Pharmaceutical Company Valuation & EBITDA Multiples, 2023

This report presents average valuation multiples for small-to-midsize pharmaceutical companies in 2023. Our analysts compiled this data from third-party databases and personal interviews with M&A professionals in both the pharmaceutical and supplement industries. With a high degree of specialization among the bankers, advisors, and investors we interviewed, we were able to parse the data by sub-industry.  

You can find the results of our study in the tables below, which cover the two most popular valuation methods used by strategic and private equity acquirers: EBITDA and revenue multiples. 

After the valuation multiple tables, we offer commentary on the state of pharmaceutical M&A in 2023 and how pharmaceutical companies are valued. 

EBITDA Multiples for Pharmaceutical Companies – 2023

*Valuations of this company type are expressed as a multiple of revenue; see table below.

Revenue Multiples for Pharmaceutical Companies – 2023

The State of Pharmaceutical M&A in 2023

Like other sectors, pharmaceutical M&A suffered in 2022 due to a combination of macroeconomic factors (geopolitical tension & rising inflation) that produced market instability. As of 2022, the total number of pharmaceutical M&A transactions fell from 143 deals in 2021 to just 109 for the entire sector, with the average EBITDA multiple for the industry sitting at approximately 13.2x. 

Despite the declines in 2022, experts agree that pharmaceutical industry valuations are gradually rising in 2023. Our analysts attributed this rise in valuations to the stockpile of capital that many pharmaceutical buyers held onto during the bull market, anticipating the downcycle. Additionally, there is now better understanding of legislation affecting the industry such as the Inflation Reduction Act, which allows buyers to more accurately measure the risk/reward of buying a pharmaceutical company. 

As the market regains stability, it has become easier to forecast larger trends, leading to the following predictions:

• The number of pharma M&A deals will likely increase over 2023, but not necessarily the multiples. The forecasted boom in M&A is a reflection of buyers’ eagerness to acquire new drugs. However, the expected integration of corporate processes (e.g., drug discovery & manufacturing) may lead to more meager offers reminiscent of the multiples found in 2022. 
• Strategic buyers are more likely to offer higher multiples for pharmaceutical companies. Since the average timeline to bring new drugs to market is often longer than PE firms want to take before reselling the company, strategic buyers will be able to offer higher valuations and act more quickly. (Related: Selling to Private Equity vs. a Strategic Buyer: An Analysis)
• A higher multiple will require M&A experience. Because of the macroeconomic turbulence of 2022, otherwise confident buyers will be more prone to hesitation and conservative offers. Running an M&A process through an experienced advisory firm will  make a substantial difference in your ultimate financial outcome.

How to Value a Pharmaceutical Company

A critical factor in valuating the health of your pharmaceutical company is your pipeline – the number of drugs in the various stages of development, testing, and mass production. Pipeline is important for two reasons: 

• Almost all drugs have a natural lifecycle surrounding the patent expiration. 
• New drugs can often take up to a decade in development and FDA evaluation before hitting the market.

With larger pharmaceutical companies, this number is often in the 50-100 range; smaller companies would be expected to have a pipeline in the ranges provided below:

Pipeline Benchmarks by Company Size

Certain factors might change the benchmark for companies. For example, compounded drugs do not require FDA approval, which allows these pharmaceuticals to hit the market much faster than other drugs. Similarly, companies that target stable customer bases (e.g., those with chronic illnesses or senior citizens) have less of a need to produce a higher number of drugs.

The relative length of a pharmaceutical company’s path to profit poses an interesting problem for buyers, who normally rely on harder metrics like EBITDA to valuate companies. While EBITDA is an industry standard in M&A, the need for buyers to understand how much their investment stands to make in the future requires additional valuation models.

To achieve this goal, M&A firms utilize discounted cash flow (DCF) analysis to estimate the value of an investment based on projected future cash flows. Calculating DCF uses the following formula: 

DCF provides pharmaceutical companies with greater leverage at the negotiating table, using projected growth and profit potential to maximize the payout. It should be noted that, despite the common usage of DCF to make valuations more accurate, EBITDA nonetheless remains the core of pharmaceutical company valuations.

Selling a Pharmaceutical Company

The intricacies of the pharmaceutical industry combined with the relative uncertainty of the economy in 2023 demands a high degree of diligence from owners and investors. 

Because I have sold several businesses, I have a good sense of what sellers need to look out for in an M&A process. I’m happy to chat with other business owners to share my experience and offer guidance. You can reach me using the link  below or via the contact page of this site.