Business valuation of biotechnology companies – valuing the biological product manufacturing firms
Companies developing a variety of anti-bacterial and virus infection prevention vaccines and similar products form a large portion of the rapidly growing biotech industry. Such firms are classified under SIC code 2836 and NAICS 325414.
Currently, there are some 2,010 competitors in this technology intensive industry sector. Together these biotech firms generate over $188B in annual revenues while employing some 248,400 staff.
Given the amount of investment required to succeed, the average company revenue in this industry tops $93M per year. Biotech firms are very efficient generating about $758,000 in annual sales per employee. The average employment head count per company is 123.
While the average revenue per company has been going up in recent years, the employment count is edging downward. The biotech companies are able to get more revenue per employee in order to meet their profitability targets while keeping the labor costs in check.
Valuing businesses in the biotech industry
Mergers and acquisitions are a fact of live in this highly competitive industry sector. As a result, there are plenty of comparable business sales to consider when valuing your company.
Business market comps offer a compelling way of estimating business value. The typical tool is the valuation multiples that relate business value to some form of its financial performance. The valuation multiples are ratios you can use to estimate the value of your target company. Here are some examples of multiples used by business owners, investors, and appraisers in the biotech sector:
- Enterprise value (EV) to gross revenues or net sales
- Value to net income
- EV to EBIT or EBITDA
- Value to total business assets
- EV to book value of owners’ equity
Example: Estimating business value with multiples
To show how you can use such valuation multiples, let’s consider an example of a typical biotech company with these financials, in $1,000:
- Net sales: $90,000
- Net income: $23,500
- EBITDA: $32,300
- Total business assets: $36,700
Now let’s apply a set of reasonable valuation multiples to estimate the company’s market value, in $1,000:
| Multiple | Multiple value | Business value |
|---|---|---|
| EV to net sales | 0.4485 | $40,365 |
| EV to net income | 8.5797 | $47,188 |
| EV to EBITDA | 5.1670 | $45,211 |
| EV to total assets | 3.2193 | $53,762 |
| Business Value Average, in $1,000 | $46,632 | |
Depending on the multiple you use, the resulting business value may be higher or lower than the average figure. Reason? No two companies in the industry are the same. Since the valuation multiples are derived from similar, but unique competitors, your results may vary.
For example, if your firm is more profitable, the business value result based on net income may be higher than the industry peers. On the other hand, net sales may be a better indicator of business value for a firm that is growing sales rapidly while trailing in profitability.
Higher valuation multiples?
You may wonder if a given biotech company can sell for higher multiples. The answer is yes. In our example, we have chosen a set of conservative multiples, applicable to a firm with an average performance track record.
Exceptional companies can surpass their peers in value by a significant amount. The reasons are better competitive position, unique technology or protected market niche the company can easily defend such as with a strong patent portfolio.
See Valuation Tour