Animal Health Company Valuations – June 2022
The animal health industry has consistently grown over the last several years, reflecting a continued focus on improving the health and wellbeing of livestock and companion animals worldwide. In particular, following an increase in pet adoptions during the COVID-19 pandemic, the companion animal submarket is expected to grow significantly over the next five years. PetKeen offers a nice summary of current companion animal trends. This growth should help to drive demand for animal health products. However, despite expectations for continued broad industry growth, valuations of animal health companies declined from December 2021 to June 2022. This article will briefly analyze some of the trends currently impacting the valuations of publicly-traded animal health companies.
This article updates our December 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 used in this analysis are listed below. The effective date of this analysis is June 29, 2022.
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 2021), while the latest 12-month period is labeled “LTM” (latest available information as of June 29, 2022).
The industry has experienced consistent values, revenue, and EBITDA growth over the last five fiscal years. Revenue and EBITDA growth flattened in June 2022, and valuations declined. Recent declines in the broad equity markets are likely contributors to the pull-back in animal health company valuations. This article will discuss other factors contributing to the recent decline in industry valuations.
Valuation Multiples
Figures 2 and 3 provide a view into the historical trend in valuation multiples (revenue and EBITDA).
We had observed some risk mitigation in valuations at the end of 2021, which may be partially responsible for the declines observed in revenue and EBITDA multiples in the LFY period shown in Figures 2 and 3. Multiples declined further through June 2022 as valuations declined and financial performance stagnated.
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 29, 2022, while “prior year” means June 30, 2021.
The orange line in Figures 4 and 5 represents data as of June 30, 2021. Projections at the time suggested continued growth in revenue and EBITDA in 2021. Actual results for 2021 were in line with these expectations. As the blue line (current data) demonstrates, the industry posted solid revenue and EBITDA growth in the LFY. However, as we move into the end of 2022, expectations appear to be shifting. Revenue expectations for 2022 are flat and subsequent growth, while strong, is not expected to rise to the levels projected in June of the prior year.
We next attempted to identify a relationship between growth rates and valuation multiples, which we present in Figures 6 and 7.
Expected growth rates appeared to influence the magnitude of multiples between the various animal health companies analyzed.
See also: Need to prepare financial statement projections? See A Practical Guide to Financial Statement Forecasts for Business Valuations.
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 8 plots each company’s LTM revenue multiple against its size (measured by market capitalization).
Zoetis is not pictured in Figure 8 due to its much larger size. Revenue multiples appeared to be correlated with company size among the smaller animal health operations. However, we acknowledge some limitations in our ability to interpret trends due to the limited number of data points.
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 for the animal health industry, as shown in Figure 9 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
Finally, we consider the impact of financial leverage (or the companies’ use of debt) and their effect on the 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) are issued to equity holders. In Figure 10, we plot NFY EBITDA multiples against their associated debt-to-total capital ratios (as available).
Given the limited number of data points available to analyze, it is difficult to conclude that leverage notably impacts valuation multiples. However, among the companies with the lowest debt levels, multiples appeared to trend with their associated debt to total capital ratios.
Tying it All Together
The trends observed in this article suggest that revenue growth, size, and profitability have the most significant influence over the valuations of publicly-traded animal health companies. Leverage may also influence valuations, but a clear relationship between this factor and valuation multiples was difficult to identify.
A summary of these observations is presented below and compared to our December 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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