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Corporate Valuation
of PharmaCo GmbH

By:
Michael Tomitz
&
David Yin

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Table of Contents

1. Introduction
Problem Background
Objectives
Theoretical Background of Corporate Valuation

2. Presentation of the Company

Analysis of the Past
Competitive Analysis
Analysis of the Company to be Valued
Analysis of the Business Plan
Analysis of the Planned Balance Sheet
Analysis of the Planned Profit & Loss Statement

3. Corporate Valuation According to the Discounted Cash-Flow Approach

Derivation of Free Cash Flows
Determination of the Cost of Capital
Determining the Companys Value According to DCF

4. Corporate Valuation According to the Multiples Approach

Determining the Companys Value on the Basis of Comparable Firms
Comparison of the Results: DCF vs. Multiples

5. Conclusion

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1.1 Problem Background
The PharmaCo GmbH is a family-owned pharmaceutical company located in Marburg.
PharmaCo GmbH owns multiple subsidiaries and has been experiencing good growth.
In anticipation of its IPO, PharmaCo GmbH has decided to sell the subsidiary A-Z Pharma
GmbH, which is responsible for the business with non-patented, or generic, drugs.
1.2 Objectives
We have been tasked with the valuation of A-Z Pharma GmbH, in order to facilitate its sale.
Using the DCF approach as well the multiples approach as a benchmark to comparable
companies, PharmaCo GmbH should have an accurate representation of the financial value
of its subsidiary.
1.3 Theoretical Background of Corporate Valuation
When evaluating a companys monetary worth, there are a few different methods that may
be employed. One method is to use data for comparable companies to estimate the value.
Pertinent data includes the following from comparable companies as well as the company in
question: enterprise value (sum of equity value and net debt) and EBIT (earnings before
interest and taxes). However, this method cannot be relied upon for precise valuation.
Another involves using the discounted cash flow approach, which is the more widely used
and reliable method. We will be using both in this case.

2.1 Analysis of the past:

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With a company looking towards the future, it is equally important for the same company to
look to the past and determine the correct course of action to seek its goal. In this case,
family owned PharmaCo GmbH is looking to sell its subsidiary A-Z Pharma GmbH, whose
responsibility is the business of non-patented drugs. This will allow PharmaCo GmbH to
significantly increase research and development and acquisitions of smaller scale
competitors in North America and Asia. Sales of A-Z Pharma GmbH steadily increased in
2012 from 375$ million to 377$ in 2013 to a record high of 386$ in 2014. Manufacturing
costs followed this same pattern of gradually increasing from 2012 to the highest point in
2014. If sales continue to rise in the coming years, then A-Z Pharma GmbH could potentially
be sold for a higher price.
2.2 Competitive Analysis:
These companies were chosen due to the similarity of business plans. The common
denominator with the below companies are that they all distribute non-patent protected
(generic) drugs.
The subsidiary A-Z Pharma GmbH, is primarily responsible for generic drugs. There are four
other companies in competition with A-Z Pharma GmbH:
Pharmaca AG: Distributes generics for cardiovascular drugs and analgesics.
BioPharma S.A.: Development, manufacture and sale of generic pharmaceuticals.
Therapeutic plc: Manufacture and distribution of products with generics
Sanix AG: Production and distribution of a total of 250 generic and branded products.
The above companies competitively affect A-Z Pharma GmbH.
2.3 Analysis of the Company to be Valued

SWOT is a tool used to help corporations determine 4 aspects of their business.

SWOT stands for Strength, Weakness, Opportunity, and Threats. By breaking down
the business into these 4 categories, corporations can decide where to focus for the
future.
S: Growth rate continuing to exceed expectations. Foothold in low taxed Country.
W: Does not manufacture generic drugs, only sells.
O: Opportunity to manufacture. Possibility to sell the company for a large profit.
T: Other companies that sell generic drugs.

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3.1 Analysis of the Business Plan:
The analysis of the business plan, planned balance sheet, and planned profit & loss
statement, all contribute to the strategic future planning of the business. This allows
PharmaCo GmbH to determine the price of selling A-Z Pharma GmbH and if selling is worth
it. A-Z Pharma GmbHs business plan from 2012 to 2014 shows a steady increase of sales
and manufacturing costs. Sales have increased from 375$ in 2012 to 386$ in 2014. These
increases in sales and in manufacturing costs reflect the business is in a period of growth.

3.2 Analysis of the planned balance sheet:

The planned or future balance sheet anticipates the company continuing to grow its assets
from 411$ in 2014 to a future balance of 433$ in 2015. This plan is ambitious but still
feasible. The company again plans a future balance that has surpassed the previous year. In
2016 the company plans a growth of 3$ in 2016 and another growth of 12$ in 2017. These
are all attainable future balances.

3.3 Analysis of the planned profit & loss statement:

A-Z Pharma GmbH plans for ambitious growth in sales between the years 2014 and 2015.
Previous years did record growth, however it was small with a max growth rate of 9$ from
2013 to 2014.
If the company attains the projected growth in 2015, there will a smaller feasible gap for the
company to hit in 2016.
The largest gap is in the years of 2016 and 2017. If this 35$ change is a long term goal of
the company to profit off of investments made in earlier years then it should be attained,
however, if this is projected to be made from the products made throughout the year, then
this could be troublesome.

3.4 Derivation of Free Cash Flows

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The free cash flows are calculated with this equation:
NOPAT (net operating profit after tax) + Depreciation + in provisions Investment WC
The free cash flows for A-Z Pharma are as follows, starting with 2013 and ending with 2018:
$32, $31, $18, -$37, $46, $42 (all in millions). We will be using FCFs for 2016 to 2018.
Beyond 2018, the future FCF is calculated to be a perpetuity with the value of $44 million.
3.5 Determination of the Cost of Capital
The cost of capital is determined by the WACC approach. Since A-Z Pharma GmbH is
completely financed by equity, the rWACC is equal to the expected return. The CAPM equation
for the expected return is: E [ Ri ] = rf + i * ( E [ RMkt ] rf ). The risk free rate is rf, i is the
asset beta, and E [ RMkt ] is the expected market return. ( E [ RMkt ] rf ) together is the
market risk premium. The equation with the appropriate numbers from A-Z Pharma GmbH
is: 0.06735 = 0.0134 + 0.83 (0.065). Therefore, we have calculated rWACC equal to .06735
and we can move on to the final stage of the DCF approach for valuation.
3.6 Determining the Companys Value According to DCF
The equation to determine the market value of A-Z Pharma GmbH is :
MVequity = [ Tt=1 (FCFt) / (1 + WACC )t ] + { FCFT+1 / [ (WACC g) * (1 + WACC)t ] }
The first part of the equation takes the Future Cash Flows that have been forecasted and
combined them into one present value sum. The second part of the equation takes the
estimate of future cash flows that are beyond the forecasting period and discounts it to
present value. Added together, we have the DCF method for valuation. For A-Z Pharma
GmbH, the two parts of the equation are $40.254 million and $630.956 million. Combined,
the value of A-Z Pharma GmbH today is $671.21 million according to the DCF approach.

4.1 Determining the Companys Value on the Basis of Comparable Firms

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To calculate the companys value using data from comparable firms, we need the following
information for these firms:
Enterprise value (equity value plus net debt) and EBIT
The companies we have chosen as peers are Pharmaca AG, BioPharma S. A., Therapeutic
PLC, and Sanix AG.
First, we must find the MultipleEBIT. This is the sum of (Enterprise Value) / (EBIT) for all peer
companies. The MultipleEBIT comes out to be 49.3249. We multiply that by the EBIT of A-Z
Pharma GmbH to find the value according to the Multiples method. It comes out to be
$937.1731 million.
4.2 Comparison of the Results: DCF vs. Multiples
The DCF method has a much more modest valuation, and is widely considered to be more
accurate. One explanation for the huge discrepancy between the two methods may be that
the comparable companies were not close enough in size to A-Z Pharma GmbH. 3 out of
the 4 companies were much larger, with the BioPharma S. A. leading with more than 4 times
the EBIT of A-Z Pharma. Since the Multiples method relies heavily on using data from other
companies in the valuation calculation, results can vary.

5. Conclusion

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According to our calculations, A-Z Pharma GmbH is currently worth $671.21 million. We
opted to use the DCF method for our official valuation since it is generally considered to
be more representative of the actual value. This valuation should be used as a basis for
which to negotiate with prospective buyers, and is only valid with the forecasting for
future cash flows that we were given access to. It is worth mentioning that the Multiples
method yielded a much higher valuation of $937.1731 million. However, this does come
with a disclaimer that the comparable firms used in this calculation were mostly much
larger than A-Z Pharma GmbH. This may have had an effect on the inflated value as
compared to the DCF method. I hope this consultation has been of assistance to you in
your endeavors. Best of luck with your upcoming IPO!