Medical device valuation is integral to exit strategy. Potential investors show interest in a device with a defensible financial valuation. The company should be able to deliver a justifiable financial valuation for its medical technology. Consulting firms use resources, aligned expertise, and intricate industry nuances to provide in-depth research-backed independent defensible pricing strategy to decision-makers. They build credible projections with a thorough qualitative analysis of industry trends, market, and economic drivers.
It is also critical to be aware of the factors that can influence medical device valuation. These factors drive both valuation and success. The firm should consider the following factors:
Status of FDA Clearance
The frequency of pre-FDA clearance, pre-revenue mergers, and acquisitions in the industry is increasing. Historically, acquirers have invested in companies following the FDA clearance. They assume market risks only. They determine the FDA clearance status through corporate press releases.
Multiple Regulatory Clearance
What kind of medical device company commands higher acquisition premiums, a multi-product company, or a single-product company? Certain single-product companies command higher acquisition premiums with their high growth prospects. Other single-product companies are acquired at a discount. Multi-product companies fall in the upper two-thirds to the middle of the multiple valuation range. Multiple products require multiple regulatory clearances. Data on regulatory clearances can be obtained from company press releases, corporate websites, and annual reports and private data as determined by medical device consultants.
Type of Fillings
As PMA is more in-depth than a 510k, such products and companies carry a larger acquisition premium. Class I medical devices are acquired for the smallest multiples as these devices are often undifferentiated commodity products. Data on the filling can be obtained from corporate websites, annual reports, and press releases by the company and private data as determined by medical device consultants.
The industry has seen a trend of more pre-revenue deals. This trend raises the following two questions:
- Does the level of sale influence the acquisition multiple?
- Is revenue a major acquisition consideration or is it anticipated that there will be more pre-revenue deals?
According to the investment bankers covering the industry, medical developers with direct sales forces command higher acquisition multiples. This is lower for companies using distributors. Corporate websites, annual reports, and press releases and private data as determined by medical device consultants can provide the required data.
Potential Profit Margin
The potential profit margin may have an influence on the acquisition multiple.
A medical device addressing the needs of a larger target market often commands – the highest acquisition multiples. Comparing on the basis of market size is often taken into higher consideration than corporate sales. The required data can be obtained from equity research reports published by major investment banks, and private data as determined by medical device consultants.
Position in Market
The position of the medical device is based on market share. This can also drive acquisition multiples. It tells how effective the device will be in healthcare settings. Data on market share can be obtained from company annual reports and equity research reports.
Projected Growth Rate
The difference between sector growth rate and projected growth rate reflects the ability of the device to gain market share and projected growth rate. Valuation multiples and the company’s ability to grow in the industry are positively correlated.
The total growth rate of a medical device is a function of sector growth and supernormal growth. Sector growth reflects the attractiveness of the sector in the industry. Supernormal growth accounts for the attractiveness of the medical device relative to similar companies in the sector. Sectors that are growing faster command higher acquisition multiples. Data on sector growth can be obtained from corporate presentations and equity research reports.
Reimbursement governs the adoption. The acquisition occurs once a company has a plan developed. Status of reimbursement can be obtained from corporate filings.
A technology that has the potential to change the dynamics of competition in the sector also motivates a significant number of acquisitions. Acquiring such technologies can give an advantage to the acquiring company. Innovation is rapid in sectors including spinal, cardiology, and orthopedics.
Large medical device companies use mergers and acquisitions for portfolio diversification, earning volatilities, and accelerating/sustain growth. However, this trend has slowed in recent years.
Other key factors include:
- Sales synergies
- Earnout model
- IPO’d prior merger and acquisition
- Acquirer Stock Performance prior to M&A