Does anyone know how to value a medtech company pre-revenue?
I am assuming it has something to do with addressing the TAM, then looking at revenue build, then some how looking at comps, then building out cash flows based off of the TAM for a DCF, usually longer than 5-10 years. But I don't know specifics, or if this general thought process is right... please let me know!
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That’s right - devil is in the detail and it will be hugely sensitive to a few assumptions (market size & ramp ip on penetration / market share - the rest is just noise).
Would also want to check whether the device has a known reimbursement path or whether it’s a new procedure - that can affect timelines (and value) significantly
That’s right - devil is in the detail and it will be hugely sensitive to a few assumptions (market size & ramp ip on penetration / market share - the rest is just noise).
Would also want to check whether the device has a known reimbursement path or whether it’s a new procedure - that can affect timelines (and value) significantly
Do you know how you'd build out the revenue build?
There are just too many variables to build out a PnL for a pre revenue company. In theory you could do it but it would be intellectual masturbation and just garbage in garbage out.
Med tech is largely a market share grab sector of pre defined verticals. While you may have new devices that find white space without existing competitors, the majority of pre revenue companies in med tech are looking to disrupt a larger competitor with better technology, better safety, efficacy, or something of the like.
Keep your analysis simple. Find public comps to get a sense of the TAM. Use research reports of comps to find the TAM, if it is not listed, use the S-1 to find TAM at IPO and see if you can find a market growth rate (“WAMGR”) to grow the TAM to today. Use reports to find how penetrated the TAM is, and then find what market share the biggest players have of that figure and how theirs has grown over time. Assume a % of annual market share for your company which is a proxy for revenue - this is your first sensitivity. Be careful and do not apply the % market share to TAM as you need to apply it to: % market penetration * TAM which is a smaller figure. There’s your revenue.
Use your public comps to see what revenue multiple they trade at. Apply an illiquidity or lack of certainty discount to comps as it is an early stage company - this is your second sensitivity. I would not do 10-20% as this is what a commercialized pre-IPO company would command. I would go anywhere from 50-75%+ discount to peers. There is no correct answer which is why you should sensitize across a large spectrum of multiples.
You should now have a matrix of values sensitizing market share (e.g. revenue) vs. multiples.
The above is the theoretical approach of what you would discuss with a company. In practice, smart med tech investors or strategic will have a conviction set of views on the specific vertical this company is looking to penetrate and will likely pay a large premium that is likely off your matrix if they have strong conviction, or come below your matrix if they see the vertical as out of favor.
Source: Formerly covered Med Tech and Digital Health for ~3 years at a bank and have worked with a number of early stage companies.
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