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The Les Kilpatrick
Students to Start-ups
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The Art of Valuation
Alex Moen
Vice President, CB Capital Partners
CB Capital Partners
860 Newport Center Drive
Newport Beach, CA 92660
(949) 219-7462
[email protected]
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Executive Summary
Valuation Methodology
Comparable Company Analysis
Precedent Transaction Analysis
Discounted Cash Flow
Putting It All Together – Determining a Valuation
Range
• Appendix
•
•
•
•
•
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Valuation Methodology
A potential institutional investor would typically utilize a combination of the following methods and
techniques to value the Company including:

Comparable Company Analysis
– Value based on trading multiples of similar publicly traded companies

Similar Transactions Analysis
– Value based on completed and pending transaction multiples in related industries

Discounted Cash Flow (DCF) Analysis
– Value based on discounting the Company’s projected cash flows back to today’s value

Book Value
– Minimum/liquidation value of the Company
– Ignores the future earning power of the Company
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Comparable Company Analysis
Determines how the market would currently value the Company
•
Advantages
–
Reflects the market’s opinion of future growth, trends and risks
–
Includes premiums for size and maturity
•
Disadvantages:
–
Often imprecise due to non-comparable data, non-financial issues and low sample
size
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Medical Device Example
Comparable Company Analysis
Midcap Medical Applications and Technology Companies
Company
Ticker
Price @
52 Week
Mkt Cap
EV
Symbol
3/2/09
% Change
($mm)
($mm)
LTM
Sales
($mm)
LTM
EBITDA
($mm)
EV/
EV/
LTM
LTM
Sales EBITDA
Midcap Companies
Beckman Coulter Inc.
BEC
$
40.60
-25.75% $ 2,570.0
$ 3,640.0
$
3,100.0
$
549.9
1.2x
6.6x
Gen-Probe Inc.
GPRO
$
37.95
-22.44% $ 2,010.0
$ 1,640.0
$
472.7
$
180.1
3.5x
9.1x
Kinetic Concepts Inc.
KCI
$
20.43
-60.14% $ 1,440.0
$ 2,960.0
$
1,880.0
$
545.5
1.6x
5.4x
Mettler-Toledo International Inc.
MTD
$
49.18
-50.49% $ 1,650.0
$ 2,170.0
$
1,970.0
$
339.9
1.1x
6.4x
1.8x
6.9x
1.4x
6.5x
3.5x
9.1x
1.1x
5.4x
Average
Median
High
Low
Dow
DJI
$
6,763
-44.83%
S&P 500 Index
SPX
$
700.82
-47.36%
Source: Capital IQ; Yahoo! Finance; Thomson Financial
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Precedent Transaction Analysis
Determines amounts paid for recent acquisitions of companies similar to the
Company
Advantages:
 Includes control, synergy and auction premiums
 Provides precedent for transaction value range
 Reflects supply and demand for similar companies
Disadvantages:
 Often imprecise due to lack of data, non-financial issues and low sample
size
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Precedent Transaction Analysis
Announced/Initial
Filing Date
TEV/Forward
(Including Bids
and Letters of
Industry Classifications
Transaction
Total Transaction
TEV/Forward Total
[NTM]
Revenue - Capital IQ
Intent)
Target/Issuer
Exchange:Ticker [Target/Issuer]
Buyers/Investors
Status
02/03/2009
PharmaNet Development Group, Inc.
(NasdaqGS:PDGI)
NasdaqGS:PDGI
Life Sciences Tools and
Services
JLL Partners
Announced
255.45
7.46
0.534
01/30/2009
Tepnel Life Sciences plc (AIM:TED)
AIM:TED
Life Sciences Tools and
Services
Gen-Probe Inc.
(NasdaqGS:GPRO)
Announced
95.92
90.4
-
01/11/2009
Advanced Medical Optics Inc. (NYSE:EYE)
NYSE:EYE
Healthcare Equipment and
Supplies
Abbott Laboratories
(NYSE:ABT)
Closed
2,902.29
10.2
2.45
12/01/2008
Mentor Corp.
-
Healthcare Equipment and
Supplies
Johnson & Johnson
(NYSE:JNJ)
Closed
1,210.57
14.0
3.16
08/13/2008
Andor Technology plc (AIM:AND)
AIM:AND
Healthcare Equipment and
Supplies
ICC Venture Capital; Delta
Partners Limited; Crescent
Capital
Cancelled
41.46
5.6
0.607
06/01/2008
WuXi PharmaTech (Cayman) Inc. (NYSE:WX)
NYSE:WX
Life Sciences Tools and
Services
Warburg Pincus LLC
Closed
63.0
3.9
0.886
04/07/2008
Alcon Inc. (NYSE:ACL)
NYSE:ACL
Healthcare Equipment and
Supplies
Novartis AG (VIRTX:NOVN)
Closed
10,605.43
10.7
3.94
03/26/2008
Athenahealth, Inc. (NasdaqGS:ATHN)
NasdaqGS:ATHN Health Care Technology
-
Closed
21.0
31.3
6.25
Average
12.9
2.9
Median
10.5
2.8
Max
90.4
6.3
Min
3.9
0.5
Source: CapitalIQ
Note: Numbers in bold are outliers and were excluded in the analysis.
Value ($mm)
EBITDA - Capital IQ
[Target/Issuer] [NTM] [Target/Issuer]
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Discounted Cash Flow
Determines the Company’s value by summing the net present value of free cash flows the
ensuing projected five years and the terminal value at the end of the fifth year using a terminal
value multiple
Advantages:
 According to modern financial theory, this is the most "correct" form of valuation
 The method is least influenced by stock market conditions or the M&A environment
 Principal valuation techniques used by foreign, large corporate, and LBO buyers
Disadvantages:
 Sensitive to assumptions of revenue growth, operating margins, fixed capital
investment, working capital investment and weighted average cost of capital
 Does not account for a "control" premium
 Does not account for the value of synergies
 Does not account for potential auction premium
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Discounted Cash Flow
Projected for Years Ending June 30,
2011
2010
2009
2008
2007
2012
Revenue
$
1,000
$
11,141
$
51,001
$
100,783
$
190,330
$
301,752
Gross Profit
$
1,000
$
9,139
$
40,422
$
80,274
$
154,110
$
252,835
Gross Margin
EBITDA
Income from Operations (Adjusted) (1)
Taxes on EBIT
Less:
Depreciation
Plus:
Inc. (Dec.) in Working Capital
Plus:
Capital Expenditures
Less:
Free Cash Flow
$
$
(6,267)
-626.7%
(6,320)
53
(836)
250
(7,353)
Notes:
(1) Assumptions and Projections provided by management.
(2) EBITDA Margin reflects management projections.
(3) Working Capital assumptions reflects management projections.
82%
$
(10,710)
$
(10,905)
195
357
925
(11,278)
-96.1%
79%
$
15,093
$
14,861
232
(3,131)
1,100
10,862
29.6%
80%
$
44,957
$
44,778
13,487
179
(3,341)
850
27,279
44.6%
81%
$
111,709
$
111,425
33,513
284
(7,271)
1,350
69,575
58.7%
84%
204,469
67.8%
111,425
58.5%
44,778
44.4%
14,861
29.1%
(10,905)
-97.9%
(6,320)
-632.0%
Income from Operations
EBIT Margin
EBITDA Margin
100%
$
204,753
$
204,469
61,426
284
(8,718)
1,350
133,259
67.9%
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Discounted Cash Flow
Present Value of Free Cash Flow
Discount Rate
PV of Free Cash Flow
65%
66%
65%
66%
67%
Net Debt
$23,510
22,846
23,510
22,846
22,203
$
Inputs
EBITDA Multiple
Corp. Tax Rate*
WACC
Revenue Growth Rate
EBIT Margin
-
10.0x
0%
65.0%
1%
0%
2012 EBITDA
Terminal Value Multiple
2012 Terminal Value
Present Value of Terminal Value Using EBITDA Multiple
$
204,753
$
204,753
$
204,753
$
204,753
10.0x
10.5x
11.0x
11.5x
$ 2,047,530
$ 2,149,907
$ 2,252,283
$ 2,354,660
Discount Rate
65.0%
66.0%
65.0%
66.0%
67.0%
$
10.0x
167,421
162,439
167,421
162,439
157,633
$
10.5x
175,792
170,561
175,792
170,561
165,515
Terminal Value Multiple
11.0x
$
184,163
$
178,683
184,163
178,683
173,397
11.5x
192,534
186,805
192,534
186,805
181,278
$
204,753
12.0x
$ 2,457,036
$
12.0x
200,905
194,927
200,905
194,927
189,160
Implied Equity Value Using EBITDA Terminal Value Multiple
Discount Rate
65.0%
66.0%
65.0%
66.0%
67.0%
$
10.0x
190,931
185,285
190,931
185,285
179,836
$
10.5x
199,303
193,407
199,303
193,407
187,718
Terminal Value Multiple
11.0x
$
207,674
$
201,529
207,674
201,529
195,599
11.5x
216,045
209,651
216,045
209,651
203,481
$
12.0x
224,416
217,773
224,416
217,773
211,363
Implied Per Share Value
Shares Out
32,360
Discount Rate
65.0%
66.0%
65.0%
66.0%
67.0%
$
10.0x
5.90
5.73
5.90
5.73
5.56
Notes:
(1) Assumptions and Projections provided by management.
(2) EBITDA Margin reflects management projections.
(3) Working Capital assumptions reflects management projections.
(4) Early stage discount rate of 65% (average of 55% for a pre-IND lead product) over 1 year back to 2008s.
(5) DCF assumes an EBITDA Multiple of 10x as referenced in the precedent transaction analysis.
$
10.5x
6.16
5.98
6.16
5.98
5.80
Terminal Value Multiple
11.0x
$
6.42
$
6.23
6.42
6.23
6.04
11.5x
6.68
6.48
6.68
6.48
6.29
$
12.0x
6.93
6.73
6.93
6.73
6.53
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Takeaways from Discounted Cash Flow
•Clearly define the DCF assumptions.
•Emerging technology and life science companies will likely require
more significant discounting given the increased uncertainty that the
early company will meet its projections.
•DCF analysis has been around (at least in some form) for centuries.
•Early-stage investors will likely review a prospect’s projections and
DCF with skepticism – be able to defend your assumptions.
•Be able to reference other valuation methodologies to further
support your analysis.
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Putting It All Together – Developing a Valuation
Range
Public Company Comparables Valuation Approach - EBITDA
Comp Group #1
MedTech Company EBITDA
Budget
2009
$1,917,172
Selected EBITDA
Multiple Range
2.4x
EBITDA
Median
EBITDA
Average
5.7x
6.0x
5.2x
% of Median
41.3%
100%
% of Average
39.1%
86.2%
Enterprise Value Conclusion
Comp Group #2
MedTech Company EBITDA
Budget
Selected EBITDA
EBITDA
EBITDA
2009
Multiple Range
Median
Average
14.7x
13.1x
$1,917,172
4.5x
10.3x
MedTech Company EBITDA
Budget
2008
$1,917,172
Selected EBITDA
Multiple Range
4.1x
EBITDA
Median
EBITDA
Average
7.9x
8.2x
6.4x
$4,509,868
--
$9,942,296
$4,509,868
--
$9,942,296
Indicated
% of Median
30.2%
100%
% of Average
34.0%
78.6%
Enterprise Value Conclusion
Comp Group #3
Indicated
Enterprise Value
% of Median
52.6%
100%
% of Average
50.3%
77.5%
Enterprise Value
$8,543,919
--
$19,754,802
$8,543,919
--
$19,754,802
Indicated
Enterprise Value
$7,920,392
--
$12,195,538
Enterprise Value Conclusion
$7,920,392
--
$12,195,538
Blended Value Conclusion (50% Group #1, 30%
Group #2, and 20% Group #3)
$6,402,188
--
$13,336,696
Notes:
(1) EBITDA Multiples adjusted downward by 40% given market conditions and size of company.
Note: The analysis above is a sample. Each valuation range will have unique
attributes given the company and the corresponding industry.
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CB Capital Contact Information
Alex Moen
CB Capital Partners
860 Newport Center Drive
Newport Beach, CA 92660
(949) 219-7462 (Direct)
[email protected]
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Appendix
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Appendix A - Medical Device Companies in Orange County
Source: Orange County Business Journal
Note: There are over 300 Medical Device companies in Orange County alone.
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Appendix A - Medical Device Companies in Orange County (cont.)
Source: Orange County Business Journal
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Appendix A - Medical Device Companies in Orange County (cont.)
Source: Orange County Business Journal
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Appendix B - VCs with an Interest in Medical Device Companies
Accuitive Medical Ventures – Invested in WaveTec Vision of Aliso Viejo in
February 2009
De Novo Ventures – Invested in WaveTec Vision of Aliso Viejo in February
2009
New Leaf Venture Partners – Invested in ReShape Medical of San Clemente
in February 2009
SV Life Sciences– Invested in ReShape Medical of San Clemente in February
2009
U.S. Venture Partners – Invested in ReShape Medical of San Clemente in
February 2009
Versant Ventures – Invested in WaveTec Vision of Aliso Viejo in February
2009
Note: There are hundreds of prospective Medical Device investors in the United
States and abroad.
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Appendix C - Prominent UCI Alumni
Adam Tomasi, Ph.D., Kauffman Fellow, Alta Partners
Adam joined Alta partners in 2006 as a Kauffman Fellow and focuses on investments in the life sciences. Originally trained
as an organic and medicinal chemist, Adam spent seven years in early stage drug discovery with Gilead Sciences and
Cytokinetics. In his last technical position, he founded and led the Anti-Infectives Medicinal Chemistry Program at
Cytokinetics, which was the first group to validate KIP-1 as an anti-fungal target, and played a key role in the creation of
Cytokinetics’ cardiovascular drug CK-1827452, which is currently in clinical trials.
Prior to joining Alta, Adam was a student in the Harvard-MIT Biomedical Enterprise Program; he completed internships at
MPM Capital and Lehman Brothers, where he was an Analyst covering the biotech sector, and attended the Harvard
Medical School. Adam completed his Ph.D. at the University of California, Irvine, where he was a Fellow of the American
Chemical Society and the University of California Regents, and was a post doctoral student with Peter Schultz at The
Scripps Research Institute/The Genomics Institute of the Novartis Foundation.
Adam holds a Bachelor of Science in Chemistry from the University of California, Berkeley, a Ph.D. in Chemistry from the
University of California, Irvine, and a Masters of Business Administration from the MIT Sloan School of Management.
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Appendix C - Prominent UCI Alumni
Brian Atwood, Co-Founder & Managing Director,
Versant Ventures
Brian Atwood specializes in biotechnology investing at Versant. Brian co-founded Versant Ventures after spending four
years at Brentwood Venture Capital where as a general partner he led investments in biotechnology, pharmaceuticals, and
bioinformatics. He also has more than 15 years of operating experience in the biotechnology industry, with emphasis on
therapeutic products, devices, diagnostics, and research instrumentation.
Prior to launching his career in venture capital, Brian was founder, president, and CEO of Glycomed, a publicly traded
biotechnology company. At Glycomed, Brian concentrated on business development and strategic alliances, closing deals
with Eli Lilly & Company, Millipore, Genentech, and Sankyo, before leading the sale of Glycomed to Ligand
Pharmaceuticals. Prior to this, he co-founded and served as director of Perkin Elmer/Cetus Instruments, a joint venture for
robotics automation and genomics research instruments and products later acquired by Perkin Elmer. Under Brian's
management, the venture developed and launched the GeneAmp® Polymerase Chain Reaction (PCR) system, the
fundamental DNA amplification innovation responsible for fueling the explosive growth of genomics research. Brian served
on the Board of Directors at Pharmion Corporation (sold to Celgene in 2008). Brian currently serves as a Board member at
the private companies ForteBio Inc., FivePrime Therapeutics, Inc., Veracyte, Inc., Trius Therapeutics, Inc., Synosia
Therapeutics, OpGen, Inc., PhaseRx, Inc., and Immune Design Corp., as well as public companies, Cadence
Pharmaceuticals (CADX), and Helicos Biosciences (HLCS).
Brian received a Bachelor's degree in Biological Sciences from the University of California, Irvine; a Master's degree from
the University of California, Davis, and an MBA from Harvard Business School.
*Disclaimer: Brian Atwood is focused on
biotechnology, pharmaceuticals and
bioinformatics.
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Kurt Miklinski Slideshow
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Who is SVB Financial Group?
• Comprised of three segments:
1. Silicon Valley Bank
2. SVB Capital
3. Other Business Services
• 31% Loan Growth (2007 to 2008)
• $5.5 Billion of loans
• $10 Billion of on balance sheet assets
• Over 11,000 clients / 1100 employees
• Global Presence (27 US offices plus India, China, UK,
Israel)
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SVB Target Market
• Technology, Life Sciences, Private Equity
and Venture Capital
• Loans $1-20 Million
• Senior blanket lien on all assets
• Quad I, II, III, IV
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SVB Med Device Clients
Orange County
• 8 public
• 30 private
• 6 private equity raises in prior 12 months
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Most Active SoCal Investors
(with a SoCal office)
Firm
Redpoint
Rustic Canyon
Clearstone
Enterprise
Tech Coast Angels
Palomar
Deals
31
21
17
13
13
13
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Medical Device Themes
• Aging population
• Resiliency compared to broader market
• High ticket and elective procedures
suffering
• Market consolidation
• Unemployment affecting volume of doctor
and dentist visits
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Success Factors/Strong
Valuations
•
•
•
•
Minimally invasive / Compelling ROI
Non-elective
New frontiers (Obesity, Diabetes)
International
– General increase in standards of living
– Increased healthcare spending
– Nationalized healthcare
• Avoidance of DOJ investigations / IP
litigation
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Jeremy Holland Slideshow
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Private Equity Trends
Jeremy Holland
Principal, Vintage Fund Management
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Executive Summary
•
•
•
•
•
•
•
•
•
•
•
US EV/EBITDA Multiples
Average Purchase Price by Transaction Type
Median Acquisition P/E Multiple by Transaction Size
Equity P/E Ratio vs. Number of Deal Announcements
2008 Private Equity
US Middle Market M&A Activity by Buyer Type
Private Equity – History
Prototypical Deal Capital Structure
Average Equity Contribution
Credit Markets Commentary
Valuation Issues and Problems
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U.S. EV/EBITDA Valuation Multiples
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Average Purchase Price by Transaction Type
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Median Acquisition P/E Multiple by Transaction Size
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Equity P/E Ratio vs. Number of Deal
Announcements
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2008 Private Equity
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U.S. Middle Market M&A Activity by Buyer Type
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Private Equity - History
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Prototypical Deal Capital Structure
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Average Equity Contribution
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Credit Markets Commentary
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Valuation Issues and Problems
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Vintage Fund Management
Contact Information
Jeremy R. Holland
Principal
Vintage Fund Management, LLC
11611 San Vicente Blvd, 10th Floor
Los Angeles, CA 90049
310-979-9090
[email protected]
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Chuck Packard Slideshow
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PACKARD BUSINESS RULES
Success Rules for
Successful Businesses
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• Successful businesses must be
adequately capitalized:
– Human Capital
– Financial Capital
– Network Capital
– Vendor/Supplier Capital
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• Experienced, Active Board of Directors
• Recruit a Strategic Advisory Board
• Operate at a Profit
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• Manage Cash Daily / Collect Accounts
Receivable
• Develop business-specific Performance
Metrics
• Business Capital / Business Experience
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• Develop the mindset of a successful
business
• Must be able to Survive Death Valley –
Staying Power