At different stages of development, entrepreneurs attempt to gain insight into the value of their technology to make strategic decisions about which paths to pursue (M&A, Fundraising, etc.). The medical technology space can be particularly difficult in this regard, as M&A, strategic partnering and licensing transactions are limited in number and the valuation for many deals are undisclosed. Pre-commercial medical technology companies do not have the same access to public markets as biopharma companies, producing fewer public companies from which to benchmark. Early stage medical technology valuations are highly dependent on addressable market size, growth forecasts and competitive product revenues, information which in many cases is not easily obtainable. Finally, the medical technology space is vast and encompasses medical devices, diagnostics and digital health all which utilize a variety of different business models, address different customer bases, and confront differing reimbursement environments. An implantable mitral valve repair device ready for its FDA pivotal trial will be valued quite differently than a pre-commercial high throughput screening instrument with applications in life science research. With fewer overall transactions and significant variances across technologies and stage of development, triangulation of valuation is the best approach.
1. M&A Precedent Transactions. The most reliable data set is derived from a thorough screen of historic deals in the sub-sector. To ensure completeness of the data set it is important to include all deal structures including M&A, licensing, strategic partnering, etc. although medical technology deals will be heavily skewed towards M&A. It is important to note that strategics often times ascribe higher valuations than public markets would, due to inherent synergies that can be captured. When analyzing appropriate precedent transactions to include in an analysis, teams should pay special attention to the following:
- Functionality: therapeutic implantable device, diagnostic device, surgical tools, surgical instruments, clinical or companion diagnostic, research tools and instruments, etc.
- End Customer: patient, hospital, ambulatory surgery center, physician, biopharmaceutical company, medical device company, reference laboratory, etc.
- Therapeutic category: cardiovascular, orthopedics, oncology, neurovascular, peripheral vascular, infectious disease, dermatology, ENT, women’s health, life science research, etc.
- Regulatory Pathway: CE Mark, PMA, 510k, Humanitarian Device Exemption, CLIA waived test or no required approvals
- Stage of Development: proof of concept, first in man, CE Mark, FDA clinical trials, FDA approved, early commercial
2. Public Company Comparables. To the extent there are public companies in the sector or in an adjacent sector, public company valuations can serve as a valuable reference point.
3. Financial Projections. Development stage companies and clinical stage companies are many years removed from commercialization and revenue generation. However, future revenue projections (geographic based epidemiological models) help illuminate the value of a product and the future revenue stream that could be generated upon product launch. A fully projected set of financial statements, including cash flows driven by working capital assumptions, can be prepared, discounted and risk adjusted to derive the current value of an early stage medical technology. Although several assumptions are utilized in the process, the exercise can be helpful in gaining directional valuation guidance. The exercise is also worthwhile as any counter party (investor, strategic, etc.) will be going through their own independent financial projection process. The financial projections can serve as a tool to gain alignment and consensus around the ultimate revenue potential of a product as well as the costs required to generate that level of revenue.
Conclusion. Valuing an early stage medical technology company is more of an art than a science. Entrepreneurs are best served by obtaining data from a few sources to build a case as to the attractiveness of their technology and the ultimate market opportunity. Triangulating a company’s value based upon M&A precedent transactions, public company comparables and robust financial projections is the most reliable method for entrepreneurs to be prepared and equipped for conversations with investors, strategics and other interested parties.
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