The Health Care Investor : Healthcare Lawyers & Attorneys for Life Science Companies & Investors

In our January 4th blog post we discussed the results of two studies indicating venture capitalists were regaining confidence in various industries and are expected to invest more in 2011 but with some hesitation surrounding medical device companies.   Data released on Friday by PricewaterhouseCoopers and the National Venture Capital Association (NVCA) in their quarterly MoneyTree Report does not contradict those findings, indicating that venture capitalists invested $21.8 billion in 3,277 deals in 2010, an increase of 19% in dollars and 12%  in deals over 2009.  According to the NVCA press release, this rise in venture capital investments is the first time since 2007 that the annual investment level has increased over the prior year's level.  

However, investments in the medical device industry fell 9% in 2010 (with the largest single quarter drop of 31% in Q4 versus Q4 2009).  The medical device industry ended the year as the fourth largest investment sector with $2.3 billion into 324 deals.  According to the report, that's slightly more deals than in 2009, when medical devices ranked third among all industries. 

Prior posts have discussed diligence issues for medical device companies as well as the uncertainty inherent in the revamped FDA section 510(k) approvals process, which may be impacting current investor confidence.

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Many private investors are considering how the current disruption in the physician practice market will play out.  Following healthcare reform, many physician groups are considering changes to their business model - whether integrating more with hospitals or forming larger groups.  There may be opportunities for investors to play in this disruption.  Join McGuireWoods for a complementary webinar on this topic:

Physician Practice Acquisitions:
Deal Considerations & Post-Transaction Integration

Tuesday, January 25, 2011
Noon - 1 p.m. (ET) | 11 a.m. - Noon (CT) | 9 a.m. - 10 a.m. (PT)

Please register at http://www.mcguirewoods.com/events/physician.asp

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This blogger had the opportunity to spend January 9 through 13 in San Francisco at the 29th Annual JP Morgan Healthcare Conference.  The annual convocation of public and private investors in healthcare and life sciences companies showcased the excitement around healthcare investments that we are generally feeling from investors.  Here are several key observations from the conference:

• Based on several conversations with venture capital and private investors, there is fear about investing in early stage medical device companies that have 510k approval exposure.  Several investors indicated that US-based companies must consider a European approval pathway to first introduce devices.
• Investors are excited about health services investing.  This can be seen in the stocks of acute hospital chains Community Health Systems, Universal Health Services and Health Management Associates.  Acute care hospital chains were generally seen as "winners" in the health reform debate. 
• Private equity funds are interested most in low acuity outpatient services investments and investments that remove cost from the system while improving quality.  Urgent care, sleep labs, dental chains and other low-acuity service providers are prime targets for private equity funds.  Many funds are still hesitant to invest in healthcare service providers that have reimbursement exposure.
• Investors do not appear to be frightened yet about the potential impact of state budgets on Medicaid programs.  Federal health reform efforts put much of the coverage expansion burden onto the states and their Medicaid programs.  At the same time, state budget cuts may impact this expansion of coverage.  For example, the Illinois legislature passed HB 5420 last week imposing new limits on Medicaid coverage. 

The JP Morgan Healthcare Conference typically acts as the kickoff to the year in healthcare dealmaking.  Based on what we saw at the conference, it should be a busy year! 

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The durable medical equipment and supply distribution industry has seen renewed interest from both financial and strategic investors.  Several regulatory and business forces are driving increased consolidation in the sector.  Although the industry has attractive dynamics, a deep due diligence review is recommended for any investor to avoid post-closing cash flow interruption and hidden liabilities. 

McGuireWoods attorneys recently authored this article which was published in the BNA Medical Devices Law and Industry Report.  The article reviews the following 10 key issues that should be the focus of any due diligence review an investment in a durable medical equipment and supply distributor:

1. Compliance with Medicare DMEPOS Supplier Standards.
2. Billing and Coding Documentation
3. Exposure to False Claims Act Litigation
4. Positioning within the Competitive Bidding Process
5. Relationships with Commercial Payers
6. Referral Source Relationship Compliance
7. Compliance with Privacy and Security Laws
8. State Licenses and Permits and Ability to Undergo Change of Control Transactions
9. State Medicaid Program Limitations
10. Potential for Increased FDA Regulation

Of course, every investment is unique and the variations in types of DMEPOS distributors varies widely.   Distributors may focus on certain segments (ie, powered wheelchairs) that present higher exposures on certain issues.  We hope that you find the article helpful as a starting point to your efforts in reviewing potential investments in this sector.

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As we'd previously reported, the U.S. House had scheduled to vote today on legislation repealing in full the healthcare reform law known as The Affordable Care Act (aka PPACA).   In response to the shootings of Arizona Congresswoman Gabrielle Giffords and others this past Saturday in Tucson, the historic vote has been postponed until a yet undisclosed date.

In the meantime, yesterday Missouri’s House of Representatives passed House Resolution 39 calling on Governor Jay Nixon and Attorney General Chris Koster (both Democrats) to cause the state to join a lawsuit challenging the constitutionality of certain aspects of The Affordable Care Act.   The Missouri resolution passed 115 to 46, with voting largely along party lines.   A companion resolution, SR 27, is currently pending in the Missouri Senate, and it seems unlikely that the Governor and AG will take action until both chambers have weighed in.  Currenly twenty states are parties to the lawsuit, and states such as Maine and Ohio are among a handful of states that  report strongly considering joinly the lawsuit as well. 

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We are excited to post the full agenda for the McGuireWoods 8th Annual Healthcare and Life Sciences Private Equity and Financing Conference to be held on Feburary 23 in Chicago, Illinois.  Please visit http://www.healthcareprivateequity.com to view the full agenda and register for the conference.  Readers of "The Healthcare Investor" can get a 50% discount on registration fees by entering "hcpe50" when you register. 

Our 8th annual conference will feature a keynote presentation from Sentator William Frist, M.D. and speakers from the following funds: LLR Partners, Waud Capital Partners, Summit Partners, GTCR, Water Street Healthcare Partners, Linden and many others!

Please direct registration questions to Lindsay Sams at lsams@mcguirewoods.com.

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The new Republican-controlled House of Representatives has scheduled a bold and symbolic vote to repeal the healthcare reform law (PPACA) next Wednesday, January 12th.  The proposed repeal legislation is expected to be a brief document that simply revokes the law in full.

Because the Senate is still controlled by Democrats, the repeal legislation is expected to go no further than the House, but despite the uphill battle, Republicans are working hard to win over enough Senate Democrats to pass repeal legislation in the Senate as well.  On Monday, key Senate Democrats sent a letter to incoming House Speaker John Boehner vehemently opposing the repeal and warning that a full-scale repeal would take away a 50 percent discount on brand-name drugs for seniors who fall into a coverage gap known as the doughnut hole.  Adding additional concerns to the mix,  the non-partisan Congressional Budget Office reported today that repeal would result in adding $230 billion to the federal debt by 2021.

Although a full-scale repeal of the law seems unlikely now, Republicans are expected to be looking at every available opportunity to slow down or roll back the healthcare legislation.  Many in the new Congress will be sure to stage strong opposition to new rulemakings and appropriations that are necessary to implement the key components of PPACA in an effort to minimize or delay the practical impact of the law. 

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According to at least two recently published surveys, the answer is yes.

National Venture Capital Association/Dow Jones Venture Source Survey

In a recent survey by the National Venture Capital Association and Dow Jones VentureSource, a majority of U.S. venture capitalists stated they are optimistic for 2011 and plan to expand investments generally. The survey involved 330 venture capital respondents polled from late November through early December.   Fifty-one percent of VCs and fifty-eight percent of company CEOs polled said they expect more venture capital investment in 2011. A n additional quarter of each group expects investment to at least remain level with 2010, while 24 percent of VCs and 14 percent of CEOs predicted a decline.

”The market was so troubled in 2009, the sentiment was that things had to get better in 2010,” says NVCA President Mark Heesen.  “It turns out our predictions were correct, and in the past year we have moved beyond the financial crisis and returned to doing what we do best — building great companies. The improving exit market and a renewed excitement in the IT sector have engendered a confidence among VCs and the CEOs of the companies in which we invest that promises to propel the startup community forward in 2011.”

The top three areas of growth identified by the NVCA/Dow Jones VentureSource survey were consumer Internet and digital media, cloud computing, and healthcare information technology.  Survey respondents expect investments in health IT to rise by 77%.  By contrast, comfort with investments in medical devices and pharmaceuticals appeared split, with even percentages of VCs expecting financing to rise, fall and stay the same. This discomfort is likely in part due to the uncertainty now surrounding the timeline for devices to reach market.

Pepperdine University Center for Applied Research Survey

The optimistic outlook from the NVCA/Dow Jones VentureSource survey is similar to that provided by blogger Dave Lavinsky.  Citing results from a Pepperdine University's Center for Applied Research survey from mid-December polling 213 venture capitalists, Lavinsky reported the following:

* Venture capitalists expect to offer their investors an average return of 15% over the next 12 months, compared with only 5% for the past 12 months, likely due to an expected increase in acquisitions of VCs' portfolio companies.

* Over 40% of VCs are currently raising more money or expect to raise more money to fund entrepreneurs within the next 1-2 years.

* 43% of venture capitalists expect general business confidence to improve in the next 12 months.

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