Advanced Corporate Finance

Simcha Barkai

ImmuLogic (A, B1, B2, B3, B4)

Case Study Questions

In early March 1991, the board of directors of ImmuLogic Pharmaceutical Corporation met to
consider an IPO. Like most biotechnology companies, ImmuLogic needed to raise substantially more
capital in order to create commercially viable products. The investment bankers had indicated that
ImmuLogic might be able to raise as much as $80 million, given the favourable climate for new
offerings of biotechnology shares.

Part 1: Background

A. What are ImmuLogic’s funding needs?

B. What are the alternative sources of funding?

Part 2: Timing

A. What are the pros and cons of going public in 1991? Why not wait a year?

Part 3: Analysis – see next two pages

Part 4: Recommendation

A. In late 1990 Katherine Kirk recommended against going public. By early 1991, she found the
prospect of an IPO attractive. What changed her mind?
B. Katherine Kirk estimates that ImmuLogic would currently be valued at $100 million. If
ImmuLogic were to wait until the start of human trials the valuation would increase to $200.
Do you recommend going public today at a valuation of $100 million, or would recommend
waiting until the start of human trials?
C. How has your analysis in part 3 shaped your recommendation?

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 Analysis Questions

DCF analysis

A. Complete a DCF valuation of ImmuLogic based on the data provide in the case. If you make
any non-standard assumption, explain how you discipline your numerical choices. How
sensitive is your valuation to your assumptions?

Fundamental multiple

The text provides Malcom Gefter’s fundamental multiple approach to valuing ImmuLogic

[Malcom Gefter] felt that an appropriate valuation for the company could be gauged by
comparing the valuation and development of other biotechnology firms going public.

Analysis

A. For each of the listed characteristics in table B1-1, determine the market capitalization of
ImmuLogic based on a multiples calculation.
B. What key information is missing from this analysis?
C. Using the data provided in the case, is there any way to gauge whether the multiples are
sensible?

In addition to the multiples suggested by Malcom Gefter’s approach, the text provides Phillip Gross’s
approach of valuing a firm as a multiple of future net income.

One rough way [Phillip Gross] used to assess whether biotechnology firms were over- or under-
priced was to compare the firms’ projected 1997 earnings, the current stage of the companys’
development, and their valuations.

Analysis

D. Determine the market capitalization of ImmuLogic based on a multiple of future earnings.

What are some pros and cons of using a multiple of future earnings?

Recent Funding Rounds:

The text provides McCance’s approach to incorporating ImmuLogic’s recent funding round:

To help identify an appropriate price range for the public offering, McCance compared the
step-ups between financing rounds for biotechnology offerings.

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Analysis

A. What is the step-up from last funding round to IPO valuation for each of the three listed
firms? Taking a multiples approach, what is the implied value of ImmuLogic? What are some
pros and cons of using a step-up multiple?

Relationship between Firm Development and Valuation

Chart B4-1 presents a hypothetical relationship between the development stage of a biotechnology
firm and valuation.

A. How do you expect these number to compare to the probability of FDA approval described
in Table A-1?
B. How do these number to compare to the probability of FDA approval described in Table A-1?
Does the comparison meet your expectation?
C. How can the probability of FDA approval be incorporated into a valuation of ImmuLogic?
D. Construct one or more valuations of ImmuLogic that incorporate the probability of FDA
approval.

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