case study 2

Case 2 - Natural Products Discovery Program

Our client has created an highly efficient and potentially superior strategy for the discovery of novel bioactive compounds from rainforest plants. Although no compounds have been shown efficacious in field or human trials, in vitro results provide statistical information on numbers of unique, previously unknown, active compounds derived from screenings. Many of these chemical structures have properties that are desirable in lead molecules for new pharmaceuticals and agrochemicals and are thus of potentially high commercial value. Activity has been shown in anticancer, antiparasitic, antibiotic, fungicidal, insecticidal, antiprotozoal and herbicidal screens. The business model is to license new chemical entities to drug and chemical companies for further development and commercialisation.

Acuity was asked to value the company based on its access rights to rainforest regions, its screening methodology and its historical success rate.

We initially prepared post-launch cash flow forecasts using published data in relation to market sizes for applications that may derive from the discovery program, probabilities of successfully achieving sales at particular levels, and typical industry costs and product life cycles. Values at launch for both human pharmaceuticals and agricultural chemicals were obtained for a number of possible sales outcomes in both categories, and a weighted average determined using probabilities that sales at each level would be achieved.

Considering the lack of surety about the likelihood of successfully completing research and product development, lack of identifiable products and the likely costs, we chose to utilise a real options analysis to bring to present worth the values determined at launch. The methodology encompasses the volatility associated with determination of market size, while eliminating the downside resulting from a valuation that fails to recognise that the owner and/or licensees of the IP can make decisions to withdraw or defer particular investments, or to modify the rate of development. Our approach also incorporates the probability of successful transition through various stages of research and development, and the subject company’s historical probabilities of generating lead compounds.