Customers & Industries: Captum Capital

The DecisionTools Suite Helps Value Early Stage Technology for Life Science Companies

  • Industry: Pharmaceutical, Healthcare
  • Product(s): Decisiontools Suite
  • Application: iNPV of new companies and technologies


Captum Capital Limited, a life sciences and health care industry consulting company, specializes in the valuation of early stage companies. This process, especially in the life sciences sector, can be problematic because of the uncertainties in outcome, time to reach market, milestones, and the length of time to take a new drug to market. Biopharmaceutical development is a very high risk business – a new drug beginning clinical trials has only a 20% chance of ever reaching the market. Through using @RISK, Captum was able to value technology projects and to calculate Risk Adjusted Net Present Value.

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Ease of use is the most obvious benefit.You don’t need to be an expert to convert a spreadsheet model to one including risks and probabilities. Some of our more advanced models for Real Option valuation are more difficult for the novice to understand conceptually, but the setting up of the @RISK model is relatively straightforward.
Dr. Michael Brand, Director, Captum Capital Limited

Assigning a value to early stage technology is difficult, but a necessary requirement prior to further investment by venture capital funds, corporate partners, or licensing or sale of the technology. Valuation is problematic when the technology is not fully developed, or the product has not yet reached market so there is no trading history. Basing value on development cost is likely to undervalue a technology which may have the potential to generate significant profit in the future. In the life sciences sector, such as biotechnology or pharmaceuticals, development presents a significantly risky prospect, with development times usually prolonged by step-wise clinical trials, and because there is only a 20% chance that a new drug beginning clinical trials will ever reach the market. Nevertheless, the potential return can reach billions of dollars. For startup companies, it is crucial that they approach these products carefully and with a full understanding of the risks and opportunities they may face when developing new products.

Captum Capital Limited, formed in 2004, is a consulting company that aids clients in supporting innovation in early stage life science companies, providing consulting services on license and technology valuation, as well as business model creation. They specialize in applying quantitative risk analysis to assist in life science technology valuation.

How Captum Uses Palisade Products

“Captum has developed a number of @RISK models to value technology projects, in several different ways,” says Dr. Michael Brand, Director of Captum Capital. They use @RISK to model the development of a new product from concept through to market, and the different stages involved in that trajectory. “There are success and failure probabilities at each stage, and uncertainties in timing and costs,” says Brand.

He explains that @RISK allows conventional spreadsheet models to reflect the probability distribution of uncertain variables – leading to calculation of Risk Adjusted Net Present Value (rNPV) – the gold standard of technology valuation. “Because this is relatively straightforward to do, the model becomes an effective communication tool, allowing changes in variables and their effects to be visualized instantly,” he says.

An example of how he uses @RISK software is ‘Rejuven8,’ a dummy technology he uses for a teaching example in Captum’s MasterClass series, a one-day professional training course that provides an introduction to technology company valuation. This example requires conventional income and expense cash flows of a normal profit and loss statement, and incorporates the addition of risk probabilities associated with milestones in the development process.

Figure 1: Output of entire model using a SimTable to compare the effect of three different prices on rNPV of a license.

After running the @RISK simulation, the graph outputs tell the user the mean rNPV—“but more importantly,” says Brand, “it gives you the 90% confidence range for the value. It also displays Tornado graphs which give some insight to which variable are influencing that rNVP.”

Figure 2: A comparison of all three model outputs.

When creating models, Captum Capital typically relies on Pert distributions “because they are easy and don’t have the ragged edges which result from Triangular distributions,” he explains. They use discrete and binomial distributions to represent decision nodes, and lognormal for asymmetrical distributions.

Reasons for Using The DecisionTools Suite

Brand uses @RISK and the DecisionTools Suite for all his class demonstrations as well as his consulting work with Captum. Brand also appreciates the power of PrecisionTree and what it can bring to the life science community. “We have tried to interest the life science community in use of decision trees using PrecisionTree,” he says. “PrecisionTree is brilliant software, making it simple to develop decision trees in Excel. Decision trees fell out of fashion in life sciences a few years ago, for reasons which are not entirely clear, and it has been difficult to reassert the benefits of this approach. PrecisionTree is one of the few software products which offers Bayesian influence diagrams.

Overall, the main reason for Captum’s use of Palisade products is summed up simply: “Ease of use is the most obvious benefit,” says Brand. “You don’t need to be an expert to convert a spreadsheet model to one including risks and probabilities. Some of our more advanced models for Real Option valuation are more difficult for the novice to understand conceptually, but the setting up of the @RISK model is relatively straightforward.”

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