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Value the Galen Holdings PLC

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Introduction: In this case study, I will value the Galen Holdings PLC, a medium-sized biotechnology company listed in London Stock Exchange (LSE), base on the varies valuation methods, and explain the differences in valuation. For the purpose of providing a better understanding of these methods, another three biotechnology companies are used as comparison. They are Acambis PLC, Celltech PLC, and Skyepharma PLC. Consider the comparability, all these four companies are listed in FT-SE 250. Business Valuation: What is a business value? Before a business is valued the purpose of the valuation must be determined. Different purpose results different values. There are a lot of purposes to value a business, such as buying or selling a business, transfer shares, employee stock option plan, going public. By the EMH, the business value is determined by the market, which provide a fair value of the business. Simply, a listed company's value is how much you can sell or buy the share in the open market. Thus, this case study will try to estimate the share value of the Galen Holdings PLC. What the investors really want to know is why and how the share traded at the real market price, are there any clues about whether the share price will go up or down in the future. In other words, whether there is a fundamental value of a share? Unfortunately, as Crockett (2002) said 'It's not obviously clear'. Theoretically, the fundamental value of a share is estimable. ...read more.


As many literatures suggested that PE ratio is a reasonable indicator for share price ( Leibowitz & Kogelman 1990), really which is widely used to value a business, especially for the new issues. However, sometimes it is confusing. According to Louth (2003), Biotech companies' shares are traded at around average 17-20 times expected earnings currently. It is little higher than the average on the FTSE All Share that is around17 times currently. Compare to the industry and FTSE all share average level, the Galen's share seemed overvalued, theoretically it will go in down, investor should sell out the shares. But as discussed above, the current value of Galen is more close to the real value, and it still has a rising trends in the market. Look back to the group's annual report, the groups keep a high increasing in the R&D expense and capital expenditure that around 30% growing rate per year, and the whole group shows a strong growing tendency. All these show the group has high present value of growth opportunities (PVGO), thus the share price will go up theoretically. The two results concluded from the PE ratio are conflicting, would the investors to buy or sell the shares currently? Confusing! The trouble with the PE ratio, naturally, centers on the elusive "E". Reported earnings is base on the past performance of the company, it is a historical figure, and which cannot show the future cash flow. ...read more.


Thus none methods can predicate the share price correctly, since that is a human being and human are changeful. In the case of Galen Group, the market price under the PE Ratio approach was �7.68, NAV approach value is �13.70, and the DDM approach value is nil. The real market price, however, was �4.95 at the balance sheet day. There is a big difference between the result of each methods and the real market price. It is difficult to say that which method is better or not, since these methods have their own advantages and disadvantages. They just provide a basic concept about the share value in the market. Reference: Farrell, J, L. (1985), 'The Dividend Discount Model: A Primer', Financial Analysis Journal, Nov-Dec, p16-25. Laura, S. (2003), 'Biotech Comp Angers Investors', online, Investment Dealers' Digest, 3/3/2003, Vol. 69, Issue 9. Available from: http://www.emeraldinsight.com/ft Leibowitz, M. L. and Kogelman, S. (1990), 'Inside the P/E Ratio: The Franchise Factor,' Financial Analysis Journal, Nov-Dec, p17-35. Louth, N. (2003), 'Jargon buster: Understanding P/E ratios', MSN Money, 4th Nov 2003. Myers, S. C. and Borucki, L. S. (1994), 'Discounted Cash Flow Estimates of the Cost of Equity Capital - A Case Study'. Financial Markets, Institutions and Instruments, Vol 3, p9-45, August. Pike, P. and Neale, B. (2003), Corporate finance and Investment, 4th edition, Prentice-Hall, Inc, London. Bibliographies: Galen Holdings PLC's annual report 2002 Acambis PLC's annual report 2002 Celltech PLC's annual report 2002 Skyepharma PLC's annual report 2002 http://www.corporateinformation.com http://fame.bvdep.com http://www.ft.com Hydra Business Valuation Methods - a Case Study of Galen Holdings PLC By MAO, Zhen Zheng 1 ...read more.

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