Biotechnology companies comprise an important and growing industry. You will find these firms classified under SIC code 2836 and engaged in the research, development and marketing of diverse products for the health and bio sciences industries.
Over 1,280 such establishments compete 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)
- Value to EBITDA
- Business Value 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|
|Value 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.