Animal Health Company Valuations
The animal health industry has consistently grown over the last several years, reflecting continued focus on improving the health and well-being of livestock and companion animals worldwide. After all, healthy animals require less natural resources to raise and yield more food or companionship. This article will briefly analyze some of the trends that currently impact animal health company valuations in the public markets.
Important notes: This article examines potential driving factors for animal health company valuations from a financial statement perspective. An actual business valuation requires an in-depth analysis of the business operations and associated risk factors that are not always evident from the data on financial statements. Also, to keep the length manageable, this article will focus on what the author interpreted as the primary value drivers. It will not touch on every observation in the data. For a quick read on the basic concepts of risk and return and how they apply in the context of this article, please visit: What is Value? and Risk and Return in the Market Approach.
The industry constituents for this analysis are listed below. We focused on publicly-traded companies located in major developed markets that produce veterinary drugs. Companies selected for this analysis had to be traded on a major exchange for at least a year with a stock price equivalent of $1 or more. The effective date of this analysis is June 30, 2021.
Figure 1 summarizes the animal health companies’ total median enterprise value (“TEV”), median revenues, and median earnings before interest, taxes, depreciation, and amortization (“EBITDA”). The latest fiscal year is notated “LFY” (2020), while the latest 12 months is labeled “LTM” (latest available information as of June 30, 2021).
The industry has experienced consistent growth in values, revenue, and EBITDA over the last five fiscal years and in the LTM. Rising demand for improved animal health (particularly as the number of animals we now raise for food has increased) has driven improvements in valuations and financial performance. In fact, the Wall Street Journal reported in October 2020 that an increase in pet ownership during the pandemic contributed to a rise in valuations for several pet-focused companies in 2020 (subscription required to access article).
Valuation Multiples
Figures 2 and 3 provide a view into the historical trend in valuation multiples (revenue and EBITDA).
Despite relatively consistent growth in valuations and financial metrics, the trend of median valuation multiples has fluctuated. Trends in median multiples only tell us so much. Let’s dive into what is impacting valuations.
The Growth Story
Growth often has a strong influence on how companies are valued. Figures 4 and 5 below present a summary of the consensus forecasts for each group. Note that “NFY” means next fiscal year; NFY (blue line) = calendar 2021 for most companies, NFY (orange line) = calendar 2020 for most companies. “Current year” means June 30, 2021, while “prior year” means June 30, 2020.
In Figures 4 and 5, the orange line represents data as of June 30, 2020 – some of the worst months of the COVID-19 pandemic. Despite the pandemic, projections at the time suggested gradual growth in revenue and EBITDA in 2020. Actual results for 2020 outperformed these expectations. As the blue line (current data) demonstrates, the industry posted solid revenue and EBITDA growth in the LFY. The industry expects growth to accelerate in 2021 and beyond.
When plotting projected revenue growth against current valuation multiples, there appeared to be some correlation. Figure 6 presents this relationship.
For the most part, companies with higher growth rates appear to trade at higher valuation multiples. The valuation multiple for Zoetis seemed to be impacted by other factors, such as size (Zoetis is the largest animal health company globally with a broad product portfolio). We noted the limited dataset and the inherent difficulty of identifying trends with a small number of data points.
We did not observe a meaningful relationship between EBITDA growth rates and EBITDA multiples.
The Size Story
Larger companies are generally perceived to have lower levels of risk relative to smaller companies. This dynamic can be due to several factors, including improved product or geographic diversification, deeper management teams, access to various distribution channels, and better availability of capital.
Figure 7 presents a possible correlation between size (measured by market capitalization) and LTM revenue multiples.
The data in Figure 7 would suggest that larger companies tend to trade at higher valuation multiples.
The Profitability Story
Revenue multiples are typically heavily influenced by profitability. We usually observe higher revenue multiples in companies with higher levels of profitability. This relationship appears to hold true for the animal health industry, as shown in Figure 8 below.
In this case, there appears to be some correlation between revenue multiples and NFY EBITDA margins. This relationship suggests that profitability is likely an important consideration in how investors value companies in the animal health industry.
Tying it All Together
The trends observed in this article suggest that revenue growth, company size, and profitability have significant influence over the valuations of animal health companies in the public markets. Valuations in the industry appear to have shrugged off the pandemic and are poised for continued growth as demand continues to rise.
I hope you found this analysis helpful. Any input, feedback, suggestions, and questions (including disagreements with my high-level analysis) are welcome! Thanks for reading.
***
The quantitative industry analytics shown in this analysis was powered by ValuAnalytics’ proprietary valuation analytics platform. If you are looking to assess how your company or client benchmarks against its publicly-traded peers, let us help you automate and accelerate your analysis. ValuAnalytics provides cost-effective, expert-level valuation analytics to give you the insight you need to make better-informed decisions around valuation. Click Request Service to get started.
