Company Valuation of a Medical Device Startup
SCFO- Jul 9, 2021
- Startup
Company valuation for many medical device startups is smaller than traditional start-up companies. Many startups are venture-backed or backed by private equity or other financial investors.
Unlike venture-backed start-ups, they are not looking to be acquired but are focused on growing and realizing their value. Consequently, their business model tends to place a premium on rapid growth and profitability.
In the medical device space, most startups are reasonably young and in the process of scaling their business. They are unlikely to require significant short-term funding to achieve scale, making them less capital-intensive.
Below, we are talking about various business valuation methods and approaches available for valuing medical device startups. Also their requirements, and their consideration. We’ll go over the key steps in determining the value of a medical device company and provide some helpful tips.
Company Valuation of Startup Enterprises
Many startups in the medical device arena are private companies, so company valuation analysis is challenging. However, based on our experience, we’ve identified the following points that help in determining the value of a medical device company. Typically, a medical device startup will generate about one-third of its revenue in the form of recurring and often very high-margin maintenance contracts.
These contracts are typically for shorter duration, though they typically have a lower upfront cost and lower maintenance costs. Typically, a medical device startup business model will generate about one-third of its revenue in the form of recurring and often very high-margin maintenance contracts.
Small medical device companies typically have a market capitalization ranging from $50 million to $1 billion. The majority of startups in the medical device industry are less than 10 years old and have increased their annual revenue by over 50 percent. Furthermore, most early-stage firms anticipate experiencing rapid revenue growth during their initial three years.
So, it’s not uncommon for a company to have 3X to 5X the revenue of its closest competitor. Some high-growth medical device start-ups have recently been valued at over $100 million. (Says Economic Times news).
What are the Main Business Valuation Methods?
The ideal business valuation methods for a medical device business model vary by country and industry. The most common methods used in India for valuing a medical device start-up include the book-value method, using the company’s balance sheet, followed by peer comparison of a start-up company to its peers (such as Varian Medical Systems (NYSE: VAR) and Stryker (NYSE: SYK), sum-of-the-parts (SOTP) method, and more.
We can consider the book-value method for the business valuation process. Some of the advantages of using the book-value business valuation methods for the valuation of a medical device start-up include: Preparing a business valuation report and providing a comprehensive view of a company’s assets, cash flow, and liabilities. It is easy to construct an in-depth balance sheet and income statement that allows for comparison across industries and for the company valuation with a valuation professional. Only a company valuation professional can select the right business valuation methods.
Many medical device companies hold low expectations for their company valuation. There are various reasons behind this sentiment, including the fact that some small business owners do not anticipate significant profitability in their ventures. Additionally, many medical device companies actively sell technology and services to the medical and healthcare industries.Surprisingly, start-up companies cannot expect significant guaranteed discounts from these organizations for the use of their technologies.
Moreover, achieving substantial cost savings in the healthcare sector may impact traditional industry players for a technology company selling services to hospitals and clinics.
The most common core valuation method for most companies is the Discounted Cash Flow (DCF) valuation method.
You can also employ other valuation methods, such as earnings multiples, trading multiples, the comparable company’s multiple method, the net asset value method, or other fundamentals.
However, all the valuation methods fall under three main approaches Asset Approach, Income Approach, and Asset Approach.
Asset Approach
A typical asset approach suggests creating a new company on a new set of facts.
For example, splitting a startup into two or three startup companies based on similar technologies can create a new company. Another method is to compare a start-up company to a new set of comparables.
For example, a new start-up company that became a big success could be compared to a company that acquired its target.
You May Also Want To Watch: Income Approaches for Medical Device Start-ups The Income approach is the most common valuation methodology for medical device startups. The rationale behind this approach is that a start-up that has yet to be monetized should have no revenue to report.
Income Approach
The income approach suggests that the value of a company derives from the income generated by its business activities.
m the business activities of the company. The type of methods employed depends on whether the company is profitable or loss-making. Profitable companies generally use the cash flow approach while loss-making companies use the net income approach.
Market Approach
When estimating the potential market size for medical devices, you can consider both the most recent sales data and the value of historical sales. Whether to use historical sales as a market-sensitivity indicator is debatable, but most successful medical device companies have the ability to generate significant revenue from the product and this is the reason investors choose to evaluate the historic performance. Market sizing is likely to be the most time-consuming process for a medical device start-up. The long-term cost of a medical device is typically in the range of USD 1.5 to 2 per patient, and the current average cost of treatment for this disease is in the range of USD 12,000 to 25,000.
Startup Valuation Methods – No-Nonsense guide to startup Valuation
Valuation of Medical Device Start-ups
Valuing a medical device start-up is a delicate exercise. For start-ups, we would also want to discount the potential value from disruption to the incumbents in the market. However, it is very difficult to make the case that an incumbent should not, at a minimum, be taken seriously as it is for every other technology business.
We view the potential for new entrants to disrupt an incumbent as a real risk, regardless of whether they can realistically realize the value of the opportunity. Based on conversations with industry experts, we have used three valuation frameworks for the medical device industry. They are appropriate for the various stages of a medical device startup’s life.
Let’s take a closer look at what you need to know about how to value a medical device startup enterprise.
1. A good starting point is to evaluate the expectations of the purchaser(s) of the medical device.
2. The number of possible stakeholders for a medical device start-up is typically quite large. These range from general patients and insurance providers to professional medical users. In addition, most medical devices have external regulatory and payer entanglements.
All parties involved with medical devices share a common thread.
The industry is often valued by looking at the expected payback period of investment. Expectations for a medical device start-up enterprise usually range between three and six years.
Valuation Considerations
Considering what it will cost a medical device start-up to reach the target customers it currently has or might want if it expands its customer base or buys/upgrades other products in its portfolio. The current market in medical devices is roughly $30 billion per year.
This figure is only expected to grow, driven by population growth and continued technological advancements. With the median annual income for a U.S. household now at around $52,000, these industries have a low market capitalization.
All businesses that have revenues, profit, or earnings face market forces to justify the level of ownership interest and control of the entity. This valuation is an important part of the business assessment as it is an initial evaluation of the company. The factors considered when valuing a medical device start-up include the following:
Market Capacity Challenges and Capitalization Valuation Investors and business owners rely on valuation to estimate the financial situation.
Final Thoughts
Based on industry sources, we find Medical Device start-ups are not valued similarly to common equities. However, the business valuation methods could be the same as those used for other startups.
Given the concentration of innovation risk, the emerging nature of the business model, and the relative newness of the industry, we view investment in Medical Device start-ups as a high-risk, high-reward proposition. There are ample potential fund sizes available for Medical Device companies, and the fees offered are quite attractive.