Quarterly Brief

13th Edition of the International Valuation Newsletter Q4 2020

October 2020 kpmg.ch/valuation Dear reader

COVID-19 remains at the top of the world agenda and nearly every day we experience new, unexpected consequences. With the majority of the year behind us, we continue to lack certainty as to where this pandemic will lead us and how we will withstand its impact.

As the leading prospect for a light at the end of the tunnel hinges on the development of a vaccine, we are confident that you too are keenly tuned into the progress and emerging developments. Given the global scale of efforts, there are significant commercial and financial effects. We therefore focus this edition of the newsletter on insights into the value drivers of the healthcare sector, i.e. pharmaceutical and biotechnology companies, with a particular focus on vaccine developers.

We explore a range of questions, including:

–– What are the sub-sectors within healthcare and can we make useful sense of observable market prices for vaccine developers? –– What factors drive the economics of a vaccine developer? –– What are common approaches to value pharmaceutical and biotechnology companies given their inherent uncertainties? –– Can other sectors learn from applied valuation approaches given the uncertainty we all face under COVID-19?

In addition, we share with you our summary of key capital market data such as index performance, sector multiples, risk free rates, country risk premiums and growth rates for selected markets. These can all be found in the final section of this Quarterly Brief.

We look forward to discussing your questions regarding valuation trends and practices during these unprecedented times. Stay safe and healthy.

Yours faithfully

Johannes Post Rolf Langenegger Partner, Deal Advisory Director, Deal Advisory Global Head of Valuation Services Valuation / Financial Modelling Isolating the intricacies of Healthcare

Discerning the economics of drug and vaccine development

Quarterly Brief – 13th Edition of the International Valuation Newsletter 3 With the outbreak of COVID-19 at the beginning of 2020 and its subsequent progression throughout the year, extraordinary attention has been placed on the healthcare sector from governments, economies, investors and the general public from all around the world. For example, developments in diagnostic technology, such as rapid COVID-19 testing, have become a focal point.

Particular interest has been placed on Standard (“GICS”), developed by –– Biotechnology companies are the potential advancement of a Standard & Poors and MSCI. According primarily engaged in the research, COVID-19 vaccine, putting a spotlight to GICS, healthcare divides into two development, manufacturing and/or on various companies. First, we will main groups, Pharmaceuticals and marketing of products based on analyse the segmentation of the Biotechnology and Healthcare genetic analysis and genetic healthcare sector and review capital Equipment and Services. Each group engineering. In this narrow field, market developments during the can be further classed into three sub- companies specialising in protein- unfolding of the COVID-19 pandemic. groups as shown in the figure below. based therapeutics to treat human We then summarise our view of the diseases are included but key market forces that shape the long- –– Pharmaceutical companies are companies manufacturing products term profitability of pharmaceutical and engaged in the research, using biotechnology without a biotechnology companies, including development, production and healthcare application are not. vaccine developers, which lays the marketing of pharmaceuticals, –– The Life Science Tools and groundwork for valuation including veterinary drugs. Services industry consists of considerations. Additionally, in this group we find companies that enable the drug large multinational companies with discovery, development, and Segmenting the healthcare sector very large market capitalisations production continuum by providing Throughout our analysis, we refer to such as Johnson & Johnson or analytical tools, instruments, clinical the Global Industry Classification Roche. trial services, and contract research

Source: GISC, Capital IQ. Note: Market Capitalisation as of 30 September 2020.

Quarterly Brief – 13th Edition of the International Valuation Newsletter 4 services. Firms which primarily Sub-sector performance after the Within the Healthcare Equipment and service pharmaceutical and outbreak of COVID-19 Services segment, Providers, biotechnology are also included. During the nine-month period between Services, Equipment and Supplies do –– Healthcare Equipment and January and October 2020, we not appear to have attracted significant Supplies includes manufacturers of measured the performance of the 20 investor interest and, as such, medical instruments or devices, largest companies in each sub-sector outperform the MSCI World Index by a diagnostic equipment, hospital against the MSCI World Index, mere 4-13% by the end of September supplies among other healthcare weighted by their respective market 2020. Given the strong global demand supplies. capitalisations as of the end of June for medical treatment, this seems –– Healthcare Providers and Services 2020 and indexed them to 100 as of counterintuitive, but it may lend includes owners and operators of 2 January 2020. credibility to the theory that COVID-19 any kind of healthcare facilities, such has reduced the demand for goods as hospitals, rehabilitation centres or As shown in the following figure, the and services in other related sectors lab testing services as well as first significant market reaction can be simultaneously. distributors and wholesalers of observed towards the end of February healthcare products. 2020, during which the regional spread During this period, Healthcare –– Healthcare Technology includes of the corona virus in Asia shifted to a Technology appears to be the only sub- companies that provide information global pandemic. Interestingly, sector that significantly outperformed technology services, such as compared to pharmaceuticals and the MSCI World Index and other applications, software or internet- biotechnology, the Healthcare healthcare sub-sectors. Thanks to the based tools primarily to doctors, Equipment and Services segment shift from face to face patient hospitals and similar. exhibited a slightly stronger decline in interactions to telemedicine, the first weeks and months of our information technology companies Do the specific characteristics of observation period as revenues of many within healthcare emerged as an these sub-sectors lead to a varied medical device providers suffered due attractive business model for investors share price development after the the large number of hospital procedures during the pandemic, as evidenced by impact of the COVID-19 pandemic? being postponed during the lockdown. the more than 80% gain in Healthcare

Share price development in the Healthcare Equipment and Services sector

200.0

180.0

e 160.0 c n a m r

o 140.0 f r e P 120.0

100.0

80.0

60.0

40.0 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20

MSCI World Healthcare Equipment and Supplies Healthcare Providers and Services Healthcare Technology

Source: S&P Capital IQ. Note: Performance of each is based on share price development indexed to 100 as of 2 January 2020 for comparability reasons.

Quarterly Brief – 13th Edition of the International Valuation Newsletter 5 Technology’s 20 largest companies, 2020. While this is not particularly impressive 25% and 37%, such as Veeva Systems, Teladoc and dramatic, we acknowledge the respectively. With a large number of Livogno. Since July 2020, however, such diversity among the very large biotechnology companies focusing on high outperformance has stagnated. Pharmaceutical companies in that sub- the research of COVID-19 vaccines, sector and, as mentioned, the and with Life Science Tools and The Pharmaceuticals, Biotechnology increased focus on COVID-19 and Services companies offering and Life Science Tools and Services related drugs and treatments, which complementary services related to sub-sectors all outperformed the MSCI reduced demand for other drugs. COVID-19, both sub-sectors posted World Index during the observation respectable performance in the period. The Pharmaceutical sub-sector Biotechnology and Life Science stock-market over the observation gained a modest 3% since January Tools and Services gained an period.

Share price development in the Pharmaceuticals and Biotechnology sector

200.0

180.0

e 160.0 c n a m r

o 140.0 f r e P 120.0

100.0

80.0

60.0

40.0 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20

MSCI World Biotechnology Pharmaceuticals Life Sciences Tools and Services

Source: S&P Capital IQ. Note: Performance of each is based on share price development indexed to 100 as of 2 January 2020 for comparability reasons.

Pharmaceutical’s profitability- phase, companies are able to recoup elevated prices for their innovative shaping market forces their investment with the protection of products. In the third phase, and once The Pharmaceutical sector is patents, typically lasting 20 years, and such protection expires, generic characterised by a unique product life other exclusivity arrangements, substitutes are able to enter the cycle with three main phases. In the typically lasting 3-7 years under FDA market and prices transition to being first, the discovery and development rules (U.S. Food and Drug driven by typical competitive market phase, companies invest billions to Administration, 2015) and up to 11 forces. In this period, brand name bring a novel medicine to market, a years under the European Medicines drugs instantly face competition with path that commonly exceeds 10 years Agency’s 8+2+1 regime (European 80-85% discounted substitutes (U.S. (U.S. Food and Drug Administration, Commission, 2004), allowing Food and Drug Administration, 2018), 2018) and sees only a small fraction of pharmaceutical companies to driving down the long-term profitability drug candidates reaching experience a defined period of of industry participants competing in commercialisation. In the second suppressed competition and, as such, generic drug markets.

Quarterly Brief – 13th Edition of the International Valuation Newsletter 6 The long-term profitability of the pressure to limit prices and, as such, develop a vaccine on the order of USD Pharmaceutical sector is further companies face numerous cost 0.5 billion to USD 1.2 billion, which is defined by the economic forces in the containment measures imposed by lower than the average cost for other form of the power of buyers and their governments including industry-wide drugs of USD 1.4 billion, on a risk- influence on price. At first glance, the price reductions and mandatory pricing adjusted basis (Kis et. al, 2018). Third, end consumer of the drug has little to systems. This price pressure erodes with the need to cover large patient no influence on price. In fact, the long-term industry profitability. numbers, prices and margins for potential nature of the product as individual vaccine doses are generally lifesaving leads to extremely low price Vaccine market distinctions lower than for therapeutics. In the end, sensitivity, which traditionally would The vaccine market is distinct from the the vaccine market is small relative to indicate the ability to charge higher broader Pharmaceutical sector in a few the overall pharmaceutical sector. In prices. A closer look, though, reveals ways. First, due to the nature of 2017, global sales of vaccines totalled extreme price pressure on the vaccines as “preventative,” vaccines USD 18.4 billion, representing slightly industry. Pharmaceutical companies, in have a higher price-elasticity of less than 2% of total pharmaceutical general, have a public trust deficit and demand than products considered as sales during the same period (World face high reputational risk. In the court “treatment,” which is the bulk of Health Organization, 2019). of public opinion, they are often products offered in the broader accused of overpricing key life-saving Pharmaceutical sector. Second, due to The effect of COVID-19 on market products. In fact, GlaxoSmithKline, the the higher probability of success forces leading vaccine supplier worldwide by (around 40% (Lo, A.W., 2020)) Under COVID-19, however, global revenue, has observed an annual observed historically in the regulatory attention has shifted industry average 4.0 percent decline in the approval process, cash flows tend to competition. Governments and non- price of their products across their be steadier and more predictable, thus profit organisations have poured both whole portfolio in the US market leading to a lower risk profile than general funding and funding to secure (GlaxoSmithKline plc, 2019). There is other pharmaceutical products. This supply of vaccines in an attempt to significant ongoing public and political leads to an implied average cost to speed up development and ensure

Phase 3 COVID-19 Vaccines-Market Capitalisation Development

400

350

300 b R U E

p 250 a C t k e

r 200 a M 150

100

50

- Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20

Moderna, Inc. Pfizer Inc. BioNTech SE Novavax, Inc. AstraZeneca PLC CanSino Biologics Inc. Johnson & Johnson

Source: S&P Capital IQ.

Quarterly Brief – 13th Edition of the International Valuation Newsletter 7 Phase 3 COVID-19 Vaccines – Market Capitalisation Development (Index = 100)

1’200 1’100 1’000 900 1 0

800 = x e 700 d n I 600 500 400 300 200 100 - Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20

Moderna, Inc. Pfizer Inc. BioNTech SE Novavax, Inc. AstraZeneca PLC CanSino Biologics Inc. Johnson & Johnson

Source: S&P Capital IQ. Note: Novavax, Inc’s market capitalisation growth, which exceeds 7,000%, has been limited graphically for presentation purposes.

supply to fight the virus. Many vaccine vaccine race is beyond the scope of million, experienced a 4,445% market developers have pledged to supply this newsletter. capitalisation increase year over year vaccines at “zero profit” or “marginal to EUR 4.9 billion. profit” while others have upfront Two of the largest companies with rejected this idea and will aim to COVID-19 vaccine candidates in Phase The investor public’s consensus capitalise as much as possible in 3, Johnson & Johnson and perception of the risk and return profile providing a vaccine to fight against AstraZeneca, have recovered to their of a security, in general, steers the COVID-19 (Financial Times, 2020). At market capitalisations of one year prior direction of its price. For example, present, there are nine vaccine after experiencing a decline to a low- when a Pharmaceutical company candidates in at least Phase 3 clinical point towards the end of March 2020, obtains successful clinical data and, as research that promise a light at the followed by an average 17.3% recovery a result, obtains regulatory approval to end of the tunnel to the public. Below to mid-October 2020. Pfizer, who did market a new drug, the uncertainty we examine how the market not fully recover, showed a 2.3% (risk) surrounding the pending capitalisations of the companies in at decline in market capitalisation year decision, and the corresponding least Phase 3 clinical research have over year with a similarly steep decline uncertainty in achieving the projected developed over the past year, in March 2020. cash flows, decreases and thus the including: Johnson & Johnson, Pfizer price of the stock increases, ceteris (in partnership with BioNTech), Moderna (December 2018 IPO), paribus. As shown above, the largest Moderna, AstraZeneca (in partnership BioNTech (October 2019 IPO) and companies’ stock prices over the with Oxford University), Novavax, Inc. CanSino Biologics (March 2019 IPO) period were relatively unchanged since and CanSino Biologics, Inc. Other experienced an average market the outbreak of the COVID-19 companies with Phase 3 candidates, capitalisation growth of 490% year pandemic, and significant increases such as Sinovac Biotech, have been over year. Novavax, Inc., who in above pre-pandemic levels appear excluded due to lack of available data. October 2019 had the smallest market unique to Moderna, BioNTech, Analysis of the likely winners of the capitalisation of the group of EUR 100 CanSino Biologics and Novavax. One

Quarterly Brief – 13th Edition of the International Valuation Newsletter 8 could draw the conclusion that funding that has propelled contributor to their growing market investors may not anticipate a development of COVID-19 vaccines by capitalisations. As such, the ability to significant cash flow impact, relative to governments around the world. market a COVID-19 vaccine would the overall business, of the largest COVID-19 vaccine developers may be likely have a much more significant companies in the vaccine race over the viewed, then, merely as winners of impact relative to their overall course of their investment time public trust and recognition, rather businesses than it would on the other horizons. A cause could be that many than able to benefit from meaningful larger and more diversified vaccine companies, including those above, overall cash flow increases. developers and pharmaceutical have pledged to reap zero or marginal companies. Even without significant profits in the sale of vaccines related Moderna, BioNTech, CanSino Biologics profits, whether by choice or not, in to COVID-19. Furthermore, pricing and Novavax, which have shown marketing a COVID-19 vaccine, the decisions and the ability to profit from noticeably high returns over the period recognition and corresponding public investments in vaccine development despite still being loss making, are trust would likely be of greater are likely to be limited by the large relatively smaller and their ascendency significance to them and their amount of non-profit and government in the vaccine race has likely been a investors.

Quarterly Brief – 13th Edition of the International Valuation Newsletter 9 Measuring in the maze

Putting together the Pharma and Biotech decision making puzzle

Quarterly Brief – 13th Edition of the International Valuation Newsletter 10 Valuation in the Pharmaceutical and Biotechnology sector

The unique aspects of the Pharmaceutical and Biotechnology sectors, such as the binary nature of the regulatory approval process, make it a challenge to produce supportable and robust valuation analyses, make sound investment decisions, and produce reliable estimates for financial reporting and tax purposes. Many valuation analysts have thus developed valuation methodologies, such as the probability weighted discounted cash flow method and the risk-adjusted net present value method, in an effort to minimize this inherent difficulty.

Valuation analysts rely on three As discussed earlier in this newsletter, Approach’s usefulness is greatly generally accepted valuation pharmaceutical companies are subject limited by the dissimilarity of the risk approaches to estimate the value of to various market forces that impact profiles unique to each drug, which an asset or business: the Income their performance and limit the may not be reasonably measurable Approach, the Market Approach and usefulness of the traditional valuation under this approach. For this reason, the Cost Approach. approaches. For example, the Market the Market Approach is generally not relied upon by valuation analysts within the Pharmaceutical sector. The Cost Income Approach Approach is generally rejected in the The Income Approach, which determines value based on projected future valuation of income producing assets, economic benefits to the asset’s owner(s), is commonly used when the such as an equity interest in a valuation practitioner is able to reasonably project the asset’s performance pharmaceutical company, as the over time, making assumptions regarding growth, margins and further benefits to the owner(s) can more investments to support the planned growth, among others. It is often the reliably be estimated using other preferred valuation approach when quality data is available due to its greater means, such as the Income Approach. transparency. The performance and long-term Market Approach profitability of a pharmaceutical The Market Approach, which determines value based on the observed company directly relate to the ability to purchases of similar assets, most often in the form of quoted prices of maintain exclusivity in the drug similar publicly traded companies or transactions of private companies, is markets in which it operates and the strongest when there is a reasonable number of recent transactions available rate at which it can introduce newly upon which the value of the asset or business can be implied. approved and exclusive drugs from its pipeline. Achieving regulatory approval Cost Approach and obtaining exclusivity is “binary” in The Cost Approach, which determines value based on estimates of the cost nature, either you achieve approval or to reproduce or replace an asset or business, is strongest when such costs not, and reasonably predicting the can be reasonably estimated, and when the performance of an asset or outcome is a challenge. This unique business is not expected to increase over time, such as increased future aspect of the industry makes it a profitability. If the performance of the asset or business fluctuates over time burden to utilise the Income Approach and the benefit to the owner can be enhanced, it is likely the Income in its traditional way. For example, Approach would be a better alternative to the Cost Approach. using the traditional discounted cash flow (“DCF”) analysis, a widely

Quarterly Brief – 13th Edition of the International Valuation Newsletter 11 accepted valuation method under the A significant portion of the risk Valuation analysts generally rely on Income Approach, limits the ability of inherent to the valuation of industry studies that categorise various the valuation analyst to capture the pharmaceutical companies is due to types of drugs and publish the binary nature of the approval process the product-specific risk or historically observed success rates by as it generally relies on a single cash idiosyncratic risk (i.e. non-diversifiable drug type at each phase of the approval flow scenario. To alleviate this, risk). The Probability of Success, also process. Pharmaceutical companies also variations of the DCF method have referred to often as the Likelihood of make use of industry experts who dive been developed, such as the Approval (“LoA”) captures the risk that into the details of regulatory filings and probability weighted DCF (“PWDCF”) a certain drug will not achieve all of the designs of studies and other method and the risk-adjusted net necessary regulatory milestones and sources to enhance their estimates. present value (“rNPV”) method, to will fall short of commercialisation. Occasionally, though, sufficient data develop more supportable and Generally, each stage of the may be unavailable, and companies transparent value indications regulatory approval process has its must rely on their instincts and intuition, enabling the valuation analyst to own PoS, which adds further potentially provoking opposition in the consider the industry’s unique market complexity and if a company is transaction setting. Typically, the PoS forces. developing multiple drug candidates, depends on the respective macro- which is often the case, there is even therapeutic area, drug classification, Risk-adjusted Net Present Value further complexity to consider and the drug modalities, and the planned The traditional DCF method involves overall company value should be strategy for patient enrolment in clinical projecting the future economic estimated in a sum-of-the-parts studies. Below is an example that benefits to the business’ owner(s), in manner, assessing each drug shows various predicted PoS’ based on the form of cash flows, and individually prior to aggregation. various macro-therapeutic areas. discounting them to their Net Present Value (“NPV”) at the business’ estimated cost of capital. As the 26.1% binary nature unique to the industry 19.1% 17.1% 16.3% cannot reasonably be captured in the 15.3% 15.1% 14.7% 13.2% 12.8% 11.4% 11.1% estimated cost of capital or discount 9.6% 8.4% 6.6% rate, a modification can be made to 6.2% 5.1% the DCF by estimating and including an adjustment for the Probability of Success (“PoS”). The risk-adjusted Other Allergy net present value method thus gets Urology Oncology Metabolic Endocrine Pyschiatry Neurology Respiratory its name as it considers the specific Hematology Autoimmune All indications Cardiovascular incremental uncertainty of the drug Ophthalmology Gastroenterology not achieving approval and reaching disease Infectious the market. Source: Biotechnology Innovation Organisation, Biomed tracker, Amplion; Clinical Development Success Rates 2006-2015.

Quarterly Brief – 13th Edition of the International Valuation Newsletter 12 Probability weighted DCF method years under FDA rules or up to 11 uncertain times, such as recessions An alternative methodology, also years under EMA’s 8+2+1 regime after or viral outbreaks where consumer stemming from the DCF method, is approval. These timelines and possible behaviour shifts significantly. During the probability weighted DCF method, extensions should be factored into the the current period of particular which instead of a single cash flow various cases developed by the adversity due to the COVID-19 scenario, relies on multiple likely cash valuation analyst. outbreak, valuation analysts may find flow scenarios, weighted each by their themselves unable to support the respective probabilities of realisation. The probabilities of the various cases assumptions in their analyses. It can The multiple likely cash flow scenarios are typically derived by deconstructing thus be fruitful for valuation analysts are often derived by developing various revenue streams into their various to remind themselves of the cases i.e. bull, bear, base cases, components at a more granular level, common methodologies in the making various assumptions about the i.e. by breaking down into the various Pharmaceutical sector and adapt company’s pipeline such as the portion drugs and deciding how certain them to their unique situation. of the current pipeline that will be parameters may impact each of the Borrowing such methods, which have approved, where for example, the bear cases’ assumptions. Using a Score- been successfully applied for many case may assume only a small portion Card Approach, the valuation analyst years, can be helpful to regain or a minimum possible amount of the can assess factors such as the stability orientation and transparency and drugs in the development pipeline of the cash flows, barriers to entry, the once more be able to make informed actually achieve approval and market position of the company, the and wise decisions with a robust and commercialisation. company’s balance sheet, and the defensible analysis, whether for company or product lifecycle and investment, joint-ventures or The valuation analyst must also derive meaningful indications of the alliances, financial reporting or tax consider the possible long-term likelihood of realisation of the various purposes, or in dispute resolutions. prospects of the various drugs, which scenarios and aid in assigning Our 12th edition of the Quarterly typically requires extending the probabilities. Brief, published in Q3 2020, contains projection period to capture possible further discussion on adapting these patent and exclusivity cliffs, i.e. when High level of uncertainty in various methods to the COVID-19 the drug will begin to face generic valuations: What can other industries situation. competition. As discussed previously learn from Pharmaceutical and in this newsletter, patents can typically Biotechnology during COVID-19? last up to 20 years, much of which Many of the valuation methodologies may expire during the regulatory employed in the inherently uncertain approval process, while market Pharmaceutical and Biotechnology exclusivity typically lasts between 3-7 sectors can be helpful during other

Quarterly Brief – 13th Edition of the International Valuation Newsletter 13 Capital market data

Quarterly Brief – 13th Edition of the International Valuation Newsletter 14 In this section, we provide a selection While COVID-19 continues to be a year (-27.3%) followed by the FTSE 100 of key financial market data covering: dominating global topic, the effect on (-20.8%). While investors in the CAC –– Comparison of major stock market stock markets varies. US indices such and the S&P Eurozone faced negative performance for the 12 months as the S&P 500 (+13.0%) and the returns (-15.4% and -1.7%, ending 30 September 2020 NASDAQ (+39.6%) and the Japanese respectively), investors in the DAX and –– S&P Eurozone BMI Index sector Nikkei 225 (+6.6%) as well as the SMI achieved slightly positive multiples international indices such as the MSCI returns (+2.7% and 1.1%, –– Risk-free rates for major currencies world (+8.6%) and the MSCI Emerging respectively). Stock market –– Country risk premiums and inflation Markets (+8.6%) all achieved positive performance over the next few forecasts for the BRIC countries returns year over year, despite the months will likely be driven by the outbreak of the pandemic. In contrast, development of COVID-19 figures and Major stock market performance: many European stock indices their effect on the economy and will Europe’s stock markets strikingly underperformed. In our sample, the be driven as well by the upcoming underperform Ibex 35 performed the worst year over United States presidential election.

Performance of leading indices 30 September 2019 – 30 September 2020 39.6% ) % (

e 13.0% c 11.0% n

a 8.6% 8.7% 8.5% 7.5% 8.1% 6.6% m r 4.8% 4.0% o 3.7% 2.7% f

r 1.4% 1.1% e p

x e

d -1.7%

n -2.7% I -4.9% -7.1%

-15.4% -20.8%

-27.3%

MSCI World MSCI S&P FTSE 100 DAX CAC 40 Ibex 35 SMI S&P 500 NASDAQ Nikkei 225 Emerging Eurozone Markets BMI Index

QoQ YoY

Source: Capital IQ, KPMG analysis.

Quarterly Brief – 13th Edition of the International Valuation Newsletter 15 Communication Services Median

S&P Eurozone BMI Index sector EBITDA multiples while18.0 thex remaining The EBITDA of most companies was 15.0x multiples: Most sector multiples up two fell over the past quarter. likely affected in a variety of ways over 12.0x The enterprise value (EV) multiple Consumer Staples and Healthcare EV/ the last months7.8 duex to the 7impact.2x 7 of.9 x 9.0x 6.1x states the market value of the EBITDA multiples declined6.0x by 0.5x and COVID-19 and the various related 2.4x 1.9x 2.1x 2.1x business in relation to an appropriate 0.7x on a quarterly basis3.0 xand now measures that have been enforced base metric. Commonly used base amount to 9.6x and 15.4x,0.0x respectively. around the world. As such, it is metrics include revenue and EBITDA. Consumer Discretionary and the31. 31. imperative30. 30. to analyse31. 3 each1. company30. 30 .in Dez Mär Jun Sep Dez Mär Jun Sep The numerator (EV) and denominator Information Technology sector 19 20 the20 context20 of 1its9 respective20 2 sector0 2 0 multiples gained the most over the last when using relative valuation (revenue, EBITDA) represent all EV/Revenue EV/EBITDA investor’s claims on the business. quarter by 2.3x and 3.2x, respectively. methodologies such as when applying multiples. Out of the eleven sectors considered, It is essential to put these nine showed increases in their EV/ developments intoCo broadernsume context.r Discr etionary Median 18.0x 15.0x 11.0x 12.0x 9.4x 7.8x 9Communication.0x Services Median 6.5x 6.0x 18.0x 3.0x 1.3x 1.0x 1.1x 1.4x 15.0x 0.0x 12.0x 31. 31. 30. 30. 31. 31. 30. 30. 7.8x 7.2x 7.9x 9.0x Dez Mär Jun Sep Dez M6.1xär Jun Sep 6.0x 19 20 20 20 19 20 20 20 2.4x 1.9x 2.1x 2.1x 3.0x EV/Revenue EV/EBITDA 0.0x 31 31 30 30 31 31 30 30 Dec Mar Jun Sep Dec Mar Jun Sep 19 20 20 20 19 20 20 20

Consumer StapleEVs / RevenueMedian EV / EBITDA

18.0x 15.0x 11.5x 12.0x 9.3x 10.1x 9.6x 9Consumer.0x Discretionary Median 6.0x 18.0x 3.0x 1.0x 0.9x 0.9x 1.0x 15.0x 0.0x 11.0x 12.0x 31. 31. 30. 30. 9.4x31. 31. 30. 30. 7.8x 9.0x Dez Mär Jun Sep Dez M6.5xär Jun Sep 6.0x 19 20 20 20 19 20 20 20 1.3x 1.4x 3.0x EV1.0x/R eve1.1xnu e EV/EBITDA 0.0x 31 31 30 30 31 31 30 30 Dec Mar Jun Sep Dec Mar Jun Sep 19 20 20 20 19 20 20 20

EV / Revenue EV / EBITDA

Consumer Staples Median

18.0x 15.0x 11.5x 12.0x 9.3x 10.1x 9.6x 9.0x 6.0x 3.0x 1.0x 0.9x 0.9x 1.0x 0.0x 31 31 30 30 31 31 30 30 Dec Mar Jun Sep Dec Mar Jun Sep 19 20 20 20 19 20 20 20

EV / Revenue EV / EBITDA

Quarterly Brief – 13th Edition of the International Valuation Newsletter 16 Energy (Oil and Gas) Median

18.0x Financials Median 15.0x 12.0x 12.0x 7.8x 10.0x 8.5x 8.3x 9.0x 7.2x 7.3x 5.2x 5.4x 8.0x 6.7x 6.0x 6.0x 3.0x 1.0x 0.8x 0.8x 0.9x 4.0x 0.0x 1.2x 1.1x 1.0x 0.9x 0.9x 31. 31. 30. 30. 31. 31. 30. 30. 2.0x 0.5x 0.6x 0.6x Dez Mär Jun Sep Dez Mär Jun Sep 0.0x 0 9 0 0 9 0 0 0 9 0 0 19 20 20 20 19 20 20 20 0 2 2 2 2 2 2

1 2

1 2

1 2 r r r z z z n p n p n p ä ä ä u e u e u EV/Revenue EV/EBITDA e . J . J . J . M . M . M . D e . D e . S . D e . S . S 0 0 0 1 1 1 1 1 0 1 0 0 3 3 3 3 3 3 3 3 3 3 3 3 EV/Revenue EV/EBITDA P/BV Health Care Median Industrials Median 16.7x 18.0x 16.1x 15.4x 18.0x 14.2x 15.0x 15.0x 12.0x 12.0x 9.4x 9.9x 7.9x 9.0x 9.0x 6.8x Energy (Oil and Gas) Median 1 6.0x 4.3x 3.7x 4.3x 4.1x 6Financials.0x Median 1.2x 0.8x 1.0x 1.1x 318.0x.0x 312.0x.0x 015.0x.0x 010.0x.0x 8.5x 8.3x 31. 31. 30. 30. 31. 31. 30. 30. 31. 31. 30. 30. 7.3x31 . 31. 30. 30. 12.0x 8.0x 6.7x Dez Mär Jun Sep D7.8xez Mär Jun Sep Dez Mär Jun Sep Dez Mär Jun Sep 9.0x 7.2x 6.0x 19 20 20 20 19 5.2x20 5.4x20 20 19 20 20 20 19 20 20 20 6.0x 4.0x EV/Revenue EV/EBITDA 1.2x EV/Revenue EV/EBITDA 3.0x 1.0x 0.8x 0.8x 0.9x 2.0x 1.1x 1.0x 0.9x 0.9x 0.5x 0.6x 0.6x 0.0x 0.0x 31 31 30 30 31 31 30 30 31 31 30 30 31 31 30 30 31 31 30 30 Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep 19 20 20 20 19 20 20 20 19 20 20 20 19 20 20 20 19 20 20 20 Information Technology Median Materials Median EV / Revenue EV / EBITDA EV / Revenue EV / EBITDA P / BV 18.0x 16.1x 15.4x 18.0x 15.0x 13.1x 15.0x 12.0x 10.5x 12.0x 7.9x 8.2x 9.0x 9.0x 6.8x Healthcare Median Industrials Median 6.1x 6.0x 6.0x 2.3x 2.1x 2.6x 1.7x 16.7x 3.0x 1.3x 1.0x 1.0x 1.1x 318.0x.0x 16.1x 15.4x 18.0x 14.2x 015.0x.0x 015.0x.0x 31. 31. 30. 30. 31. 31. 30. 30. 31. 31. 30. 30. 31. 31. 30. 30. 12.0x 12.0x 9.4x 9.9x Dez Mär Jun Sep Dez Mär Jun Sep Dez Mär Jun Sep Dez Mär J7.9xun Sep 9.0x 19 20 20 20 19 20 20 20 9.0x 19 20 20 20 19 6.8x20 20 20 6.0x 4.3x 3.7x 4.3x 4.1x 6.0x EV/Revenue EV/EBITDA EV/Revenue EV/EBITDA 3.0x 3.0x 1.2x 0.8x 1.0x 1.1x 0.0x 0.0x 31 31 30 30 31 31 30 30 31 31 30 30 31 31 30 30 Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep 20 19 20 20 20 20 19 20 20 20 19 20 20 Utilities Me19dian 20 20

EV / Revenue EV / EBITDA 18.0x EV / Revenue EV / EBITDA 15.0x 10.6x 12.0x 9.5x 9.7x 10.3x Real Estate Median 9.0x 23.3x Information25.0x Technology Median21.9x 23.2x Materials6.0x Median 21.0x 2.6x 3.0x 3.5x 3.0x 20.0x 3.0x 18.0x 14.8x 16.1x 15.4x 18.0x 12.4x 12.9x 0.0x 15.0x15.0x 11.7x 13.1x 15.0x 10.0x 10.5x 31. 31. 30. 30. 31. 31. 30. 30. 12.0x 12.0x Dez Mär Jun Sep Dez Mär Jun Sep 5.0x 7.9x 8.2x 9.0x 1.3x 0.9x 0.9x 0.8x 9.0x 19 20 20 20 19 6.1x20 6.8x20 20 6.0x0.0x 6.0x 2.3x 2.1x 2.6x EV/Revenue EV/EBITDA 3.0x 31. 31.1.7x30 . 30. 31. 31. 30. 30. 31. 31. 30. 30. 3.0x 1.3x 1.0x 1.0x 1.1x 0.0x Dez Mär Jun Sep Dez Mär Jun Sep Dez Mär Jun Sep 0.0x 1319 20 3120 2300 19 3020 2310 20 3119 2300 20 3020 31 31 30 30 31 31 30 30 Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep 19EV/Re20venue 20 E20V/EBIT19DA 20 20P/BV 20 19 20 20 20 19 20 20 20

EV / Revenue EV / EBITDA EV / Revenue EV / EBITDA

Real Estate Median Utilities Median

18.0x 23.3x 23.2x 25.0x 21.9x 21.0x 15.0x 20.0x 10.6x 10.3x 14.8x 12.0x 9.5x 9.7x 12.9x 15.0x 11.7x 12.4x 9.0x 10.0x 6.0x 2.6x 3.0x 3.5x 3.0x 5.0x 1.3x 0.9x 0.9x 0.8x 3.0x 0.0x 0.0x 31 31 30 30 31 31 30 30 31 31 30 30 31 31 30 30 31 31 30 30 Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep 19 20 20 20 19 20 20 20 19 20 20 20 19 20 20 20 19 20 20 20

EV / Revenue EV / EBITDA P / BV EV / Revenue EV / EBITDA

Source: Capital IQ, KPMG analysis. Notes: Multiples are analysed based on the latest information available as of the assessment date for the respective edition of the Quarterly Brief. Changes of index composition, revised financial information and newly available information as of the respective assessment date may cause multiples to change. 1 Financial services companies differ from many other companies in how they operate. Debt acts more as ‘raw material’ than operational capital for financial services companies. A common valuation metric used by analysts evaluating such firms is the price to book (P/B) ratio.

Quarterly Brief – 13th Edition of the International Valuation Newsletter 17 Risk-free rates: Different directions across the globe The risk-free rate (or base rate) can generally be broken down into two key components that seek to compensate the investor: the first for expected inflation and the second for deferred consumption. The base rate is considered to be free of risk except for risks embedded in the underlying currency and risks related to investments in the particular country. As no investment is truly risk free, the risk-free rate is typically approximated by referencing the yield on long-term debt instruments issued by presumably financially healthy governments. The historical risk-free rates for the Eurozone, Germany, the US, the UK and Switzerland are shown below.

Compared to Q2 2020, risk-free rates in the Eurozone, Germany, and Switzerland have further declined. The risk-free rate in Switzerland is the lowest of our sample and amounts to -0.32%. The risk-free rate in the US remained relatively stable at 1.61% as of 30 September 2020. In the UK, however, interest rates increased from 0.56% in Q2 2020 to 0.72%. Similar to other macroeconomic indicators, the development of the risk-free rate is highly dependent on the trajectory of the COVID-19 pandemic and measures taken by central banks to counter its effects.

Risk-free rates

EUR EUR GBP CHF USD

31/3/2016 1.03% 0.90% 2.39% 0.25% 2.81% 30/6/2016 0.46% 0.49% 1.85% (0.03)% 2.50% 30/9/2016 0.53% 0.47% 1.61% (0.06)% 2.48% 31/12/2016 0.97% 0.95% 2.03% 0.35% 3.06% 31/03/2017 1.25% 1.24% 1.88% 0.32% 3.27% 30/06/2017 1.39% 1.33% 2.02% 0.39% 3.04% 30/09/2017 1.40% 1.38% 2.05% 0.45% 3.04% 31/12/2017 1.34% 1.34% 1.89% 0.36% 2.89% 31/03/2018 1.25% 1.24% 1.79% 0.56% 3.08% 30/06/2018 1.09% 1.12% 1.83% 0.51% 3.00% 30/09/2018 1.13% 1.15% 1.87% 0.61% 3.10% 31/12/2018 0.90% 0.94% 1.91% 0.37% 3.17% 31/03/2019 0.67% 0.65% 1.65% 0.17% 2.96% 30/06/2019 0.35% 0.33% 1.56% 0.02% 2.71% 30/09/2019 (0.03)% (0.03)% 0.88% (0.36)% 2.25% 31/12/2019 0.37% 0.34% 1.25% (0.16)% 2.46% 31/03/2020 0.06% 0.01% 0.68% (0.20)% 1.54% 30/06/2020 0.01% (0.02)% 0.56% (0.29)% 1.60% 30/09/2020 (0.08)% (0.11)% 0.72% (0.32)% 1.61%

Source: KPMG analysis. Approach: Determination of a present value-equivalent uniform interest rate based on the yield curve of the respective central bank.

Quarterly Brief – 13th Edition of the International Valuation Newsletter 18 Country risk premium: Relatively Compared to Q2 2020, Brazil’s country India and China’s country risk stable compared to Q2 2020 risk premium increased slightly to premiums rose by 0.2 percentage The country risk premium is a 3.1%, following the trend over the last points to 2.0% and 0.7% respectively. measure of risk that accounts for four quarters. Since 31 December Russia’s country risk premium incremental political, economic, legal, 2019, Brazil’s country risk premium remained relatively stable over the last liquidity and other risks that has increased by 0.4 percentage twelve months and increased by only businesses face in less developed points, the highest increase of our 0.1 percentage points in Q3 2020 to capital markets. Recently, country risk sample. Over the last four quarters, 2.0%. has become increasingly more relevant to investors, due to the many Country risk premium changes experienced by the global 31 Dec 19 31 Mar 20 30 Jun 20 30 Sep 20 economy. Restrictive trade policies, in particular, have made investment Brazil 2.7% 2.8% 3.0% 3.1% performance in previously stable countries less predictable. KPMG’s Russia 1.9% 1.9% 1.9% 2.0%

Valuation practice has been analysing India 1.8% 1.9% 2.0% 2.0% and measuring country risk for 15 years and covers more than 150 China 0.5% 0.5% 0.6% 0.7% sovereign states in a proprietary Based on two-year analysis. KPMG model. Source: KPMG CRP study.

Growth rates: Long-term growth measured through several Compared to the prior quarter, EIU expectations for Russia and India parameters. For our presentation, revised its inflation expectations for have increased we consider the Consumer Price 2020 upwards for all countries, which is Growth rates are a major component Index (“CPI”) and the GDP deflator. most likely related to the development of the terminal value calculation for The CPI is a measure that examines of COVID-19. The highest long-term the discounted cash flow method. the weighted average of prices of a growth is expected for India with CPI Inflation forecasts are one of the basket of consumer goods and and GDP deflator both amounting to typical indicators that can be used to services, while the GDP deflator, 4.4% in 2024. Russia is expected to assess the long-term growth rate. The calculated as the difference between show the second highest growth with a inflation rates for Brazil, Russia, India nominal and real GDP, measures the CPI of 3.5% and a GDP Deflator of and China are based on the change in prices for all of the goods 4.0% in 2024. Lower long-term growth Economist Intelligence Unit’s (“EIU”) and services produced in an rates are expected for Brazil and China inflation forecast for the years 2020 economy. with an expected GDP deflator of 3.0% to 2024. The expected inflation can be and 1.8% respectively in 2024.

Inflation forecast

Country 2020 2021 2022 2023 2024

CPI 2.8% 2.8% 3.5% 3.4% 3.2% Brazil GDP Deflator 3.9% 2.5% 2.9% 2.6% 3.0%

CPI 3.4% 3.9% 3.6% 3.7% 3.5% Russia GDP Deflator 1.0% 3.9% 5.7% 5.3% 4.0%

CPI 5.2% 4.0% 4.6% 4.2% 4.4% India GDP Deflator 7.4% 3.4% 3.6% 3.9% 4.4%

CPI 3.5% 3.1% 3.0% 2.9% 2.7% China GDP Deflator (1.0)% 0.8% 2.2% 1.8% 1.8%

Source: EIU.

Quarterly Brief – 13th Edition of the International Valuation Newsletter 19 References

1. DiMasi JA, Grabowski HG, Hansen RA. Innovation in the pharmaceutical industry: new estimates of R&D costs. Journal of Health Economics 2016; 47:20-33

2. European Commission, 2004. Article 14(11) of Regulation (EC) No 726/2004 https://ec.europa.eu/health/sites/health/files/files/eudralex/vol-1/ reg_2004_726/reg_2004_726_en.pdf

3. Financial Times, 2020. How close is a coronavirus vaccine https://www.ft.com/content/e5012891-58da-4a4f-8a05-182adf3ba0e2

4. GlaxoSmithKline plc, 2019. Annual Report https://www.gsk.com/media/5894/ annual-report.pdf

5. Kis, Zoltán & Shattock, Robin & Shah, Nilay & Kontoravdi, Cleo. (2018). Emerging Technologies for Low-Cost, Rapid Vaccine Manufacture. Biotechnology Journal 2018; 14: e1800376

6. Lo, A. W., Siah, K. W., & Wong, C. H. (2020). Estimating Probabilities of Success of Vaccine and Other Anti-Infective Therapeutic Development Programs. Harvard Data Science Review

7. U.S. Food and Drug Administration, 2015. Patents and Exclusivity https://www.fda.gov/media/92548/download

8. U.S. Food and Drug Administration, 2018. Generic Drugs: Questions & Answers https://www.fda.gov/drugs/questions-answers/generic-drugs- questions-answers

9. U.S. Food and Drug Administration, 2018. NDA at the FDA https://www.fda.gov/media/105012/download

10. World Health Organization, 2019. Global vaccine market report. World Health Organization. https://apps.who.int/iris/handle/10665/311278. License: CC BY-NC-SA 3.0 IGO

Quarterly Brief – 13th Edition of the International Valuation Newsletter 20 Your contacts

KPMG AG Räffelstrasse 28 PO BOX CH-8036 Zurich

Johannes Post Partner, Deal Advisory Global Head of Valuation Services +41 58 249 35 92 [email protected]

Rolf Langenegger Director, Deal Advisory Valuation / Financial Modelling +41 58 249 42 71 [email protected]

kpmg.ch/valuation

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