INVESTMENTS

In August 2007 and December 2008, the Company made an aggregate investment of $7.5 million in kaleo, Inc. (“kaléo”), a privately held specialty pharmaceutical company dedicated to building innovative solutions for serious and life-threatening medical conditions. Tredegar owns Series A-3 Preferred Stock and Series B Preferred Stock in kaléo that, taken together, represents on a fully-diluted basis an approximate 18% interest in kaléo. Tredegar accounts for its investment in kaléo under the fair value option. At the time of the initial investment, the Company elected the fair value option of accounting since its investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests. Kaléo’s stock is not publicly traded.

The estimated fair value of the Company’s investment was $95.5 million as of December 31, 2019 and $84.6 million as of December 31, 2018. The Company recognized net appreciation on its investment in kaléo of $28.5 million ($23.4 million after taxes) and $30.6 million ($23.9 million after taxes) in 2019 and 2018, respectively, including a $17.6 million dividend paid on April 30, 2019. Future dividends are subject to the discretion of kaléo’s board of directors. Amounts recognized associated with the Company’s investment in kaléo are included in “Other income (expense), net” in the consolidated statements of income and separately stated in the EBITDA from ongoing operations table in Note 5.

The Company estimates the fair value of its investment in kaléo by: (i) computing the weighted average estimated enterprise value (“EV”) utilizing both the discounted cash flow method (the “DCF Method”) and the application of a market multiple to earnings before interest, taxes, depreciation and amortization (the “EBITDA Multiple Method”), (ii) applying adjustments for any surplus or deficient working capital and estimates of contingent liabilities, (iii) adding cash and cash equivalents, (iv) subtracting interest-bearing debt, (v) subtracting a private company liquidity discount estimated at 10% and 15% at December 31, 2019 and 2018, respectively, of the net result of (i) through (iv), and (vi) applying liquidation preferences and fully diluted ownership percentages to the estimated equity value computed in (i) through (v).

The Company’s estimate of kaléo’s EV as of December 31, 2019 was determined by weighting the EBITDA Multiple Method by 80% and the DCF Method by 20%, which was consistent with the weighting applied at December 31, 2018. The heavier weighting towards the EBITDA Multiple Method was due to its heuristic nature versus the hypothetical nature of the projections used in the DCF Method. The DCF Method projections rely on numerous assumptions and Level 3 inputs, including estimating market growth, market share, pricing, net margins (after allowances for temporary discounts, prompt pay discounts, product returns, wholesaler fees, chargebacks, rebates and copays), selling expenses, R&D expenses, general and administrative expenses, income taxes on unlevered pretax income, working capital, capital expenditures and the risk-adjusted discount rate. In addition, there are various regulatory and legal enforcement efforts, including an ongoing Department of Justice investigation related to kaléo’s Evzio business, which could have a material adverse effect on kaléo’s business that require assessment in any valuation method applied.

The table below provides a sensitivity analysis of the estimated fair value at December 31, 2019, of the Company’s investment in kaléo for changes in the EBITDA multiple used in applying the EBITDA Multiple Method and the changes in the weighting of the DCF Method.



($ Millions)			EV-to-Adjusted EBITDA Multiple
			7.0 x		8.0 x		9.0 x		10.0x		11.0x
Weighting to DCF Method	50	%	$	89.8	$	95.6	$	101.4	$	107.3	$	113.1
	40	%	$	85.5	$	92.5	$	99.5	$	106.5	$	113.5
	30	%	$	81.1	$	89.3	$	97.5	$	105.7	$	113.8
	20	%	$	76.8	$	86.2	$	95.5	$	104.9	$	114.2
	10	%	$	72.5	$	83.1	$	93.6	$	104.1	$	114.6
	—	%	$	68.2	$	79.9	$	91.6	$	103.3	$	114.9

The ultimate value of the Company’s ownership interest in kaléo will be determined and realized only if and when a liquidity event occurs (including dividends), and the ultimate value could be materially different from the $95.5 million estimated fair value reflected in the Company’s financial statements at December 31, 2019.