Biotech/Pharma M&A Question (valuation & return related)
Hi all,
Can anyone provide insight into what metrics are typically looked at if you're a public biotech/pharma buyer looking to acquire and/or merge with another public biotech/pharma that isn't profitable?
Let's say financing could be either entirely cash/debt or mixed with equity. Wondering which metrics you'd focus on to understand whether the transaction creates value for buyer shareholders (i.e. EPS accretion/dilution, value creation analysis, IRR?).
Also wondering if anyone has a link to the slides a bank created to support valuing a transaction in the biotech/pharma space?
Thanks in advance. Much appreciated!
bump - any biotech bankers out there?!
In my somewhat limited experience, there are valuation thresholds based on the target's ability to clear FDA development milestones that are usually structured like earnouts. If the target's potential blockbuster fails to get approval / keep moving, deal ends up being worth a lot less, and there's usually probability-adjusted valuations for each step in the approval process.
Beyond that, a lot of revenue multiples. Again, only did a few biotech deals, and this was a long time ago, but some of the stuff I remember.
Awesome, thanks for the response.
Sounds like you’re describing CVRs (I.e. target shareholders get paid out if one of the drugs gets approved, hits a sales threshold, etc).
Do you recall looking at anything like ROIC or levered/unlevered IRR to understand return potential in excess of WACC? - Non-biotech I know this is something an acquirer would look at as well as earnings accretion.. Wondering how applicable it is to acquiring a pre-commercial or not profitable biotech?
People do risk/probability-adjusted pipeline drug DCFs for biotech firms that make drugs. It's really a guessing game.
EV/Revenue gets some looks if the Co. is already generating revenue from its R&D partners and/or royalty payments. If it's pre-revenue, see above. CVR/earnouts are common.
I work with a fair number of biotech firm and I must confess I hate this sector: it's filled with arrogant charlatans who think their drug is gonna save the world. Usually turn out to be some failed Phase 3 or some not-really-better-than-thou shit that doesn't make a difference.
There are good companies. I'm a bit cynical.
Good friends with someone who has sizable equity in a biotech startup. Seems like he's taken a big pay cut hoping for a big payday eventually. I wouldn't say arrogance is common in biotech but everyone is hoping to get that homerun by being acquired by a big pharma/large pharma corp.
Biotech more so than other fields of healthcare tend to attract people who want to become very wealthy as well as making life changing impact on patient care.
These are mostly valued with a prob-adjusted DCF.
You could also look at ev/peak sales
Then some companies have internal metrics that they would use:
-irr or roic
-value creation (ev of the DCF Vs ev of the listed business assuming a 50 pts premium) pre and post synergies
Wacc should be unprobabilized.
Best
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