GlaxoSmithKline and peers
Pharmaceuticals and healthcare companies are capital-intensive companies, with high debt on their balance sheets due to heavy setup costs and huge research and development expenses. The EV/EBITDA ratio (or enterprise value to earnings before interest, tax, depreciation, and amortization) is often used to value capital-intensive companies. The chart below shows the forward enterprise multiple (or forward EV/EBIDTA multiple) trend since June 2010 for GlaxoSmithKline, along with change in the EBIDTA margin over the same period.
The forward EV/EBIDTA multiple for GlaxoSmithKline is ~10x, which is much lower than the industry average of ~14x. Johnson & Johnson (JNJ) has an enterprise multiple of ~11x, Merck (MRK) has ~12x, AstraZeneca has ~13x, Eli Lilly and Co. (LLY) has ~17x, and Bristol Myers Squibb (BMY) has an enterprise multiple of ~24x.
The price-to-earnings (or PE) multiple is one of the simplest multiples used for valuations. A forward PE multiple represents the estimates of a company’s PE multiple for the next 12 months. The forward PE ratio for GlaxoSmithKline is ~16x for 2015, while it is ~19.6x for the industry. The cross-sectional study indicates a direct relation between EPS growth and the forward PE for GSK.