Biotech Enterprise Value and M&A Evaluations
Enterprise Value (EV) is a measure of a company’s total value, often used as a comprehensive alternative to equity market capitalization that includes debt.
EV = (Market Cap + Preferred Stock + Outstanding Debt + Minority Interest) – Cash and Cash Equivalents
During Q2 2022, a record >200 publicly listed biotechnology companies were trading at a negative enterprise value. Several of these negative EV companies were acquired or otherwise entered into strategic partnerships that led to >100% rallies.
During the worst days of the financial crisis, there were well under half that number trading at a negative EV…
Just because a company trades below its EV does not necessarily imply something positive. In many instances, these entities do not have enough cash to make it to their next milestone.
Our analysis shows that about half of the companies trading below their EV are in a danger zone. The other half of that list might be in a strong position to weather any storm on their way to marketable drugs or technologies and acquisitions.
The 40% pullback that we have seen in the biotech space has been its longest and deepest in history. BUT we have a seen a nice bounce since 6/13/2022 where the sector has risen over 27%.
Perhaps the sector is a year ahead of the broader equity markets and we are starting to see some life. Some M&A could get the sector moving. Consider the amount of cash on hand for the large players and the lack of credit they are seeing in their multiples as a result of the cash. It would appear a good time to put that cash to work and spend on long duration assets