575 $134,712 $170,993 $193,412 $209,564 $223,821 $226,045 $227,324

Operating Expenses
G&A and R&D $775 $5,376 $5,376
Sales, Marketing Ops, CME $50,656 $52,176 $53,741 $55,353 $57,014 $58,725 $60,486 $62,301 $60,432 $58,619
Annual inflation for SM&CME 3%
Total Operating Expenses ($000s) $775 $56,032 $57,552 $53,741 $55,353 $57,014 $58,725 $60,486 $62,301 $60,432 $58,619

Effective Tax Rate 26%
Pre-Tax Earnings ($000s) ($775) ($49,280) ($19,695) $29,833 $79,359 $113,979 $134,688 $149,078 $161,520 $165,613 $168,705
Effective Tax Rate 0% 0% 0% 26% 26% 26% 26% 26% 26% 26% 26%
Probability of Occurring 100% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%

Risk Adjusted Net Cash Flows ($000s) ($775) ($2,932) ($1,172) $1,313 $3,493 $5,017 $5,929 $6,563 $7,110 $7,290 $7,427

Project Cash Flows & NPVs Assuming Outlicensing at Phase IIb
License deal at start of phase IIb Milestones/Upfronts

DCF
Phase I Phase II
$5,000
Phase III
$5,000
NDA Approval
$8,000 $10,000
Royalties
6.0%
Predict licensing
2010
Year3
2011
Year4
2012
Year5
2013
Year6
2014
Year7
2015
Year8
2016
Year9
2017
Year10
2018
Yr1 terms based on
Phase Phase I/IIa Phase I/IIa Phase IIb Phase IIb Phase III Phase III Phase III NDA Launch
Transition probability
Probability
100%
100%
44%
100%
100%
44%
100%
44%
65%
44%
80%
29%
100%
23%
comparable
Revenues ($000s) $0 $0 $0 $0 $0 $0 $7,872
recent deal terms
G&A and R&D Expenses $4,386 $4,386 $12,200 $12,200 $12,200 $2,000 $5,376
COGS
Marketing and Sales
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$25,328
$1,120
$50,656
Conduct
Milestones $5,000 $5,000 $8,000 $10,000
Royalties $472 valuations at time
Expenses (for Licensee) $9,386 $4,386 $17,200 $12,200 $12,200 $35,328 $67,625

PHARMA LICENSEE
of expected
Effective Tax Rate
Risk adjusted CF
0%
($9,386)
0%
($4,386)
0%
($7,568)
0%
($5,368)
0%
($5,368)
0%
($10,104)
0%
($13,671)
outlicensing and
Discount
Risk adjusted net DCF
100%
($9,386)
90%
($3,952)
81%
($6,142)
73%
($3,925)
66%
($3,536)
59%
($5,996)
53%
($7,309) for the present
(11% discount rate used)
rNPV $17,460 time period
BIO-TEC
Effective Tax Rate 26% 0% 26% 0% 0% 26% 26% Valuations
Risk Adjusted CF $5,000 $0 $2,200 $0 $0 $2,288 $2,396
Discount
Risk Adjusted DCF
100%
$3,700
90%
$0
81%
$1,321
73%
$0
66%
$0
59%
$1,005
53%
$948
support decision-
(18% discount rate used)
rNPV in 2012 $14,071 Value of license for US rights making
Value share
Total Milestone and Royalty
45%
Note: Special
Payments ($000s): $202,029 $4
thanks to Avance
Initial Valuation Assuming Outlicensing at start of Phase I/Iia
2008 2009 2010 2011 2012 for sharing
Cash Flows
Prob
rCFs
100%
($775)
100%
($775)
40%
($340)
40%
($340)
26%
$3,658
licensing model
Discount Rate:
PV Cash Flows
100%
($775)
85%
($657)
72%
($244)
61%
($207)
52%
$1,887 (www.avance.ch)
Total Value rNPV ($000s) $4

Evaluate Valuations Based on Different Assumptions
For CDiff NewProd Case Study (assuming $3k/course of therapy leads to product adoption):
Don’t invest if you think market will flatten out in next few years
Still risky investment if you think market will double by launch, all else equal
Likely to need prolonged market growth to make investment attractive
Need market research to learn more about expectations for future
hospital CDiff growth rates before making go/no go decisions to
invest or continue development
Valuation Scenarios
Scenarios For Different Market Growth Levels- Assume project successful in clinical trials, outlicensing occurs, $3000 pricing, and sales projections
reached
Low Market Growth Moderate Market Growth Continuation of High Recent Market Growth
Total Hospital C Diff Mkt at Launch: 500,000 Total Hospital C Diff Mkt at Launch: 600,000 Total Hospital C Diff Mkt at Launch: 700,000
Risk Adjusted NPV: ($1,020,000) Risk Adjusted NPV: $4,000 Risk Adjusted NPV: $650,000
Potential Licensing Agreement Potential Licensing Agreement Potential Licensing Agreement
Licensor % of CF Value (Goal > 40%): 45% Licensor % of CF Value (Goal > 40%): 45% Licensor % of CF Value (Goal > 40%): 40%
Milestone Payments ($MM): Milestone Payments ($MM): Milestone Payments ($MM):
Phase II $2,000 Phase II $5,000 Phase II $5,000
Phase III $2,000 Phase III $5,000 Phase III $7,000
NDA $5,000 NDA $8,000 NDA $8,000
Approval $10,000 Approval $10,000 Approval $15,000
Royalties: 3% Royalties: 6% Royalties: 8%
Investors will not realize required rate of return in this scenario

NOTE:
Estimated 26% Probability of reaching phase IIb and outlicense stage where investors realize any return
Exit Valuation estimates represents the present value of expected future stream of revenues to founder and investors due to milestone and royalty payments.
Licensing revenues are not guaranteed and are based on succesful licensure and commercial success once product is launched
Model assumes that company will have a lean organizational structure and effectively outsource key clinical development functions
Timeline should be considered realistic, but aggressive
Assumes company will be successful negotiating a licensing deal where company will realize >40% of expected value from future cash flows

Explore Opportunity Further with Primary Market Research
Test assumptions with advisory board

Primary market research
Conduct qualitative interviews (conversations, NOT surveys)
“Gut check” and test assumptions with wider range of customers
(i.e. providers, patients, payors)
Answer targeted unanswered questions
Discover opportunities not initially realized or considered
Explore pitfalls and challenges

Combine Primary research + secondary research to
reassess opportunity

Refine commercialization roadmap and decision criteria


Key Take-Aways
It’s never too early to evaluate the future commercial potential for compounds
in development.
Market models are not crystal balls and forecasts are best guesses.
However, they provide a useful tool supporting decision making and help
guide product development decisions.
The greatest value in process is learning how market dynamics, predicted
product adoption, and expectations for licensing terms will impact cash flows
and profitability if compounds are successfully outlicensed, approved by the
FDA, and launched.
Working through this process will highlight the commercially important factors
that you already know about your target markets and compounds in
development and alert you to those that you need to know.
May reduce future market research costs
Focus projects to answer “need to know unanswered questions” that
drive product sales and cash flows
May help guide clinical trial design to address commercial needs
Select end points that lead to commercially compelling product labels if
products are FDA approved and launched

Pharmacision LLC Service Offerings
Strategic Planning
Business strategy and plan development
In/out-licensing commercial due diligence assessments/preparation
New product planning
New market and competitive landscape assessments
Market modeling
Demand forecasting and financial NPV analyses

Marketing Initiatives
Brand strategy and marketing plan development
Positioning and message development
Targeting strategy development
Professional and patient advertising campaign development
Marketing and communication material development


Contact Information

Pharmacision LLC
Thomas Marten
President

(734)895-3670
tmarten@pharmacision.com


New Drug Opportunity Assessments Strat Planning For Future Success

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