This excerpt taken from the PARS DEF 14A filed Oct 3, 2006.
RBC/TF applied the same methodology in the DCF method as described above under Valuation of Vela at Current Stage of Development, with adjusted present value and probability assumptions. The unlevered free cash flows associated with dextofisopam were discounted back to the midpoint of 2012 when the company is expected to have successfully completed and filed an NDA with the Food and Drug Administration. The value of interim cash flows was determined using a discount rate range of 14.1% to 18.1%. RBC/TF estimated the discount rate based upon the cost of capital of comparable public companies to projected Vela upon successful completion of the second
milestone: Avanir Pharmaceuticals, GPC Biotech AG, NPS Pharmaceuticals, and Pozen. These companies were chosen because, for the purposes of the cost of capital analysis, RBC/TF considered them to have similarity with Velas projected business following successful completion of the second milestone. The selected public companies may significantly differ from Vela based on, among other things, the stage of development of their product candidates, the disease indications on which they are focused, and the market opportunities for their product candidates. A premium was included in Velas discount rate in correlation to its projected size at the second milestone stage of development.
The value ranges of the cash flows were then multiplied by a factor weighing the probability of successful commercial viability from the second milestone stage of development. RBC/TF estimated the likelihood of achieving the commercial scenarios following successful completion of the second milestone to be a range of 75% to 85%, based upon the Vela Forecast, industry reports and discussions with Pharmos management.
The resulting future enterprise value range at the midpoint of 2012 was then discounted back to present value using a time discount calculation with the current companys discount rate for a present enterprise value range of $171.1 million to $236.6 million.