'The lack of track record makes the valuation of start-ups both complicated and interesting,' says Raghav Bhaskar, who works at PwC on valuation and modeling, primarily in investments, mergers, and acquisitions. 'The forecasts are usually ambitious, and especially if a company is not yet in the commercial phase, potential investors naturally have questions about that. Additionally, there are many uncertainties. Our challenge is to come to a reasonable and realistic valuation and to provide insight into different scenarios based on assumptions about the company's key value drivers.'
Bhaskar recently conducted the valuation of start-up Predica Diagnostics, which won PwC's involvement at a pitch competition during the Dutch Life Sciences conference 2023. PwC has long been involved in organising this annual conference, and valuation and financing are important recurring themes for the participating companies and investors.
Valuation to attract financing
Predica Diagnostics, a spin-off from Radboudumc, focuses on non-invasive detection of cervical abnormalities with its first product, which can signal the early development of cervical cancer. 'We wholeheartedly support Predica's mission,' says Matt Reindl, who leads PwC's pharma, lifesciences, and medtech team. 'Predica's CEO, Marco de Boer, gave a compelling pitch that made us very enthusiastic about contributing to Predica's next step. When we sat down with Marco after his pitch competition win, he immediately knew what he wanted from us: a valuation that would provide a current and solid foundation for the business case he presents to potential investors in Predica.'
What investors expect from a valuation
PwC knows how investors and corporates view a valuation, says Reindl. 'This is important for start-ups like Predica and other biotech and medtech companies seeking financing. These companies typically have an expensive development trajectory and an intensive process to go through before they can bring their product to market. We often work for various types of financiers active in this market. For private equity and venture capital considering an investment and for international corporates looking to fill their pipeline with new products and innovations, possibly the blockbusters of the future.'
'In private equity and venture capital, there also comes a time when they exit, through a partnership with other investors, sale, or IPO. In all these types of transactions, investors look for a realistic story and an attractive, but also explainable balance between the price and the risks of the investment.'
Beginning of the lifecycle
During PwC's valuation, Predica's first product was still in development. It is now ready. There was a developed idea and initial research results, and funding was needed to finance further research and development. 'How do you sell to investors that this idea is worth a certain amount of money? That is an interesting challenge,' says Bhaskar. 'Especially for companies that are still at the beginning of their lifecycle. That means asking a lot of questions and investigating what the basis is for potential success and what the risks and uncertainties are.'
A specific uncertainty for start-ups in the pharma, lifesciences, and medtech sectors is that international expansion directly depends on obtaining approval from national health authorities such as the Food and Drug Administration (FDA) in the United States and the European Medicines Agency (EMA). Bhaskar: 'It may also be that a company does not have intellectual property rights in all desired markets. We incorporate that into the scenario analysis.'
Storytelling is also important in valuation
With the scenario analysis, which included whether or not national approval was obtained in key regions, PwC arrived at a valuation range for Predica. The scenarios confirmed a positive baseline situation for investors and quantified the potential expansion by entering key markets on other continents.
Reindl: 'Creating a valuation naturally involves calculations, and that is what you can expect from our experts. But storytelling is just as important, and by delving into the business case and possible scenarios, Raghav and his team have built a beautiful bridge from story to numbers. The story you tell with the numbers makes the difference. But it is also about having the numbers ready with the story and knowing what the impact of how ambitions actually develop can be on the value. We wanted to help Predica with that interplay between numbers and story.'
Bhaskar: 'A cashflow model is the basis; the storytelling completes it. In the early stages of start-ups, there is often logically a significant role for the technical experts, the people with the innovative ideas and deep knowledge of the product. It is inspiring how they talk about it with passion. Such storytelling is crucial to even get to the table with investors: without belief in the product, the conversation about money will not happen. But to then also convince an investor on the financial business case and the potential for value creation, the storytelling about the market, scenarios, and valuation must also be sharp. That is where our contribution comes in handy.'
Contributing to progress in healthcare
For Bhaskar, the charm of the work is that every client is different, and so is the dynamic in attracting investments: 'I always find it wonderful to discover with the client what the unique aspects of the company are. Looking at which valuation methods best fit the business case, where the company stands in its development, and what possible future scenarios are. Bringing the story and the numbers together with Predica was a very enjoyable process, and it is very satisfying to really help them move forward.'
Reindl also looks back on the assignment with great pleasure: 'It was nice to hear from Predica that our valuation and scenario analysis helped them and that it provided good input to confidently go into the next pitches with potential investors. The work Predica does is great, and it feels good to be able to contribute as an advisor to progress in healthcare.'
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