Valuation of Pharmaceutical and Biotechnology Companies: Comparable Multiples Method (Part 2)

In this article the Comparable Multiples Method (CMM) is discussed and analysed. CMM is based on a relatively basic principle; that the value of the target company (the company to be valued) can be derived through certain multiples (financial ratios) of similar (comparable) companies.

Step 1: Analysis of the Target Company

There are certain data that should be collected for the target. These are both financial and non-financial:

  • Non-Financial Data
    • Location: headquarters, countries of operation, location of subsidiaries.
    • Quoted Status: Publicly Listed or Private
    • Subsidiaries: number of subsidiaries, subsidiaries’ sector of operation.
    • Global Strategy: M&A, organic growth, future potential.
    • Product Pipeline: Number of products, breakdown of products’ type.
    • Number of competitors and potentially perform a SWOT and Porter’s 5 forces analysis as well as create a BCG matrix.
    • Market drivers and challenges.
  • Financial Data
    • Revenue structure: breakdown of revenues by area. For example, a company active in the Oil & Gas industry could segment its sales by type of product sold Natural Gas sales, Petroleum Sales, Bioethanol etc.
    • Cost structure: Where does the company spends its cash on compared to the industry? R&D, Marketing or Manufacturing?
    • Bench-marking of competitors and the target.

Step 2: Characteristics of Comparable Companies

The comparable companies should have similar Financial and Non-Financial Data (as in Step 1) with the target. At a later stage CMM will be applied on Sanofi, the meaning of “similar data” will be clearer and more specific.

Step 3: Collection of Financial Data and Multiples of Comparable Companies

There exist two different types of multiples. These are Enterprise Value multiples and Equity multiples.

  • Enterprise Value multiples: enterprise value (EV) is defined as Market Capitalisation + Net Debt (i.e. Debt – Cash). It is partially market-dependent (due to the market capitalisation component) but it has a significant enterprise specific element (net debt). The most commonly used EV multiples are EV/Sales, EV/EBIT, EV/EBITDA and EV/Free Cash Flow.
  • Equity multiples: these are multiples which are based on the market value of equity of the comparable company. PE ratio, P/Sales, P/Book Value and P/Operating Cash Flow are mostly used.

Step 4: Analysis

Before estimating the average and the median of the multiples above a careful consideration shall be given when ruling out outliers. Outliers are numerical values diverging from most of the sample. It should be noted that the median is estimated for ensuring that the sample is uniform (i.e. all outliers have been excluded, sample is converging). After analysing and deciding on the final multiples the market value of Equity and the Enterprise Value can be estimated based on the corresponding multiples and financial data of the target company (e.g. if  the average of P/Sales of the comparable companies has been estimated, then it should me multiplied by the sales of the target company to measure what its P is i.e. its market value of equity).

Example: CMM Valuation of Sanofi-Aventis (As of 31.12.2005)

In 2005, Sanofi-Aventis was particularly active in 3 main therapeutic areas: Cardiovascular (~10% of total sales), CNS (~20% of total sales), Blood (~15% of total sales) and Oncology (~10% of total sales). Using appropriate country filtering (U.S., Northern European and Japanese companies were included) and by searching through financials the following companies with similar revenue breakdown were identified:

 Baxter International
 Johnson & Johnson
 King Pharmaceuticals
 Mitsubishi Pharma
 Torii Pharmaceutical

By assessing the characteristics of the sample one could observe a number of problems. Firstly, comparable companies in terms of market size are missing apart from Johnson & Johnson, which however, has a large medical devices segment and could be considered non-comparable. For the purpose of this valuation, Johnson & Johnson will be included. The second problem is the size of the sample. The sample contains 6 companies which is sufficient only if it contains highly comparable companies.

In the table below the multiples of the comparable companies are shown. Highlighted in red are the outliers which have been excluded in the calculation of the average and the median (click on the picture to see the actual numbers more clearly).

Comparables Companies - Average Multiples
Comparables Companies – Average Multiples

The table below presents the process of estimating the total market value of Sanofi Aventis’ equity based on the derived transaction multiples. Net Debt has only been subtracted from Enterprise Value to determine the market capitalisation of the company as figures derived from equity multiples are market values of equity.

Market Value of Equity Estimation - CMM Approach
Market Value of Equity Estimation – CMM Approach

Using the CMM approach the market value of equity of Sanofi-Aventis as of 31.12.2005 was estimated at € 92,954 mn. The market capitalisation of Sanofi-Aventis was € 103,656 mn. (31.12.2005).


In CMM one collects a sample of comparable companies based on both financial and non-financial criteria. Equity and enterprise multiples are collected for the comparable companies and the average and median are calculated for the comparable companies and outliers are excluded. Thereafter, the average multiples are applied to the target company. Net debt has to be subtracted from the enterprise value derived from the comparable multiples, as equity multiples estimate the market value of equity and the aim is to compare these values to the actual market capitalisation of the target company.

Although a 10% deviation between the derived value and the actual market capitalisation of Sanofi-Aventis can be considered as huge when considering share price performance, CMM is highly sensitive to the selection of the sample and the average multiples. A difference in a decimal point in a high-weight multiple can have a large impact on the final value of the company.

The next article will focus on the Comparable Transactions (CT) methodology and provide an overall summary of the valuation results from the 3 methodologies (CMM, CT and DCF) on Sanofi.


Dimitris uses its unique blend of studies in Management and Biotech combined with his quick witted entrepreneurial spirit to provide deep insights into strategic and financial aspects of the Biotech industry.

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