A private equity client asked Dean & Company to perform due diligence on a development-stage biotech investment target. The management of the target company had presented a business case based around a key orphan drug pipeline product with expected peak sales of ~8x the target’s current revenues.
Our key objective was to evaluate the assumptions behind the target company’s business case.
- Calculate the likely revenue potential by analyzing addressable market, competitive landscape, price benchmarks, and reimbursement policies
- Estimate the probability of success by reviewing clinical trial results, identifying the regulatory hurdles, and reviewing the manufacturing process
- Re-evaluate the NPV of the target company based on our revised assumptions
- Our due diligence revealed that management used overly optimistic addressable market and price assumptions, while discounting some serious competitive risks
- Based on our revised assumptions, we concluded that the NPV of the target company was ~50% of management estimates under a best-case scenario
- Furthermore, we identified key partner renegotiation levers to unlock value and to maximize the probability of success if the target were acquired