Archive for February, 2011

Biotechnology companies comprise an important and growing industry, classified under SIC code 2836 and engaged in the research, development and marketing of diverse products for the health and bio sciences industries.

There are 1,280 such establishments in the US alone generating about $24.2B in annual sales and employing just under 30,000. An average firm makes $22,900,000 in annual revenues with 25 staff.

Business valuation of biotech firms

Biotechnology companies may grow rapidly and achieve considerable profitability. As a result they are often the targets of acquisitions. Valuation methods based on the market of comparable business sales are quite common for valuation of businesses in this industry sector.

Valuation multiples are the typical tools under the market approach. They let you estimate the value of your firm based on the the enterprise values of comparable firms relative to their financial performance. The common valuation multiples used are:

  • Enterprise value (EV) to revenues (net sales)
  • EV to EBITDA
  • EV to Property, Plant and Equipment (PPE) assets
  • EV to total business assets
  • EV to book value of owners’ equity

Example: Use of valuation multiples for biotech company value estimation

As an example, let’s pick an average biotechnology company with the following annual financials:

  • Revenue: $22,900,000
  • EBITDA: $800,000
  • Total business assets: $1,800,000

Using the valuation multiples derived from comparable small cap firms we calculate the business value and summarize the results as follows:

Multiple Multiple value Business value
EV to net sales 0.4485 $10,270,745
EV to EBITDA 17.167 $13,733,604
EV to total assets 8.8667 $15,960,038
Average Business Value $13,321,462

The values may fall closer together or wider apart depending upon how well your specific biotech company matches the industry average across the various income and asset bases.

Multiples for valuation in your industry

You may come across this situation when valuing a private business: the company owns substantial real estate assets in addition to business operations. By convention, businesses are appraised as though the premises were rented rather than owned. If the company owns its premises and does not pay rent to the landowners, you need to factor a fair market rental expense into its income statement.

Consider business and real property separately in your business valuation

This puts the company on an equal footing with its industry sector peers. Remember that business value is defined by business earnings. Since it is typical for companies to lease their premises, you need to consider the effect of this expense on the business cash flow and business valuation calculations, especially with such income-based methods as the Discounted Cash Flow.

What about the business owned real property? You should determine its market value separately, as though the property were put on the market to get the highest and best renter.

The net operating income (NOI) from this arrangement along with the capitalization rate define the economic value of the property. If the business were to be put on the market, along with its real estate holdings, the value of the package would be the sum of business and real estate values, considered separately.

Valuing a business and real estate together

One business valuation method that you can use for your calculations is the well-known Multiple of Discretionary Earnings technique. As you go through your valuation analysis, input the fair market value of the real property along with any other non-operating / excess business assets. The method then lets you calculate the valuation result that combines the business and real estate values.

Business Valuation based on Multiple of Earnings