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Business Concepts for Biomedical Scientists: Finance

Part 1: Financial Statements and Forecasting

00:00:12.03 Hi everyone, welcome to business concepts
00:00:15.06 for life scientists. Today, we're going to be talking
00:00:17.01 about finance. My name is JeShaune Jackson
00:00:19.13 and I'm the program manager of the Entrepreneurship
00:00:21.01 Center here at UCSF's campus.
00:00:23.07 I'll be initiating this today and then after
00:00:25.28 Christine will followup with a few more topics
00:00:27.29 that we'll discuss.
00:00:29.09 So first, just some of the objectives
00:00:31.02 by the end of the class, I promise
00:00:33.19 that you'll be able to do the following:
00:00:35.15 you'll be able to identify 3 different financial
00:00:36.28 statements and how companies use them,
00:00:38.20 read and identify parts of a P&L statement,
00:00:41.26 calculate a burn rate,
00:00:43.11 explain and apply concepts such as opportunity cost,
00:00:47.01 cost of capital, and net present value,
00:00:49.06 as well as apply these concepts in financial planning.
00:00:52.28 But first, let's define finance.
00:00:56.09 So corporate finance deals with the sources
00:00:59.01 of funding and the capital structure of corporations.
00:01:02.09 Just a little step further, it's always important to remember
00:01:05.04 that the purpose is always to increase the value
00:01:07.11 of the firm to the shareholders.
00:01:08.22 But within our context, let's think
00:01:11.29 about biotechnology. So biotechnology defines
00:01:15.02 finance as how the company will fund itself
00:01:18.04 and allocate its financial resources.
00:01:20.10 In academia, where some of you may be
00:01:22.04 a lot more familiar with, is how the lab will budget
00:01:26.12 for its operations and manage expenses.
00:01:29.09 So let's talk about 3 different categories today,
00:01:33.06 the first category is Revenue and Costs,
00:01:35.24 so within that we're going to talk about what
00:01:38.14 the enterprise earns and spends.
00:01:40.01 The second is Forecasting, and in Forecasting
00:01:43.00 we're going to be estimating the funding
00:01:45.11 of the enterprise.
00:01:46.14 And then Cost of Capital is the required
00:01:48.21 rate of return to make an investment.
00:01:50.23 Sounds a little technically jargon-y
00:01:53.04 right now, but I promise you're going to understand
00:01:55.12 what we're talking about by the end of this.
00:01:57.13 So first, let's just go in and talk about Revenue and Costs.
00:02:00.21 So Revenue and Costs is how enterprises
00:02:04.02 measure performance. So within this section
00:02:06.28 we're going to talk about an overview of the financial statements
00:02:09.12 and you'll be able to answer these 3 questions:
00:02:11.21 How much revenue did Gilead earn in 2015?
00:02:14.23 What was the annual burn rate for the company in 2015?
00:02:18.05 And at the current burn rate, how many months
00:02:20.20 of cash does this company have remaining left?
00:02:23.11 But first, let's go into the types of financial statements.
00:02:27.12 So there are 3 financial statements you can find
00:02:30.11 online at the SEC.gov.
00:02:32.18 So public companies are required to file
00:02:34.18 these financial statements so that shareholders have
00:02:38.05 all the information that they need
00:02:39.08 to make a decision on the company.
00:02:40.26 These 3 statements are the
00:02:43.08 income statement, the balance sheet,
00:02:45.09 and the cash flow statement.
00:02:47.13 The company we're going to be using is Gilead,
00:02:50.14 which some of you are familiar with
00:02:52.22 as a biotech company. If you look at the bottom,
00:02:55.12 I put these three because there's really consolidated
00:02:58.28 information, it's a lot more at a high level,
00:03:01.27 some dashboards, instead of just diving directly
00:03:05.15 into a 10K, which is just full of text. You may be
00:03:07.27 lost. Some of you might want to start with Google Finance
00:03:10.19 or Yahoo! Finance, because it's a lot more intuitive
00:03:12.22 if you're just starting off.
00:03:14.13 So first, we're going to talk about the income
00:03:18.00 statement. So the income statement
00:03:20.11 covers Revenue and Costs. It's also
00:03:22.17 called a Profit and Loss statement.
00:03:23.25 The income statement covers the net
00:03:26.21 income over a period of time.
00:03:29.05 So the period of time that we're going to be using
00:03:30.20 is the year 2015. So if you look at
00:03:35.06 Gilead's income statement, you can see all
00:03:37.04 the way up top, we have Revenues.
00:03:39.05 Revenues is broken down into produce sales,
00:03:41.17 which also has a line of royalty, contracts, as well
00:03:45.08 as a few others.
00:03:46.13 It's important to know that these are clumped
00:03:48.10 together into total revenues and then
00:03:50.19 we're going to subtract out some of the other expenses
00:03:52.14 in the company. Some of those expenses include
00:03:55.02 cost of goods, which you can see here.
00:03:57.10 Cost of goods for a biotech company
00:03:59.16 is usually what goes into the direct cost,
00:04:03.00 the raw materials, of developing a drug.
00:04:05.12 So these are chemicals, raw goods such as
00:04:09.02 pipetting materials, capsules, et cetera.
00:04:12.16 For research and development, it's important
00:04:15.12 to look at, in this expense, this is where your salary
00:04:18.25 is going to come out of. As a scientist,
00:04:21.19 as any technical person, research and development
00:04:24.17 encompasses some of these laborers here.
00:04:26.26 Selling, general, and administrative expenses,
00:04:30.01 also called SG&A, here you can see where
00:04:33.00 the marketing expenses are, where the sales
00:04:35.04 team, the executive team, pretty much
00:04:38.02 all of the business side of things is kind of
00:04:40.07 pulled out of this side.
00:04:41.28 So you can see what the total cost is in expenses are.
00:04:44.19 Under it, you can see there are a few others,
00:04:46.21 but it's not really -- at this stage, I wouldn't
00:04:49.27 dive too much into that. Just know that there
00:04:51.24 are taxes and other provisions that you kind of
00:04:53.19 have to go through that you would subtract out.
00:04:55.25 But right now, let's just keep it high level
00:04:58.02 revenues minus expenses. And you can see
00:04:59.27 at the bottom we have our net income to the company.
00:05:02.20 The second statement we're going to talk about
00:05:06.11 is the balance sheet. So the balance sheet
00:05:08.07 pretty much encompasses the assets,
00:05:10.21 liabilities, and equity.
00:05:12.15 Different from the income statement
00:05:15.04 because the balance sheet is just a snapshot
00:05:16.12 at a period of time. So this can be any day.
00:05:18.26 The day we're going to use is the same as our
00:05:21.16 income statement, which is 12/31/15.
00:05:24.19 But just remember, it's a point in time.
00:05:26.20 This is an overview of the balance sheet.
00:05:30.10 You know, as scientists, we love equations
00:05:32.27 so here's an equation.
00:05:34.02 Assets always equals liabilities
00:05:36.03 plus equity. So total assets we're going to go over,
00:05:38.21 but liabilities just think of it as debt,
00:05:40.15 and just know that these two have to balance out,
00:05:43.23 no pun intended.
00:05:44.19 So here's a consolidated balance sheet
00:05:48.26 for Gilead. If you look at the top you can see
00:05:50.24 cash and cash equivalents, if you look down
00:05:53.15 another row item, you can see accounts receivable.
00:05:55.24 So accounts receivable is money that you're waiting
00:06:00.07 to collect. So you already performed the service
00:06:03.11 or you already sold the goods to the company,
00:06:05.08 and if you think of it like on a credit card,
00:06:07.15 you're just waiting to collect the cash
00:06:09.09 from your customers. At the bottom you can see
00:06:11.13 property, plant, and equipment, also called
00:06:13.23 PP&E. Here are some of you're
00:06:15.29 hard long-term assets, such as
00:06:19.08 land or new manufacturing facility, or some other
00:06:22.17 large asset that you want to just clump into this scenario.
00:06:26.16 So you can see at the bottom what our total assets
00:06:28.08 equates to. Next up, we're going to look at liabilities
00:06:32.02 and equity. As I mentioned before, liabilities
00:06:34.13 is just your debt, it's the debt of a company,
00:06:37.14 it's what the company owes to any lenders.
00:06:40.15 If you look down at the bottom you can see
00:06:42.24 retained earnings, this is the company's stock.
00:06:45.20 So this is people who've purchase stock in the company
00:06:47.29 and they have equity in it.
00:06:49.24 So you can see what the retained earnings equals
00:06:52.29 and that's your equity. So if you add these two
00:06:54.23 up together, what do you get?
00:06:57.02 Your total assets always equals your
00:06:59.02 total liabilities plus equities.
00:07:00.23 So you can see both of these equate to $51,839,000,000.
00:07:06.00 The last statement we're going to talk about
00:07:09.27 is the cash flow statement. The cash
00:07:12.01 flow statement encompasses three
00:07:14.00 different activities. So where's cash moving between
00:07:17.02 these three? One of those is operating,
00:07:19.08 the other is investing, and then finally,
00:07:21.15 financing. And again, this is over a period of time.
00:07:26.04 So we're going to use the year end of 2015.
00:07:30.20 And so our snapshot is going to be coming from 12/31/15.
00:07:37.03 So let's talk about the concept of cash burn.
00:07:40.18 So cash burn at a high level is just
00:07:42.21 how much is a the company churning through its cash,
00:07:45.07 how much time do we have before we essentially
00:07:47.29 run out of money and we have to close the doors.
00:07:49.29 So the formal definition we have here
00:07:52.04 is that it's an approximation of how much
00:07:54.26 money a biotech company or a project
00:07:57.17 has and is using over a period of time.
00:08:00.15 An example of that period of time can be monthly,
00:08:03.05 quarterly, or annually for longer term strategies,
00:08:06.26 And then it's important to remember in biotech
00:08:09.25 one thing that we use is that we just use
00:08:12.00 the operating loss as kind of a good benchmark
00:08:14.23 for what our cash burn is.
00:08:17.15 So we're not using Gilead for this,
00:08:19.19 you can see the company name has changed
00:08:21.15 to Portola Pharmaceuticals. And it's because Gilead
00:08:23.23 is a really well-established, large, not burning out
00:08:28.03 of any cash right now any time soon. So
00:08:30.26 it's just not as good of an example as Portola,
00:08:33.08 which as you can see has a operating loss
00:08:36.04 of $227million. So let's just walk through the example
00:08:42.14 of cash burn. So if you want to determine
00:08:44.19 how many months of cash does this company
00:08:47.01 have left. You use this simple equation,
00:08:49.08 you take the current cash from the balance
00:08:50.29 sheet and you then you divide it by the annual
00:08:53.19 operating loss, you multiply it out by 12 months.
00:08:56.09 And you'll get the number of months
00:08:57.12 that the company has left.
00:08:59.07 So for this example, for Portola, we're going to look here
00:09:02.22 we can see that the cash that we pulled
00:09:04.28 from the balance sheet is $444million,
00:09:07.10 you can see the operating loss as we previously mentioned
00:09:12.00 is $227million. So if you divide those
00:09:14.10 two out and you multiply by 12,
00:09:16.09 you can see that the company has little under 2
00:09:18.16 years left before it essentially has to close its doors
00:09:20.26 or raise additional funding, or increase revenue.
00:09:24.04 Or decrease costs.
00:09:27.06 So again, those financial statements
00:09:30.09 as we mentioned, one is the balance sheet,
00:09:32.27 which is a snapshot over a period of time,
00:09:34.15 If you look at the two in the middle,
00:09:37.06 remember that these are a summary of a period of time.
00:09:39.12 So we have our cash flow, which is
00:09:42.03 where is cash moving between our operating
00:09:44.01 and investing and financing activities.
00:09:45.19 You have our income statement, also
00:09:47.11 called a P&L, or profit and loss,
00:09:49.19 and just remember, it's revenues minus expenses
00:09:52.07 and it always equals the net income.
00:09:53.22 Just to kind of put things into context,
00:09:58.25 one of the things we like to use is
00:09:59.29 operating evaluation metrics. Just
00:10:02.19 because $20million doesn't mean much
00:10:04.29 to a company like Apple, whereas $20million
00:10:07.06 to a smaller company that's only doing,
00:10:09.21 let's say $30million of revenue,
00:10:11.10 the $20million means a lot more. So we like
00:10:13.14 to create what are metrics or ratios,
00:10:15.21 so you put that into a percentage so that it
00:10:17.06 becomes a lot more relevant to the specific company
00:10:19.26 that you kind of want to evaluate.
00:10:21.05 One of those metrics is gross margin,
00:10:24.07 also called profit, just to see you know, how
00:10:27.01 profitable is this company. That's just revenues
00:10:28.28 minus expenses equals gross profit.
00:10:31.24 You convert that into percentages and you'll see
00:10:34.08 in a relative context, how profitable is this company.
00:10:37.14 The next one is net income,
00:10:39.25 this is just cash to the company. This is a simple
00:10:42.01 equation, you really just want to see
00:10:43.23 how much company is going to the company.
00:10:45.17 And lastly, solvency, which is the
00:10:48.02 ultimate financial health status of the company.
00:10:51.13 So you use this metric as we used for Portola,
00:10:53.17 just to see how many months does this company
00:10:56.11 have left before it essentially has
00:10:58.04 to close its doors or really do some hardcore
00:11:01.13 capital restructuring. Next up, we're going to talk
00:11:05.26 about parallels to academia. Please refer to
00:11:08.15 Amy's video, and she'll give you a lot more
00:11:11.22 examples of how do we use finance
00:11:15.10 in academia and how she uses it in her lab,
00:11:18.02 and how does it translate to some things
00:11:20.06 that are similar to other small businesses.
00:11:21.28 Alright, next up, we're going to talk about
00:11:24.06 forecasting. So forecasting, as I mentioned before,
00:11:26.19 is estimating the funding of the enterprise.
00:11:28.26 Now, so in this segment, we're going to talk
00:11:31.19 about what is forecasting, why companies do it,
00:11:33.27 and we're going to predict the use of
00:11:36.15 cash for activities that the company might use
00:11:38.27 in the future.
00:11:39.22 But first, let's talk about why do companies
00:11:42.18 forecast? The main reason, and the main goal,
00:11:46.02 is to get a better grasp on cash management,
00:11:49.27 where's our cash going? Where can we put
00:11:52.00 cash today that can generate some more cash
00:11:55.11 in the future? Remember, when it comes to companies
00:11:57.16 in the finance side, cash is always king.
00:12:00.11 You know, where is our money going right now?
00:12:01.21 The second, as I kind of alluded to a little bit is
00:12:04.21 strategy, so we can kind of strategize where do we
00:12:07.29 put our money today, what activities do we invest in,
00:12:11.01 what piece of equipment should we buy,
00:12:12.16 how much money is this equipment going to give us
00:12:15.01 in the future, or we can just determine some long-term
00:12:17.03 short-term, and midterm strategies.
00:12:19.15 It's also important to remember that as
00:12:22.20 science as we are, and as technical we may be,
00:12:25.17 forecasting really is an art and a science.
00:12:28.14 The science you might be a lot more familiar with,
00:12:30.25 it's the math, the crunching equations, but there's also
00:12:34.28 an art to it. It's always important to remember that
00:12:37.20 the one thing that's true about forecasting is that
00:12:40.04 it will always be 100% wrong.
00:12:42.16 You know, it's really just about backing up your assumptions,
00:12:44.17 coming up with really strong supported assumptions for
00:12:48.04 what you have. Why are you forecasting out this?
00:12:50.20 How'd you get there? And it just makes it a lot easier
00:12:54.02 from a finance side to determine where the company's
00:12:56.23 going to be going in the future.
00:12:58.08 Alright, so let's talk about how we use forecasting
00:13:04.13 with an organization. So usually we try to mesh this in with
00:13:07.00 long-term, short-term, and mid-term strategies.
00:13:09.28 So a long-term strategy usually is a much heavier
00:13:13.15 of an investment. So long-term strategy
00:13:15.22 are what are we going to finance,
00:13:17.17 on an annual 3+ year type strategy.
00:13:20.28 What are we going to invest in today
00:13:23.05 that we're not going to see a return for
00:13:24.22 a long period of time or over a lengthy
00:13:27.03 period of time. Whereas the short-term
00:13:28.29 finance strategy would be a one year or
00:13:32.18 one month, or just a really short-term budget.
00:13:34.29 So what are we going to buy for office supplies?
00:13:38.12 What are we going to buy this new machine for
00:13:40.15 that we're only going to use for a year?
00:13:41.14 Or really small, much smaller items.
00:13:45.08 So here's an example that some of you
00:13:49.15 may be familiar with. So this is just the different stages
00:13:51.25 of drug development for a company.
00:13:53.13 So the short-term strategy, as you can see,
00:13:56.01 will be to just demonstrate proof of concept
00:13:57.26 within just a few patients.
00:14:00.09 We can see we budgeted out just how much
00:14:01.26 it would cost, and we have a strategy map
00:14:04.15 as to what we get out.
00:14:06.19 On the long-term side, you can see
00:14:08.09 the cumulative amount is roughly $240million
00:14:11.08 total, but the long-term strategy is
00:14:14.02 how do we get this drug to market
00:14:16.27 commercial success, market this drug,
00:14:18.27 whereas today, we're just mapping out
00:14:21.25 for that proof of concept.
00:14:23.16 So let's use an example that
00:14:27.01 is a lot simpler to understand, just to kind of get
00:14:30.07 your grasp around some of the concepts of forecasting.
00:14:32.09 So here, we're going to use the very
00:14:34.28 simple idea of, let's say your daughter.
00:14:37.13 Your daughter is entrepreneurial at heart,
00:14:41.01 she really wants to work and earn her dollar.
00:14:44.01 So she comes to you and says she wants
00:14:46.18 to sell lemonade out of a lemonade stand.
00:14:49.06 So for forecasting, you really want to predict
00:14:51.28 what is this lemonade stand going to look like
00:14:55.11 over the next 3 years?
00:14:57.10 So we're going to forecast 2017, 2018, and 2019.
00:15:01.27 But, you see the A next to 2015 and 2016
00:15:04.27 because these are our actuals. So these
00:15:07.02 are actuals, also called historicals.
00:15:09.01 So this is what we're going to base
00:15:10.24 the foundation of our assumptions. So
00:15:15.23 you can see our assumptions column,
00:15:17.13 some of the assumptions you can see here
00:15:19.09 is, each year we're increasing by 50%
00:15:22.22 the number of units sold as we went from 2016
00:15:26.27 to 2017, and that's based on the fact that your daughter
00:15:31.27 sold 500 last year, she sold an additional 250
00:15:34.02 this year, so that's a 50% increase.
00:15:36.25 So we're just using that as our base of assumption,
00:15:39.00 it can be 50%, it can be 35%, it can be 100%,
00:15:42.01 it can be 200%. In the end, it's just really about
00:15:46.09 making sure that you have the credibility and validity
00:15:49.04 to back up why you feel that percentage is going to
00:15:51.16 be that number. So that's your assumption.
00:15:53.09 So that's what you kind of manipulate
00:15:55.18 in forecasting. But you can see we're pretty much just
00:15:57.25 forecasting out a traditional income statement.
00:16:00.09 You're just doing a simple P&L forecast
00:16:02.09 so you can see, is this going to be viable for
00:16:05.01 your daughter to do in the future, how much
00:16:06.22 is it going to cost you, is it going to be worth it?
00:16:08.19 So you know, this is just a really simple
00:16:10.18 example of a lemonade stand, but just wanted to get you
00:16:13.09 guys a little more familiar with forecasting
00:16:15.27 and financial statements.
00:16:19.19 So next up, we're going to be going to Christine.
00:16:21.28 Please check out her video, where she's going
00:16:23.22 to finish off the finance section.

Part 2: Basic Financial Principles

00:00:12.00 Hi, I'm Christine Siu
00:00:13.24 and I'm going to walk you through the second
00:00:14.27 half of the presentation today.
00:00:17.14 My background is twelve years
00:00:19.10 in venture capital and private equities,
00:00:21.08 specializing in biotech and life
00:00:22.27 science companies.
00:00:24.06 I spent the last four years advising
00:00:27.01 and building companies in biotech.
00:00:29.00 So Jeshaune would've walked you through
00:00:33.00 revenue and costs, and forecasting,
00:00:34.25 and we're going to go through the cost of capital
00:00:36.26 section next.
00:00:37.27 So the cost of capital is
00:00:41.09 how to evaluate and prioritize
00:00:43.12 projects, how projects will be assessed
00:00:46.14 financially, and how to compare projects financially.
00:00:49.06 The cost of capital is the rate of return
00:00:53.25 required to persuade an investor
00:00:55.19 to make a given investment.
00:00:57.02 So for example, Biotech XYZ wants to raise
00:01:00.27 equity to fund a clinical trial of its lead drug.
00:01:03.14 Equity investors would require a 30%
00:01:06.25 rate of return to make the investment.
00:01:08.28 Therefore, the company's cost of capital,
00:01:11.02 for the equity, is 30%.
00:01:13.04 The cost of capital is dependent
00:01:15.06 upon the perceived risk of the company
00:01:17.14 or the investment. The less risky an investment is,
00:01:20.17 the lower the cost of capital would be.
00:01:22.20 How this translates in drug development
00:01:26.27 is seen here, so basically, you've got
00:01:30.04 thousands of compounds at very early stages.
00:01:33.02 And those are worked through the funnel
00:01:35.24 of clinical development until
00:01:37.12 hopefully you have at least one
00:01:39.03 successful compound approved by the FDA
00:01:41.09 at the end.
00:01:42.14 As the drug is working its way through
00:01:44.22 the clinical development cycles,
00:01:46.10 it's being de-risked and the probability of success is going up.
00:01:50.00 The cost of capital is going down
00:01:52.21 as a probability of success increases,
00:01:54.16 so therefore, they are indirectly proportional
00:01:57.27 to each other.
00:01:59.17 The opportunity cost is the cost of
00:02:03.01 the next best alternative that must be
00:02:04.19 foregone in order to choose a desired plan.
00:02:06.26 Opportunity cost is all about tradeoffs.
00:02:09.16 So in a very simplistic example,
00:02:12.01 if there's an apple and an orange,
00:02:14.10 if you choose the apple, the opportunity cost
00:02:16.18 is the orange. And perhaps a more relevant
00:02:19.24 example, if I decide to attend graduate school,
00:02:23.08 the opportunity cost of going to graduate school
00:02:26.04 is the value of the foregone wages had I worked instead.
00:02:29.01 Investors have multiple options
00:02:31.24 to invest their capital and will demand
00:02:33.22 a higher return, i.e. a higher cost of capital,
00:02:36.15 to invest in riskier companies.
00:02:38.21 In this example, which company
00:02:44.05 would have the higher cost of capital?
00:02:46.03 Biotech A has a drug candidate that is
00:02:49.04 in preclinical testing and needs to raise
00:02:50.29 money to file an IND.
00:02:52.19 Biotech Z has a drug candidate in a phase 3
00:02:56.15 clinical study and needs to raise money to file an NDA.
00:02:59.26 In this example, Biotech A has the higher cost of capital.
00:03:05.02 Its drug is in earlier stages and it's riskier.
00:03:08.01 So NPV is the Net Present Value.
00:03:14.15 This concept relies on the time value
00:03:17.00 of money, it's the fundamental principle
00:03:19.02 in finance that a dollar today is worth more
00:03:21.26 than a dollar in the future.
00:03:23.21 So the NPV translates an investment's value
00:03:28.25 over time in today's dollars.
00:03:31.15 The equation to do this
00:03:33.04 is the future value equals the present value
00:03:36.13 times 1 plus the interest rate
00:03:38.16 to the nth power.
00:03:39.19 Where n is the number of periods,
00:03:41.22 usually years in this case.
00:03:44.08 So the important thing to note about
00:03:46.02 this equation is the interest compounds
00:03:50.03 on an annual basis, so this is not a linear
00:03:53.03 equation, this is an exponential function.
00:03:55.05 The Net Present Value is simply
00:03:58.02 the Summation of all the Present Values.
00:04:00.14 In this example, Biotech X is considering developing
00:04:06.29 a drug. It will cost $500,000,000 over 8 years
00:04:10.29 before the drug is approved.
00:04:12.21 Once approved, the drug will produce
00:04:15.10 $1,500,000,000 in profit over 2 years.
00:04:18.12 Should the biotech company invest in this drug?
00:04:20.05 So here you see all the annual cash flows laid out
00:04:25.03 from year 1 to 10, those are the future values.
00:04:27.26 You'll see the discount we've selected here is 25%
00:04:32.08 and using the previous equation, you'll see that we discounted
00:04:35.13 them to the present value today.
00:04:37.27 You'll see the concept of time value money
00:04:41.01 at work here if you look out in year 10,
00:04:43.24 you'll see that $107,000,000 is worth quite
00:04:46.13 a bit less than the billion dollars in year 10 future value.
00:04:49.23 So, the net present value
00:04:52.05 is the summation of all of those cash flows
00:04:54.16 in the present tense, and you'll see that
00:04:58.18 that equals 32.
00:05:00.06 So what does that 32 mean?
00:05:02.04 Well, it means that the NPV is positive,
00:05:05.12 and the investment would earn money for the biotech company.
00:05:08.01 So the NPV is an indicator
00:05:11.21 of how valuable a project can be
00:05:13.20 and whether it's worth investing in.
00:05:15.13 So if the NPV is greater than 0,
00:05:18.22 it means the investment would add value to the firm.
00:05:20.27 If the NPV is less than 0,
00:05:23.10 it means it would subtract value from the firm.
00:05:25.17 If it's 0, it's neither a gain or a loss.
00:05:29.19 So the IRR, the Internal Rate of Return,
00:05:35.07 is the interest rate at which the net present
00:05:37.23 value of all the cash flows equals zero.
00:05:40.17 So if you're looking at the mathematical equation,
00:05:44.15 this is basically setting the NPV equal to 0,
00:05:47.17 and solving for the interest rate at which that happens.
00:05:51.05 The practical use is the IRR can be
00:05:54.12 used to evaluate the attractiveness
00:05:56.22 of a project or an investment.
00:05:58.07 If the IRR of a new project exceeds a company's
00:06:01.26 required rate of return, that project is desirable.
00:06:04.18 If the IRR falls below the required
00:06:07.18 rate of return, the project should be rejected.
00:06:09.19 In this example, a venture capitalist
00:06:13.19 is considering an investment in a biotech company
00:06:16.00 developing a drug for Alzheimer's.
00:06:17.12 The company would require a $10,000,000 investment
00:06:20.16 today and another $20,000,000 investment
00:06:22.24 in two years. The VC expects to sell the shares
00:06:26.01 for $90,000,000 five years from today.
00:06:28.14 The VC's hurdle rate is 25% for biotech investments.
00:06:33.13 Should they make the investment?
00:06:35.10 So here again, we've laid out the cash flows,
00:06:37.18 you see the $10million that would need to be
00:06:39.13 invested today, the $20million invested two
00:06:42.23 years from today, and the $90million in return
00:06:46.04 five years from today.
00:06:47.25 The IRR at which the NPV would equal
00:06:50.19 0 is 33.5%. And what does that mean?
00:06:55.04 Well, the 33.5% is greater than the VC's hurdle
00:06:58.21 rate, so that means that they should
00:07:00.08 make this investment.
00:07:01.17 So, in summary, the cost of capital
00:07:06.24 is used by all organizations
00:07:08.20 when assessing the cost of funding operations.
00:07:11.21 The NPV is used mainly by companies
00:07:15.00 when valuing assets to acquire.
00:07:16.24 They can also be used by equity research analysts
00:07:19.21 when valuing companies and their future cash flows.
00:07:22.02 The IRR is used mainly by investors when
00:07:25.09 evaluating an investment opportunity.
00:07:27.04 Here are some advanced topics to look into,
00:07:32.22 for example, you could look into
00:07:35.21 the discount rate and how that's calculated,
00:07:38.06 there's also a lot of mathematical equations
00:07:41.09 and variables behind that.
00:07:42.24 So here are a few scenarios to consider,
00:07:45.05 in terms of parallels to academia,
00:07:47.12 I would strongly encourage you to view Amy's
00:07:49.28 presentation, she will talk about examples about
00:07:53.01 opportunity costs in a lab, she'll walk
00:07:55.06 through NPV and how she's decided on which
00:07:59.14 projects to invest in, in her experience.
00:08:02.24 So for finance course objectives,
00:08:06.20 by now you should be able to identify the three
00:08:09.03 different financial statements and how
00:08:10.09 scientists use them. Read and understand a P&L
00:08:13.07 statement. Calculate burn rate.
00:08:14.27 Explain and apply concepts
00:08:16.24 such as opportunity cost, cost of capital,
00:08:19.00 and NPV. And apply these concepts in financial planning.
00:08:22.15 Thank you for watching our presentations.

Part 3: Parallels to Academia

00:00:12.04 Hi, my name is Amy Kao
00:00:14.02 and I'm an assistant professor at the
00:00:15.17 University of California, San Francisco.
00:00:17.11 Today I'm going to be talking with you
00:00:18.26 about business concepts for life scientists.
00:00:20.23 So, as it turns out,
00:00:23.28 to figure out finance in academia is not that
00:00:27.13 different from in biotechnology.
00:00:29.10 It just has a lot fewer complicated
00:00:32.09 financial models. So you have already heard
00:00:36.13 from Jeshaune about revenue and costs,
00:00:38.04 and what an enterprise needs to earn
00:00:40.14 to cover its costs.
00:00:42.28 You've also heard about forecasting,
00:00:45.23 estimating the funding of an enterprise.
00:00:50.07 In terms of parallels to academia,
00:00:52.09 here's some questions that we might consider.
00:00:54.08 So how is your lab like a small business?
00:00:56.25 I realized early on that running my lab
00:00:59.27 was really like running a small business
00:01:01.22 and that is in the sense that, I had to figure
00:01:03.24 out how much I was bringing in, revenue
00:01:06.06 from grants and from federal sources,
00:01:10.08 from private foundations,
00:01:12.06 from consultation, and then figuring out
00:01:15.22 what my costs were. Which the majority
00:01:17.25 of costs are in personnel.
00:01:19.24 And additional costs come from equipment
00:01:21.23 or lab reagents.
00:01:23.02 And I figured out pretty early
00:01:26.02 that I needed to make sure that the revenue
00:01:28.01 and the cost balance. So in that
00:01:29.17 sense, how is my lab budget like
00:01:31.26 a cash flow statement?
00:01:33.11 Well, I actually keep an Excel spreadsheet
00:01:36.02 where I know how much cash I have
00:01:37.20 on hand from every source
00:01:39.19 and I also know what I'm spending my money
00:01:42.23 on. So I know per month
00:01:45.06 how much I'm spending on personnel,
00:01:46.29 on average how much I spend for reagents,
00:01:49.00 and if there are any big ticket items
00:01:50.26 that gets included in my Excel spreadsheet.
00:01:52.22 And I check the spreadsheet
00:01:54.07 at least every two months,
00:01:56.13 in short of rough times I'll check it
00:01:58.23 even every month.
00:02:00.10 So, do I think about burn rate?
00:02:03.06 I think about burn rate a lot.
00:02:04.23 I know at any point in time
00:02:06.26 how much I have in each --
00:02:09.20 from each grant, how much I'm spending,
00:02:11.22 and how much I can project will be coming in.
00:02:16.02 And this is very helpful, because knowing
00:02:18.01 my burn rate helps me predict how much money
00:02:20.21 I'll have on hand in the future
00:02:22.09 and allows me to determine when I need
00:02:24.00 to be writing more grants
00:02:25.16 or if I'm able to hire.
00:02:28.15 So you also heard from Christine about
00:02:32.17 the cost of capital and what's required
00:02:34.19 in terms of return to make an investment.
00:02:36.21 And we actually think about this
00:02:38.17 in academics as well. So some other questions
00:02:42.00 that we might consider in this regard are:
00:02:43.24 What are examples of opportunity
00:02:45.07 cost in the lab?
00:02:46.27 So I had an example of
00:02:49.26 trying to figure out an opportunity cost not too long ago.
00:02:52.00 So we have induced pluripotent stem cells
00:02:54.15 in the lab that we were hoping to edit
00:02:55.26 with CRISPR-Cas technology.
00:02:57.10 And this is a little more challenging
00:02:58.27 in stem cells than it is in other
00:03:00.15 cell lines. We didn't know
00:03:01.26 this going in, though, so we tried a few times
00:03:03.18 and it didn't work. So then I started
00:03:05.20 to wonder, should we be outsourcing
00:03:06.28 this to a company? And we know how much
00:03:09.10 they would charge it, and so what I did
00:03:10.23 was that I asked somebody in the lab
00:03:12.02 to come up with sort of a budget
00:03:13.27 for doing this in our lab.
00:03:15.19 As it turned out, if we added up time
00:03:18.03 and reagents, the amount we would spend
00:03:20.23 doing this in our lab was exactly the same
00:03:22.22 as what we would pay a company
00:03:24.12 to do. And that was a very useful exercise,
00:03:26.21 in terms of figuring out the opportunity cost
00:03:28.23 for this project.
00:03:31.00 In terms of deciding which projects
00:03:32.19 to invest in, there are a lot of things that go into this.
00:03:35.21 I think sometimes it has to do
00:03:37.27 with the projects that are attractive to
00:03:41.01 a funding agency. It also has a lot
00:03:43.25 to do with what we're interested in
00:03:45.09 and what we think will have the greatest
00:03:47.23 impact on sort of the knowledge base and
00:03:49.28 health in the world.
00:03:51.15 In addition, sometimes this depends on
00:03:54.06 the folks we have in the lab and the expertise
00:03:56.24 we have in the lab or collaborators
00:03:58.24 that we could find.
00:03:59.24 In terms of my near and long term
00:04:01.29 financial strategies, I've already told you
00:04:04.02 that I keep an eye on the budget.
00:04:06.27 I have an Excel spreadsheet that I use
00:04:09.08 a lot, it gets a lot of work.
00:04:12.16 And in addition to that,
00:04:14.11 we actually have a lot of help from the finance
00:04:16.12 office. So, we call them our post-award people.
00:04:18.26 They can help me determine how much
00:04:21.03 I'm spending in a given month,
00:04:22.10 they can provide projections
00:04:24.20 for when a grant is going to run out,
00:04:26.06 and they can also provide me
00:04:29.08 very exact numbers on cash on hand.
00:04:31.29 And so, with their help
00:04:33.15 I like to keep an eye on the spreadsheet
00:04:37.05 with projections out -- I actually project
00:04:39.26 to about five years, and I like to
00:04:41.24 know that I have enough cash on hand
00:04:43.25 in order to run the lab for about two years.
00:04:45.21 If I can see that I'm not going to be able to
00:04:47.28 achieve that, then I know that it's time
00:04:49.20 to write more grants.
00:04:51.18 Okay, well, thank you very much for your time!

Videos in this Talk
  • Part 1: Financial Statements and Forecasting
    Part 1: Financial Statements and Forecasting
    Audience:
    • Researcher
    • Educators of Adv. Undergrad / Grad
  • Part 2: Basic Financial Principles
    Part 2: Basic Financial Principles
    Audience:
    • Researcher
    • Educators of Adv. Undergrad / Grad
  • Part 3: Parallels to Academia
    Part 3: Parallels to Academia
    Audience:
    • Researcher
    • Educators of Adv. Undergrad / Grad
Speakers: Christine Siu, JeShaune Jackson, Aimee Kao
Total Duration: 0:30:11
Recorded: December 2016
All Talks in Professional Development
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Talk Overview

This video series is designed to teach bench researchers the finance basics involved in financial planning and decision making. Content includes an overview of financial statements, and basic concepts of business finance such as calculating burn rate, opportunity cost, and net present value. Concepts will be reinforced using practical examples from academic and industry settings.

Speaker Bio

Christine Siu

Christine Siu

Christine Siu has 12 years of experience in private equity and venture capital.  She has worked with Third Rock Ventures, Warburg Pincus and Thomas McNerney, specializing in life sciences and biotechnology.  Most recently, she started a company, Global Blood Therapeutics (GBT), with Third Rock Ventures.  Christine currently consults with venture funds and start-up biotech companies… Continue Reading

JeShaune Jackson

JeShaune Jackson

JeShaune Jackson currently manages the operation activities of the Entrepreneurship Center at UCSF and assistant instructor for the life science pre-accelerator program, which has helped a portfolio of companies raise nearly $20M and be placed in some of the top accelerators.  He previously worked with Cleveland Clinic’s venture capital arm helping to manage 60+ spinoff… Continue Reading

Aimee Kao

Aimee Kao

Aimee Kao is an Assistant Professor in the Department of Neurology at UCSF.  She received her MD, PhD degrees from the University of Iowa and then performed her Neurology residency at UCSF followed by a post-doctoral fellowship with Cynthia Kenyon.  Her lab is interested in the basic pathophysiological mechanisms underlying neurodegenerative diseases.  She is a… Continue Reading

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