Hi everyone, welcome to business concepts
for life scientists. Today, we're going to be talking
about finance. My name is JeShaune Jackson
and I'm the program manager of the Entrepreneurship
Center here at UCSF's campus.
I'll be initiating this today and then after
Christine will followup with a few more topics
that we'll discuss.
So first, just some of the objectives
by the end of the class, I promise
that you'll be able to do the following:
you'll be able to identify 3 different financial
statements and how companies use them,
read and identify parts of a P&L statement,
calculate a burn rate,
explain and apply concepts such as opportunity cost,
cost of capital, and net present value,
as well as apply these concepts in financial planning.
But first, let's define finance.
So corporate finance deals with the sources
of funding and the capital structure of corporations.
Just a little step further, it's always important to remember
that the purpose is always to increase the value
of the firm to the shareholders.
But within our context, let's think
about biotechnology. So biotechnology defines
finance as how the company will fund itself
and allocate its financial resources.
In academia, where some of you may be
a lot more familiar with, is how the lab will budget
for its operations and manage expenses.
So let's talk about 3 different categories today,
the first category is Revenue and Costs,
so within that we're going to talk about what
the enterprise earns and spends.
The second is Forecasting, and in Forecasting
we're going to be estimating the funding
of the enterprise.
And then Cost of Capital is the required
rate of return to make an investment.
Sounds a little technically jargon-y
right now, but I promise you're going to understand
what we're talking about by the end of this.
So first, let's just go in and talk about Revenue and Costs.
So Revenue and Costs is how enterprises
measure performance. So within this section
we're going to talk about an overview of the financial statements
and you'll be able to answer these 3 questions:
How much revenue did Gilead earn in 2015?
What was the annual burn rate for the company in 2015?
And at the current burn rate, how many months
of cash does this company have remaining left?
But first, let's go into the types of financial statements.
So there are 3 financial statements you can find
online at the SEC.gov.
So public companies are required to file
these financial statements so that shareholders have
all the information that they need
to make a decision on the company.
These 3 statements are the
income statement, the balance sheet,
and the cash flow statement.
The company we're going to be using is Gilead,
which some of you are familiar with
as a biotech company. If you look at the bottom,
I put these three because there's really consolidated
information, it's a lot more at a high level,
some dashboards, instead of just diving directly
into a 10K, which is just full of text. You may be
lost. Some of you might want to start with Google Finance
or Yahoo! Finance, because it's a lot more intuitive
if you're just starting off.
So first, we're going to talk about the income
statement. So the income statement
covers Revenue and Costs. It's also
called a Profit and Loss statement.
The income statement covers the net
income over a period of time.
So the period of time that we're going to be using
is the year 2015. So if you look at
Gilead's income statement, you can see all
the way up top, we have Revenues.
Revenues is broken down into produce sales,
which also has a line of royalty, contracts, as well
as a few others.
It's important to know that these are clumped
together into total revenues and then
we're going to subtract out some of the other expenses
in the company. Some of those expenses include
cost of goods, which you can see here.
Cost of goods for a biotech company
is usually what goes into the direct cost,
the raw materials, of developing a drug.
So these are chemicals, raw goods such as
pipetting materials, capsules, et cetera.
For research and development, it's important
to look at, in this expense, this is where your salary
is going to come out of. As a scientist,
as any technical person, research and development
encompasses some of these laborers here.
Selling, general, and administrative expenses,
also called SG&A, here you can see where
the marketing expenses are, where the sales
team, the executive team, pretty much
all of the business side of things is kind of
pulled out of this side.
So you can see what the total cost is in expenses are.
Under it, you can see there are a few others,
but it's not really -- at this stage, I wouldn't
dive too much into that. Just know that there
are taxes and other provisions that you kind of
have to go through that you would subtract out.
But right now, let's just keep it high level
revenues minus expenses. And you can see
at the bottom we have our net income to the company.
The second statement we're going to talk about
is the balance sheet. So the balance sheet
pretty much encompasses the assets,
liabilities, and equity.
Different from the income statement
because the balance sheet is just a snapshot
at a period of time. So this can be any day.
The day we're going to use is the same as our
income statement, which is 12/31/15.
But just remember, it's a point in time.
This is an overview of the balance sheet.
You know, as scientists, we love equations
so here's an equation.
Assets always equals liabilities
plus equity. So total assets we're going to go over,
but liabilities just think of it as debt,
and just know that these two have to balance out,
no pun intended.
So here's a consolidated balance sheet
for Gilead. If you look at the top you can see
cash and cash equivalents, if you look down
another row item, you can see accounts receivable.
So accounts receivable is money that you're waiting
to collect. So you already performed the service
or you already sold the goods to the company,
and if you think of it like on a credit card,
you're just waiting to collect the cash
from your customers. At the bottom you can see
property, plant, and equipment, also called
PP&E. Here are some of you're
hard long-term assets, such as
land or new manufacturing facility, or some other
large asset that you want to just clump into this scenario.
So you can see at the bottom what our total assets
equates to. Next up, we're going to look at liabilities
and equity. As I mentioned before, liabilities
is just your debt, it's the debt of a company,
it's what the company owes to any lenders.
If you look down at the bottom you can see
retained earnings, this is the company's stock.
So this is people who've purchase stock in the company
and they have equity in it.
So you can see what the retained earnings equals
and that's your equity. So if you add these two
up together, what do you get?
Your total assets always equals your
total liabilities plus equities.
So you can see both of these equate to $51,839,000,000.
The last statement we're going to talk about
is the cash flow statement. The cash
flow statement encompasses three
different activities. So where's cash moving between
these three? One of those is operating,
the other is investing, and then finally,
financing. And again, this is over a period of time.
So we're going to use the year end of 2015.
And so our snapshot is going to be coming from 12/31/15.
So let's talk about the concept of cash burn.
So cash burn at a high level is just
how much is a the company churning through its cash,
how much time do we have before we essentially
run out of money and we have to close the doors.
So the formal definition we have here
is that it's an approximation of how much
money a biotech company or a project
has and is using over a period of time.
An example of that period of time can be monthly,
quarterly, or annually for longer term strategies,
And then it's important to remember in biotech
one thing that we use is that we just use
the operating loss as kind of a good benchmark
for what our cash burn is.
So we're not using Gilead for this,
you can see the company name has changed
to Portola Pharmaceuticals. And it's because Gilead
is a really well-established, large, not burning out
of any cash right now any time soon. So
it's just not as good of an example as Portola,
which as you can see has a operating loss
of $227million. So let's just walk through the example
of cash burn. So if you want to determine
how many months of cash does this company
have left. You use this simple equation,
you take the current cash from the balance
sheet and you then you divide it by the annual
operating loss, you multiply it out by 12 months.
And you'll get the number of months
that the company has left.
So for this example, for Portola, we're going to look here
we can see that the cash that we pulled
from the balance sheet is $444million,
you can see the operating loss as we previously mentioned
is $227million. So if you divide those
two out and you multiply by 12,
you can see that the company has little under 2
years left before it essentially has to close its doors
or raise additional funding, or increase revenue.
Or decrease costs.
So again, those financial statements
as we mentioned, one is the balance sheet,
which is a snapshot over a period of time,
If you look at the two in the middle,
remember that these are a summary of a period of time.
So we have our cash flow, which is
where is cash moving between our operating
and investing and financing activities.
You have our income statement, also
called a P&L, or profit and loss,
and just remember, it's revenues minus expenses
and it always equals the net income.
Just to kind of put things into context,
one of the things we like to use is
operating evaluation metrics. Just
because $20million doesn't mean much
to a company like Apple, whereas $20million
to a smaller company that's only doing,
let's say $30million of revenue,
the $20million means a lot more. So we like
to create what are metrics or ratios,
so you put that into a percentage so that it
becomes a lot more relevant to the specific company
that you kind of want to evaluate.
One of those metrics is gross margin,
also called profit, just to see you know, how
profitable is this company. That's just revenues
minus expenses equals gross profit.
You convert that into percentages and you'll see
in a relative context, how profitable is this company.
The next one is net income,
this is just cash to the company. This is a simple
equation, you really just want to see
how much company is going to the company.
And lastly, solvency, which is the
ultimate financial health status of the company.
So you use this metric as we used for Portola,
just to see how many months does this company
have left before it essentially has
to close its doors or really do some hardcore
capital restructuring. Next up, we're going to talk
about parallels to academia. Please refer to
Amy's video, and she'll give you a lot more
examples of how do we use finance
in academia and how she uses it in her lab,
and how does it translate to some things
that are similar to other small businesses.
Alright, next up, we're going to talk about
forecasting. So forecasting, as I mentioned before,
is estimating the funding of the enterprise.
Now, so in this segment, we're going to talk
about what is forecasting, why companies do it,
and we're going to predict the use of
cash for activities that the company might use
in the future.
But first, let's talk about why do companies
forecast? The main reason, and the main goal,
is to get a better grasp on cash management,
where's our cash going? Where can we put
cash today that can generate some more cash
in the future? Remember, when it comes to companies
in the finance side, cash is always king.
You know, where is our money going right now?
The second, as I kind of alluded to a little bit is
strategy, so we can kind of strategize where do we
put our money today, what activities do we invest in,
what piece of equipment should we buy,
how much money is this equipment going to give us
in the future, or we can just determine some long-term
short-term, and midterm strategies.
It's also important to remember that as
science as we are, and as technical we may be,
forecasting really is an art and a science.
The science you might be a lot more familiar with,
it's the math, the crunching equations, but there's also
an art to it. It's always important to remember that
the one thing that's true about forecasting is that
it will always be 100% wrong.
You know, it's really just about backing up your assumptions,
coming up with really strong supported assumptions for
what you have. Why are you forecasting out this?
How'd you get there? And it just makes it a lot easier
from a finance side to determine where the company's
going to be going in the future.
Alright, so let's talk about how we use forecasting
with an organization. So usually we try to mesh this in with
long-term, short-term, and mid-term strategies.
So a long-term strategy usually is a much heavier
of an investment. So long-term strategy
are what are we going to finance,
on an annual 3+ year type strategy.
What are we going to invest in today
that we're not going to see a return for
a long period of time or over a lengthy
period of time. Whereas the short-term
finance strategy would be a one year or
one month, or just a really short-term budget.
So what are we going to buy for office supplies?
What are we going to buy this new machine for
that we're only going to use for a year?
Or really small, much smaller items.
So here's an example that some of you
may be familiar with. So this is just the different stages
of drug development for a company.
So the short-term strategy, as you can see,
will be to just demonstrate proof of concept
within just a few patients.
We can see we budgeted out just how much
it would cost, and we have a strategy map
as to what we get out.
On the long-term side, you can see
the cumulative amount is roughly $240million
total, but the long-term strategy is
how do we get this drug to market
commercial success, market this drug,
whereas today, we're just mapping out
for that proof of concept.
So let's use an example that
is a lot simpler to understand, just to kind of get
your grasp around some of the concepts of forecasting.
So here, we're going to use the very
simple idea of, let's say your daughter.
Your daughter is entrepreneurial at heart,
she really wants to work and earn her dollar.
So she comes to you and says she wants
to sell lemonade out of a lemonade stand.
So for forecasting, you really want to predict
what is this lemonade stand going to look like
over the next 3 years?
So we're going to forecast 2017, 2018, and 2019.
But, you see the A next to 2015 and 2016
because these are our actuals. So these
are actuals, also called historicals.
So this is what we're going to base
the foundation of our assumptions. So
you can see our assumptions column,
some of the assumptions you can see here
is, each year we're increasing by 50%
the number of units sold as we went from 2016
to 2017, and that's based on the fact that your daughter
sold 500 last year, she sold an additional 250
this year, so that's a 50% increase.
So we're just using that as our base of assumption,
it can be 50%, it can be 35%, it can be 100%,
it can be 200%. In the end, it's just really about
making sure that you have the credibility and validity
to back up why you feel that percentage is going to
be that number. So that's your assumption.
So that's what you kind of manipulate
in forecasting. But you can see we're pretty much just
forecasting out a traditional income statement.
You're just doing a simple P&L forecast
so you can see, is this going to be viable for
your daughter to do in the future, how much
is it going to cost you, is it going to be worth it?
So you know, this is just a really simple
example of a lemonade stand, but just wanted to get you
guys a little more familiar with forecasting
and financial statements.
So next up, we're going to be going to Christine.
Please check out her video, where she's going
to finish off the finance section.