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

In Part II of this blog series we look at recent transactions in the arena of contract research organization, with a particular focus on private equity investing in CROs.

In one recent example, prescription drug data-mining company IMS Health acquired TTC, Philadelphia, a drug trials data-analytics company for drug manufacturers and drug contract research organizations (CROs). IMS will reportedly offer TTC’s services via its clinical trial optimization unit, which is part of its healthcare value solutions business. IMS sources state, “IMS will integrate its evidence-based, anonymized patient and treatment outcomes insights with TTC’s comprehensive cost data drawn from organizations that conduct nearly 80% of all commercial clinical studies.” Linda Drumright, general manager Clinical Trial Optimization Solutions at the New Jersey-based company, said, “There is growing demand for more data and analytics to optimize the clinical trial process. Together [with TTC] we can deliver an end-to-end view of trial planning and execution, increasingly critical at a time when the industry faces significant challenges and requires new approaches.”

IMS also recently acquired PharmaDeals, a Web-based subscription database that gathers information about the pharmaceutical industry. IMS is owned in part by TPG Creative Capital, a leading international private equity investor in healthcare, with $51.5 billion of capital currently under management.

Covance and Pharmaceutical Product Development were once again the biggest top-line gainers during the quarter. Pharmaceutical Product Development was taken private as of December 2011, following a $3.9 billion cash purchase by The Carlyle Group  and Hellman & Friedman, as reported in their December 5, 2011 press release. Covance is one of the world’s largest and most comprehensive drug development services companies with over 11,000 employees in 60 countries; they have assisted pharmaceutical and biotech companies develop one-third of all prescription medicines in the market today.

Likewise, Nautic Partners LLC recently invested in Theorem Clinical Research, which partnered with Gallus BioPharmaceuticals in an endeavor to get pharmaceutical companies in emerging markets to enter the U.S. market.

Frontier Capital, which focuses exclusively on partnering with the management teams of high growth business services companies, led an investment deal merging a pair of CROs, Inclinix Inc. and PMG Research Inc.. Current research modalities include asthma, Type II diabetes, influenza vaccines, hypertension and obesity treatments.

Private equity firm, TPG Star Charisma Limited plans to acquire all of the outstanding shares of ShangPharma that they do not currently own. According to their website, the bid values ShangPharma, with Eli Lilly and GlaxoSmithKline (www.gsk.com) among its clients, at between $157.5 million and $176 million.

As discussed in Part I, the CRO industry involves players employing a variety of partnering models; but no matter the approach and niche need the particular CRO intends to serve, CROs have become increasingly more valued and of interest to private equity investors. Additional news on performance of some additional key players in the contract research organization industry is as follows:

• ICON reported 2nd quarter 2012 revenue up 19% to $277 million; income from operations, excluding restructuring and other non-recurring items, was $16.6 million or 6% of revenue, according to their Consolidated Income Statements.
• Chinese CRO WuXi PharmaTech reported another period of double-digit revenue growth during third quarter led by the firm's burgeoning manufacturing services division. WuXi is responsible for manufacturing hepatitis C therapy INCIVEK® for Vertex and Johnson & Johnson (www.jnj.com); the drug's first full quarter of sales since launch was a driver behind this huge jump in manufacturing services revenue compared to the prior year.
• Charles River Laboratories (www.crai.com) turned in positive top-line growth in the third quarter of 2011, largely due to foreign currency gains. Growth was driven by strong demand in the firm's research models and services segment. From a Charles Rivers Associates press release, revenue for Q2 of fiscal 2012 was $67.8 million, compared with $80.6 million for the Q2 of fiscal 2011, quarter ended July 2, 2011. Non-GAAP revenue for the Q2 of fiscal 2012 was $66.3 million, compared with $79.6 million for the Q2 of fiscal 2011. The firm has announced it has significantly expanded a preferred-provider agreement with a leading global pharmaceutical firm and is in the early stages of similar discussions with other large clients.

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Contract research organizations (CRO) provide research services support for the biotechnology, medical device and pharmaceutical industries on a contractual basis. They offer such services as preclinical and clinical research, clinical trials management, biopharmaceutical development and pharmacovigilance. CROs run the gamut from international full-service organizations to niche specialty businesses. The emergence of the strategic partnership model, with some of the largest global pharma companies pairing with leading CROs in R & D, has stimulated the industry's growth.

A survey by RW Baird analyst Eric Coldwell found that 42% of pharmaceutical companies saw prices increase during the second quarter 2012, up from one-third in the first quarter. The scene is set for a projected 3.6% to 8% growth in R&D budgets among both pharmaceutical and biotech firms. Coldwell speculated, “Looking ahead several years, we have generally concluded that client R&D budgets will be flattish in total, yet the CRO industry secular market move to higher involvement will continue as clients replace less efficient internal functions with more efficient and cost effective external solutions.”

An article in Forbes found that of 388 drugmakers and biotechs that were surveyed reported that CRO clients expect a 9% increase in outsourced R&D budget, with total market penetration by CROs increasing from 35% in 2010 to 38% in 2011. Among large drugmakers, 27% expect to outsource, while 47% of the smallest companies expect to outsource.

The Association of Contract Research Organizations (ACRO) conducted a survey of its own members and examined 11,508 trials carried out by ACRO members; the results showed that each CRO was involved, on average, in over 750 studies. By comparison, ACRO states that approximately nine of its members worked on roughly 400 trials in 2008. They also contributed to 33 of 38 drugs approved in the US and Europe in 2010.

For these reasons, the last 18 months have been a buying spree of CRO’s by private equity funds with the next 12 months looking to be similar.  The ability of CROs to improve performance even when R & D budgets have remained flat has made them a darling of investors.

In Part II of this report we will examine key industry players and the firms that have recognized the growth potential of the segment and invested accordingly.

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During recent months, private equity firms have been actively selling and buying dental practices, which some investors believe is a relatively stable and recession-proof health-care arena. With an aging population requiring more dental work, minimal government intervention and mostly private-pay, investing in dental practice has seen a definite uptick.

Just last month, Great Expressions Dental Services acquired the New York-based dental practice management company, Exceldent, with 19 dental practice locations with New York, New Jersey and Connecticut. With this recent acquisition, Great Expressions controls 170 locations in sixteen states. Great Expressions has, over the past four years, strategically grown by integrating 98 offices through 11 acquisitions, helping land the firm on Inc. Magazine’s list of the 5,000 fastest growing companies in America in each of the past three years.

In October, OMERS Private Equity purchased Great Expressions Dental Services from Audax Group, a private equity and mezzanine investor with over $55 billion in net assets. Its P.E. arm makes equity investments of between $10 million and $100 million; its mezzanine group focuses on financing requiring $10 million to $60 million of capital. OMERS Private Equity makes private equity investments for OMERS, one of Canada’s largest plans with over $50 billion in assets.

JLL Partners, a New York-based private equity firm with approximately $4 billion of capital under management, has recently completed its take-private acquisition of American Dental Partners, Inc., a Massachusetts-based provider of dental practice management services. The company is affiliated with 27 dental group practices, which have 282 dental facilities and approximately 2,404 operatories in 21 states. The deal was valued at approximately $392 million, including $81 million of assumed debt, or $19 per share. Debt financing was provided by Keybank, CIT Healthcare and NXT Capital.

Northeast Dental Management, a private-equity backed dental firm, increased its geographic reach, purchasing the assets of Dental Associates of Northern Virginia that included approximately $61 million in debt from NXT Capital. NXT provides structured financing opportunities to middle-market clients up to $125 million.

The Riverside Company, a global private equity firm that manages over $3 billion in assets and that focuses on acquiring companies valued at up to $200 million, has acquired DentalPlans.com.  DentalPlans.com represents more than 30 of the largest dental savings plan networks that offer 10%-60% off most dental procedures to individuals, businesses and groups across the U.S. This acquisition is Riverside’s 61^st healthcare investment.

Although some states are cautious of the “corporate model” of practicing dentistry, the trend of private equity investing in the area of dental healthcare is one continuing of sustained interest.

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Dental practice management companies have been an increasing focus of private equity firms throughout the United States and Canada. As the cost of healthcare increases, small dental practices, like private medical practices, will soon be an anomaly. Thus, it is becoming increasingly apparent that the recent trend of dental practice management companies acquiring and running solo groups should continue. A growing trend is toward corporately owned or managed group dental practices. The factors driving this trend are increasing costs for dental education and enormous dental student debt. The cost for setting up and managing a dental practice and the expertise needed to negotiate dental insurance contracts has led many dentists to seek employment or affiliation with a corporate dental practice management company.

American Capital, a publicly-held private equity firm and global asset manager invests from $10 million to $300 million per company in the U.S. and €5 million to €25 million per company in Europe, has invested in Dental Practice Management Company.  Arcapita Bank, a principal investing firm specializing in venture capital transactions that focuses on healthcare, information technology and industrial technology sectors has acquired FORBA, also known as Sanus Holdings, a leading dental practice management company that focuses on providing dental care to underprivileged children in the U.S. Freeman Spogli a private investment firm dedicated exclusively to investing alongside management in retail, direct marketing and distribution companies positioned for growth, has recently acquired a majority interest in Bring Now! Dental.  Coast Dental Services has acquired SmileCare which is backed by Liberty Partners, a venture capital management firm that specializes in healthcare, IT, business processing outsourcing as well as internet technologies and services.

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As we round out our series on private equity investing in dialysis, we note an emergence in overseas dialysis investing by U.S. investors.   Our blog typically focuses on U.S. investing but can’t help but note the interest in overseas activity.  In particular, dialysis centers look to be the next focus of private equity investing in the Indian healthcare market.

NephroLife Care (India) Pvt Ltd, a renal disease management chain founded in 2009 by Shiram Vijayakumar, has raised $25 million from New Enterprise Associates (NEA) and DaVita, Inc., one of the largest kidney health care companies in the United States. During the initial stage, the company raised $3 million from ROI Capital, a family business run by former Barclays Capital Dev Kumar Roy. This deal closely followed Bessemer Venture Partners backing of Nephroplus, a dialysis chain with plans to open 100 treatment centers. DaVita showed revenues of $6.47 billion, with a net income of $406 million in 2010.

Alliance Medicorp India is a joint venture between Apollo Hospitals and GSK Velu’s Trivitron, which runs both dialysis and dental centers. Alliance is seeking Rs 60 crore (about $13 million USD) in private equity funding. Fortis Healthcare has also announced plans to open 50 dialysis clinics by investing more than Rs 30 crore (about $6.5 million USD).

In an article on www.vccircle.com, Shiraz Bugwadia, managing director at the investment banking firm o3 Capital, states, “’Nephrology is clearly one of the single specialty themes and an attractive sub-segment in the healthcare chain. Scale and margins are good and you can cater to a large demography.’”

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            A few weeks ago, McGuireWoods hosted our 8^th Annual Healthcare & Life Sciences Private Equity & Finance Conference along with co-sponsor McGladrey.  The Hon. Bill Frist gave the keynote address.  It was a real treat to have the former Senate Majority Leader at our conference.  With his position as a partner at the private equity firm of Cressey and Co, his role in shaping government policy on healthcare in the Senate and his ongoing practice as a leading heart and lung transplant surgeon, Dr. Frist sits at the vital intersection of government, private industry and the healthcare infrastructure.

            In Dr. Frist’s keynote address, he walked through his assessment of the significant problems we face as a country in rising healthcare costs.  He built his analysis articulating the following sequence:

            (i)      The greatness of America will ultimately be constrained if we are unable to control our growing national debt;    

            (ii)     The primary driver of our national debt is federal entitlements;

            (iii)    The primary driver of the growth in federal entitlement spending is Medicare and Medicaid spending (not social security); and

            (iv)    The primary driver in Medicare and Medicaid spending is runaway healthcare costs.

In short, to Dr. Frist, the continued greatness of America depends in large measure on our ability to bend the cost curve on healthcare services.

            While not everyone would have drawn exactly the same breakdown, the endpoint is not controversial – if we do not control healthcare costs, Medicare and Medicaid will bankrupt the country.  From that stark position, many people have drawn many different conclusions about what we should do to get out of our predicament.  Some advocate changing the healthcare system in general to look more like other countries (seems politically unlikely at this time).  Others seem to call for more modest tinkering reforms (seems unlikely to move the needle enough to change the outcome). As the former Republican Senate Majority Leader, Dr. Frist’s prescription leans much more on private industry innovation.  And that prescription has some definite guidance for the healthcare investor.

            Dr. Frist believes that the innovations that drive toward a better “value‑based” healthcare solution (defined as: clinical results per dollar spent) will be the fertile intersection of economics and policy choices going forward.  He went on to describe what he anticipates as federal and state government policy shifts that will drive policy toward a heightened focus on value-based healthcare. 

            Regardless of your thoughts on the political aspects of Dr. Frist’s perspective, it is difficult to argue with his conclusion that companies offering products and services that improve the clinical outcomes of each dollar spent will be rewarded as we move down the road toward reigning in healthcare costs.  That could mean companies with products or services based on improving community wellness.  It could mean companies delivering structures that change physician incentives toward maintaining the health of a population instead of providing services to sick individuals.  It could mean an information technology solution to specific clinical problems.  It could mean a thousand different things.   The main takeaway from Dr. Frist’s presentation was that the smart healthcare investor should not be looking just for cost savings mechanisms or ways to leverage structural pockets of profitability in the system but rather should be looking for opportunities that promise greater “value-based” healthcare products and services.   Good advice from perhaps the leading voice on healthcare investing. 

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