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Investments
 9 Months Ended
Sep. 30, 2020
Investments, Debt and Equity Securities [Abstract]  
Investments and Other Noncurrent Assets
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.
The estimated fair value of the Company’s investment was $34.5 million as of September 30, 2020 and $95.5 million as of December 31, 2019. The Company recognized a decrease in value on its investment in kaléo of $36.2 million ($28.2 million after income taxes) in the third quarter of 2020, and a decline of $61.0 million ($47.7 million after income taxes) since the December 31, 2019 valuation. The decline in estimated fair value during the first nine months of 2020 was primarily due to: (i) lower expectations for 2020 earnings before interest, taxes, depreciation and amortization ("EBITDA") and net cash flow associated with lower market demand for epinephrine delivery devices, resulting from COVID-19-related delays in in-person back-to-school schedules which significantly impacted kaleo’s peak back-to-school season, and social distancing guidelines which disrupted 2020 summer and after-school activities, (ii) pricing pressure, and (iii) a higher private company liquidity discount. kaléo’s stock is not publicly traded. The net appreciation on its investment of $28.5 million ($23.4 million after taxes) in the first nine months of 2019, included a pre-tax cash dividend of $17.6 million 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 net sales and EBITDA from ongoing operations by segment table in Note 11.
The Company estimated the fair value of its investment in kaléo at September 30, 2020 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 EBITDA (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 approximately 20% at September 30, 2020 (versus 10% at December 31, 2019 and 10% at September 30, 2019) 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 September 30, 2020 was determined by weighting the EBITDA Multiple Method by 20% and the DCF Method by 80% compared to an 80% and 20% weighting of the EBITDA Multiple Method and DCF Method, respectively, used in the Company's estimate of kaléo’s EV as of December 31, 2019. A heavier weighting towards the DCF Method as of September 30, 2020 was used as it reflects the significant decline in kaléo’s EBITDA during the three months ended September 30, 2020 and is based on kaléo's current projections that assume ongoing pricing pressures and additional research and development ("R&D") spending for new products. 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 co-pays), 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 discontinued 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 September 30, 2020, 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
4.0 x5.0 x6.0 x7.0x8.0x
Weighting to DCF Method100 %$34.9 $34.9 $34.9 $34.9 $34.9 
90 %$33.4 $34.0 $34.7 $35.4 $36.1 
80 %$31.8 $33.2 $34.5 $35.9 $37.3 
70 %$30.3 $32.4 $34.4 $36.5 $38.5 
60 %$28.8 $31.5 $34.3 $37.0 $39.8 
50 %$27.3 $30.7 $34.1 $37.6 $41.0 
The ultimate value of the Company’s ownership interest in kaléo will be determined and realized only if and when a liquidity event occurs, and the ultimate value could be materially different from the $34.5 million estimated fair value reflected in the Company’s financial statements at September 30, 2020.