Criteria and Strategies for Choosing the Right Comparable Companies in Biotech Valuation
When valuing a private or public biotech company using market multiples, one of the most critical first steps is ‘comparable companies selection’ which involves devising a valuation peer group – the comps. These are the most relevant comparable companies for analysis in order to conduct the valuation using comparable companies valuation approach (also known as the multiple methods). The peer group of comparable firms chosen directly impacts the valuation assessments, therefore, it is vital to carefully screen for and select the closest comparable public companies for devising benchmark valuation multiples. This article describes the practice for choosing the optimal comparables when valuing a biotech company using the market multiples methodology.
Comparable Companies Selection on Business Models & Drug Pipelines
Ideally, the comparable biotech firms selected will be public companies that have highly similar underlying business models and drug development pipelines and portfolios to the private biotech target company being valued. For instance, when one is tasked with valuing a clinical-stage oncology biotech focused on developing novel immuno-oncology drugs and biological therapies, other mid-cap cancer immunotherapy developers that have similar immuno-oncology assets in their R&D pipelines would make appropriate comparable companies to analyze based on their comparable business and pipeline focus.
On the other hand, large-cap diversified pharmaceutical companies that operate across many therapeutic areas would likely not be particularly relevant comparable peers to use in this situation for a specialized oncology biotech valuation. The diversified pharmas participate in too many other non-comparable business activities and drug categories unrelated to the specialized oncology biotech.
Therefore, it is prudent to closely evaluate the following dimensions of the target biotech company and its comparable peers to identify the closest business model and pipeline alignment:
- Specific therapeutic focus and areas of drug R&D
- Current drug development status and key pipeline assets and their stages
- Level of reliance on R&D partnerships for funding pipeline development
- Business model and structure (biotech vs. pharma vs. medical device)
- Revenue generation status (commercial vs. pre-revenue)
While it may not always be possible to find comparable companies that perfectly align across every one of these business dimensions, the more overlap that can be identified, the better. The comparables selected should match as closely as possible to the target biotech’s core business model, drug development pipeline, and go-to-market strategy when possible.
Multiples by Development Stage of Valuation Peers
In the biotech and biopharma industry, the company development stage heavily influences appropriate valuation multiples, often even more so than simple industry classification. Later stage, commercial biotech firms warrant different valuation multiples than very early pre-revenue, pre-clinical biotech startups.
Therefore, during comparable companies selection process, it is crucial to intentionally segment the peer group by company development stage and timeline. Comparable firms should be identified in the same or very similar development stage as the target biotech for an apples-to-apples comparison of valuation multiples by stage. For example:
- Early stage pre-revenue biotechs – Focus comparables on other biotechs with drugs still in preclinical or Phase I trials. Valuation multiples will focus more on cash runway, funding needs, and pipeline potential rather than commercial metrics.
- Mid stage clinical biotechs – Select peers that also have assets in Phase II or Phase III trials. At this stage, some early revenue projections may be possible to analyze.
- Late stage biotechs approaching commercialization – Choose comparables also nearing Phase III completion and regulatory submission to allow comparison on near-term revenue and profitability projections.
- Commercial-stage biotechs already generating revenue – Use only comparables that are also already selling approved products to enable direct comparison on current revenue and earnings multiples.
By segmenting the comparable companies by development stages, decision-makers can ensure they are comparing apples-to-apples when analyzing appropriate valuation multiples for each stage of the biotech lifecycle.
International Biotechs in Comparable Companies Selection
In some cases, there may not be sufficient comparable biotech companies trading in the public markets in the same country as the target biotech company being valued. This is often the case when valuing private startups biotech and early-stage biotech companies developing innovative new drugs. In these situations, it is recommended to expand the comparable companies search to include international biotech firms as well.
While geographic differences must be considered, international biotech peers can provide additional robust data points for valuation multiples, even if not perfect comparables. This allows for compiling a broader list of potential peers for quantitative and qualitative analysis. For example, a UK-based biotech startup could potentially be benchmarked against both domestically listed biotech firms as well as comparable US and European-listed biotech companies when assessing appropriate valuation multiples by geography. Having more international peers to analyze is typically better than limiting the peer group solely to domestic-listed biotechs in the same geographic market.
Size and Scale of Companies in the Valuation Peer Group
While not as critical of a factor as a comparable business model, pipeline, and development stage, comparing biotech companies of similar size and scale can also be a useful exercise, especially when looking at market capitalization and enterprise value metrics used in multiples analysis:
- Large-cap biotechs (over $10 billion market capitalization valuation)
- Mid-cap biotechs (between $2 billion to $10 billion in market capitalization)
- Small-cap biotechs (under $2 billion market capitalization)
One can segment market capitalization based on the need to enable valuation for different sizes of biotech companies. Comparing a smaller biotech with much larger peers may skew multiples analysis. Larger biopharmas tend to warrant different valuation multiples than small-cap companies. Therefore, where possible, grouping comparables by market cap segments can be helpful for normalizing the size effect when applying EV/Revenue, P/E, and other multiples valuation techniques.
Comparable Companies Selection using a Funnel Approach
For devising the valuation peers, it is a good strategy to cast a relatively wide initial net across the companies in public markets before methodically screening down to the most applicable comparable companies.
Leverage biotech market intelligence databases that allow screening for comparable companies using criteria like therapy type, MoA, development stages, and financial metrics. Start broad, and progressively narrow down the list by looking at the business model, pipeline, and growth factors as discussed. The goal should be to identify at least 8-12 relevant valuation peers if possible, then select the 4-6 that are the closest fit for the detailed valuation analysis. Having a robust list of potential peers allows for removing poor-fit firms and focusing on the ideal comparables aligned to the target biotech.
Careful and systematic selection of the most relevant comparable public biotech companies provides the foundation for sound valuations based on market multiples analysis. The most applicable comparable firms will be those that align closely to the target biotech across the key business model, pipeline, stage of development, size, and other critical factors that affect value. By incorporating these practices for screening and selecting optimal comparable companies, one can perform accurate biotech valuations using multiples.
BiopharmaVantage is a specialist healthcare consulting firm that specializes in providing valuation services specifically for biotech assets and companies. If you would like to explore how we can assist you, then please get in touch with us.