Deal Advisor 7 Sb

Deal Advisor

BUSINESS PROBLEM

Whenever a business development deal is negotiated, the deal terms are critically important to the ultimate value of the deal. The deal terms affect profits, cash flow, and risk. Profits are affected because revenues and costs and perhaps profits are being divided in some way. Cash flow is affected due to the timing of payments, revenues, and costs. The riskiness of the deal comes from results that are worse or better than expected. For smaller companies, this risk can jeopardize the very existence of the company.

As negotiations progress, each side proposes deal terms. Multiple alternatives are typically considered. At any point in the process, a company would like to know how the proposed deal terms affect profits, cash flow, and risk.

TYPICAL SOLUTION

Companies either base decisions mostly on comparable deals or build a profit and loss (P&L) model to evaluate deal terms.

LIMITATIONS OF THE TYPICAL SOLUTION
• Comparing more than just the basic results among several sets of deal terms is difficult.
• Use of a single, static base case precludes the assessment of risk.
• The other company’s point of view is not modeled, limiting the ability to react to the potential partner’s claims and needs.

Slides 2

For more information, please download the Deal Advisor Overview (pdf).

 

INFORMATION REQUIREMENTS

Required Inputs

• Annual costs per full-time equivalent (FTE)
• Clinical, other R&D, marketing, sales, administrative, and other overhead costs
• Cost of goods sold (COGS)
• Deal profit split
• Discount rate
• Milestone payments and receipts
• Personnel (FTE’s) required
• Royalty rate schedule
• Yearly revenues of product in question, input as deciles to account for risk
• Tax rates
 

Optional Inputs

• Development costs, timing, and probabilities of success
• Tax benefits
• Revenue and cost sharing
• Manufacturing and supply agreements
• Loan provisions
• Copromotion fees
• Net operating losses
• Company risk tolerances

 

Outputs

• Cash-flow for Deal A and Deal B
• COGS for Deal A and Deal B
• Expenses by category for Deal A and Deal B
• Profits (NPV) for Deal A and Deal B by company
• Probability that Deal A has better profits than Deal B
• Probability that Deal A has better cash-flow than Deal B
• Probability of cash-flow crisis for Deal A and Deal B (for smaller companies)
• Revenues for Deal A and Deal B

 

Deal Advisor includes both tabular and graphical versions of these data.