Vantage Point Advisors Q1 2022 Healthcare Valuation Blog

Welcome to VPA’s first quarterly healthcare valuation blog. This blog is designed to track valuation trends in the healthcare sector, with a focus on the different industry sub-sectors. We will be reviewing publicly traded companies in each sub-sector with the goal of finding specific relationships and trends to provide a better understanding of the healthcare valuation landscape. We will begin with valuation multiples from public companies [1] and add other analyses and topics related to the healthcare sector in future updates (transactions, IPOs, regulations, and other relevant industry information).

DISCLAIMER: This blog is intended as industry insight, not as investment advice. While values obtained through the public company multiples presented can help provide one indication of value for a private company, there are other approaches and methodologies that most likely need to be employed in order to actually conclude an estimate of equity value.

Public Company Multiples

To understand the multiples discussed, it is important to first understand what is referred to as business enterprise value (“BEV”). A company’s BEV is made up of its equity value along with its net debt (debt minus cash). Or written another way, equity value equals BEV less net debt. The graphic below illustrates this relationship.

After determining the BEV of the public companies by adding (1) the equity value (market capitalization) and (2) the net debt obtained through quarterly and annual filings, multiples are calculated from the income statement data. [2]

The multiples that will be calculated for the sub-sector companies in this blog will be the following:

  • BEV to LTM Revenue (“BEV/Sales”)
  • BEV to LTM EBITDA (“BEV/EBITDA”)

Sub-Sectors

When looking at the healthcare sector from a valuation standpoint, each sub-sector has different operational characteristics and pricing mechanisms that cause vastly differing valuation multiples, making it difficult to lump all companies together. This creates a need to allocate the larger universe of companies into their respective sub-sectors to record meaningful historical relationships and trends. The companies that will be tracked in this blog represent a mix of public companies in the healthcare sector broken down by the following sub-sectors:

The selected companies are traded on major U.S. exchanges (NYSE and Nasdaq) since these have a large amount of trading volume from public markets and are the best sources of market information. To further filter the companies and make the results more valuable, we excluded smaller companies (<$200MM in revenue in most cases) and companies whose stock has not been publicly available for at least two years. This helps to “drown out the noise” from companies whose multiples would be considered outliers when compared to the longer-running, more stable sub-sector companies.

Also, new public companies tend to have higher volatility in their prices, and in turn higher volatility in valuation multiples, until these metrics “level off” over time. The analyses in this blog will be performed over the previous two-year period, so this filtering allows us to look at the data from the same set of companies over the entire review period. A listing of the companies that will be tracked in this blog are included here.

BEV/Sales Multiples

The median revenue multiples of each sub-sector were plotted on the same chart (below), which does a great job of showing the differences in valuations between the sub-sectors given their different profitability and growth prospects. You will notice some sub-sectors have much higher multiples than others. For medical device manufacturing, this makes sense as these companies are more similar to technology companies than standard healthcare companies.

Also note, some sub-sectors tend to move with one another. Again, using device manufacturing as an example, it appears there is some correlation with the alternate site facilities sub-sector and to a lesser degree the post-acute services sub-sector. In future versions of this blog, we plan to further explore these relationships.

BEV/EBITDA Multiples

EBITDA multiples tend to be more volatile than revenue multiples, with much different ranges for each sub-sector. This did not lead to a very clean and meaningful chart when all were plotted together. Instead, we broke out each sub-sector into its own chart, which helps to present historical trends for each sub-sector. The graphs present the median multiples (solid lines) but also include the upper and lower quartiles of the datasets (dashed lines). The two-year high and low median multiples are highlighted as well.

Interesting finds:

  1. The first half of each graph occurred during the heart of the coronavirus pandemic (COVID-19). You will notice some sub-sectors performed poorly during this period, such as alternate site facilities and senior care. However, some sub-sectors did extremely well, like post-acute services and clinical laboratories and diagnostic services.
  2. The spreads of the quartiles provide some talking points. Medical device manufacturing has a large spread, which is to be expected as there are many companies included in this sub-sector with low homogeneity in their business models. You will also notice that staffing has a very tight spread, which is simply because there are only two companies included in that sub-sector.

Conclusion and Takeaways

We hope you enjoyed reading VPA’s first healthcare valuation blog. There are certainly some interesting relationships and trends happening within the different sub-sectors. We plan to provide updates to this analysis each quarter and dive deeper into the data to help explain these findings better.

We value being a resource. If you are interested in receiving this quarterly blog, or have any updates or questions to share, send inquiries to bjames@vpadvisors.com.

Brandon James, CFA
Vantage Point Advisors
Vice President – Healthcare Practice
180 State St., Suite 225, Southlake, TX 76092
214.254.4810
C 972.898.7884
bjames@vpadvisors.com

 

[1] All data used for the analyses found in this blog were obtained from S&P Capital IQ.

[2] The BEV is calculated as of a set date and usually compared to different periods of revenue and profit. The period we are most concerned with for this blog will be the last twelve months (“LTM”), but multiples are also calculated based on fiscal year, historical average, and forward-looking income data.