McGuireWoods is undertaking a yearlong effort to profile up-and-coming women leaders in private equity. This profile series complements our existing Women Leaders in Private Equity profile series, which will continue throughout 2019. For this profile, we are pleased to feature Emily Castle is an associate at Audax Private Equity. Access her profile.
To recommend a rising star for a future interview, email Amber Walsh at awalsh@mcguirewoods.com.
McGuireWoods has launched a new series featuring interviews with C-suite leadership of private equity-backed portfolio companies. Our first interview is with Bill Southwick, CEO of QualDerm. Access his profile by clicking here.
To recommend a leader for a future interview, email Holly Buckley at hbuckley@mcguirewoods.com.
Private equity firms invest in many sectors of the healthcare industry, but until recently, orthopedic practices remained largely untouched. Now — given the high demand for services, increased case movement to outpatient venues and high-value ancillaries — the enthusiasm for orthopedic practice investment is growing rapidly. Industry watchers expect a flurry of such transactions in 2019 and beyond.
To learn about recent investments, market dynamics and regulatory considerations in this area, read my new McGuireWoods white paper, co-authored with colleagues Gretchen Townshend, Timothy Fry and Amanda Roenius, “Private Equity Investments in Orthopedic Practices: We’ve Got Your Back.”
McGuireWoods has long been an avid supporter of the advancement of professional women. As part of our initiative seeking to expand the leadership of women in private equity, we are continuing our series of profiling women leaders in private equity. We are hopeful that this series will serve to inspire other women to pursue their careers in private equity in a way that best challenges and motivates them, which these impressive women have all done. We are pleased to feature Sheila Schweitzer of Blue Ox Healthcare Partners. Access her profile by clicking here.
To recommend a woman for a future interview, email Amber Walsh at awalsh@mcguirewoods.com.
Integrated Oncology Network (ION), a portfolio company of Silver Oak Services Partners, has announced it acquired e+CancerCare (e+).
e+, based in Nashville, Tenn., is an operator of outpatient cancer care centers across 10 states.
ION, based in Corona del Mar, Calif., is a radiation oncology management and cancer center development company that now owns and manages more than 50 treatment centers in 17 states.
Silver Oak, based in Evanston, Ill., is a private equity investment firm focusing on middle-market healthcare, business and consumer services companies.
McGuireWoods served as counsel and legal advisor to ION in connection with the transaction.
Financial terms of the acquisition were not disclosed.
Vyne has announced it has been acquired by The Jordan Company from Accel-KKR.
Vyne, based in Dunwoody, Ga., is a provider of secure health information exchange and electronic health care communication management solutions.
The Jordan Company, founded in 1982 and headquartered in New York, is a middle-market private equity firm that invests in a wide range of industries, including healthcare.
Accel-KKR, founded in 2000 and headquartered in Menlo Park, Calif., is a technology-focused private equity firm.
Financial terms of the deal were not disclosed.
H.I.G. BioHealth Partners, the life-science investment affiliate of H.I.G. Capital, has announced the sale of Vertiflex to Boston Scientific. The total equity value of the sale is approximately $465 million in cash, with additional payments contingent on commercial goals.
H.I.G. BioHealth, based in Miami, invests in a broad range of healthcare opportunities, principally in companies developing therapeutic drugs, medical devices and diagnostics for unmet medical needs. The firm typically invests $5 million to $40 million per company over the life of an investment.
Vertiflex, based in Carlsbad, Calif., develops minimally invasive interventions for spinal stenosis. This includes Superion, an indirect decompression system designed to improve physical function and reduce pain in patients with lumbar spinal stenosis.
Boston Scientific (NYSE: BSX) announced its intention to acquire Vertiflex in May.
The final in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses physician alignment strategies. I am joined by my colleague Sarah Ahmed in authoring the column.
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By Sarah Ahmed and Geoffrey Cockrell
Consolidation of healthcare provider services practices continues at a remarkable pace. Increasingly, the structures of larger consolidated practices are focusing on various aspects of physician alignment. Indeed, finding creative structures of physician alignment can be the difference between a private equity fund winning or losing their bids to acquire these practices.
One panel at our 15th Annual Healthcare and Life Sciences Private Equity and Finance Conference on February 20th explored the evolving structures and philosophies of physician alignment. Our expert panel included Daniel Brinkenhoff (Principal at Centre Partners Management LLC), Goran Dragolovic (Chief Executive Officer of Women’s Health USA), Jonathan Lewis (Partner at Sheridan Capital Partners), and Bill Southwick (Chief Executive Officer of QualDerm Partners). The panel was moderated by Geoffrey Cockrell (Partner at McGuireWoods LLP). The key take-aways from the panel included the following:
1. The most critical aspect of a successful physician alignment strategy is to understand what elements of the structure are most significant to a particular practice. For some, rehabilitating current income after the transaction is paramount. For others, some measure of autonomy over compensation is key. Understanding the physicians’ hot buttons is critical. Often that understanding involves educating the physicians on the various structural tradeoffs.
2. In all of these structures that involve future economics (income repair, rollover value in a subsequent sale, etc.) a choice has to be made as to whether those future economics will be more closely tied to local performance vs performance of the overall organization. The arguments for each approach tend to be more philosophical. Some sponsors prefer everyone pulling and benefiting together. Others prefer the physician’s economics to be more closely connected to the performance they can more directly influence.
3. Some of the newer structures allow physician groups to have autonomy over how current income economics are distributed among the leading physicians. Similarly, some current models move current income away from individual production to a sharing of local profitability. There is a mixed view among sponsors on whether connecting physician compensation to bottom line profit (vs top line revenue production) is a beneficial or complicating feature. The verdict is still out on those structures.
4. There are also varied approaches on physician equity ownership beyond rollover equity. Some sponsors favor wider physician participation as a key feature of physician alignment, while others are skeptical that physician interest is really that high and prefer to limit the availability of equity buy-in opportunities and the related dilution of the sponsor’s equity.
5. All sponsors recognize the difficulty of dealing with younger physicians who were nearly at partner level at the time of the primary transaction. The solutions are imperfect both in economic effect and tax treatment. Advance planning and strong current income plans for new doctors are key.
The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses investing in the life sciences. It is authored by our colleagues Tim Loveland and Leah Eubanks.
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By Tim Loveland and Leah Eubanks
As the life sciences investment market gets more crowded, recent changes in the industry have shifted investors’ focus to new opportunities in outsourcing, quality, and consumerization, according to experts who spoke on a panel at the 15th Annual Healthcare and Life Sciences Private Equity and Finance Conference on February 20th.
The panel of experts included Ben Daverman, Managing Director, GTCR, LLC, Brad Hively, Principal/Operating Partner, RLH Equity, Barrett Polan, Investment Analysis, Hayfin Capital Management LLP, and Phil Smith, Managing Director, Duff & Phelps. The panel was moderated by Kim Susko, Management Consulting Director, RSM US LLP.
Here are 3 key takeaways from the discussion:
1. The life sciences industry is experiencing a dramatic shift to outsourcing as operational and regulatory demands emerge that often go beyond internal capabilities. The pharmaceutical outsourced services market alone is valued at over $150 billion today and is anticipated to continue to grow as pharmaceutical companies face increased drug development and discovery costs. A more challenging FDA regulatory framework and market changes (such as virtual biotechnologies for early drug development) have resulted in a substantial increase in the number and cost of clinical trials and challenges to keeping expertise in-house. Many pharmaceutical companies have opted to eliminate their R&D functions in their entirety and outsource services such as early drug development. Medical device companies often outsource product development, manufacturing, clinical work, and branding and marketing. Examples of outsourced industries for healthcare providers include revenue cycle management, practice management services and equipment. Investments in outsourced companies are increasingly competitive and some models may put negative pressure on returns with higher-than-expected development costs and less control over regulatory compliance. However, there continue to be significant new opportunities for growth and increased efficiency.
2. Quality is still king for managing drug and device risks. Smart investors continue to prioritize companies with strong quality improvement and risk management cultures as a top-of-mind issue both as a point of diligence and as a means to measure and define a company’s value. In the medical device space, for example, the FDA no longer simply reviews medical devices and approves a pre-market approval or 510k submission. Instead, the regulatory process for pre-market approvals for new devices can be extensive, unpredictable and lengthy and associated clinical trials may not be successful. In addition, reimbursement changes and a heightened awareness of drug cost have forced manufacturers and distributors of drug and device products to obtain more and better-quality data to avoid extensive regulatory scrutiny. However, there are ample opportunities for investment in quality and risk management support. Pharmaceuticals and dietary supplement companies heavily outsource quality data and control services and even sales and promotion functions to assist in marketing claims regarding the quality of their products. The importance of quality metrics and testing continues to be a pathway for growth in drug and device.
3. Investors may find value in the consumerization of devices and pharmaceuticals. As the market shifts to consumerization of biological data, companies which have seen significant growth often do so by treating patients like consumers. GlaxoSmithKline recently announced a $300 million deal with 23 and Me to further commercialize the latter’s genetic data to identify patients with certain rare disorders for drug development and clinical trial design. Various market players are attempting to commercialize FDA-approved platforms for gene therapy using CRISPR and other genetic tools. Technological developments such as wireless telemetry, which is used to monitor patient physiological parameters over a distance, provide additional opportunities for consumerization. For patients with chronic diseases, insurance companies, employers and medical device companies have all focused on increased consumer engagement as a way to manage patient health through incentives and lower healthcare costs. Investors may find tremendous value in companies that increase consumer engagement, add value and provide a pathway or support for increased consumerization.
The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses investing in the pharmacy space. It is authored by our colleagues Trey Andrews and Holly Buckley.
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By Trey Andrews and Holly Buckley
Vertical consolidation of the pharmacy and drug delivery sector and the entrance of non-traditional players into the pharmacy space will accelerate disruption of the status quo in the drug delivery supply chain in coming years, according to experts who spoke on a panel at the Annual Healthcare and Life Sciences Private Equity & Finance Conference in Chicago on February 21, 2019.
Experts included Taylor Phelps, Senior Vice President at Raymond James, Billy Suddath, Managing Director, HCIT at Robert W. Baird & Co., and Kathy Contratto, Healthcare Technology Consulting Leader at RSM US LLP (moderator).
Here are three (3) key points from the panel discussion.
1, Vertical Consolidation. In 2018, there was significant consolidation in the pharmacy and drug supply chain sector, with non-traditional combinations between insurers and pharmacy benefit managers taking center stage in the market. Panelists noted that vertical consolidation should be expected to continue and will translate into other large market participants entering the drug supply chain. With respect to non-traditional players entering the pharmacy space, there are mounting concerns that significant disruption could be coming to the drug supply chain—particularly by online pharmacies delivering drugs to patients. Both acquisitions in and offerings via the online pharmacy sector continue to expand and in practice are allowing both traditional and non-traditional drug suppliers to reach customers on a much larger scale. Ultimately, panelists are seeing drug distributors consolidate the drug distribution channel in ways that allow distributors to deliver drugs directly to patients and control the entire drug delivery process.
2. Rise of Specialty Pharmacies. The fastest growing subsector in drug distribution is specialty drugs. Panelists cited data that the specialty drug market will very quickly become greater than fifty percent of annual drug spend in the United States. Currently, oncology drugs are the specialty drug category with the greatest annual spend. Panelists expressed that the prominence of spend focused on oncology drugs could be a factor in investors increased interest in infusion therapy centers, where patient access to oncology drugs has increased in recent years. Orphan drugs—drugs manufactured for small patient populations—continue to be the fastest growing subsector in the drug distribution space. Large-scale specialty pharmacies should continue to be able to take advantage of the speed and prevalence in which orphan drugs are growing on an annual basis. Regional specialty pharmacies, which tend to focus on a specific therapeutic class of drugs, will also be able to capture significant growth in this vertical model. Panelists explained that some hurdles could prevent significant growth for regional specialty pharmacies, including, the ability to obtain consistent access to drugs and to provide value add to patients by developing data to support the patient experience. Panelists also noted that large health systems are beginning to enter into the specialty pharmacy sector to avoid losing refill business to retail pharmacies. In the coming years, it is likely that hospital pharmacies will begin moving out into communities to offer drugs to patients through ancillary pharmacies.
3. Year of the Consumer. 2019 will be the year of the consumer with respect to pharmacies. Consumers continue to demand pricing transparency and increased access via online pharmacies will continue to drive pricing transparency. In combination with pricing transparency for consumers, drug price reductions from manufacturers continue to be a significant focus in politics. Panelists highlighted several congressional hearings and proposed administrative regulatory changes to how rebates are provided as likely to influence overall drug pricing. Panelists noted that pharmacies are continuing to promote medication adherence, for both clinical and economic reasons, which will continue to integrate pharmacies into value-based care models with the intention of reducing hospitalizations. Some pharmacies are currently offering drug adherence tracking and monitoring to assist patients, and the pharmacy sector should continue to expect these types of offerings to be developed and integrated.