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

Selling a healthcare company is a daunting task that requires significant foresight, planning and expertise in addition to the tremendous amount of time required to consummate a deal. For a first time seller, the process is especially intimidating as the owner begins the process that will ideally lead to a sale of the business at a price that accurately reflects the value of the business. With that in mind, I had the pleasure of interviewing Bill Siren of AlixPartners, LLP to discuss issues the owner of a healthcare business should consider when he or she has decided to sell their company.

MW: What is the first step that an owner should take to prepare the company for sale once they have made a decision to do so?

Siren: Once the owner decides that the time is right to sell the company, the owner should prepare the company so it can be shown to prospective buyers in the best possible light. These preparations include: (i) obtaining an initial valuation, (ii) conducting an independent, in-depth audit of the business and (iii) identifying areas where improvements can be made that will positively impact the company’s bottom line and operating metrics that prospective buyers use to evaluate a possible acquisition.

MW: What resources are available to assist the owners of a company to perform the initial valuation, conduct the initial audit and identify areas to improve performance?

Siren: Preparing to sell a company can be a very nuanced and delicate exercise. That is why it is important to hire a team of experts with industry specific knowledge to help guide the process and not just finance professionals. The ideal team should blend operational experience in the healthcare field with expertise related to financial modeling and the evaluation process undertaken by prospective buyers. Accredited valuation professionals with operational experience in the healthcare field will have the appropriate industry-specific knowledge as well as the expertise to perform an accurate valuation and audit and identify areas for improvement. These skills are critical in being able to increase the company’s attractiveness to prospective buyers.

MW: How does the initial valuation shape the process of selling the company?

Siren: The initial valuation serves as the starting point in negotiations with prospective buyers. A low valuation could be a sign that the company has room to improve its earnings performance; a metric typically measured by EBITDA.

MW: What are preliminary steps owners can take to improve earnings performance as measured by EBITDA?

Siren: If a company’s initial valuation is below the owner’s expectations and is a result of poor EBITDA, there are several steps an owner can take to improve earnings performance and, in turn, improve the company’s EBITDA. The first is to control expenses. The most common expense drivers that can be improved include supply agreements and pharmaceutical contracts, staffing, benefit levels for employees, overtime usage, etc. The next step is to review the revenue cycle. The improvements gleaned from creating efficiencies to get from patient registration to payment collection more quickly and reduce revenue leakage will fall directly to the company’s bottom line. Third, the company may need to improve its payor mix (if this is controllable). Depending upon the type of business, it is always advantageous to have a high percentage of commercially insured patients. Next, examine and evaluate the physical premises. The owner should make all necessary improvements. Prospective buyers will look for potential money pits and lower their offer accordingly if any exist. A buyer may also find additional value in an operationally efficient company supported by a physically sound infrastructure. Finally, rigorous due diligence should be conducted to ensure the thoroughness and accuracy of the company’s financial records. The company’s financial information should be completely transparent to any potential buyer. While not an exhaustive list, these are steps that can be taken to improve a company’s earnings performance and its attractiveness as a target to prospective buyers.

MW: How will any improvements made to the business improve the owner’s chances of selling or the purchase price for which he or she is able to sell the company?

Siren: The steps to improve performance, most notably EBITDA, not only make the company more attractive to buyers, but may also increase the price for which the owner is able to sell the company. The purchase price is often a multiple of EBITDA. Thus, a boost in EBITDA is augmented by the EBITDA multiplier and exponentially increases the purchase price. The business efficiencies that lead to stronger earnings need to be demonstrated and sustained for several months before the EBITDA number becomes reliable and can reasonably be expected to prompt a higher offer from a prospective buyer. With EBITDA as the dynamic variable, the purchase price can increase even if the multiple remains constant. However, the EBITDA multiple is not always constant. Improving the company’s operational efficiency may lead to a higher multiple where the buyer is willing to pay for an operationally sound company that it can easily fold into its operations without the added task of improving the company’s operations or upgrading its facilities.

---- To be continued.

For more information, please contact Bill Siren at AlixPartners, LLP at (615) 312-8292 or Geoffrey C. Cockrell at McGuireWoods LLP at (312) 849-8272.

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I recently had the pleasure of interviewing Trey Crabb, Founder and President of Health Strategy Partners, LLC, located in Nashville. Trey is a veteran strategic and financial advisor to the healthcare industry. In 2010, Trey founded Health Strategy Partners after spending many years at prominent advisory and investment banking firms in New York, Charlotte and Nashville. Our discussion focused in large part on Trey’s creation of Health Strategy Partners and his company’s focus and expertise as well as Trey’s thoughts on A Courting Process: Selecting an Investment Bank That is Right for You, an article I co-authored with my McGuireWoods partners Scott Becker and Krist Werling. The following is a synopsis of our interview.

Trey, I understand that your decision to found Health Strategy Partners was in part due to your beliefs that there was a real need for financial advisory services to for-profit and not-for-profit middle market healthcare companies. Could you explain your goals with the creation of Health Strategy Partners and the focus of your company?

Indeed, a dual focus on both not-for-profit and for profit healthcare organizations puts Health Strategy Partners in a unique position. When we work on transactions between these two groups of companies, our goal with the for profits is to be sure that they understand that ‘fit’ and patience are just as important, if not more so, than are valuation and access to capital. On the not-for-profit side, which includes government-owned healthcare facilities, helping boards understand the intricacies of structuring transactions to benefit communities and keeping income tax sheltered are two areas where we spend much of our efforts. As you question points out, we serve middle market companies in both of these segments in areas such as mergers, acquisitions, joint ventures and affiliations as well as equity and debt capital raises. We also work with much larger companies when their needs are middle market in size, and offer outsourced corporate development department services on the buy-side. We focus on healthcare services of all types from services provided in facilities (e.g. hospitals and others) and not (e.g. home health), and in more technology oriented businesses where service is important (e.g. transcription, laboratories).

Trey, I know that you have read our article A Courting Process regarding some key considerations for healthcare sellers in the investment bank selection process. Would you please share some initial thoughts regarding the recommendations for consideration discussed in article?

I read your article series with interest, as the process by which companies choose an investment banker is near and dear to my heart. As someone who has worked 20 years for two bulge bracket investment banking firms, a boutique firm, a consulting firm and now own my own investment banking firm, I have some perspective from the ‘other side of the table’. I’ll share my thoughts from the perspective of both large (and/or more sophisticated) and small (and/or less sophisticated) companies. Large companies tend to have their own staff dedicated to exploring strategic alliances, mergers, acquisitions, joint ventures, affiliations and the like. Depending on their geographic coverage, personnel may be located not only in the home office but in local markets many miles from headquarters as well. When it comes to buy side strategic transactions, these are usually handled in-house as a result. Smaller sell side activity is also usually handled in-house. When it comes to larger transactions or when the entire business is to be sold, management teams usually interview a small handful of firms who have multi-line capabilities and an industry emphasis. Since the late 1990s and early 2000s banks which have shown a willingness to lend are many times given a preference in such a process for a variety of reasons. In other cases, a firm (or individual) is chosen by the company without an interview process at all due to a previous relationship, or related, the interview process is pursued only to check pricing of the preferred banker (not my favorite process to participate in, unless I’m the preferred banker!). On a separate note, financing transactions related to bank debt are handled by in-house finance staff. Bankers are typically engaged only to access public debt or equity markets.

Would you please describe for us any changes you noted in the past several years regarding the investment banking business for healthcare companies?

The investment banking landscape has undergone significant change over the past 10 years. After 9/11 mass layoffs on Wall Street were commonplace, and many experienced bankers were forced to relocate to other firms with lesser known nameplates. Big firms since that time have been very quick to continue a pattern of reductions in force when industry sectors have become less busy. The relative importance of the boutique investment banks has really increased since that time as a number of those bankers either laid off from previous employers or those who have chosen to pursue that environment are chipping away at large firm’s market shares on strategic transactions. This has become more pronounced since the market downturn which began in 2008 and in many respects continues through today. As a result, companies large and small would be wise to find the banker with the best fit/relationship/demeanor/availability/reputation regardless of their level of overhead, as long as investment banking is a core part of their focus. Management teams generally will know within 30 minutes if a prospective investment banker has the connections and relationships necessary to get the deal closed.

Trey, what are your thoughts as to how healthcare companies typically identify potential investment banks and some nuances of the selection process?

Some larger organizations and most smaller companies may not have a dedicated staff of professionals focused on strategic transactions. Management teams may use an investment banker for buy and sell-side activity, and like larger companies, may interview a handful of firms or use another where a previous relationship exists. Sourcing of firms to interview and engage is many times haphazard – internet searches, board member and management relationships and referrals from other peers are typical methods used by smaller companies to find a banker. On the other side of the coin, there are a multitude of service companies with current and potential healthcare organization business – accounting, consulting and law firms; turnaround and management firms, software firms and other groups focused on providing financial advisory services (those who write RFPs and help with access to yet other firms providing bond underwriting and interest rate derivative services). In many instances, each of these firms will have an early view on potential strategic opportunities from time to time, and as a result be asked by companies if they also are in the “M&A” business. After hearing that question enough times, many of these firms have moved existing personnel into this area or hired new ones for that purpose. In these cases, the strategic advisory business typically becomes a bolt-on, non-core service designed to protect their original business. On the other hand, there are a number of firms focused squarely on what I’m describing here, the Middle Market, and they come in both generalist and specialist flavors. I have found that there are quite a few very good investment bankers who have worked in a collection of industries. When it comes to healthcare, my belief is that a deep industry knowledge saves time and generates a real return for the client. As for me, when non-healthcare opportunities come my way I happily refer them out to other quality firms in the hopes that they will treat me likewise. Companies of all sizes like the attention and idea generation provided from high quality, well known investment banking firms. Many of these companies will hire the most well known firm to represent them in a strategic transaction. I have heard too many instances however of deals being handed off to personnel different from the ones who do the marketing; to people with whom the company is uncomfortable, and without a personal connection to the original contacts of the firm. Companies must get the absolute commitment from the lead banker on the project and know that when they call, he/she will answer the call. This is the biggest selling point of boutique firms. They can get down to doing deals and just provide great service to clients. The biggest selling point of bulge bracket firms is access to professionals in every possible discipline: debt, equity, M&A, etc., some with a retail distribution network. Generally, these firms won’t do a transaction below a certain fee floor, unless they choose to do so to protect the existing relationship.

Thank you, Trey, for your valuable insight in this interview. Trey Crabb and Health Strategy Partners may be reached at 615.463.6262 or tcrabb@healthstrategypartners.com. The company website is www.healthstrategypartners.com.

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In two prior posts regarding, we addressed various questions for a seller to consider when selecting an investment bank to help the seller achieve its transaction goals.   Those questions, as well as those below,  are just a handful of questions that we suggest companies consider . Ultimately, if you determine that working with an investment bank makes sense for your transaction, a bank can help you move a transaction along in an efficient, low stress and financially rewarding way if you are able to find the right bank for you.

 Is the magnitude and type of transaction exciting to the investment bank such that it will keep the bankers’ attention and keep energy focused on pushing the deal through to completion?    In other words, does the deal fall within the bank’s sweet spot? Deals that are at the larger end of a bank’s typical transaction size may mean that the bank has fewer contacts with the types of investors/buyers that should be targeted. Deals that are in the smaller end of a bank’s typical transaction size may not keep the bankers’ attention to drive the deal efficiently toward closing. 

Will the investment bank be willing to follow your management’s lead on the key deal terms (including which targets are contacted, how the various stages of the process will run, etc.)? With the seller management team, does the bank have strong relationships with one or a few leaders that you perceive would be favored over other seller leadership? Alternatively, do you as the seller prefer an investment bank that will lead you through the process and is the investment banker able to do this for you?

Are the bankers willing and able to provide significant research and insight into potential buyers?  For many sellers, choosing a buyer turns on not only the purchase price but on the buyer’s reputation and own strategic goals as well. This is particularly true when all or some of the seller management team will be staying with the buyer going forward.   Most investment banks have research teams who can provide the desired information, but if in-depth information relating to the buyers is important to you, this is one aspect of the bankers’ services that should be discussed.

 Does the proposed timing and track of the deal process proposed the investment bank make sense to you and work with your needs and goals?

Finally, what do the bankers’ clients have to say about them?  The bankers should offer the ability to contact references from current and former clients. Discussing your questions with these references, particularly former sellers, may prove to be very enlightening as to the road ahead. 

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As a follow-up to our prior post on the topic, below are a few key additional questions that sellers can consider when evaluating investment banks in order to find the bank that will ultimately meet the sellers' needs.  These questions are excerpted from a recent article authored by Krist Werling, Scott Becker and me.

One additional question sellers should ask ia How many investor/buyer targets does the investment bank intend to contact with the request for proposal? More specifically, how many potential investors/buyers does the investment bank intend to contact at each stage of the process? Investment banks can very greatly in their philosophy of which and how many targets to contact. Some believe in disseminating the RFP to as many possible targets as are available in the industry whereas others chose to limit distribution to a few select potential investors/buyers that they believe would have the most interest and that would be the best match for you. You should ask how many targets does the bank intend to initially contact and sign confidentiality agreements, how many will receive RFPs, how many will be invited to management meeting and with how many will the bank negotiate offers/letters of intent? Investment banks can very greatly in their philosophy of which and how many targets to contact. Depending on your own sales philosophy, this is another way that you can distinguish among investment banks.

Within the spectrum of investors/buyers that the investment bank intends to contact, how many strategic buyers vs. financial buyers such as private equity funds will be targeted? Strategic buyers are existing players in the industry that may seek to purchase or invest in your business in order to expand an existing business in a strategic fashion, and this may be a more or less attractive option for you as a seller depending on your relationships with your competitors in the industry, your willingness to divulge confidential information to competitors, etc. Financial buyers often will be willing to ultimately pay a higher price for the business where strategic buyers are often more stream-lined in their acquisition methodology and thus more likely to close the deal quickly and efficiently.  To this end, challenges can arise with investment banks when they have too high a comfort level in one part of the market vs another. For example, in one healthcare transaction for a small specialty hospital chain with outstanding earnings, a client hired an investment bank for the principal purpose of seeking financial buyers.   There, the bankers spent the great majority of their efforts with strategic buyers seeking, in the client’s view, the easier close but not necessarily the maximum price.  Ultimately, the client perceived that it already knew each of the strategic buyers and that pricing from the strategic buyers would not permit a deal.

Do the investment bankers understand why your company is ready to sell at this time? Have they worked out the background story of the sale – essentially explaining why, if the business is such a great thing, you now want to part with it?   Buyers will want to know why you are selling and your story about why you want to sell thus becomes an important part of the process.

Do the bankers believe you need to take significant measures to get the business more fully in shape to sell at a maximum price and are you willing to takes these steps?

What is the investment bank’s philosophy with respect to the completion of due diligence and negotiation of the form of purchase agreement/investment documents before signing a letter of intent? In other words, is the investment bank comfortable with signing a letter of intent before diligence is substantially complete and before at least a rough form of purchase agreement is agreed upon? Investment banks have different philosophies on the wisdom of signing of letters of intent early vs. further long in the process and it is important you be comfortable with the bank’s intended approach although the determination of which negotiation approach will likely be as dependent on the negotiation power of the seller (i.e. on the strength of the seller’s business and interest it generates) as it does on the investment bank’s own philosophy.

What are the fees to be charged by the bank? Most banks will charge a retainer fee (which will be treated as a deposit on payment of the full fee) as well as a sliding scale fee based on achieving targeted outcomes. 

Who at the investment bank will be contacting the potential investors/buyers? In other words, will be bankers that you meet with during the initial selection process and works with most closely at the senior leadership level actually be contacting the targets and doing much of the ground work? Likewise, will those particular bankers be present at management presentations and at other key discussions with potential buyers after initial contact is made?

What does the investment bank believe is the range of value for your business? Specially, what assumptions of earnings are used to generate the value range, what multiple of earnings do they anticipate an investor/buyer paying? Within the total purchase price, what does the bank anticipate will be the buyer’s split of cash and debt financing? Although it is important for you to know that the investment bank values your business and will strive hard to achieve the most lucrative deal possible, it is also important to insure that you are working with an investment bank that sets aggressive but reasonably achievable targets.

In addition to the questions raised in Part I of this discussion, these are just a handful of questions that we suggest companies consider when assessing the value of various investment banks.  In Part III we will discuss a few remaining issues for sellers' consideration when making this important decision.

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For many healthcare companies, when it is time to sell or refinance their business, finding an investment bank that fits the needs, philosophies and goals of the seller can be an important component for success during the sale/refinance process.   Earlier this year, Barclays PLC represented biopharmaceuticals company Ception Therapeutics, Inc. as it closed the $250 million sale of 100% of its capital stock to Cephalon, Inc., arguably helping Ception to achieve optimal pricing. Likewise, in 2006, when hospital system HCA went private via a $33 billion management leveraged buyout, the largest in history at the time, Merrill Lynch Healthcare Investment Banking Group acted as financial advisor to HCA through the process, likely increasing HCA shareholders’ return.  

Utilizing an investment bank is not necessary for all companies in all transactions, but an investment bank can help the seller successfully market the business and attract the right potential investors/buyers and ultimately can result in not only a more lucrative deal but a transaction that otherwise meets the seller’s goals. Assessing which investment bank is right for a seller can be a daunting process, but there a few key questions that you as the seller can pose to your leadership when evaluating the various banks in order to find the bank that will ultimately meet your needs.  In a recent article authored by Krist Werling, Scott Becker and me, we addressed a number of questions that a seller should consider during the selection process.

One of the first key questions a seller should ask is this:  How well versed is the investment banker in your particular industry?  Not only are there investment banks that specialize in healthcare (either boutique investment banks that focus on healthcare or healthcare divisions of larger more diverse investment banks) but some investment banks have specialized experience and knowledge about a particular industry within healthcare such as surgery centers, imaging facilities, etc.   For example, Bank of America-Merrill Lynch, William Blair, Goldman Sachs, Morgan Stanley, JP Morgan and others have significant health care banking groups within their larger investment banking segments and have made headlines with some of the most substantial healthcare M&A deals in the past calendar year, including Pfizer’s purchase of Wyeth for $66.2 million, Roche Holding’s acquisition of the remaining 44% of Genentech and Merck’s purchase of Schering Plough. Middle market more general investment banks like Dresner Partners also often have healthcare experience.  Other banks like Cain Brothers, Leerink Swann and Edgemont Capital Partners have the advantage of focusing nearly exclusively on health care services. Working with an investment bank that understands the complexities of your industry enables the bankers to jump right into a transaction without the need for you to educate them about your industry or to explain basic fundamentals about your business.

The seller should also ask Does the bank understand your individual company as an entity with a unique model, management team and philosophy?   Have they taken the time to get to know your corporate culture and special aspects of your product and service delivery and do they appreciate the ways in which your company differs from your industry competitors?

The seller should further consider Is investment banking a main focus of the company?  We generally caution people against hiring parties to do investment banking services where this is not a core part of their efforts.   For example, one client hired a big four accounting/consulting firm a few years ago to help sell its specialty pharmaceutical business. Investment banking was a newer business line for the big four firm. After months without good results, the client hired William Blair, a company that does focus in investment banking and in part in healthcare and had much better results: i.e. the client ultimately completed a transaction which exceeded essentially all of its targets. 

There are a number of additional considerations when selecting the right investment bank discussed in the article.  In future posts, we will address these questions.

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On April 6^th, US-based biopharmaceutical company Cephalon, Inc. (NASDAQ: CEPH) acquired all of the outstanding capital stock of Ception Therapeutics, Inc., also a US-based biopharmaceutical company focused on developing novel products to address areas of unmet medical need, for $250 million.  The transaction resulted from the January 2009 purchase by Cephalon of an option to acquire the Ception stock.  Cephalon heralds the merger as a unique opportunity to expand its biologics pipeline, including the anticipated introduction to the market of CINQUIL™ (reslizumab), which is currently in Phase III studies and is intended to treat eosinophilic asthma. 

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