Preface Dedication and Acknowledgments, Shomesh E. Chaudhuri Dedication and Acknowledgments, Andrew W. Lo 1 Why Healthcare Finance? 1.1 Financing: The Lifeblood of Biomedical Innovation 1.2 Being Harvey Lodish 1.3 Convergence 1.4 Biomedicine from a Financial Perspective PROFILE OF A LEADING HEALTHCARE INSTITUTION: NATIONAL INSTITUTES OF HEALTH (NIH) 1.5 The Challenges of Drug Development PROFILE OF A LEADING HEALTHCARE INSTITUTION: NATIONAL CENTER FOR ADVANCING TRANSLATIONAL SCIENCES (NCATS) 1.
6 What Do Investors Want? 1.7 Financial Engineering Can Help Bridge the Valley of Death 1.8 Roadmap CONCEPT CHECK ANSWERS REFERENCES 2 From the Laboratory to the Patient 2.1 Early-Stage Research and Development 2.2 Technology Licensing 2.3 Biotech Start-Up 2.4 The Role of Nonprofit Organizations 2.5 Later-Stage Clinical Development 2.
6 The Growing Importance of Universities and Academic Medicine 2.7 Post-Approval Commercialization and Distribution 2.8 Patent Expiration, Generics, and Pricing 2.9 Commercial Health Insurers 2.10 Recent Trends in Industry Consolidation 2.11 Conclusion KEY POINTS REFERENCES 3 Present Value Relations 3.1 Assets as Sequences of Cash Flows 3.2 Assets and the Time Value of Money 3.
3 Using Discount Rates to Determine an Asset''s Net Present Value 3.4 Future Value of a Current Cash Flow PROFILE OF A LEADING HEALTHCARE ECONOMIST: DANA GOLDMAN 3.5 The Risk Premium 3.6 An Infinite Cash Flow: The Perpetuity Formula 3.7 A Finite Number of Fixed Cash Flows: The Annuity Formula PROFILE OF A LEADING HEALTHCARE ECONOMIST: TOMAS J. PHILIPSON 3.8 Inflation 3.9 Inflation and Biomedicine 3.
10 NPV versus Value versus Price KEY POINTS CONCEPT CHECK ANSWERS PROBLEM SET REFERENCES 4 Evaluating Business Opportunities 4.1 Valuing a Typical Biomedical Program 4.1a Probability of Success and Duration 4.1b Costs THE COST OF AN APPROVED DRUG 4.1c Revenues 4.1d Discounted Cash Flows and rNPV 4.2 Valuing a Typical Biopharma Company 4.2a Portfolio Constituents 4.
2b Consolidated Financials 4.3 Deciding to Undertake or Shut Down a Project: The NPV Decision Rules 4.3a Use Cash Flows, Not Accounting Earnings, When Calculating NPV 4.3b Use After-Tax Cash Flows 4.3c Use Cash Flows on an Incremental Basis 4.4 Accounting Basics for Capital Budgeting 4.5 How to Use Accounting Data to Estimate Cash Flows 4.6 Other Capital Budgeting Techniques 4.
6a Profitability Index 4.6b Payback Period 4.6c Internal Rate of Return 4.6d Industry Practices 4.7 Discounted Cash Flow Analysis of Artemis Biotherapeutics 4.7a Program Overview 4.7b Time Line and Probability of Transition Success (PoTS) 4.7c Program Revenues 4.
7d Program Expenses 4.7e Discounted Cash Flow Analysis 4.8 Conclusion KEY POINTS CONCEPT CHECK ANSWERS PROBLEM SET REFERENCES 5 Valuing Bonds 5.1 Overview of Fixed-Income Markets 5.2 Valuing Discount Bonds and the Term Structure of Interest Rates 5.3 Forward Rates 5.4 Coupon Bonds 5.5 Yield to Maturity 5.
6 Corporate Bonds 5.7 The Yield Spread: Sources of Risk 5.8 Bonds and Biopharma Companies KEY POINTS CONCEPT CHECK ANSWERS PROBLEM SET REFERENCES 6 Valuing Stocks 6.1 Legal Characteristics of Stocks 6.2 Stock Markets 6.3 Valuing Stocks Using the Dividend Discount Model 6.4 The Gordon Growth Model 6.5 The Multistage Valuation Model 6.
6 Modeling Dividends via Payout Policy 6.7 Growth Opportunities KEY POINTS CONCEPT CHECK ANSWERS PROBLEM SET REFERENCES 7 Portfolio Management and the Cost of Capital 7.1 Measuring the Randomness of Returns 7.2 Portfolio Returns and Diversification 7.3 The Limits of Diversification 7.4 Estimating the Cost of Capital 7.5 Deriving the CAPM and Estimating Beta 7.6 The Weighted-Average Cost of Capital 7.
7 The Cost of Capital in the Biopharma Industry PROFILE OF A LEADING HEALTHCARE ECONOMIST: SCOTT E. HARRINGTON KEY POINTS CONCEPT CHECK ANSWERS PROBLEM SET REFERENCES 8 Therapeutic Development and Clinical Trials 8.1 Introduction to Pharmaceutical R&D 8.1a Drug Development PROFILE OF A LEADING HEALTHCARE INSTITUTION: FDA 8.1b Device Development 8.2 Clinical Trials by the Numbers PROFILE OF A LEADING BIOPHARMA PROFESSIONAL: RICHARD SCHELLER 8.3 Unique Challenges for Medical Devices 8.4 Randomized Clinical Trial Design 8.
5 Size, Power, and Cost 8.6 Bayesian Adaptive Clinical Trials 8.7 Bayesian Decision Analysis and Patient Preferences KEY POINTS CONCEPT CHECK ANSWERS PROBLEM SET: THE STATISTICS OF CLINICAL TRIAL DESIGN REFERENCES 9 Decision Trees and Real Options 9.1 Overview of Decision Trees and Options PROFILE OF A LEADING BIOPHARMA PROFESSIONAL: JUDY C. LEWENT 9.2 Decision Tree Analysis 9.2a Constructing a Decision Tree 9.2b Decision Tree Analysis for Pharmaceutical R&D 9.
3 Decision Trees and Optionality 9.3a Additional Options 9.3b Managing Complexity 9.4 Real Options and the Binomial Option-Pricing Model 9.5 Building a Binomial Tree 9.6 Incorporating Scientific Risk 9.7 The Binomial Option-Pricing Model 9.7a The Two-Period Binomial Option-Pricing Model 9.
7b The Multiperiod Binomial Option-Pricing Model KEY POINTS CONCEPT CHECK ANSWERS PROBLEM SET: abc pharmaceuticals case study REFERENCES 10 Monte Carlo Simulation 10.1 Why Simulate? 10.2 Applications of Monte Carlo Simulation KEY POINTS CONCEPT CHECK ANSWERS 11 Healthcare Analytics 11.1 Estimating Clinical Trial Success Rates PROFILE OF A LEADING HEALTHCARE INSTITUTION: TUFTS CENTER FOR THE STUDY OF DRUG DEVELOPMENT (TUFTS CSDD) 11.2 Predicting Drug Approvals 11.3 Machine-Learning Predictions of Probabilities of Success 11.4 Modeling Correlation 11.4a Correlation via Latent Variables 11.
4b Estimating Correlations via Subjective Judgment 11.5 Simulating Correlated Random Variables 11.6 Conclusion PROFILE OF A LEADING HEALTHCARE ECONOMIST: HEIDI WILLIAMS KEY POINTS CONCEPT CHECK ANSWERS PROBLEM SET: machine-learning models for predicting drug approvals REFERENCES 12 Biotech Venture Capital PROFILE OF A LEADING SCIENTIST/ENTREPRENEUR: PHILLIP SHARP 12.1 What Is Venture Capital? PROFILE OF A LEADING SCIENTIST/ENTREPRENEUR: ROBERT S. LANGER PROFILE OF A LEADING SCIENTIST/ENTREPRENEUR: TILLMAN GERNGROSS 12.2 Mitigating Risks and Aligning Goals: The Term Sheet 12.2a Commitment of Capital 12.2b Types of Securities 12.
2c Covenants 12.2d Registration Rights PROFILES OF LEADING BIOPHARMA PROFESSIONALS: LUKE EVNIN AND ANSBERT GADICKE 12.3 Raising Start-Up Capital PROFILE OF A LEADING BIOPHARMA PROFESSIONAL: BRUCE BOOTH 12.4 Biotech Valuation 12.4a Determining Value Out: Revenues PROFILE OF A LEADING HEALTHCARE ECONOMIST: MICHAEL GROSSMAN PROFILE OF A LEADING HEALTHCARE ECONOMIST: JOSEPH A. DIMASI 12.4b Determining Money In: Expenses 12.4c Investment Time Horizon Valuing Therapies for Rare Diseases 12.
4d Biotech Valuation Summary 12.5 Venture Philanthropy PROFILE OF A LEADING HEALTHCARE ECONOMIST: CAM DONALDSON The Cystic Fibrosis Foundation and Venture Philanthropy KEY POINTS CONCEPT CHECK ANSWERS PROBLEM SET: axon bio case study REFERENCES 13 Securitizing Biomedical Assets 13.1 What Is Securitization? 13.2 A Numerical Example of Securitization 13.3 Securitization and the Financial Crisis of 2007-2008 13.3a Numerical Example of Securitization Gone Wrong 13.4 Biomedical Megafunds PROFILE OF A LEADING BIOPHARMA PROFESSIONAL: CHRISTIANA GOH BARDON PROFILE OF A LEADING BIOPHARMA PROFESSION.