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

 As discussed in our prior multi-part series, dental clinic and dental practice management companies remain an exciting investment opportunity for many private equity investors. Medicaid spending on dentistry increased 63% to $7.4 billion between 2007 and 2010.  Medicaid reimbursement in the field is, in fact, projected to reach $622 billion over the next decade. 

Thus dental companies tend to be heavily dependent on both their commercial payor relationships but Medicaid reimbursement as well. For example, in 2011, dental clinics affiliated with Church Street Health Management LLC had over 1 million patient visits; the company reported $161 million in revenue with over 90% of it originating from Medicaid and the State Children’s Health Insurance Program (SCHIP) during that same period.  

Of course, as with many subsectors, there are companies who push the limits of regulatory appropriateness, and we occasionally see instances of companies being ousted from Medicaid.   It is therefore important for investors to understand the potential abuses and closely vet any dental company investment for these risks.

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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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Current Trends in Healthcare M&A

Tuesday, September 20, 2011

7:30 – 10 a.m.
The Ritz-Carlton
100 Carondelet Plaza
St. Louis, Missouri

McGuireWoods LLP, Clayton Capital Partners, KPMG, Lockton and the St. Louis RCGA invite you to join us for an interactive conference with representatives from regional healthcare companies and private equity funds. Following a networking breakfast, Dr. John Short, former CEO of RehabCare Group and director of Kindred Healthcare, will address current merger and acquisition trends in the healthcare sector. Dr. Short and other healthcare CEOs and private equity investors will then participate in a panel discussion examining best practices in both buying and selling healthcare and healthcare related businesses.

Who Should Attend

CEOs, CFOs and VPs of Business Development at middle market healthcare and life sciences companies, as well as private equity funds that invest in these sectors.

A full agenda will follow in the coming weeks.  Online registration is available here. 

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On March 25th McGuireWoods hosted a webinar for private equity investors that provided an overview of key business issues and due diligence process for investments in the dialysis and physician practice spaces.  If you missed the webinar, an archived copy of the webinar is available on our webite.  This entry provides a brief summary of one of the most important aspects of making an investment in any space: due diligence. 

The dialysis market has been a lucrative area for investment by a number of private equity funds.  Here are a few key areas for conducting diligence on these investments:

• Referral streams - understanding where referrals for the facilities come from is essential.  Further, investors must ensure that relationships with referral sources are in compliance with the Anti-Kickback Statute and Stark Act.
• Medical Director Agreements - ensuring that facilities are properly staffed with CMS-mandated medical directors and that medical director relationships meet appropriate regulatory requirements and include enforceable non-competes.
• Payor Contracting - conducting an analysis of reimbursement rates and ability to retain payor contractrs from commercial payors. 

After being decimated in the late 90s, the physician practice management space is again seeing interest from investors.  When investing in this market, a few key diligence areas include:

• Structural Issues - state corporate practice of medicine laws typically prohibit employment of physicians by corporations that are owned by non-physicians.  As such, physician practice management companies are typically structured as a management relationship with a "professional corporation."
• Management Agreement Structure - state laws prohibiting fee splitting impact the structure of management agreements.  It is important to confirm compliance with fee splitting laws to ensure enforceability of management agreements. 

For a copy of the full presentation, email us at kwerling@mcguirewoods.com or awalsh@mcguirewoods.com. 

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