The financial needs of Nepkar have been estimated using a model of the business costs and revenue forecasts. The philosophy behind the model is to estimate the costs as fairly as available data permits, with a pessimistic bias where there is doubt.
First-year technical equipment and costs are estimates provided by a yeast geneticist, along with a 70% contingency for unforeseen needs (see Appendices 1.6 and 1.6.1). The molecular biology and yeast genetics that form the mainstay of Nepkar's activities will not need major capital items or special services in the initial phase of the company. We will require a total capex of £l57k in year one, of which £115k is fragile, likely to wear out quickly, or prone to obsolescence, and will be depreciated in three years; the remaining £42k will be depreciated over five years. The second year includes an allowance for £100k of additional equipment (the largest item of which is anticipated to be a sequencer), the third year an additional £200k, mainly expansion equipment to enhance throughput and efficiency. Laboratory fit-out costs are planned at £15/sq ft for benching etc., plus some miscellaneous identifiable costs. No requirement for special features, such as fume hoods, is anticipated. PCs are added as staff are recruited, at £1500 each, plus a 33% overhead for printers.
The staff organization is reflected on a quarterly basis in Appendix 1.5 (Staffing). The Yeast Genetics team is the first to be established, quickly followed by Molecular Genetics. The Screening group is delayed until 18 months after start-up, when significant numbers of screening strains become available for analysis. While this is a fast start-up, it has been constrained by limiting net hiring to a maximum of three staff per quarter after Q1. The Research Advisor (Dr Mark Alias) will be part-time to the extent of one day per week.
Recruitment costs and space requirements are estimated per job function. The space includes both laboratory and office space, plus 500 sq. ft allowed for corridors, bathrooms, storage and foyer. A total space requirement of 3500 sq. ft is therefore required after 21 months. We will set-up Nepkar in a facility we have already located of this size to avoid the disruption of relocation. Rental costs have been over-estimated compared to market rent levels to allow for flexible lease terms.
Costs are accumulated into two cost-centers, for Laboratory and G&A overhead. Laboratory costs include staff costs for Group Leaders and below, consumables at £1250 per head per month, all capital costs related to technical equipment, maintenance arbitrarily (and pessimistically) estimated at 10% of capex, basic services, and real-estate costs. Substantial amounts are provided initially for technical and general advice.
Overhead costs includes non-scientist staff, other non-specific utilities and office services. Again, substantial amounts are provided for legal and IP advice, plus general scientific advice through the Science Advisory Board.
The Laboratory and G&A overheads are transferred to the Summary sheet. The capex is added, and depreciation removed, to obtain a cash spend.
Income is substantially less certain than costs. Income is forecast under three scenarios, but this range could readily be exceeded as a result of unforeseen technological, competitor, operational or financial developments. In each scenario, the pricing discussed in the Research Contracts section is used (except for the first, already-committed sale to British Biotech), but as royalty payments will not occur before 8-10 years elapse, they are not included. Similarly the buyout option revenue is assumed to be far in the future and not included. In all scenarios, a success rate of three screens out of every four is assumed (the fourth being technically intractable), affecting the success fee income. Success is strongly correlated with speed of screen development.
In all cases, the committed British Biotech sale, plus one other both occur in the first year.
The median case assumes modest technical progress during that year attracting a further 3 sales in the second year, accelerating to 4 in year 3, then 6. Completion times speed up substantially as experience grows, increasing capacity substantially (with little cost increase). The median case management focus will shift from learning to cost control in later years.
The worst case assumes that screen development is less tractable, demanding a more laborious case by case approach to problem solving. More technical solutions will have to be discovered (during years 2 and 3), so that capacity remains limited until year 4. In this worst case, management focus must remain on improving the learning abilities of the organization.
The best case assumes that each new screen poses few new technical problems, so that rapid speedup can occur. Capacity increases dramatically as screen development time drops. Costs increase over the median case as an additional 6 scientists are recruited (plus additional 3 G&A). The best-case management focus will shift to marketing in later years.
Given the uncertainties in revenues we have decided to use P/E ratios of companies in related businesses to value Nepkar. However, many of it's direct competitors are not reporting profits at the moment (e.g. Cadus) and so are not suitable for comparing P/E ratios. For the median case we decided that the industry average for pharmaceutical companies would approximate to the P/E ratio for Nepkar operating in the median case. This would mean Nepkar has a P/E ratio of 25 and a value of £20 million. For the best case we looked at growing companies producing medical products and instruments for comparison. We found that these (e.g. Guidant Corporation and Boston Scientific Corporation) traded at a P/E ratio of 70. This would give a best case valuation of Nepkar in four years of £l 08 million.
The earliest point at which the future path of Nepkar should be clear is after two years. The worst-case cash requirement at that milestone is £1.5m. The initial financing therefore requires commitments of £1.5m of equity investment, which is offered in return for a 30% shareholding in Nepkar. There will prospectively be a refinancing after two years, contingent on demonstration of sufficient technical and commercial progress. The cash will be drawn down in tranches of £500k every six months for 18 months.
Final exit is projected to be via a listing or trade sale, with timing dependent on Nepkar's technical and cashflow progress - 3½ years would be earliest feasible (best-case), 5 years for the median case.
A trade sale is somewhat unlikely, as the most obvious buyers are the large pharmaceutical companies, and Nepkar's business may suffer with other customers if it is felt to be not secure with its intelligence of early drug leads. An IPO is therefore more appropriate. The exact listing form is somewhat uncertain, given the somewhat immature state of EASDAQ, and the current turmoil within the London Alternative Investment Market, however a full-board London Stock Exchange listing, or a NASDAQ listing is also available.
|Table of Contents||Appendices|
1. Executive Summary|
|All information herein is confidential and belongs to Nepkar.|