Biotech Precedent Transaction Analysis
- The IB Brief
- 3 days ago
- 2 min read
Precedent Transaction Analysis – Biotech
Precedent Transaction Analysis is the last comparative valuation method. Put simply, a company can be valued by averaging valuation multiples paid in recent acquisitions of similar companies. I tackled a valuation of Vertex Pharmaceuticals using five other biotech acquisitions as benchmarks. Again, this wasn’t as straightforward as expected, finding the data was a frustrating process. Each acquisition required multiple websites to find all the metrics which was time consuming!
Table 2: Acquisition metrics
Transaction data acquired from the following sources: respective company 10-K reports (year of acquisition), Morningstar, businesswire
The goal of this piece was to practise precedent transaction analysis, not to produce a precise valuation of a potential acquisition target. I used AI tools to shortlist biotech companies recently in the news and chose Vertex Pharmaceuticals. Earlier this year, the Boston based company received FDA approval for their drug Journavx, a pain relief medicine.
Yahoo!Finance reports revenue of $11.02B and EBITDA of $5.11B. Therefore, using our mean EV/EBITDA ratio (15.54x) we can calculate EV.
$5.11B x 15.54 = $79.4B
If we used EV/Revenue (10.25x), EV would be
$11.02B x 10.25 = $113B
While this disparity does seem alarming, this highlights some of the drawbacks of this analysis method. Not only is the definition of a ‘similar transaction’ rather subjective, the time in which the acquisition occurred greatly affects valuation metrics. For example, the COVID market is very different to the tariffs of today.
This article marks the final part of my mini-series exploring the three core valuation techniques: DCF, Comps, and Precedent Transactions.
I hope you enjoyed!
Please check out the rest of my articles here.
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