The valuation was done on 18th March 2013

1. VALUATION ANALYSIS
Almirall S.A.
PROFILE
Almirall S.A is a pharmaceutical company involved in R&D development of propriety medications with
a therapeutic focus on:
Asthma
COPD ( Chronic Obstructive Pulmonary Disease)
Gastrointestinal disorders
Psoriasis & other dermatological conditions
Almirall S.A has a 60 year history of being a stable company; however, they are facing challenging
times due to the overall poor economic climate in addition to Spain’s efforts in introducing ‘generic
prescription’. This has led to the operating income falling to a new low of € 56 M in 2012.
VALUATION
We decided to value Almirall by Intrinsic Valuation rather than multiples for the simple reason that we
wanted to know how much the assets of Almirall are worth rather than the price of Almirall based on
multiples.
Almirall is in similar state to a declining company where its revenue is almost stagnant and operating
income consistently falls. Although one can argue that this is due to external factors, such as global
recession or Spanish regulations, analysis of its competitors as well as other big pharmaceutical
companies led us to conclude differently. We analyzed the financial results of prominent
pharmaceutical companies over a 5-year span and found out the following:
The Pharmaceutical industry overall is indeed affected by the global recession. Some of the big
players, such as Novartis, AstraZeneca, and Takeda, have had a reduction in their earnings in
2012. However, few have displayed a consistent decline in earnings from 2009 such as in the
case of Almirall.
The Ipsen annual report1 provides a comparison of 2012 earnings of 22 pharmaceutical and
drug companies. The companies with declining earnings had a median -7% decline in revenues
(highest performer: -2% for Merck, lowest performer: -17% for Astrazeneca and BMS) in
comparison to an 11% decline for Almirall. The companies with increased earnings had a
median 7% increase in revenues with Abbot presenting the lowest increase of 2% compared
to the highest performer Novo-nordisk at 18%.
Almirall has been unable to earn excess returns based on the investment it has made; the
problems could be attributed to poor management than to fundamentals. Hence, Almirall could
1
http://www.ipsen.com/en/financial-
results?date_filter_1%5Bvalue%5D%5Byear%5D=&date_filter_1%5Bvalue%5D%5Bmonth%5D=0&date_filter_1%5
Bvalue%5D%5Bday%5D=0&date_filter_1%5Bvalue%5D%5Bhour%5D=0&date_filter_1%5Bvalue%5D%5Bminute%5
D=0&date_filter_1%5Bvalue%5D%5Bsecond%5D=0
DISCLAIMER: This document is not an offering for any investments. It represents only the opinion of Saurabh Mishra. Any views
expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or
inducement to invest and is not in any way a testimony of, or associated with Farmantra S.L.

2. have been valued with either the status quo value with the probability of having existing
management team and with an optimal value with the probability of having the new
management team that helps to turn-around the company. However, Almirall, being a family
based business; the probability of having new management in charge is negligible. Despite
this, the promising news is that Almirall, with declining operating income, has paid off all debts
in 2012 and therefore there is no probability that the company will become a distressed
company
Based on above analysis, we decided to value Almirall on its current status with existing reinvestments
and returns. Besides, we assumed that the existing management would be capable of turnaround of
the company and that its new innovative products in the offing and international expansion would
allow Almirall to get excess returns over a five year period. In other words, the company would try to
attain its cost of capital, if not exceed the cost of capital.
We have assumed a 2 stage model where, in the first stage, Almirall would grow at a higher rate than
the rate of the economy for a maximum period of five years followed by a second stage where Almirall
undergoes stable growth i.e grows at the rate of the economy. We have the following rationale to
support this assertion:
Almirall has several products in the pipeline and is expecting to launch many of them in
2013 and 20142. In order to launch they have increased their S&G expenses in the last
quarter of 2012 and they are expected to increase in 2013.
The international sales are growing and currently they comprise 60% of the revenues
which could offset the decreasing domestic sales in Spain.
We have valued Almirall by applying the free cash flow to the firm model. As the company has paid all
outstanding debt by 2012, the cost of capital will be equal to cost of equity.
Present value of Free Cash flow to the firm = € 208.83 M
Present Value of the Terminal Value of the firm = € 637.92 M
Value of operating assets = € 846.75 M
Value of cash, marketable securities & non-operating assets = € 52.3 M
Value of the firm = Market value of Equity = € 899.053 M
Number of shares outstanding = 170.522827 M
Market Value of Equity/share = € 5.18
Our valuation suggests that Almirall is overvalued at € 10.11/share as of today 18-Mar-13
2
http://investors.almirall.es/phoenix.zhtml?c=209345&p=irol-newsArticle&ID=1787556&highlight=
3
There is no debt left with Almirall, Hence the market value of debt is zero
DISCLAIMER: This document is not an offering for any investments. It represents only the opinion of Saurabh Mishra. Any views
expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or
inducement to invest and is not in any way a testimony of, or associated with Farmantra S.L.

3. SUMMARY OF ASSUMPTIONS FOR VALUATION
High growth Phase Stable Growth Phase
Length of period 5 years After 5 years
Tax Effective tax rate increasing 6% every year to Marginal tax rate of 30%
reach the marginal tax rate of 30%4
Cost of capital Adjusted every year from the current 10.13% to 9.06%
9.06% when it reaches the stable growth
Return on capital Currently 5.19% which is less than the cost of 9.06% which is the cost of capital.
capital5. Assumed that it finds its way to reach
the cost of capital in stable growth period
Non-cash working Currently 0.97% of revenues in 2012 and 0.97% of revenues
capital assumed to grow at the same rate6
Reinvestment rate7 34% of after tax operating income supposed to 16% of after tax operating income
decline after second half of the high growth
period to 16%
Expected growth 1.75% projected to decline after second half of 1.53%
rate in operating high growth period to 1.53%9
income8
Risk Parameters The bottom up unlevered beta is 1.0810 which Stable Beta = 1, Cost of capital = 9.06%
decreases to 1 in stable growth period
Ke =10.13% Risk premium = 8%11
4
A firm cannot receive the tax benefits forever and hence it has to pay marginal tax rate of 30% in the stable growth period
5
IF ROC< COC it implies that we are locking this firm into investing in negative excess return projects. Hence we assumed that
Almirall will find its way to earn its cost of capital so that reinvestment is lower during stable phase
6
The non-cash working capital as percent of revenues has been 0.94% on a five year average
7
Reinvestment rate is calculated by (Net Capex + change in non-cash working capital)/EBIT(1-T). During stable period, we have
calculate how much reinvestment is required to attain a ROC of 9.06%
8
Expected growth rate = Return on capital*Reinvestment rate
9
Risk free rate is a good proxy for a growth rate in economy. The assumption implies that during stable growth period the firm
cannot grow more than the rate of economy and hence 1.53% is used which is the risk free rate – 10 year german bond rate
10
The firm does not have debt
11
Risk premium for AAA rated country is 5.46%. Country risk premium for Spain is 3%. (Damodaran website).The Total Risk
premium for Almirall is calculated based on where its located and from where it receives the revenues
DISCLAIMER: This document is not an offering for any investments. It represents only the opinion of Saurabh Mishra. Any views
expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or
inducement to invest and is not in any way a testimony of, or associated with Farmantra S.L.

4. Important parameters used in calculations:
Operating Income: Almirall’s operating income has been consistently decreasing since 2009;
from € 179.1 M in 2009 to € 56 M in 2012. The steep fall in operating income in 2011 (€
96.9M) occurred as a result of the economic crisis as well as patent expiration of several
products. In addition, the royal decree of Spain favored generic prescriptions that affected the
sales of branded drugs of Almirall. The operating income in 2012 decreased further due to
increased investment in R&D of € 15 M (10.4%) and significant increase in SG&A worth € 80 M
(23.5%) for new product launches. Based on our analysis of the competitive landscape, we
decided not to normalize the operating income.
R&D: In many countries, based on accounting standards, R&D is not capitalized. However,
we have capitalized12 the R&D in order to understand the return they get on the investment.
The capitalization may not always result in higher ROC. Only those companies that earn
excess returns or that have high R&D productivity will have higher ROC on capitalizing. The
results before and after capitalizing mentioned below :
Before Capitalizing R&D After Capitalizing R&D
EBIT € 56 M € 89 M
Capex € 72.9 M € 232.4 M
Depreciation & Amortization € 68 M € 202.34 M
Book Value of equity € 854.7 M € 1267.84 M
Book Value of Debt € 202.2 M € 202.2 M
ROC13 4.73% 5.19%
Capitalizing R&D increases the ROC of Almirall although it’s well below the Cost of Capital. This implies
that R&D does create value for Almirall but it’s still not able to attain its cost of capital.
Growth rate: We neither used the management’s forecasts nor the analyst’s growth rates;
we calculated the growth rate based on the fundamentals i.e. using how much they have
reinvested (reinvestment rate) and how well they have reinvested (ROC)
12
Capitalizing R&D does not change the free cash flows
13
Marginal tax rate of 30% is used to calculate after tax operating Income in calculation of ROC. Although effective tax rate could
be used which is 0% in 2012 but as ROC is used to calculate future growth/investments it is more prudent to use the marginal tax
rate.
DISCLAIMER: This document is not an offering for any investments. It represents only the opinion of Saurabh Mishra. Any views
expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or
inducement to invest and is not in any way a testimony of, or associated with Farmantra S.L.

5. ASSESSING THE VALUE FOR GROWTH
In order to understand how much we are paying for Almirall’s growth, we decided to analyze their
growth. As a mature company most of their growth comes from their existing assets rather than their
growth assets. We decided to value the assets in place and understand how much we are paying for
them. Almirall has two options from their existing assets :-
1. They pay out all the earnings to their claim holders (lenders and stockholders)
2. They reinvest a portion of that for growth
Assuming Almirall does not reinvest the existing assets and pursues a no-growth policy. This implies
that the earnings will remain the same for perpetuity and Almirall should keep returning the entire
earnings as dividends to its shareholders. The value of those assets can be computed by EBIT/cost
of capital.
Estimating price paid for growth Almirall S.A.
Operating income € 89 M
After tax operating income14 € 62.3 M
Cost of capital 10.13%
Value of assets in place € 615 M
Enterprise value15 € 1672 M
Price paid for growth( EV- value of assets in place) € 1056 M
Proportion of price paid for growth 63 %
The difference between the Enterprise value and the value of existing assets provide the price we
would pay for the growth.
We are paying € 1056 M currently for the growth that constitutes 63% of the price paid for future
growth. Next, we decided to analyze how much the growth is worth. We assumed that Almirall will
keep reinvesting at current rate of 34% with the current return on capital of 5.19%. The value of the
company with growth in perpetuity can be obtained as After tax operating income * (1-
reinvestment)/ (cost of capital – growth rate).
14
Again we used marginal tax rate of 30% assuming Almirall has to revert to this tax sooner or later.
15 Bound to change based on current stock price, The stock price today 18th March is €10.11
DISCLAIMER: This document is not an offering for any investments. It represents only the opinion of Saurabh Mishra. Any views
expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or
inducement to invest and is not in any way a testimony of, or associated with Farmantra S.L.

6. THE VALUE FOR GROWTH
Estimating Value for growth Almirall S.A.
Reinvestment rate 34%
Return on Capital 5.19%
Growth rate 1.77%
Value of Firm with growth € 490 M
Value of growth16 -€124 M
Price paid for growth € 1056 M
Price paid/value of growth Too high
This could be worked the other way round too. We can also value growth by setting a higher growth
rate of 5% with high return on capital of 10%. In that case Almirall has to reinvest 50%17 of the
operating income but the fundamentals that the higher growth rate will affect the value inversely if
ROC18<COC, will not change. In order for value of the growth to increase, Almirall needs to earn ROC
greater than the COC. As the current return on capital is less than the cost of capital, the value of
growth is negative i.e. - €124 M and the price we are paying for the growth is too high.
RECOMMENDATIONS:
Almirall has to earn excess returns (ROC>COC) in order to have valuable growth. As the earnings are
declining consistently for the past 4 years, Almirall could do the following:
Restructuring: Almirall could restructure itself by liquidating assets that do not produce
excess returns and grow smaller. They could also focus on their core-competence and
outsource the rest
New Investments: Declining companies gain very little from growth assets. As seen above,
the price paid for future growth constitutes 63%. However the price we pay should be based
on not just growth but ‘quality growth’ that generates excess returns. Almirall could increase
R&D productivity and invest in developing innovative products that could manage to achieve a
high growth
Internationalization: As domestic sales have been dropping and international sales growing,
Almirall needs to focus aggressively on increasing sales internationally. This could be achieved
by either a strategy based on expansion in emerging markets or launching new products in
developed markets
16 Value of growth is negative as Almirall earns a ROC less than the cost of capital
17
Reinvestment rate =growth rate/return on capital
18 ROC = Return on capital, COC = Cost of Capital
DISCLAIMER: This document is not an offering for any investments. It represents only the opinion of Saurabh Mishra. Any views
expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or
inducement to invest and is not in any way a testimony of, or associated with Farmantra S.L.