Lloyd Price
- Jul 22, 2023

HealthTech M&A multiples: current trends and variables driving valuations

Exec Summary:

The average revenue multiple for HealthTech companies in 2023 is 4.5x. This is down from 6.5x in 2022, but still higher than the average revenue multiple for all technology companies, which is 3.5x.

The higher revenue multiple for HealthTech companies reflects the fact that the healthcare market is growing rapidly and there is a lot of demand for innovative digital health solutions.

The average revenue multiples for different types of HealthTech companies in 2023 are:

Telehealth companies: 5.5x
Wellness companies: 4.0x
Drug discovery companies: 7.0x
Medical device companies: 5.0x
Healthcare IT companies: 3.5x.

Factors influencing the average revenue multiple for HealthTech companies today are:

The growth of the healthcare market.
The adoption of digital health solutions by healthcare providers.
The development of new and innovative digital health applications.
The level of competition in the HealthTech sector.
The overall economic climate.

10 Key Variables in HealthTech M&A valuation multiples today are:

Stage of the company's development: Early-stage companies are typically valued at a lower multiple than more mature companies.
Size of the company: Larger companies are typically valued at a higher multiple than smaller companies.
Intellectual property portfolio: Companies with valuable intellectual property are typically valued at a higher multiple.
Quality of the management team: A strong management team can add value to a company and may lead to a higher valuation.
Revenue growth: This is one of the most important factors in determining the valuation of a healthtech company. Companies with strong revenue growth are typically valued at a premium to those with slower growth.
Gross margin: Gross margin is a measure of a company's profitability. Companies with higher gross margins are typically valued at a premium to those with lower margins.
Customer acquisition costs: Customer acquisition costs (CAC) are the costs associated with acquiring new customers. Companies with lower CACs are typically valued at a premium to those with higher CACs.
Market share: Market share is a measure of a company's dominance in its industry. Companies with a large market share are typically valued at a premium to those with a smaller market share.
Regulatory landscape: The regulatory landscape for healthtech is constantly evolving. Companies that operate in industries with a favorable regulatory environment are typically valued at a premium to those that operate in industries with a more challenging regulatory environment.
Technology moat: A technology moat is a competitive advantage that makes it difficult for other companies to compete with a company. Companies with a strong technology moat are typically valued at a premium to those that do not have a moat.

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HealthTech M&A valuation multiples

HealthTech M&A valuation multiples are a set of metrics used to determine the value of a HealthTech company in an acquisition or merger.

These multiples are typically based on financial metrics such as revenue, earnings, or users/subscribers, and can differ based on the company's stage of development, growth prospects, market position, and other relevant factors.

Some of the most commonly used HealthTech M&A valuation multiples include:

Enterprise value (EV) to sales: This multiple is the most common way to value healthtech companies. It is calculated by dividing the company's enterprise value (EV) by its trailing 12-month revenue.
EV to EBITDA: This multiple is used to measure a company's profitability. It is calculated by dividing the company's EV by its earnings before interest, taxes, depreciation, and amortization (EBITDA).
Price to earnings (P/E) ratio: This multiple is used to measure a company's valuation relative to its earnings. It is calculated by dividing the company's stock price by its earnings per share (EPS).
Price to sales (P/S) ratio: This multiple is used to measure a company's valuation relative to its sales. It is calculated by dividing the company's stock price by its trailing 12-month revenue.

The specific multiple that is used to value a HealthTech company will depend on a number of factors, including the company's stage of development, growth prospects, market position, and other relevant factors. However, the multiples listed above are a good starting point for understanding how HealthTech companies are valued in M&A transactions.

It is important to note that valuation multiples are just one factor that is considered when valuing a healthtech company. Other factors, such as the company's management team, its intellectual property, and its strategic positioning, can also play a role in determining the company's valuation.

Here are some of the recent trends in HealthTech M&A valuation multiples:

Valuation multiples vary depending on the subsector of healthtech. For example, companies in the telehealth sector typically command higher valuation multiples than companies in the medical device sector.
Valuation multiples are also affected by the stage of development of the company. Companies that are still in the early stages of development typically command lower valuation multiples than companies that are more mature.
Valuation multiples have been increasing in recent years. This is due to a number of factors, including the growing demand for digital health solutions, the increasing investment in healthtech by venture capitalists, and the favorable regulatory environment for healthtech companies.

Current HealthTech M&A valuation multiples

In terms of valuation, the 10 Key Variables in HealthTech M&A valuation multiples today are:

Stage of the company's development: Early-stage companies are typically valued at a lower multiple than more mature companies.
Size of the company: Larger companies are typically valued at a higher multiple than smaller companies.
Intellectual property portfolio: Companies with valuable intellectual property are typically valued at a higher multiple.
Quality of the management team: A strong management team can add value to a company and may lead to a higher valuation.
Revenue growth: This is one of the most important factors in determining the valuation of a healthtech company. Companies with strong revenue growth are typically valued at a premium to those with slower growth.
Gross margin: Gross margin is a measure of a company's profitability. Companies with higher gross margins are typically valued at a premium to those with lower margins.
Customer acquisition costs: Customer acquisition costs (CAC) are the costs associated with acquiring new customers. Companies with lower CACs are typically valued at a premium to those with higher CACs.
Market share: Market share is a measure of a company's dominance in its industry. Companies with a large market share are typically valued at a premium to those with a smaller market share.
Regulatory landscape: The regulatory landscape for healthtech is constantly evolving. Companies that operate in industries with a favorable regulatory environment are typically valued at a premium to those that operate in industries with a more challenging regulatory environment.
Technology moat: A technology moat is a competitive advantage that makes it difficult for other companies to compete with a company. Companies with a strong technology moat are typically valued at a premium to those that do not have a moat.

HealthTech valuations on public markets today

As of July 21, 2023, HealthTech valuations on public markets have been slashed. The average enterprise value (EV) to sales multiple for HealthTech companies is 4.8x, down from 5.6x in FY 2022. The average EV to EBITDA multiple is 11.0x, down from 12.5x in FY 2022.

There are a number of factors that have contributed to the decline in HealthTech valuations, including:

The overall economic slowdown, which has led to investors becoming more cautious about risk.
The war in Ukraine, which has created uncertainty in the global markets.
Rising interest rates, which have made it more expensive for companies to borrow money.
Regulatory changes, such as the implementation of the Medicare Access and CHIP Reauthorisation Act (MACRA), which have made it more difficult for healthcare providers to make money.

Future HealthTech valuations on public markets in 2024

It is difficult to predict the future, but there are a number of factors that suggest that HealthTech valuations on public markets could rebound in 2024. These factors include:

The continued growth of the global healthcare market. The global healthcare market is expected to reach $10 trillion by 2024, providing a large addressable market for healthtech companies.
The increasing adoption of digital health technologies. Digital health technologies are becoming increasingly popular, as they offer a number of benefits, such as improved efficiency, patient engagement, and outcomes.
The growing focus on value-based care. Value-based care is a reimbursement model that rewards providers for delivering high-quality care at a lower cost. This model is likely to drive demand for HealthTech solutions that can help providers improve the quality and efficiency of care.

Of course, there are also some risks that could weigh on HealthTech valuations in 2024.

These risks include:

The ongoing economic slowdown. The global economy is facing a number of challenges, which could lead to slower growth in the healthcare market.
Regulatory changes. The healthcare industry is highly regulated, and any changes to regulations could impact the valuations of healthtech companies.
Technological disruption. The healthcare industry is constantly evolving, and new technologies could emerge that disrupt the existing market.

Overall, the future of HealthTech valuations on public markets is uncertain. However, there are a number of factors that suggest that valuations could rebound in 2024. Investors who are interested in HealthTech should carefully consider the risks and opportunities before investing in any HealthTech company.