Health IT Valuation Trends by HIT Subsector

February 19, 2017

We believe the next chapter for health IT is likely to perpetuate initiatives around value-based care but using dramatically different forces: the Trump administration is forcefully advocating free-market levers in healthcare and across all sectors, with a focus on de-regulation, price transparency, and patient responsibility.  While the catalysts may change, the simple objective remains the same for investors and operators alike: generate strong financial returns for shareholders by building sound business models that align profit incentives across all stakeholders with superior health outcomes.

To begin, it is easier to assess the future with a solid understanding of the past.  HGP took a deep dive analysis into valuation multiples for 266 M&A transactions from 2010 through 2016 categorized across 15 health IT subsectors.  The findings are unbiased and unfiltered, yet only serve as a guidepost, since every transaction has a unique identity and circumstance. 

A Box and Whisker plot graphically displays the Median, 25th Percentile, 75th Percentile, Minimum, and Maximum; where points beyond 1.75 times the Inter-Quartile Range are shown as outliers. The Inter-Quartile Range (blue columns) is the 75th Percentile minus the 25th Percentile and serves to describe the variation in the range of outcomes.

The sectors were sorted according to decreasing median revenue multiple, and show a trend of decreasing IQR as median revenue multiple decreases.  We can interpret this to mean that while companies that fall within sectors further to the right on the graph can expect a lower revenue multiple in a transaction, the transaction is also much more predictable.  A company that falls within a sector on the left, however, cannot have as strong a confidence in their expected outcome.  These observations follow a common theme in investment theory: that with greater potential upside, there is also greater risk and volatility.

The statistical significance of each sector varies depending on the volume, date, and variability of transactions within each.  While these metrics may be used as a guidepost for expected outcomes, the end result often depends as much on seller and market fundamentals as buyer circumstances, and buyer circumstances tend to be extremely unpredictable.  It is not uncommon for the clearing price of a transaction to be significantly higher than the cover bids.  This usually occurs when a buyer has unique circumstances that justify a higher price than the rest of the buyer universe.  Identifying those buyers and appropriately positioning in relation to them is part of the art of running a successful transaction process.

Feel free to contact us if you would like to discuss how we categorized each sector and for more detail on the specific findings within each sector.