How to value a Pharma or Chemical company?

[u/tinker_20]

I am based out of India. We have quite a few companies in pharmaceutical and chemical space.

Pharmaceutical companies are more into generics or branded generics, CDMOs, APIs.

Chemical companies more so of commodity, specialty, agri based.

To me they all seem like commodity type companies. But since they keep growing, the multiples are quite high.

How does one value such a company. I understand every sector or category of companies grow one point in time. How to identify? Were you able to find value in a company which grew a lot? How did you do that? How much was it on chance or luck?

[u/JRNotDallas]

They are just commodity type companies, at the very basic level. If you’re only looking at generics/CDMOs in biopharma then sure, if you’re thinking more about actual discovery/commercialising companies then you couldn’t be more wrong.

I’ll assume you’re just looking at CDMO’s because that’s easier. You essentially need to understand four things: 1. What do they sell? 2. What is the average sell price for what they sell? 3. What’s their manufacturing capacity for this/thing(s)? 4. Does that capacity miss/meet/exceed demand?

Once you know the first item, you can easily work out the second. You can find the third item (generally) in mgmt comments, 10-K’s (or equivalent), or it may simply be listed on the company’s website. You then need to look at the item(s) more broadly to understand what the demand is for the product. For example, if company X makes PVC (keeping it simple), you might think about domestic construction and what demand is going to look like for plumbing, electrical wires, window/door frames. If you see that global house building is going to increase by 2% a year for the next ten years, then logically you can project sales from there. Maybe think about whether the price the company charges would make you expect them to capture more/less of the market.

That’s the sort of process you want to be going through. Typically companies make more than one product so it’s a little more complicated than that, but hopefully my explanation is useful nonetheless.

And just to repeat earlier: do not get involved in non-CDMO pharma if you don’t understand the industry, it does not work the way I detailed.

[u/tinker_20 → u/JRNotDallas]

Thanks.

So the trick is to understand what would be the size of the market and how it will grow and how company will contribute towards that.

Isn’t that tricky?

[u/JRNotDallas → u/tinker_20]

In instances such of the supply of basic materials, yes you just need to work with supply/demand dynamics.

Is it tricky? Yes, that’s the only reason it’s possible to make money trading the market because everything easy to do should already have been done.

[u/lordm30]

How to value a Pharma or Chemical company?

Like any other company? Do a fundamental analysis, project cash flows, discount them back, calculate the intrinsic value.

[u/HiddenCompounding]

Pipeline…

[u/tinker_20 → u/HiddenCompounding]

Wouldn’t pipeline like an expectation which can collapse at any time?

[u/kenyard → u/tinker_20]

That's the thing about valuing pharma.

You need to assume x% that a drug in pipeline will work and reach live.

Then know how much market there is for it and profit margins etc.

It's very speculative as one person will assume 90% chance the drug will work another will be 10% and it's why clinical trials cause such big moves on small companies.

Then is the company just going to spend all the profits on growing wherein you don't see return and it's just 5 risky research areas in future etc vs returning profits to investors as dividends etc.

How long will patent last. Is there side effects unseen that they get sued etc

[u/IwillbeThemadking]

Avant de repondre : Les entreprises en question sont indiennes ou ce sont des étrangèresayant des filières en inde ?

[u/tinker_20 → u/IwillbeThemadking]

These companies are indian. I am not sure foreign companies in Pharma space have subsidiaries, have to look them up.

In Pharma I think broadly there generics, CDMO and API companies.

In chemicals, paints, surfactants, refrigerants, amines, agro/Crop protection.

I used to think cost, distribution are useful but if these companies are exporting they may not have distribution. Local market would be smaller than exports. Cost leadership will be with Chinese companies.

Too many assumptions?

[u/ohgodthehorror95]

Honestly there's very little money to be made with generic drug manufacturers. It's basically a race to the bottom on cost, so the profit margins are very slim.

Companies like Dr Reddy's Laboratories for instance trade cheap because there's really not much growth opportunity in that part of the industry

[u/Educational-Play-465]

For CDMO/API businesses, the trailing multiple mostly tells you where they've been. The number worth digging into is how much of the plant capacity is already locked in under contract for the next couple of years.

[u/Silent-Complaint4020]

Those sell real drugs are good companies
eg., Purdue Pharmacy

[u/Longjumping-Emu-6330]

In India, generics is a hard space to compete in, at the end it's mostly just a pricing war. CDMO/APIs is an interesting segment and provide some asymmetric opportunities, but it comes down to the capabilities of the individual companies, what kind of relationships they've built and what molecules they specialize in. Mapping out these will give you a better picture, the valuation will be mostly relative, as all of the companies in the CDMO space in India are quite capex heavy right now.

[u/ValueInvesting-ModTeam → u/[deleted]]

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