Reliable valuation in the healthcare industry

Healthcare is an extremely diverse sector that encompasses a wide range of industries with unique capital expenditure patterns, cash flow sources, and vulnerabilities. For example, in the pharmaceuticals value chain, you will find both drug developers and contract development and manufacturing organizations (CDMOs).

Drug developers make massive research and development (R&D) investments to build patent portfolios that can generate millions, if not billions, in licensing income. In contrast, a CDMO’s R&D expenses are aimed at developing cost-effective methods for manufacturing existing drugs.

This difference is directly reflected in the financials. In Q1 2025, Pfizer’s R&D expenses amounted to 16.06% of its revenue. In contrast, this figure stood at only 3.3% for Thermo Fisher Scientific, a leading CDMO. Interestingly, this sector also includes institutions such as nursing homes, whose business models can resemble those of rental properties or hotels.

Given these diverse characteristics, this article will discuss two techniques that can help you confidently uncover valuation insights in such a varied sector.

Which Valuation Method Provides Accurate Healthcare Company Valuations?

The discounted cash flow (DCF) method. The DCF method can produce accurate valuations for any company with an extensive financial history, not just healthcare companies. This valuation method involves forecasting future cash flows and discounting them.

Since the cash flow forecasts are based on observed trends, this approach effectively captures the unique characteristics of each business. Therefore, it is particularly useful for valuing healthcare companies, which vary widely in size and business model.

Example

Altrua Care develops and markets proprietary drugs. Its financial performance over the past five years is summarized below:

Particulars	2020	2021	2022	2023	2024
Revenue	$540,000,000	$648,000,000	$777,600,000	$1,010,880,000	$1,263,600,000
Cost of sales	$120,000,000	$168,000,000	$193,200,000	$212,520,000	$244,398,000
Research and development (R&D) expenses	$1,500,000	$1,950,000	$2,730,000	$4,095,000	$4,914,000
Selling, informational, and administrative expenses	$80,000,000	$92,000,000	$115,000,000	$132,250,000	$152,087,500
Earnings before interest and taxes (EBIT)	$338,500,000	$386,050,000	$466,670,000	$662,015,000	$862,200,500
Effective tax rate	25%	25%	25%	25%	25%
Earnings before interest after taxes (EBIAT)	$253,875,000	$289,537,500	$350,002,500	$496,511,250	$646,650,375
Depreciation and amortization (D&A)	$60,000,000	$60,000,000	$60,000,000	$60,000,000	$60,000,000
Capital expenditure	$15,000,000	$17,250,000	$24,150,000	$33,810,000	$43,953,000
Change in Net Working Capital (NWC)	$20,000,000	$22,000,000	$24,200,000	$26,620,000	$29,282,000
Unlevered Free Cash Flow (UFCF)	$278,875,000	$310,287,500	$361,652,500	$496,081,250	$633,415,375

Since the effective tax rate has stayed constant at 25%, we will assume the same for our forecast period.

By applying the formula for compound annual growth rate (CAGR), we can calculate the growth rates for the above cash flow items as follows:

Particulars	CAGR
Revenue	23.68%
Cost of sales	19.46%
Research and development (R&D) expenses	34.54%
Selling, informational, and administrative expenses	17.42%
Depreciation and amortization (D&A)	0.00%
Capital expenditure	30.84%
Change in Net Working Capital (NWC)	10.00%

Furthermore,  Altrua Care’s weighted average cost of capital can be calculated as follows:

Particulars	Amount
Equity (E)	$1,500,000,000
Debt (D)	$300,000,000
Cost of equity (CE)	15%
Cost of debt (CD)	36%
Tax rate (T)	25%
Weighted average cost of capital (WACC)	17%

Note: WACC is calculated as per the following formula:

WACC=E/E+D x CE+{D/E+D x C x 1-T}

Let’s assume that Altrua Care can be expected to be in operation for 10 years.

So, we will forecast cash flows for the next 10 years based on the CAGRs of cash flow items and discount them with the WACC. Also, we will calculate the terminal value as the expected asset-based valuation at the end of the forecast period.

The cash flow forecast based on the abovementioned method is as follows:

Particulars	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Revenue	$1,562,820,480	$1,932,896,370	$2,390,606,230	$2,956,701,785	$3,656,848,768	$4,522,790,556	$5,593,787,360	$6,918,396,207	$8,556,672,429	$10,582,892,460
Cost of sales	$291,957,851	$348,772,849	$416,644,045	$497,722,976	$594,579,867	$710,285,109	$848,506,592	$1,013,625,974	$1,210,877,589	$1,446,514,368
Research and development (R&D) expenses	$6,611,296	$8,894,837	$11,967,114	$16,100,555	$21,661,687	$29,143,633	$39,209,844	$52,752,924	$70,973,784	$95,488,129
Selling, informational, and administrative expenses	$178,581,143	$209,689,978	$246,217,972	$289,109,142	$339,471,955	$398,607,969	$468,045,478	$549,579,000	$645,315,662	$757,729,650
Earnings before interest and taxes (EBIT)	$1,085,670,191	$1,365,538,706	$1,715,777,100	$2,153,769,112	$2,701,135,259	$3,384,753,844	$4,238,025,447	$5,302,438,308	$6,629,505,394	$8,283,160,313
Effective tax rate	25%	25%	25%	25%	25%	25%	25%	25%	25%	25%
Earnings before interest after taxes (EBIAT)	$814,252,643	$1,024,154,030	$1,286,832,825	$1,615,326,834	$2,025,851,445	$2,538,565,383	$3,178,519,085	$3,976,828,731	$4,972,129,045	$6,212,370,235
Depreciation and amortization (D&A)	$60,000,000	$60,000,000	$60,000,000	$60,000,000	$60,000,000	$60,000,000	$60,000,000	$60,000,000	$60,000,000	$60,000,000
Capital expenditure	$57,508,105	$75,243,605	$98,448,733	$128,810,322	$168,535,425	$220,511,750	$288,517,574	$377,496,393	$493,916,281	$646,240,062
Change in Net Working Capital (NWC)	$32,210,200	$35,431,220	$38,974,342	$42,871,776	$47,158,954	$51,874,849	$57,062,334	$62,768,568	$69,045,424	$75,949,967
Unlevered Free Cash Flow (UFCF)	$784,534,338	$973,479,205	$1,209,409,750	$1,503,644,736	$1,870,157,066	$2,326,178,784	$2,892,939,177	$3,596,563,770	$4,469,167,340	$5,550,180,206

We will assume that, at the end of the forecast period, the balance sheet items for Altrua Care will be as follows:

Particulars	Amount
A. Assets
Cash and equivalents	$2,500,000,000
Accounts receivable	$850,000,000
Inventory	$500,000,000
Property, plant, and equipment	$3,900,000,000
Intangible assets	$1,500,000,000
Other long-term assets	$750,000,000
Total assets	$10,000,000,000
B. Liabilities
Accounts payable	$650,000,000
Accrued expenses	$400,000,000
Long-term debt	$1,500,000,000
Deferred tax liabilities	$450,000,000
Total liabilities	$3,000,000,000
Asset-based valuation (Terminal value)	$7,000,000,000

Finally, Altrua Care’s valuation can be calculated by discounting the cash flows and terminal value in the following manner.

Year	Unlevered free cash flows (UFCF)	Discounting factor	Discounted cash flow
2025	$784,534,338	1.17	$670,542,169
2026	$973,479,205	1.3689	$711,139,751
2027	$1,209,409,750	1.601613	$755,119,839
2028	$1,503,644,736	1.87388721	$802,420,086
2029	$1,870,157,066	2.192448036	$852,999,494
2030	$2,326,178,784	2.565164202	$906,834,261
2031	$2,892,939,177	3.001242116	$963,913,961
2032	$3,596,563,770	3.511453276	$1,024,237,969
2033	$4,469,167,340	4.108400333	$1,087,812,038
2034	$5,550,180,206	4.806828389	$1,154,644,967
2034 (Terminal value)	$7,000,000,000	4.806828389	$1,456,261,683
Altrua's valuation			$10,385,926,219

Thus, Altrua Care’s valuation can be estimated as $10.39 billion.

How To Value Healthcare Companies Which Lack Sufficient Financial History?

When you need to value a healthcare company with an insufficient financial history, you can use the comparable company analysis (CCA) method. This valuation technique attempts to estimate a company’s worth by analyzing how the market values comparable companies.

In this method, you must start by listing companies with similar products, size, geographical diversification, and growth rate. Then, you will need to gather the market capitalization and other financial information of the companies on your list.

Investors typically value early-stage companies based on metrics such as sales or revenue, as these businesses often have not yet achieved profitability. However, more mature companies would be valued based on EBITDA or net income. Then, you need to establish the valuation multiple for each company in the list. You can achieve this by simply dividing the market capitalization by the revenue, sales, EBITDA, or any other financial metric that you have chosen. The next step would be to remove any outliers and calculate both the average and the median.

Finally, you can estimate the target company’s valuation by simply applying the average or median valuation multiple to its financial figures.

Example

Suppose you are valuing MacroHeal, an American drug manufacturer focusing on specialty and generic drugs. You also know that its sales were $3.5 billion in 2024.

When you screen for similar companies online, you can gather the following information:

Company	Market capitalization	Sales
Zoetis Inc	$69,300,000,000	$9,290,000,000
United Therapeutics Corp	$13,430,000,000	$2,990,000,000
Neurocrine Biosciences, Inc	$13,370,000,000	$2,410,000,000
Viatris Inc	$10,730,000,000	$14,260,000,000
Elanco Animal Health Inc	$7,400,000,000	$4,430,000,000
Lantheus Holdings Inc	$5,750,000,000	$1,540,000,000
Prestige Consumer Healthcare Inc	$3,760,000,000	$1,140,000,000
Amneal Pharmaceuticals Inc	$2,640,000,000	$2,830,000,000

At this stage, you can exclude outliers by establishing upper and lower bounds for market capitalization as well as sales using quartiles and interquartile range (IQR).

Particulars	Market capitalization	Sales
First quartile (Q1)	$5,252,500,000	$2,192,500,000
Third quartile (Q3)	$13,385,000,000	$5,645,000,000
IQR (Q3 - Q1)	$8,132,500,000	$3,452,500,000
Lower bound (Q1 − 1.5×IQR)	-$6,946,250,000	-$2,986,250,000
Upper bound (Q3 + 1.5×IQR)	$25,583,750,000	$10,823,750,000

Based on these bounds, you can exclude Viatris Inc and Zoetis Inc. The price-to-sales (P/S) ratio for all remaining companies is as follows:

Company	Price-to-sales (P/S) ratio
United Therapeutics Corp	4.49
Neurocrine Biosciences, Inc	5.55
Elanco Animal Health Inc	1.67
Lantheus Holdings Inc	3.73
Prestige Consumer Healthcare Inc	3.3
Amneal Pharmaceuticals Inc	0.93

The average P/S ratios for these companies is 3.28. Based on this, MacroHeal’s valuation can be estimated as follows:

Valuation = Sales × Average P/S ratio = $3,500,000,000 × 3.28 = $11,480,000,000

Thus, MacroHeal’s valuation can be estimated as $11.48 billion.

Eqvista – Accuracy through diligence!

Due to diverse business models, in-depth research is required to accurately value healthcare businesses. If the target company has an extensive financial history, you can use the discounted cash flow (DCF) method to capture all its unique characteristics. To value a company with limited financial history, you must rely on the comparable company analysis (CCA) method.

But even the CCA method relies on abundant market data.

Hence, the challenges in valuing healthcare companies are even more pronounced when dealing with healthcare startups. Due to their small size and novel business models, it can be impossible to find comparable listed companies.

For such complex valuations, consider relying on Eqvista. Due to our deep expertise in startup valuations, clients trust us to deliver accurate assessments for assets totaling about $3 billion each month. Contact us to see how we can support your valuation needs!