**R&D Cost by Phase**: This can be provided by the Management of the company (as estimates). For the purpose of this analysis the figures provided by Bogdan and Villiger.**Attrition Rates:**Probability of approval by phase – Assumed based on past studies/cases**Discount Rate**: Discount rate of the project can be assumed to be the same as the discount rate of the company, if the company has one project or very few similar ones (i.e. same therapeutic area – same risk etc.) Discount rate (and more specifically, beta) decreases each time a drug passes to the next phase of clinical trials because the project becomes less riskier as the product gets closer to the market. The discount rate is estimated through the Capital Asset Pricing Model (CAPM).**Post-approval revenues and costs:**In order to value the company sales forecasts are needed. That is particularly hard and risky to do because of the uncertainty of the market, the economy, the regulation or even tax policies in general in 6-7 years from now. However, revenues and costs are necessary to estimate future free cash flows of the firm or the project.**P&L and Balance Sheet items:**Items such as Cost of Goods Sold (COGS), Selling, General and Administrative (SGA) costs, EBIT margin, CAPEX and Working Capital will be assumed as a % of sales based on comparable companies (high growth, medium growth and maturity companies).**Free Cash Flow calculation (1/2)**: If revenue projections have already been obtained (from the company’s management) the next step is to estimate operating expenses that lead to EBIT. By assuming an appropriate tax rate, estimating CAPEX (capital expenditure on fixed assets), change in Working Capital and Depreciation & Amortization (using the relevant method, e.g. straight line) Free Cash Flow to the Firm (FCFF) can be calculated by using the following formula: FCFF = EBIT*(1-T) + (Depr’n & Amortisation) – CAPEX – Change in Working Capital**Free Cash Flow calculation (2/2):**If revenue projections have not been provided by the management of the company then there are two alternatives. The first one is the market method and the second is the comparable method. The former suggests that the market forecasts and statistics should be found (e.g. if the product is a cancer drug then forecasts for the oncology market need to be found – it would be even more relevant if forecasts of the subsector can be reproduced i.e. if the product is monoclonal antibody cancer drug, then research the monoclonal antibody cancer market). Then estimate the therapeutic area’s statistics (potential number of patients targeted for the treatment based on disease prevalence) estimate pricing (search for comparable products to see prices and look for social insurance reimbursement percentages) and of course examine market access and penetration issues that may arise and perform quantitative (by looking at past products) and qualitative analysis (ask doctors whether they would prescribe that drug or not, do questionnaires, focus groups etc.) based on this information.

**STEP**

**1**: Comparable Companies (COGS, SG&A, EBIT Margin, WACC)

**STEP**

**2**: R&D Costs by Phase

**STEP**

**3**: Discount Rate by Phase

**STEP**

**4**: Discounted Cash Flow Results

**STEP**

**5**: NPV of the Project

**STEP**

**6**: Sensitivity Analysis – Effect of Initial Sales and CAGR on DCF and NPV

*Comparable Licensing Deals Valuation*can be applied, in which the appraisal is based on licensing and royalties revenue development and how costs are distributed between the licensor and the licensee, what is the risk and value shared etc.

*probably*invest in a company that has already proven its ability to potentially develop successful products, i.e. a company that has already out-licensed one of its products. Such company will probably have less strict terms by the VCs as opposed to a company that has not secured any deal. In that case, model-wise, a valuation model should be considered that will incorporate VC investments as well as licensing deals.