Week 2: Understanding the Target

Welcome back readers to the second installment of my blog! I was planning on working on transaction assumptions this week but I had to make changes in my plans as I began to retrieve data from Arcus Biosciences SEC filings. I realized the most efficient way to get the work done was to start tabling and figuring out the levers needed for the model to work. Constructing a basic model and then assessing strategic plans to increase the efficiency of Arcus before getting to the full model would greatly streamline the process. 

In short this included researching: 

A Paper Model: 

I revisited a simplified “paper” LBO model that I had originally thought of during the planning phase of the project (back when I first proposed the idea to the panel) to assess the viability of the purchase. I remade the paper model including more accurate data to reflect the SEC filings. Now with this paper model I could outline the key components of the transaction structure, such as the purchase price, sources of funds (equity and debt), and the initial capital structure. This provides a framework for building the full financial model and ensures consistency in the assumptions and calculations. The model also set me on the right path to highlights the critical assumptions and calculate high level returns. The paper LBO model acts as a roadmap for building the full financial model. It outlines the sequence of steps, calculations, and interconnections between different components of the model, making it easier to organize and develop the complete model in a systematic manner.

Pharma Pipeline: 

To develop accurate projections for Arcus Biosciences, it is crucial to have a comprehensive understanding of their product pipeline, clinical trial progress, and the competitive landscape within the biopharmaceutical industry. This knowledge will inform the revenue potential and associated operating expenses. Estimating operating expenses is a critical component, encompassing research and development costs, clinical trial expenses, and selling, general, and administrative expenses – all of which are essential for a biopharmaceutical company’s operations and growth. Furthermore, projecting capital expenditures and changes in working capital requirements based on the expected growth and operational needs is vital to capture the full financial picture and cash flow dynamics. By thoroughly assessing these factors, a robust financial model can be constructed to evaluate the potential acquisition accurately. Furthermore, understanding the pipeline would allow me to make adjustments to acquisition price based on goodwill, intangible assets etc… and also perform initial sensitivity analysis to assess the impact of changes in key assumptions on the returns and cash flows.

Thanks for reading, see you all next week!