Ivf practice valuation - A Ready Reckoner - Kapil Khandelwal, EquNev Capital, www.equnev.com


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my column (w)health check discusses on the various issues and methods to value an ivf practice

Kapil Khandelwal
EquNev Capital

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Ivf practice valuation - A Ready Reckoner - Kapil Khandelwal, EquNev Capital, www.equnev.com

  1. 1. Health Biz India June 2013 47IVF Practice Valuation –A Ready ReckonerBy: Kapil KhandelwalAcouple of years ago, adoctor acquaintancecame to me with anoffer from a start-up chain ofIVF to acquire his practice. Thevaluation offered for their IVFpractice according to him didnot justify the assets and thegoodwill he and his wife hadpainfully created over the yearsin the community for whichthere was no premium beingoffered. Of course the deal didnot go through.Over the last year, there hasbeen an increased investmentactivity especially that ofmergers and acquisitions ofstand-alone IVF clinics orcompanies having a chainIVF clinics. There has beenconsolidation in the IVF sectoroutside India and there aresigns of this occurring in Indiaas well. One of the drivers forconsolidation of IVF in Indiais the assisted reproductivetechnology (ART) (Regulation)Bill – 2010. The ART Billcalls for certain standards tobe maintained by these IVFcentres and small players needfunds to meet those standardsmandated by the Bill.Recent transactionsHCG has invested in Dr.Kamini Rao’s IVF clinics chainand plans to take it national.The valuation of the IVFbusiness was not disclosedpublically. Earlier, ManipalHospitals invested growthcapital in Ankur Healthcare,a speciality centre, focusedin delivering comprehensiveservices in the areas ofreproductive medicine like IVF,andrology and men’s health.There has been a number ofquestions raised about whetherthe IVF clinics/companyvaluations were right.Due to variations in laws across countries and differences inownership interests, the methods to determine the final value ofan IVF practice could vary greatly(W)health Checkwww.healthbizindia.in
  2. 2. Health Biz India June 201348However, the objective of thiscolumn is not to critique thevalue at which the transactionshave taken place or fallen offbut to guide on the parameterson which the valuation ofan IVF business is based.It is intended as a generalbackground informationto assist practitioners inestablishing the fair marketvalue of an IVF practice.Due to variations in lawsacross countries, underlyingreasons for the valuation,and differences in ownershipinterests, the methods todetermine the final valuecould vary greatly. Forthese reasons, it is highlyrecommended that the adviceand assistance of a qualifiedvaluation consultant beobtained in all matters relatingto the sale or purchase of apractice. The word IVF clinicand IVF practice may havebeen used interchangeably inthis article.Why value an IVF practice?There are several reasons tovalue an IVF practice, howeverthe following four reasonsare mainly why valuation isconducted:Financial planning:Expansion and equipmentacquisition• Tax planning• Estate planning• Debt financing andcollateralisation• Litigation and malpractice• Unsolicited offer (hospitalwanting to secure practice)Management information:• Buy/sell agreement in achain of IVF/group practice• Long range planningPersonal:• Disability• Death• Divorce• RelocationRetirement:• Continuity of clinicalrecords with a goodclinician• Fund an annuity or otherretirement incomeKey determinantsLet us understand that thereare several determinants onwhich the valuation of bothan IVF clinic practice or achain of clinics rests. Goodwillbeing one of them, withoutcareful nurturing, customers/patients/clients would soontake their business to otherIVF providers. Goodwill inIVF practices is developed andsustained by the specialisedexpertise of the doctorsand other specialists. Thesevaluation determinants try toencapsulate the basic valuesthat the market may place onthe quality of earnings of aparticular IVF clinic practice/chainObjective determinants:• Number of cycles permonth• Success rate and cumulative(W)health CheckUniquenessof IVF clinicpractice V/s IVFchain businessThere are nine key parameterson which we consider theuniqueness of an IVF Practicewhile valuing it. These include:Price sensitivityIVF services are price insensitive.When we want to have a baby,we seek out the most qualifiedIVF professional, regardless ofprices and not go by the brandDoctor is the faceIVF specialists may hiretechnicians to perform services,but the specialist approves thediagnosis and work performed.Customer loyalty flows through tothe individual doctor rather thanthe business (e.g. Kamini Rao,Gunasheela in Bangalore)Customer trustAs long as trust is maintained,costumers to the IVF clinic willcontinue to return or refer othercustomers. It is this trust thatbuild and sustains goodwillunlike a branded IVF chain ofclinicsIndividual IVF success rateWhile IVF services would be fairlystandardised across all the IVFclinics, it is the success rate andthe individual skills of the teamat the clinics that makes oneclinic preferable from anotherIVF clinic markets aregeographically restrictedIVF clinics would serve ageographically restricted marketunlike a chain that may servean aggregation of multiplegeographical marketsCustomer referrals is the mainsource of new businessUnlike a brand, it is the referralsfrom satisfied customers thatfeeds the new business at anIVF clinic
  3. 3. Health Biz India June 2013 49(W)health Checksuccess rate over cycles• Patient flow from abroadand types of servicesprovided to them• Price points or premiumover other IVF clinics• Historical profitability• Growth rate by differentservices• Payment mix• IVF Specialists’ age/healthand succession plan• IVF Specialists’ ownership/utilisation and/versus non-owner utilisationSubjective determinants:• Nature and history of thepractice/clinic• Good obstetrics andgynaecology practice• Practice type (solepractitioner, single group,multispecialty group)• Specialty type (includingconsideration of averageterm of the patient/doctorrelationship)• Facilities (including thelocation, length of time, andsurrounding demographics)• IVF specialist’s reputation• Professional management:Experience and quality ofmanagement and staff• Competition also tied withlocational advantage• Lab and equipment• Batch IVF• Quality: Consistent resultscomparable with the best inthe world• Counselling service offersand additional non-pregnancy IVF offers• Good and experiencedembryologist• Good QA – QC facility• System driven, leading tostaff and supplies efficiency• Central marketing• Scouts, selects egg donors• Maintains sperm and eggbank• Selects and providessurrogates• The clinic must be totallytransparent in all itsoperations• Must let the patient knowwhat its success rates arein regard to the procedureintended• Keeping abreast with thelatest development acrossthe globe and get bestpractices• Location(s) and locationaladvantage• Follow ART Guidelines (seebox)• Follow tax and otherregulatory compliancesFor valuing an IVF practice,there are several popularmethods being used toexpress a fair value of the IVFpractice. These include: incomeapproach, market approachand cost or asset basedapproach.Income approachThis approach assumes valuebased on the projected incomeexpected to be generated bythe IVF practice. There aretwo most common method ofdetermining value using theincome approach.Discounted cash flowapproach (DCF): TheDCF method presumes pastearnings of the practice arenot sufficiently relevant for thevaluation, and instead, requiresa projection of future revenuesof the practice for a numberof years. These future earningsare then utilised to determinethe value of the practice. Thismethod is used where thepractice has not matured andis in growth stage and thereis variance in the revenuesignificantly year on year.Capitalisation of excessearnings method (CoEE):The CoEE method makesa presumption that the IVFclinics past earnings arerepresentative of its futureearnings. Once the earningswww.healthbizindia.inSalient points of ART Billimpacting valuation:• All ART Clinics shall registerthemselves with theRegistration Authority• Certificate of accreditationfrom Authority is must forpracticing ART• All ART clinics shall obtaintemporary registrationwithin 6 months and regularregistration within 18 monthsfrom date of notification• Registration Authority maysuspend registration ifconditions are not beingfollowed by ART clinics• Registration Authority shallhave power to inspect ARTClinics• No ART procedures shall beperformed on a women below21 years of age• Written consent from patient• ART clinics should maintaincomplete records regardingpatients• No ART clinic shall offer toprovide a couple with a child ofpre-determined sexImpact of transparencyguidelines:• Small clinics with flexiblepricing, claiming false inflatedresults, will be affected• All clinics will be open toinspection and accreditation• Advantageous to chain basedon quality and transparencyART Bill &BusinessValuation
  4. 4. Health Biz India June 201350stream is determined, andappropriate adjustment ismade for earnings on the valueof assets, the remainder issubjected to a capitalisationrate. The resulting numberrepresents the value of the“intangible asset” of thepractice. The fair market valueof the practice’s assets is addedto this amount.The total of these twoamounts represents the valueof the practice. This methodis used to value mature IVFpractices that have reachedmature cash flows and growthand therefore capitalisationassumes a single proxy foreach and every future year’sreturn on the IVF practice.Market approachThe market approach measuresvalue based on what investorspaid for similar medicalpractices. This approach relieson either similar publicly-traded medical practices oractual sales transactions ofsimilar medical practices as anindication of value. There arefour steps involved in applyingeither market approach to anIVF practice. These steps are asfollows:• Determination ofrepresentative earningsand cash flow levels for thesubject practice• Selection of comparablepublicly traded practicesor practices recently sold(comparable practices)• Selection of appropriatecapitalisation rates basedon a relative risk analysisbetween the subject practiceand the comparablepractices• Determination of fairmarket value of the subjectpractice’s debt and equityIn India, there are hardly anypublically-listed IVF practicesor deals in the IVF space.Hence, this approach becomesa reference check to whatapproach other valuationstook. Therefore, a proxy ofrecent deals in the healthcaresector is used. These could begrossly out of reference for IVFpractice valuations (see table).There is preference to usethe market approach becauseit illustrates what real investorshave been willing to pay andaccept in real transactions.This approach is also usedbecause it is not as muchsubject to the valuationcompanies’ ‘opinion’. Thus,issues such as adjustments forcompensation or the discreetvaluation of goodwill thatare required in the incomeapproach and the costapproach are unnecessary.Cost or asset-basedapproachThe cost approach focuses onthe balance sheet and relieson the estimated value ofthe assets, both tangible andintangible, which comprisesthe IVF practice. Due toits controversial natureencompassing a variety ofmeanings, goodwill is themost complicated componentof practice value to measure.In the case of IVF, specialisedequipment is required torun the practice, an exactreplacement of equipmentmight be necessary.However, in the caseof most companies, thebusiness operator is primarilyconcerned with replacingassets with similar assets andhaving the assets (equipment)installed. Further, we areconcerned with embeddingthe aging of the asset in theanalysis, but the aging reflectedby depreciation methods maynot actually reflect economicdepreciation. Therefore,proper aging of the assets mustbe considered.The issue of Goodwill in IVFpracticeThe IVF business andpersonal goodwill are difficult(W)health CheckThe IVF businessand personalgoodwill are difficultto define
  5. 5. Health Biz India June 2013 51enough to define (see thedeterminants); they are evenharder to measure. Thecontribution of Goodwilltoward total IVF practicevalue is often the most difficultcomponent to agree upon anddetermine. Every successfulIVF practice has an inherentcomponent of goodwill. Thisquality may arise from any oneor any number of subjectivedeterminants outlined abovefor the IVF practice. The valueof goodwill to be carriedinto the valuation of an IVFpractice is subjective. Mostpersonal goodwill of an IVFspecialist can be transferredto a new owner because mostof the patients have trust andconfidence in the selling IVFspecialist. Thus, the selling IVFspecialist’s recommendationis likely to carry substantialweight in the patient’s decisionto stay with the new IVFpractice owners. However,once the goodwill of an IVFpractice has been defined andits transferability confirmed,an analysis of the accountingrecords can begin.Adjusting of the valuationto fair market valueIt is necessary to examinewhether a discount or apremium is required to adjust avalue obtained using a specificvaluation method to the valuerequired for valuing the IVFpractice. Before beginninga discussion of discounts, itis necessary to understandthe base or level to whichthe premium or discount isapplied. The diagram (RelativeLevels of Valuation) illustratesvarious levels of ownership ofan IVF practice. The level ofinterest is important because acontrolling interest is usuallyworth more than a minorityinterest, and a tradeableminority interest is usuallyworth more than a closely heldminority interest.Thus, whenever a particularmethod is used it will likelyresult in a value for a specificlevel of value. The value mayrequire an adjustment, theaddition of a premium orsubtraction of a discount,to obtain a value after themethod that is suitable for thatparticular IVF Practice.ConclusionWhile there are several waysto value a practice, the oneslisted in the article are themost common ones used toassist in IVF practice buy orsell side negotiations. Each hasits benefits and drawbacks,and should be given carefulattention to understandthe context and the keydeterminants for which thevaluation is carried out.(W)health CheckAbout the Author:Kapil Khandelwal has earnedrecognition as an angel investor,venture capitalist and expertin health sciences, education,agri, clean tech and informationcommunications and technology(ICT). His expertise positions himas one of the thought leaders inIndia, Asia Pacific and emergingmarkets. In his 25 years ofhis career, he has carried outover 30 transactions includingcross-border and buyouts. Hehas chaired various committeesat various industry bodies. Kapilruns an early stage investmentfund and his own investmentbanking and advisory servicescompany EquNev Capital PrivateLimited.He can be contacted at: kapil@kapilkhandelwal.com