Valuation of Technology: Advanced methods and methods used ... · 02.04.2013 · business models /...

Valuation of Technology: Advanced methods and methods used in the transaction world CICBV Western Canadian Conference

Jeremy Webster, CA, CBV, ASA

September 19, 2013

© Deloitte LLP and affiliated entities.

Table of contents

Market Methods

– Venture capital methods

• Method A: pre-money valuations implied by VC funding

• Method B: valuations implied by recent IPOs

– Valuations using guideline public company forward multiples

– Scorecard method

– Risk Factor Summation method

– Berkus method

– Licensing deals

Income Methods

– Monte Carlo method

– Risk-adjusted DCF method

2 CICBV - presentation


Market methods



VC method A: using precedent pre-money valuations by growth stage

• Valuations across growth stages provide reference points for investor

risk-reward appetite

• Valuations are implied by VC funding of comparable companies in

early-to-late stage rounds

• Implied valuations are directly tied to stage of growth

• However, minimal publicly available data make this challenging

• US trend: by early 2013, pre-money valuations for early stages were

under pressure, while later stages saw increases


Source: Venture Capital Industry Overview, Dow Jones VentureSource, July 2013


Median pre-money valuations by round class (annual)


Source: Venture Capital Industry Overview, Dow Jones VentureSource, July 2013


VC method B: using precedent IPO valuations

• Utilize recent IPOs for comparable companies to find implied valuations

– Publicly available sources: market data services, VentureSource, SEDAR,

news releases

• Provides a barometer of the market’s view of comparable industries and

business models / products

• Adjustments may be required for growth stage, market position, competition,

and other risk factors

6

• In the last 3-5 years

• Similar product lines

• Similar business models

• Use the most relevant

multiples for the target’s

industry and growth

stage

• e.g. EV/Revenue vs. P/E

• Use the median/mean as

a starting point to

determine a target

multiple

• Adjust target multiple

• Consider recency of

transactions, company

sizes, operating activities,

capital structures, and

other relevant

circumstances

• Use the adjusted

precedent target multiple

to calculate the implied

valuation

1. 2. 3. 4.

Assess valuations

via implied

multiples

Calculate

implied

valuation

Identify relevant and

recent IPOs

Adjust target

multiple

CICBV - presentation


Median Time From Initial Equity Funding to IPO

7

• Source: Venture Capital Industry Overview, Dow Jones VentureSource, July 2013


Median Amount Raised ($M) Prior to IPO

8



Median Pre-Money Valuation ($M) at IPO

9



Example: consumer electronics in audio and lifestyle

CICBV - presentation 10

Implied valuation via implied multiples

Valuation

2013

revenue multiple

2014

revenue multiple

$1.7 billion 3.3x 1.7x

$1.6 billion 3.1x 1.6x

Company Offer date Implied

valuation (USD)

Implied

EV/Revenue

Implied

EV/EBITDA

Description

A Mid 2011 $535 mil 3.3x 15.1x Produces directly competitive

products in audio

B Early 2011 $105 mil 1.0x 5.7x Component OEM in audio

C Early 2010 $200 mil 1.7x 8.1x Produces broadly competitive

products in audio

D Late 2009 $60 mil 1.0x 18.5x Designs firmware for lifestyle

E Mid 2008 $90 mil 1.2x 6.1x Component OEM and broadly

competitive products in audio

Mean $200 mil 1.6x 10.7x

Median $105 mil 1.4x 9.4x

Minimum $60 mil 1.0x 5.7x

Maximum $535 mil 3.3x 18.5x

• Later stage company

• 50-55% of the business in audio

• Total revenues exceeded $500m

• Expected continued growth in audio products

• Expected growth premium in lifestyle products

• Marquee VC investors at each stage

• Investor confidence in management team


Valuations using guideline public company forward multiples

• Public companies that are well-covered by equity analysts will have 1,2,

and 3-year forward estimates available

• These estimates will provide the basis for assessing market

expectations for companies in the industry

• The chosen multiple should be useful for pre-IPO companies

– e.g. EV/Sales or EV/EBITDA vs. P/E

• Often a subset of guideline companies are most relevant for

comparison and selecting a target multiple range

– Choice of multiple range is based on the considered differences in

market capitalization (size), operating activities, and other

circumstances of the selected guideline companies



Example: biotech innovations for neurosurgery


Range of public co

trading multiples

Low Mid High

EV / Sales 0.8x 4.9x 17.4x

EV / 2013 Sales 1.4x 3.3x 8.6x

EV / 2014 Sales 1.0x 1.9x 3.8x

Selected public co

trading multiples

Low Mid High

EV / Sales 3.0x 4.0x 5.0x

EV / 2013 Sales 2.5x 4.0x 5.5x

EV / 2014 Sales 1.0x 1.5x 2.0x

• Selected multiples considered the region, size, and

other circumstances of the guideline public

companies

• The company’s lower sales relative to the market

and company-specific risks were also considered

Low Mid High

Enterprise Value $17.5m $21.5m $25.5m

Implied EV / 2013 Sales 3.4x 4.2x 4.9x

Implied EV / 2014 Sales 1.3x 1.6x 1.9x

Resulting range of valuations and multiples


Biotech IPOs in 2013


Source: Capital IQ

Offer date Target/Issuer Exchange:Ticker

Offer amount

($US mm)

% shares

offered

Equity value

($US mm)

21-Aug-13 Regado Biosciences, Inc. NasdaqCM:RGDO 42.0 98% 42.9

7-Aug-13 Intrexon Corporation NYSE:XON 160.0 11% 1,523.8

24-Jul-13 Onconova Therapeutics, Inc. NasdaqGS:ONTX 77.5 25% 309.3

24-Jul-13 Conatus Pharmaceuticals Inc. NasdaqGM:CNAT 66.0 85% 77.7

24-Jul-13 Cellular Dynamics International, Inc. NasdaqGM:ICEL 46.2 24% 188.8

23-Jul-13 Heat Biologics, Inc. NasdaqCM:HTBX $25.0 55% $45.6

23-Jul-13 Agios Pharmaceuticals, Inc. NasdaqGS:AGIO 106.0 56% 190.3

17-Jul-13 OncoMed Pharmaceuticals, Inc. NasdaqGS:OMED 81.6 17% 472.2

4-Jul-13 Cardio3 BioSciences SA ENXTBR:CARD 29.7 23% 131.8

27-Jun-13 Prosensa Holding N.V. NasdaqGS:RNA 78.0 17% 466.8

25-Jun-13 ReproCELL, Inc. JASDAQ:4978 42.4 8% 561.0

25-Jun-13 Esperion Therapeutics, Inc. NasdaqGM:ESPR 70.0 33% 214.6

19-Jun-13 PTC Therapeutics, Inc. NasdaqGS:PTCT 125.6 35% 355.1

18-Jun-13 bluebird bio, Inc. NasdaqGS:BLUE 101.0 26% 387.7

10-Jun-13 PeptiDream Inc. TSE:4587 68.3 13% 544.9

6-Jun-13 Kadimastem Ltd. TASE:KDST 5.6 23% 24.3

30-May-13 Epizyme, Inc. NasdaqGM:EPZM 77.1 66% 116.7

21-May-13 Portola Pharmaceuticals, Inc. NasdaqGM:PTLA 122.1 25% 491.3

15-May-13 Ambit Biosciences Corporation NasdaqGM:AMBI 65.0 46% 141.7

8-May-13 Receptos, Inc. NasdaqGM:RCPT 72.8 30% 246.4

30-Apr-13 Erytech Pharma Société Anonyme ENXTPA:ERYP 22.7 27% 84.6

10-Apr-13 Chimerix, Inc. NasdaqGM:CMRX 102.5 83% 124.0

4-Apr-13 Cancer Genetics, Inc. NasdaqCM:CGIX 6.0 29% 20.4

26-Mar-13 Immunicum AB (publ) OM:IMMU 3.3 27% 12.3

20-Mar-13 Enanta Pharmaceuticals, Inc. NasdaqGS:ENTA 56.0 23% 244.1

19-Mar-13 Tetraphase Pharmaceuticals, Inc. NasdaqGM:TTPH 75.0 52% 144.6

7-Mar-13 Arc Aroma Pure AB OM:AAP B 0.8 17% 4.4

31-Jan-13 KaloBios Pharmaceuticals, Inc. NasdaqGM:KBIO 70.0 36% 193.0

28-Jan-13 Stemline Therapeutics, Inc. NasdaqCM:STML 33.2 49% 68.0

24-Jan-13 LipoScience, Inc. NasdaqGM:LPDX 45.0 36% 125.0

Total $1,876.4 $7,553.4


Scorecard valuation for pre-revenue companies

• Compares a target to typical angel-funded startups in a region/sector and

adjusts to reflect company-specific factors

• Important to have a good understanding of range of pre-money valuations for

the pre-revenue companies in a region/sector

• Each factor has a weighting range (e.g. 0-25%)

• Assessment relative to region/sector norm has positive/negative factor impact

14

• Valuations can vary with

the economy and

competitive environment

• Regional variances may

be limited

• Pre-money valuations in

US

• Typical range of $1-5

million

• Typical average of $2.5

million

• Key factors are weighted

and compared to the

norm for region/sector

• e.g. strength of

management, size of

opportunity, product/tech,

competition,

marketing/sales

• Use the weighted Sum of

Factors to adjust the

average pre-money

valuation

1. 2. 3. 4.

Determine average

valuations in the

region/sector

Apply Sum of

Factors to

region/sector

average

Identify pre-money

valuation of pre-revenue

companies in

region/sector

Adjust by

comparing target to

perception of similar

deals done


Source: Payne, B. “Scorecard valuation methodology: Establishing the valuation of pre-revenue, start-up companies”, January 2011.


Scorecard example

• A sample of angel groups in 2010 showed an average pre-money

valuation for pre-revenue companies of $1.67 million (median: $1.5

million)

– Range of valuations: $1.25 to $2.7 million

– Average assumed: $1.5 million


Comparison factor Weighting Target relative to

norm

Factor

Strength of entrepreneur and team 30% 125% 0.3750

Size of the opportunity 25% 150% 0.3750

Product/technology 15% 100% 0.1500

Competitive environment 10% 75% 0.0750

Marketing/sales/partnerships 10% 80% 0.0800

Need for additional investment 5% 100% 0.0500

Other factors 5% 100% 0.0500

Sum 1.0750

Average pre-money valuation ($2.5 million) x Sum of Factors (1.0750) = $2.7 million



Risk Factor Summation method

• Similar to Scorecard method, compares a target to typical angel-funded

startups in a region/sector and adjusts to reflect the target’s risk factors

• However, considers a much broader set of factors, incl. exogenous factors

– e.g. political risk, litigation risk, international risk, reputation risk

• Reflects the premise that more risk factors lead to higher overall risk with each

risk being weighted equally

• Range of score for each risk (-2 to +2) reflects an adjustment to the average of

+$1 million to -$1 million

16

• Valuations can vary with the

economy and competitive

environment

• Regional variances may be

limited

• Pre-money valuations in US

• Typical range of $1-2 million

• Typical average of $1.5 million

• Each factor is assigned a

score between -2 and +2

• Risk factors assessed include:

management, growth stage,

legislation/political,

manufacturing, sales/

marketing, funding/capital

raising, competition,

technology, litigation,

international, reputation,

lucrative exit

• Use the sum of risk scores to

adjust the average pre-money

valuation

• +$250k for each +1

• -$250k for each -1

1. 2. 3. 4.

Determine average

valuations in the

region/sector

Apply Sum of

Factors to

region/sector

average

Identify pre-money

valuation of pre-revenue

companies in

region/sector

Assess each risk

using risk-

assessment score




Berkus method: valuing pre-revenue companies

• Pre-revenue valuation method assumes start-up has the potential to

reach revenues over $20 million within 5 years

• Method allows for pre-revenue valuation of up to $2 million ($2.5 million

after product launch)

• Method is not applicable once revenues are achieved

If exists: Add to company value (up to):

Sound idea

(basic value)

$0.5 million

Prototype

(reducing technology risk)

$0.5 million

Quality management team

(reducing execution risk)

$0.5 million

Strategic relationships

(reducing market risk)

$0.5 million

Product rollout or sales

(reducing production risk)

$0.5 million


Source: Berkonomics.com


Licensing Deals – comparable transactions

• Review comparable licensing transactions

– Sources: Recombinant Capital, news releases, annual reports, etc.

• Analyze all financial pieces of comparable licensing deals, including:

– Up-fronts

– Milestones

– Royalties (% of revenue, $ per unit, % of profit)

– R&D cost sharing

– Equity (investment in shares of licensor)

– Ongoing management

– IP maintenance and protection

• Often difficult to obtain all relevant financial information for comparable deals

• Do not fall into trap of only considering the royalty rate!

– Consider the value of entire deal

• Can use comparable licensing transaction information to derive value under a

discounted cash flow approach



Licensing Deals – discounted cash flow

• A market-influenced income approach

• Based on comparable license deals, estimate future cash flows from a

license agreement, including:

– Upfronts

– Milestones

– Cost sharing

– Royalties

• Apply a risk-appropriate discount rate

• Determine present value

• Consider licensor vs. licensee value sharing

– Financial terms of a license deal represent a value sharing

equation



DCF (license deal) – example licensor perspective

($000's) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Worldwide product sales - by licensee -$ -$ -$ 25,000$ 40,000$ 60,000$ 80,000$ 100,000$ 120,000$ 140,000$

REVENUES

Upfront payment (license fee) 5,000

Milestone payments

- End of Phase II clinical trials 15,000

- End of Phase III clinical trials 20,000

Royalties @ 15% - - - 3,750 6,000 9,000 12,000 15,000 18,000 21,000

Total revenues to licensor 5,000 15,000 20,000 3,750 6,000 9,000 12,000 15,000 18,000 21,000

EXPENSES

Clinical trial and regulatory costs 5,000$ 10,000$ 20,000$ 1,000$ 1,000$ 1,000$ 1,000$ 1,000$ 1,000$ 1,000$

Percentage of costs to be paid by licensor 50% 50% 50% 50% 50% 50% 50% 50% 50% 50%

Licensor share of clinical trial and regulatory costs 2,500 5,000 10,000 500 500 500 500 500 500 500

General & administrative costs 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500

Patent costs and capex 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

Total expenses incurred by licensor 5,000$ 7,500$ 12,500$ 3,000$ 3,000$ 3,000$ 3,000$ 3,000$ 3,000$ 3,000$

Net income before tax - 7,500 7,500 750 3,000 6,000 9,000 12,000 15,000 18,000

Income tax @ 33.62% - 2,522 2,522 252 1,009 2,017 3,026 4,034 5,043 6,052

Net income after tax (after-tax cash flows) -$ 4,979$ 4,979$ 498$ 1,991$ 3,983$ 5,974$ 7,966$ 9,957$ 11,948$

PV factor @ 25% 0.8000 0.6400 0.5120 0.4096 0.3277 0.2621 0.2097 0.1678 0.1342 0.1074

PV of after-tax cash flows -$ 3,186$ 2,549$ 204$ 653$ 1,044$ 1,253$ 1,336$ 1,336$ 1,283$

Total PV of after-tax cash flows to licensor 12,844$



DCF (license deal) – example licensee perspective

VALUE SHARING ANALYSIS

$000's % of total

Value to licensor - NPV 12,844$ 37%

Value to licensee - NPV 21,559 63%

34,403$ 100%

($000's) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

REVENUES

Product sales -$ -$ -$ 25,000$ 40,000$ 60,000$ 80,000$ 100,000$ 120,000$ 140,000$

EXPENSES

Upfront and milestone payments 5,000$ 15,000$ 20,000$

Clinical trial and regulatory costs 5,000 10,000 20,000 1,000$ 1,000$ 1,000$ 1,000$ 1,000$ 1,000$ 1,000$

Percentage of costs to be paid by licensee 50% 50% 50% 50% 50% 50% 50% 50% 50% 50%

Licensee share of clinical trial and regulatory costs 2,500 5,000 10,000 500 500 500 500 500 500 500

Royalties @ 15% - - - 3,750 6,000 9,000 12,000 15,000 18,000 21,000

SG&A @ 20% - - - 5,000 8,000 12,000 16,000 20,000 24,000 28,000

Total expenses incurred by licensee 7,500$ 20,000$ 30,000$ 9,250$ 14,500$ 21,500$ 28,500$ 35,500$ 42,500$ 49,500$

Net income before tax (7,500) (20,000) (30,000) 15,750 25,500 38,500 51,500 64,500 77,500 90,500

Income tax @ 33.62% (2,522) (6,724) (10,086) 5,295 8,573 12,944 17,314 21,685 26,056 30,426

Net income after tax (after-tax cash flows) (4,979)$ (13,276)$ (19,914)$ 10,455$ 16,927$ 25,556$ 34,186$ 42,815$ 51,445$ 60,074$

PV factor @ 25% 0.8000 0.6400 0.5120 0.4096 0.3277 0.2621 0.2097 0.1678 0.1342 0.1074

PV of after-tax cash flows (3,983)$ (8,497)$ (10,196)$ 4,282$ 5,547$ 6,699$ 7,169$ 7,183$ 6,905$ 6,450$

Total PV of after-tax cash flows to licensee 21,559$



Income methods



Monte Carlo simulation

• Scenario analysis model that allows for the impact of changes to multiple

variables to be evaluated

• Allows for a wider range of scenarios to be considered and a visualization of

the distribution of outcomes

• Key variables to consider include: cap rate, earnings, growth rate, sales growth

23

• Choose the variables in the

DCF valuation that you want

estimate probability

distributions on

• Define the distributions (type

and parameters) for each of

these variables

• Run a simulation, where you

draw one outcome from each

distribution and compute the

value of the firm.

• Estimate the expected value

across repeated simulations

1. 2. 3. 4. Set the range and

distribution of

values for the

variables

Use the

outcomes to

estimate the

value

Select variables to be

evaluated

Run multiple

simulations


Source: Damodaran, A. “Valuing firms in distress”


Monte Carlo


Source: Palisade.com


Probability-weighted DCF method – decision tree

• Basic DCF adjusted for probabilities and outcomes for various

economic events

– Probabilities of successfully achieving each regulatory development

stage (e.g. Biotech: successful/failure by each phase/trial stage)

• Major factors quantified by this approach include:

– Cost

– Risks

– Time

• Advantage: minimizes debate over discount rate

– Use conventional business discount rate and deal with

technology-specific risk in the probability factors


Decision tree DCF – basic venture example

Stage 1

Years 1

Cost $12

FMV $45

Stage 2

Years 2

Cost $33

FMV $85

Project Discontinued

Stage 2

Years 2

Cost $33

FMV $85


Stage 3

Years 3

Cost $75

FMV $296

FMV @ Market

Launch

$713

75%

25%

50%

50%

50%

81%


50%


19%


Valuation conclusions – pull it all together

• Consider the importance, relevance, and strength of each approach

• Consider which methods are most important for the purpose

• Consider which methods are typically used in the industry / sector

• Consider which methods have substantial data available and therefore result in more meaningful

conclusions

• After considering all of above, weight results from each approach accordingly in deriving a financial

conclusion

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