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Biotechnology Valuation Using Real Options the Acquisition of Alder Biopharmaceuticals Inc

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Biotechnology Valuation Using Real Options the Acquisition of Alder Biopharmaceuticals Inc Biotechnology Valuation Using Real Options The Acquisition of Alder BioPharmaceuticals Inc. by H. Lundbeck A/S Master Thesis M.Sc. Economics & Business Administration – Finance & Investments Gerrit Martin Jungen S-123293 [email protected] No. of Pages: 79 No. of Characters: 163,538 Submitted: 29th of May 2020 Supervisor: Rune Dalgaard Spring Semester 2020 Abstract Traditional discounted cash flow methods face inherent weaknesses when confronted with multi-staged uncertainty such as drug development. Real options valuation holds promise but is in practice rarely adopted. Meanwhile, big pharma continues to spend large sums on acquiring small biotechnology firms in the quest to create shareholder value. One recent example is H. Lundbeck A/S buying out Alder BioPharmaceuticals Inc. This thesis investigates if Lundbeck has created value and how a real options approach to valuation could help understand if Lundbeck paid ‘fair value’. The migraine prevention market is discussed and modelled as an input for a risk-adjusted discounted cash flow analysis of Alder’s lead asset Eptinezumab while an epidemiology model is paired with a real options approach to value Alder’s early-stage asset ALD1910. A verdict is reached after an event study is performed on Lundbeck’s share price reaction on the announcement day. Contents 1. Introduction ............................................................................................................................. 1 1.1 Problem Definition ................................................................................................................................... 2 1.2 Research Question & Hypotheses ............................................................................................................ 2 1.3 Relevance ................................................................................................................................................. 3 1.4 Background to the Biotechnology Sector ................................................................................................. 3 1.4.1 Introduction to Biotechnology .................................................................................................... 3 1.4.2 Drug Development in the U.S..................................................................................................... 4 1.4.3 Drug Approval in the European Union ....................................................................................... 6 2. Methodology ............................................................................................................................ 7 2.1 Philosophy of Science Statement ............................................................................................................. 7 2.2 Outline of Analysis Approach .................................................................................................................. 8 2.2.1 Company Overview, Market & Strategic Environment .............................................................. 9 2.2.2 Eptinezumab ............................................................................................................................... 9 2.2.3 ALD1910 .................................................................................................................................... 9 2.2.4 Price vs. Value Analysis ........................................................................................................... 10 2.2.5 Lundbeck Event Study .............................................................................................................. 10 2.3 Data and Sources .................................................................................................................................... 11 3. Theoretical Valuation Background ..................................................................................... 12 3.1 On the Critical Importance of Valuation ................................................................................................ 12 3.2 Overview of Valuation Methodologies .................................................................................................. 12 3.3 Discounted Cash Flow Valuation ........................................................................................................... 13 3.4 Real Options Valuation .......................................................................................................................... 15 3.4.1 Introduction to Real Options .................................................................................................... 15 3.4.2 Overview of Different Approaches ........................................................................................... 17 3.4.3 MAD assumption ...................................................................................................................... 21 3.5 Advantages & Disadvantages of DCF vs. Real Options ........................................................................ 21 4. Empirical Industry Background .......................................................................................... 23 4.1 Drug Development Costs ....................................................................................................................... 23 4.2 Empirical Data on Clinical Trial Success Rates ..................................................................................... 24 4.3 Sales Forecasting & The Patent Cliff ..................................................................................................... 25 5. Analysis & Discussion ........................................................................................................... 26 5.1 Company Overview, Market & Strategic Environment ......................................................................... 26 5.1.1 Company Overview .................................................................................................................. 26 5.1.2 The Migraine Prevention Market .............................................................................................. 28 5.1.3 Strategic Environment .............................................................................................................. 29 5.2 Valuation of Alder BioPharmaceuticals ................................................................................................. 34 5.2.1 Eptinezumab – DCF Assumptions & Model Construction ....................................................... 34 5.2.2 Eptinezumab – Valuation Results ............................................................................................. 42 5.2.3 ALD1910 – Static DCF Assumptions & Model Construction.................................................. 47 5.2.4 ALD1910 – Static Valuation Results ........................................................................................ 52 5.2.5 ALD1910 – Real Options Assumptions & Model Construction .............................................. 54 5.2.6 ALD1910 – Real Options Valuation Results ............................................................................ 57 5.2.7 SOTP Valuation (Standalone Case) .......................................................................................... 58 5.3 Price vs. Value Discussion ..................................................................................................................... 59 5.3.1 Transaction Overview at Announcement.................................................................................. 60 5.3.2 Purchase Consideration & Structuring ..................................................................................... 60 5.3.3 SOTP Valuation (Acquisition Case) ......................................................................................... 61 5.3.4 Price vs. Value Comparison ..................................................................................................... 62 5.3.5 Lundbeck’s strategic rationale .................................................................................................. 64 5.4 Event Study of Lundbeck’s Share Price Reaction .................................................................................. 65 5.4.1 Event study construction........................................................................................................... 65 5.4.2 Event study results .................................................................................................................... 67 7. Conclusion .............................................................................................................................. 69 7.1 Summary of Results ............................................................................................................................... 69 7.2 Limitations ............................................................................................................................................. 70 7.3 Avenues for Future Research ................................................................................................................. 72 II. References .............................................................................................................................. 73 Appendix A-1: Unlevered Free Cash Flow Derivation .................................................................... 88 Appendix A-2: Exemplary Decision Tree of R&D Projects ............................................................. 89 Appendix B-1: Porter’s Five Forces Framework .............................................................................
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