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

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