For biotechnology or pharmaceutical firms, development presents a significantly risky prospect. Development times are usually prolonged by step-wise clinical trials, and there is only a 20% chance that a new drug beginning clinical trials will ever reach the market. Nevertheless, the potential return can reach billions of dollars. For startup companies, it is crucial that they approach these products carefully and with a full understanding of the risks and opportunities they may face when developing new products.
Captum Capital Limited, a life sciences and health care industry consulting company, specializes in the valuation of early stage companies, and apply quantitative risk analysis to assist in life science technology valuation.“Captum has developed a number of @RISK models to value technology projects, in several different ways,” says Dr. Michael Brand, Director of Captum Capital. They use @RISK to model the development of a new product from concept through to market, and the different stages involved in that trajectory. “There are success and failure probabilities at each stage, and uncertainties in timing and costs,” says Brand.
An example of how he uses @RISK software is ‘Rejuven8,’ a dummy technology he uses for a teaching example in Captum’s MasterClass series, a one-day professional training course that provides an introduction to technology company valuation. This example requires conventional income and expense cash flows of a normal profit and loss statement, and incorporates the addition of risk probabilities associated with milestones in the development process.
After running the @RISK simulation, the graph outputs tell the user the mean rNPV—“but more importantly,” says Brand, “it gives you the 90% confidence range for the value. It also displays Tornado graphs which give some insight to which variable are influencing that rNVP.”
Brand uses @RISK and the DecisionTools Suite for all his class demonstrations as well as his consulting work with Captum.
Overall, the main reason for Captum’s use of Palisade products is summed up simply: “Ease of use is the most obvious benefit,” says Brand. “You don’t need to be an expert to convert a spreadsheet model to one including risks and probabilities. Some of our more advanced models for Real Option valuation are more difficult for the novice to understand conceptually, but the setting up of the @RISK model is relatively straightforward.”
Read the full case study here.