Animal Health Company Valuations – December 2021 Update
The animal health industry has consistently grown over the last several years, reflecting continued focus on improving the health and wellbeing of livestock and companion animals worldwide. The Animal Health Institute has a nice infographic summarizing the breadth of the industry in the U.S. alone. This article will briefly analyze some of the trends currently impacting valuations of publicly-traded animal health companies.
This article was first posted to the ValuInsights blog and updates our June 2021 analysis.
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. The effective date of this analysis is December 29, 2021.
Figure 1 summarizes three items for the animal health companies:
- Total enterprise value calculated as the sum of market capitalization and interest-bearing debt less cash;
- Median revenues; and
- Median earnings before interest, taxes, depreciation, and amortization (“EBITDA”).
The latest fiscal year is notated “LFY” (calendar 2020), while the latest 12 months is labeled “LTM” (latest available information as of December 29, 2021).
The industry has experienced consistent growth in values, revenue, and EBITDA over the last five fiscal years and in the LTM. Improvements in valuations outpaced growth in financial performance. Rising demand for improved animal health (particularly as the number of animals raised for food continues to increase) has driven improvements in valuations and financial performance.
Valuation Multiples
Figures 2 and 3 provide a view into the historical trend in valuation multiples (revenue and EBITDA).
Despite valuations outpacing recent financial performance, valuation multiples declined in the LTM period. 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 December 29, 2021, while “prior year” means December 31, 2020.
In Figure 4, the orange line represents data as of December 31, 2020. Despite the pandemic, projections at the time suggested continued strong growth in revenue and EBITDA in 2020. Actual results for 2020 were in line with 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 NFY+1 (2022) revenue growth against NFY revenue multiples, there appeared to be some correlation (although we acknowledge the limited number of data points). Figure 6 presents this relationship.
We did not observe consistency throughout the limited number of data points. However, companies with growth rates of approximately 6% or less tended to trade at multiples ranging between 1.0x and 4.0x NFY revenue. Companies with growth rates of approximately 8% or more traded at much higher multiples of projected NFY revenue.
Other factors may be impacting the valuation multiples observed, which will be discussed. For example, Zoetis is the largest animal health company globally with a broad product portfolio and generates the highest profit margins among the companies analyzed. Dechra Pharmaceuticals also generates substantial profit margins. These factors likely contribute to the magnitude of the observed revenue multiples for these companies.
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 plots each company’s LTM revenue multiple against its size (measured by market capitalization).
Given the limited number of data points, it is difficult to determine whether size has a meaningful impact on the magnitude of valuation multiples. Clearly, Zoetis has the highest multiple and is the largest company, while Phibro Animal Health Corporation is the smallest company and trades at the lowest multiple.
The Profitability Story
Revenue multiples can be 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 NFY 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.
The Leverage Story (***New***)
New to this update, we consider the impact of financial leverage (or the companies’ use of debt) and their impact on the valuation multiples. In the last year, we have noticed an increasing trend of risk mitigation among investors, both in the private and public markets. Therefore, we have included financial leverage among the considerations we analyze to explain the observed valuation multiples.
Debt usage tends to increase financial risk to equity holders. Debt holders have a senior position within a company’s capital structure, and debt servicing occurs before any cash flow benefits (i.e., dividends) issued to equity holders. In Figure 9, we plot LTM revenue multiples against their associated debt-to-total capital ratios (as available).
We could not determine whether leverage had a meaningful impact on valuation multiples given the limited number of data points available to analyze. However, Zoetis and Decra Pharmaceuticals appear to be better positioned from a leverage perspective, while Phibro Animal Health Corporation and Elanco Animal Health Incorporated traded at lower multiples and greater levels of financial risk.
Tying it All Together
The trends observed in this article suggest that revenue growth and profitability have the most significant influence over the valuations of publicly-traded animal health companies. Size and leverage may also have an influence, but a clear relationship between these factors and valuation multiples could not be identified.
A summary of these observations is presented below and compared to our June 2021 analysis.
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.
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