Go to market

Opportunity: A company XYZ intended to launch its innovative diagnostic kits based on Limbal stem cell deficiency in the Indian market


  • Orphan kit
  • Few published results
  • Indian market unwilling to accept an innovative product unless launched in developed markets


Our Strategy:

  • Advised the Company to first launch in developed markets
  • Identified a partner in Austria/Slovenia and assisted in launching products and developing sales forecast
  • Identified  Key opinion leaders (KOLs) in one of the finest eye hospitals of India
  • Negotiated with the KOLs to validate the kits and publish papers



  • KOL’s acceptance to validate and publish results generated further interests amongst other prominent hospitals of India
  • The published papers would assist the company to increase their sales in other markets besides India

Case study on valuation - Biotech company

Opportunity: A biotech company‘s product was in Phase 1. Buoyed up by the good results, the company was keen to raise funds and continue drug development.

Challenges: Limited data regarding comparable technologies, technology at early stage.

Product assessment:

  • Assessed the technology : Attributes, Target Profile, Patents, R&D risks, Market potential
  • Evaluated the pre-clinical data : Safety, Efficacy, Toxicology etc
  • Assessed the risks that could impact the approval and market potential of the product: regulatory risks, clinical design, statistical assumptions in the design of clinical trials

Financial Approach:

No historical data to calculate cash flows and cost of capital.

  • Estimation of comparable firm betas (public biotech companies)
  • Conversion of Debt ratio (book value) to Industry averages, estimation of cost of capital
  • Cash Flows (In & Out): Primary and secondary research to validate growth rate assumptions etc.
  • Probabilities to cross the phases and reach the market
  • Decision Tree to value the project


  • An independent valuation by Farmantra was very well appreciated for its sound technical and financial analysis and assisted the company in negotiating well with the Investors.


This valuation was conducted in 2013 and is not relevant as of today as many factors assumed in 2013 have changed. Nevertheless, this case study should be used to understand the depth of analysis we conduct for each valuation. This case study should not be used to make any investment decisions.


Almirall S.A is a pharmaceutical company involved in R&D development of propriety medications with a therapeutic focus on:

  • Asthma
  • COPD (Chronic Obstructive Pulmonary Disease)
  • Gastrointestinal disorders
  • Psoriasis & other dermatological conditions

Almirall S.A has a 60 year history of being a stable company; however, they are facing challenging times due to the overall poor economic climate in addition to Spain’s efforts in introducing ‘generic prescription’. This has led to the operating income falling to a new low of € 56 M in 2012.


We decided to value Almirall by Intrinsic Valuation rather than multiples for the simple reason that we wanted to know how much the assets of Almirall are worth rather than the price of Almirall based on multiples.

Almirall is in similar state to a declining company where its revenue is almost stagnant and operating income consistently falls. Although one can argue that this is due to external factors, such as global recession or Spanish regulations, analysis of its competitors as well as other big pharmaceutical companies led us to conclude differently. We analyzed the financial results of prominent pharmaceutical companies over a 5-year span and found out the following:

  • The Pharmaceutical industry overall is indeed affected by the global recession. Some of the big players, such as Novartis, AstraZeneca, and Takeda, have had a reduction in their earnings in 2012. However, few have displayed a consistent decline in earnings from 2009 such as in the case of Almirall.
  • The Ipsen annual report1 provides a comparison of 2012 earnings of 22 pharmaceutical and drug companies. The companies with declining earnings had a median -7% decline in revenues (highest performer: -2% for Merck, lowest performer: -17% for Astrazeneca and BMS) in comparison to an 11% decline for Almirall. The companies with increased earnings had a median 7% increase in revenues with Abbot presenting the lowest increase of 2% compared to the highest performer Novo-nordisk at 18%.
  • Almirall has been unable to earn excess returns based on the investment it has made; the problems could be attributed to poor management than to fundamentals. Hence, Almirall could have been valued with either the status quo value with the probability of having existing management team and with an optimal value with the probability of having the new management team that helps to turn-around the company. However, Almirall, being a family based business; the probability of having new management in charge is negligible. Despite this, the promising news is that Almirall, with declining operating income, has paid off all debts in 2012 and therefore there is no probability that the company will become a distressed company.

Based on above analysis, we decided to value Almirall on its current status with existing reinvestments and returns. Besides, we assumed that the existing management would be capable of turnaround of the company and that its new innovative products in the offing and international expansion would allow Almirall to get excess returns over a five year period. In other words, the company would try to attain its cost of capital, if not exceed the cost of capital.

We have assumed a 2 stage model where, in the first stage, Almirall would grow at a higher rate than the rate of the economy for a maximum period of five years followed by a second stage where Almirall undergoes stable growth i.e grows at the rate of the economy. We have the following rationale to support this assertion:

  • Almirall has several products in the pipeline and is expecting to launch many of them in 2013 and 20142. In order to launch they have increased their S&G expenses in the last quarter of 2012 and they are expected to increase in 2013.
  • The international sales are growing and currently they comprise 60% of the revenues which could offset the decreasing domestic sales in Spain.

We have valued Almirall by applying the free cash flow to the firm model. As the company has paid all outstanding debt by 2012, the cost of capital will be equal to cost of equity.

Present value of Free Cash flow to the firm = € 208.83 M

Present Value of the Terminal Value of the firm = € 637.92 M

Value of operating assets = € 846.75 M

Value of cash, marketable securities & non-operating assets = € 52.3 M

Value of the firm = Market value of Equity = € 899.053 M

Number of shares outstanding = 170.522827 M

Market Value of Equity/share = € 5.18

Our valuation suggests that Almirall is overvalued at € 10.11/share as of today 18-Mar-13



High growth Phase

Stable Growth Phase

Length of period

5 years

After 5 years


Effective tax rate increasing 6% every year to reach the marginal tax rate of 30%4

Marginal tax rate of 30%

Cost of capital

Adjusted every year from the current 10.13% to 9.06% when it reaches the stable growth


Return on capital

Currently 5.19% which is less than the cost of capital5. Assumed that it finds its way to reach the cost of capital in stable growth period

9.06% which is the cost of capital.

Non-cash working capital

Currently 0.97% of revenues in 2012 and assumed to grow at the same rate6

0.97% of revenues

Reinvestment rate7

34% of after tax operating income supposed to decline after second half of the high growth period to 16%

16% of after tax operating income

Expected growth rate in operating income8

1.75% projected to decline after second half of high growth period to 1.53%9


Risk Parameters

The bottom up unlevered beta is 1.0810which decreases to 1 in stable growth period

Ke =10.13% Risk premium = 8%11

Stable Beta = 1, Cost of capital = 9.06%

Important parameters used in calculations:

Operating Income: Almirall’s operating income has been consistently decreasing since 2009; from € 179.1 M in 2009 to € 56 M in 2012. The steep fall in operating income in 2011 (€ 96.9M) occurred as a result of the economic crisis as well as patent expiration of several products. In addition, the royal decree of Spain favored generic prescriptions that affected the sales of branded drugs of Almirall. The operating income in 2012 decreased further due to increased investment in R&D of € 15 M (10.4%) and significant increase in SG&A worth € 80 M (23.5%) for new product launches. Based on our analysis of the competitive landscape, we decided not to normalize the operating income.

R&D:In many countries, based on accounting standards, R&D is not capitalized. However, we have capitalized the R&D in order to understand the return they get on the investment. The capitalization may not always result in higher ROC. Only those companies that earn excess returns or that have high R&D productivity will have higher ROC on capitalizing. The results before and after capitalizing mentioned below:

Before Capitalizing R&D

After Capitalizing R&D


€ 56 M

€ 89 M


€ 72.9 M

€ 232.4 M

Depreciation & Amortization

€ 68 M

€ 202.34 M

Book Value of equity

€ 854.7 M

€ 1267.84 M

Book Value of Debt

€ 202.2 M

€ 202.2 M




Capitalizing R&D increases the ROC of Almirall although it’s well below the Cost of Capital. This implies that R&D does create value for Almirall but it’s still not able to attain its cost of capital.

Growth rate: We neither used the management’s forecasts nor the analyst’s growth rates; we calculated the growth rate based on the fundamentals i.e. using how much they have reinvested (reinvestment rate) and how well they have reinvested (ROC)



In order to understand how much we are paying for Almirall’s growth, we decided to analyze their growth. As a mature company most of their growth comes from their existing assets rather than their growth assets. We decided to value the assets in place and understand how much we are paying for them. Almirall has two options from their existing assets :-

  1. They pay out all the earnings to their claim holders (lenders and stockholders)
  2. They reinvest a portion of that for growth

Assuming Almirall does not reinvest the existing assets and pursues a no-growth policy. This implies that the earnings will remain the same for perpetuity and Almirall should keep returning the entire earnings as dividends to its shareholders. The value of those assets can be computed by EBIT/cost of capital.


Estimating price paid for growth

Almirall S.A.

Operating income

€ 89 M

After tax operating income14

€ 62.3 M

Cost of capital


Value of assets in place

€ 615 M

Enterprise value15

€ 1672 M

Price paid for growth( EV- value of assets in place)

€ 1056 M

Proportion of price paid for growth

63 %

The difference between the Enterprise value and the value of existing assets provide the price we would pay for the growth.

We are paying € 1056 M currently for the growth that constitutes 63% of the price paid for future growth. Next, we decided to analyze how much the growth is worth. We assumed that Almirall will keep reinvesting at current rate of 34% with the current return on capital of 5.19%. The value of the company with growth in perpetuity can be obtained as After tax operating income * (1- reinvestment)/ (cost of capital – growth rate).



Estimating Value for growth

Almirall S.A.

Reinvestment rate


Return on Capital


Growth rate


Value of Firm with growth

€ 490 M

Value of growth

-€124 M

Price paid for growth

€ 1056 M

Price paid/value of growth

Too high

This could be worked the other way round too. We can also value growth by setting a higher growth rate of 5% with high return on capital of 10%. In that case Almirall has to reinvest 50% of the operating income but the fundamentals that the higher growth rate will affect the value inversely if ROC<COC, will not change. In order for value of the growth to increase, Almirall needs to earn ROC greater than the COC. As the current return on capital is less than the cost of capital, the value of growth is negative i.e. – €124 M and the price we are paying for the growth is too high.


Almirall has to earn excess returns (ROC>COC) in order to have valuable growth. As the earnings are declining consistently for the past 4 years, Almirall could do the following:

  • Restructuring: Almirall could restructure itself by liquidating assets that do not produce excess returns and grow smaller. They could also focus on their core-competence and outsource the rest.
  • New Investments: Declining companies gain very little from growth assets. As seen above, the price paid for future growth constitutes 63%. However the price we pay should be based on not just growth but ‘quality growth’ that generates excess returns. Almirall could increase R&D productivity and invest in developing innovative products that could manage to achieve a high growth.
  • Internationalization: As domestic sales have been dropping and international sales growing, Almirall needs to focus aggressively on increasing sales internationally. This could be achieved by either a strategy based on expansion in emerging markets or launching new products in developed markets.
  • http://www.ipsen.com/en/financial-results?date_filter_1%5Bvalue%5D%5Byear%5D=&date_filter_1%5Bvalue%5D%5Bmonth%5D=0&date_filter_1%5Bvalue%5D%5Bday%5D=0&date_filter_1%5Bvalue%5D%5Bhour%5D=0&date_filter_1%5Bvalue%5D%5Bminute%5D=0&date_filter_1%5Bvalue%5D%5Bsecond%5D=0
  • http://investors.almirall.es/phoenix.zhtml?c=209345&p=irol-newsArticle&ID=1787556&highlight=
  • There is no debt left with Almirall, Hence the market value of debt is zero
  • A firm cannot receive the tax benefits forever and hence it has to pay marginal tax rate of 30% in the stable growth period
  • IF ROC< COC it implies that we are locking this firm into investing in negative excess return projects. Hence we assumed that Almirall will find its way to earn its cost of capital so that reinvestment is lower during stable phase
  • The non-cash working capital as percent of revenues has been 0.94% on a five year average
  • Reinvestment rate is calculated by (Net Capex + change in non-cash working capital)/EBIT(1-T). During stable period, we have calculate how much reinvestment is required to attain a ROC of 9.06%
  • Expected growth rate = Return on capital*Reinvestment rate
  • Risk free rate is a good proxy for a growth rate in economy. The assumption implies that during stable growth period the firm cannot grow more than the rate of economy and hence 1.53% is used which is the risk free rate – 10 year german bond rate
  • The firm does not have debt
  • Risk premium for AAA rated country is 5.46%. Country risk premium for Spain is 3%. (Damodaran website).The Total Risk premium for Almirall is calculated based on where its located and from where it receives the revenues
  • Capitalizing R&D does not change the free cash flows
  • Marginal tax rate of 30% is used to calculate after tax operating Income in calculation of ROC. Although effective tax rate could be used which is 0% in 2012 but as ROC is used to calculate future growth/investments it is more prudent to use the marginal tax rate.
  • Again we used marginal tax rate of 30% assuming Almirall has to revert to this tax sooner or later.
  • Bound to change based on current stock price, The stock price today 18th March is €10.11
  • Value of growth is negative as Almirall earns a ROC less than the cost of capital
  • Reinvestment rate =growth rate/return on capital
  • ROC = Return on capital, COC = Cost of Capital