Pharmaceutical Patent Valuation Mandate in a Fundraising Context
Independent valuation of a pharmaceutical patent portfolio conducted to support share issue pricing in a fundraising process
Description of the mandate: valuation of a portfolio of pharmaceutical patents in the pre-clinical phase
The mandate aimed to determine the fair economic value of a portfolio of pharmaceutical patents covering a therapeutic molecule in the pre-clinical phase, intended for the treatment of chronic inflammatory diseases. The intangible asset valuation was intended to serve as a negotiation basis for setting the issue price of new shares issued on the occasion of the institutional fundraising.
The mandate took place in a demanding context, combining scientific, financial and regulatory issues, where the valuation needed to translate both the patent's potential and the probability of success of future trials.
The engagement required close collaboration with the financial, R&D and management control departments, in order to establish consistent and verifiable assumptions on commercialisation prospects.
Key challenges: valuing an asset with high technological risk and strong commercial potential
The main challenges of the mandate were:
- assessing the value of an intangible asset with high technological risk and strong commercial potential;
- integrating the probabilities of obtaining regulatory authorisations (pre-clinical, I, II, III, marketing authorisation phases) into the economic model;
- ensuring consistency between the patent valuation and the forecast financing plan;
- ensuring methodological transparency vis-à-vis investors and the group's auditor.
Approach and outcomes: cross-checking probabilistic DCF, royalties, restated costs and licensing multiples
The valuation deployed a strictly financial and structured approach, in line with market practices:
- the income approach (probabilistic DCF) — modelling of commercialisation scenarios integrating the probabilities of success of clinical phases, estimated royalty rates and market projections;
- the royalty approach, incorporating a sensitivity analysis on regulatory success rates and target market penetration;
- the cost approach, consisting of valuing historical and projected research and development expenditure, restated to neutralise public subsidies received;
- the market approach, based on multiples observed in comparable transactions of molecule licences in a similar phase.
The study enabled the establishment of a prudent but substantiated value range, recognised by investors as an objective reference basis. The conclusions contributed to strengthening the company's financial credibility within the fundraising, while ensuring consistency between the patent valuation and that of the company as a whole.
Illustrative example: numerical application to a pre-clinical chronic inflammation molecule
For illustrative purposes only — unrelated to the actual data of the mandate — a pre-clinical pharmaceutical patent targeting a therapeutic market of USD 2bn with a cumulative probability of clinical success of around 8-12% (typical for inflammatory diseases) could exhibit a probabilistic economic value of between CHF 5M and 18M. The range is explained by the DCF model's sensitivity to key parameters: probability of progression to phase II (15-25%), expected royalty rate on licensing (8-15%), market share in case of market launch (5-15%) and discount rate reflecting the risky profile of an early-stage biotech asset (15-25%).
Summary: 7-week mandate, four probabilistic approaches, basis for the issue price in the fundraising
Pharmaceutical patent valuation mandate delivered in 7 weeks for a Swiss biotech in institutional fundraising. Four approaches deployed (probabilistic DCF, royalties, restated costs, licensing multiples) incorporating clinical success probabilities. Deliverable: independent report serving as the basis for setting the issue price of new shares, validated by investors and the auditor.
Frequently asked questions: methods, clinical probabilities, issue price and auditor enforceability
How is a pre-clinical patent valued?
A pre-clinical patent valuation rests mainly on a probabilistic DCF which models expected future flows, weighted by success probabilities at each clinical phase (pre-clinical → phase I → phase II → phase III → marketing authorisation). The DCF is cross-checked with a royalty approach (market rate on licences) and a cost approach (restated cumulative R&D).
What clinical success probabilities to retain?
Clinical success probabilities vary by therapeutic area and phase. As a guide, in the inflammation/immunology sector, observed cumulative transition rates are around 60-70% pre-clinical → I, 50-60% I → II, 25-35% II → III, 60-70% III → marketing authorisation, i.e. a cumulative pre-clinical → marketing authorisation probability of around 5-15%. These assumptions must be documented and calibrated against public bases (BIO, PhRMA, IQVIA).
How is the share issue price set based on the valuation?
The patent valuation feeds the company's overall valuation (portfolio value + other assets - debts). The issue price of new shares then derives from the ratio between post-money value and total number of shares after issuance. The independent patent valuation serves as a substantiating basis vs investors and limits challenges on the pre-money valuation.
Why deploy several methods?
No single method captures the complexity of a biotech asset alone: the DCF reflects probabilistic commercial potential, royalties anchor valuation on market references, costs translate the investment made, multiples position within the context of recent transactions. The cross-checking of the four methods produces a robust and defensible range.
How to treat public subsidies received?
Public subsidies (Innosuisse, EU programmes, R&D credits) are neutralised in the cost approach: only costs actually incurred and financed by the company are retained to estimate replacement value. Without this restatement, the value would be overestimated by external funding that does not reflect the company's real effort.
Is the valuation enforceable against the group's auditor?
An independent valuation, compliant with IFRS 13 standards, IVS and sector best practices (BVR-Best Practices), is generally acceptable to auditors. It may be reused in accounting (impairment test, Purchase Price Allocation) subject to update if key assumptions evolve significantly.
Similar mandates: other intangible asset valuations in healthcare and biotechnology
The transactions shown include those completed by, or with the involvement of, Hectelion team members in current or previous professional roles. They are presented for illustrative purposes only and do not imply exclusive responsibility by Hectelion.
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The transactions presented were carried out by, with the contribution of, or with the participation of members of the Hectelion team in the context of functions performed currently or previously.