What’s the value of a research site?
Valuation of site for purchase by site networks
As site networks compete with each other to purchase clinical research sites, certain valuation standards have emerged. For sites that achieve a scale threshold, an exit is possible at a multiple of the site’s EBITDA. EBITDA stands for earnings before taxes, interest, depreciation and amortization, and it’s a universal benchmark for profit used across industries.
In general, the higher the EBITDA, the higher the multiple; this reflects the fact that larger site operations are rarer, and offer an opportunity for the acquirer to deploy more capital, and for industry entrants, to serve as the “anchor” investment in the space.
How is valuation calculated?
As a rule of thumb, for EBITDA below $5 million, multiples might be in the 4-6x range (possibly lower for smaller sites); for the $5-10 million range, multiples might be in the 7-9x range; and for EBITDA over $10 million, multiples might be in the teens. EBITDA as a percent of sales typically range from 25% to 50%, depending on the site size and efficiency. Of course, a certain threshold of revenue needs to be achieved to hit this range; a good threshold to aim for is $2 million of revenue to get a clear sense of profitability.
Site owners planning an exit need to think of the key “levers” for a higher exit:
1. Revenue
Without a minimum revenue, there is not enough scale to establish a healthy EBITDA and be considered a purchasable business. A good threshold to aim for is $2 million. In addition, site operators should try to diversify their investigator base and establish a book of repeat business from multiple sponsors to diversify revenue risk. Finally, the site should have a clear pipeline of revenue – a lot of operations received a one-time revenue boost from covid vaccine trials that are not recurring, and savvy buyers will hone in on the question of how repeatable this revenue stream is. See a case study of one of CRIO’s clients, Medex Healthcare Research, for an example of how much emphasis the buyer put on the forecast revenue stream, not simply past revenue stream.
2. EBITDA
Site operators should manage to profitability. Again, higher revenue will naturally drive higher EBITDA since so much of the costs of running a site are fixed – management, rent, insurance, etc. Negotiating higher budgets creates great financial leverage since the increased revenue from higher rates goes straight to the bottom line. Also, operators need to maintain a lean operation, which creates a tricky balancing act between the need to attract and retain high performing staff and the need to manage wages to a certain level. Of course, with technology and stratified roles (e.g., having lower cost resources do things like data entry), operators can drive higher margins by maximizing the productivity of “primary coordinators” – the staff that actually does the bulk of the work for patient visits. Site owners should measure “visits per coordinator” as a key metric, since that will likely be the single most predictable driver of profitability.
3. EBITDA Multiple
As discussed, higher revenue drives higher multiples. But as a site operator, creating competition for the site can also drive up the multiple. An investment adviser can help structure the sale, and will almost certainly achieve a higher outcome, but most require a minimum threshold of EBITDA to justify their fees (one adviser told us $3 million of EBITDA). For sites that are lower in size, operators can run their own process. Owners can start now by cultivating relationships with prospective acquirers, and ensuring that their accounting is in order. A good lawyer and accounting firm will be critical.
In the coming years, a lot of site owners will exit to a network consolidator; for owners that are able to build to a certain level, the current environment is an excellent time to consider an exit due to the large influx of capital chasing a finite number of sites.
