company comparables

hi guys, lets you have biotech company that is not profitable/has poor cash flow, i am assuming you cant use EV/EBITDA for comps. but lets say the company does not have any sales of products either, so you cant use EV/Sales. thus is the only other viable option to use EV/R&D and compare how efficiently it uses its R&D vs. other companys?

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Comments (11)

Sep 25, 2010 - 12:38am

it would depend on the type of company. An internet company, for instance, could be valued on unique impressions, page views, etc. An O&G company can be valued based on all sorts of reserves based methodologies. A hospital can be valued on number of beds. etc...

Sep 25, 2010 - 1:10pm
hopefulbankerz:
how about EV/scientists? seems like a good one

hahahaha.

For a biotech company, you'd look at EV/rev if it has any revenue. If it doesn't have revenue, you're not going to make up a metric like ev/scientists or ev/r&d - you'd get laughed out of the room. One thing you could look at would just be basic enterprise value; because biotech companies are so cash intensive, you can get an idea of what the market thinks their technology is worth simply by removing cash from their market cap (and adding debt, if they have any, which most biotech companies don't)

Sep 27, 2010 - 6:36pm
drexelalum11:
hopefulbankerz:
how about EV/scientists? seems like a good one

hahahaha.

For a biotech company, you'd look at EV/rev if it has any revenue. If it doesn't have revenue, you're not going to make up a metric like ev/scientists or ev/r&d - you'd get laughed out of the room. One thing you could look at would just be basic enterprise value; because biotech companies are so cash intensive, you can get an idea of what the market thinks their technology is worth simply by removing cash from their market cap (and adding debt, if they have any, which most biotech companies don't)

Let me get this straight, your answer for how to value a biotech company is to look at the market value? I'd refrain from laughing at other posts Einstein.

EV/Scientists is not that far fetched considering we're in a biotech buble. The question the OP should be asking yourself is what investors are willing to pay for. It must be something competitively difficult to obtain. Earnings is the obvious answer, but when the industry is still in its infancy, investors look toward proxies for earnings that they believe will one day monetize into earnings. This is what caused the internet bubble. Investors believed companies could monetize page views into earnings. Turned out to be more difficult than predicted.

Now, as a prudent investor, ask yourself what you'd pay for.

If cost structures are quite homogeneous across competitors, revenue is a great proxy for earnings. If the cost structures differ, proxies for revenue (ie. hotel beds, hospital beds) are useless.

Any competitor can hire scientists so its a pretty weak proxy for earnings. Does the company manufacture the technology or license it? If it plans to manufacture, you might want to look into capacity/output. If it plans to license, you'd want to see if it has signed any major contracts as of yet.

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Oct 21, 2010 - 9:34am
lindamas:
how does one spread comps? what are the steps?

First you'd define your comps universe, then you'd generally have a template that you use, so you'd update the BS items, fully-diluted NOSH, etc to get your EV and equity value, you'd input the latest numbers from IS, CF, calculate your multiples (template should do that for you), decide which ones are relevant / which to use, throw out the comps that don't support your thesis / look weird, and then put them in to powerpoint in some ridiculously annoying and cumbersome procedure as graphs or tables

Oct 20, 2010 - 5:42pm

I really wouldn't shit on Drexel gang. Guys got some pretty good insights and his methods here make sense.

The number of scientists is completely meaningless. Having 500 Scientists on staff isn't indicative of anything other than the fact that you have 500 scientists. As he said, the number of people you have working for you in a given role in no way provides good information as to the market value of a organization.

If I had asked people what they wanted, they would have said faster horses - Henry Ford
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