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Insights on Issues & Trends that Impact Investments in Healthcare & Life Science Businesses

Healthcare & Life Sciences Private Equity Deal Tracker: Vyne Acquired by The Jordan Company

Posted in Healthcare Services Investing

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.

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Healthcare & Life Sciences Private Equity Deal Tracker: H.I.G BioHealth Sells Vertiflex to Boston Scientific

Posted in Healthcare Services Investing

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.

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Physician Alignment Strategies: Physician Autonomy, Equity and Compensation Models, and Leadership

Posted in Healthcare Services Investing

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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Physician Alignment Strategies: Physician Autonomy, Equity and Compensation Models, and Leadership

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.

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Issues and Trends in Life Sciences Investments

Posted in Healthcare Services Investing

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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Issues and Trends in Life Sciences Investments

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.

Pharmacy Investment Trends: Market Consolidation, Non-Traditional Market Participants, and Other Activity – 3 Key Points

Posted in Healthcare Services Investing

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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Pharmacy Investment Trends: Market Consolidation, Non-Traditional Market Participants, and Other Activity – 3 Key Points

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.

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Up-and-Coming Women in Private Equity to Know: Ashley Chang

Posted in Healthcare Services Investing

McGuireWoods is undertaking a year-long effort to profile up-and-coming women leaders in private equity. This new 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 Ashley Chang of RTC Partners. Access her profile.

To recommend a rising star for a future interview, email Amber Walsh at awalsh@mcguirewoods.com.

Key Opportunities and Issues in Ophthalmology Investments – Five Takeaways

Posted in Healthcare Services Investing

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 ophthalmology. It is authored by our colleagues Amanda Roenius and Holly Buckley.

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Key Opportunities and Issues in Ophthalmology Investments – Five Takeaways

By Amanda Roenius and Holly Buckley

Private equity investment in ophthalmology and optometry practices has remained steady over recent years, and, according to experts who spoke on a panel titled “Key Opportunities and Issues in Ophthalmology Investments” at the 16th Annual Healthcare and Life Sciences Private Equity & Finance Conference, held in Chicago on February 20 and 21, 2019, private equity investors still have their eyes on this space.

Experts included Brett Skolnik, Managing Director at Baird, Andrey Vakhovskiy, Principal at HIG Capital, and Andrew Welch, Managing Director at Revelstoke Capital Partners. The panel was moderated by Holly Buckley, Partner at McGuireWoods LLP.

Here are five key takeaways from the panel discussion.

1. With acquisition activity accelerating, the vision space remains ripe for investment. Investments of scale are often highly competitive. Experts commented that while investment in this space may have lagged behind some other healthcare sectors, such a dermatology and dental, investors have seen tremendous success over the past few years, and competitors have taken note. Experts estimate that while there are approximately thirty (30) investors currently in the market, the vision space remains highly fragmented, so there is still tremendous room for consolidation.

2. Physician alignment remains the key to success, but such alignment must reach beyond compensation. As is the case in numerous other subspecialties, the number of retiring ophthalmologists is outpacing the number of physicians who are beginning their careers in this space, which creates competition for recruitment of talent. This landscape puts additional pressure on investors to develop innovative incentive and alignment strategies. Experts discussed a number of these strategies, emphasizing that while raw compensation will always remain a consideration, other benefits and the cultural fit matter just as much. Investors should consider ways to engage younger physicians, such as through involvement in committees, research, platform development, and alternative work arrangements.

3. Investment in vision practices brings additional benefits to consumers through high-volume ancillary businesses and premium services. Many ophthalmology and optometry practices own ancillary business lines, such as ambulatory surgery centers and optical shops. While these ancillary businesses are often lucrative for investors, they also provide investors the opportunity to add value to the practice through the provision of proactive and comprehensive management and compliance strategies. In addition to ancillaries, vision businesses can diversify from a reimbursement perspective by providing premium eye-care service offerings, such as LASIK, premium intraocular lens, and dry-eye treatments, all of which are generally cash pay and provide healthy margins.

4. Retina practices present attractive investment opportunities, but such investments are often costly. The retina subspecialty has seen an increased demand for investment from private equity. Experts opined that this increase in demand is likely due to the unique dynamics of this subspecialty, including but not limited to injectable drugs, such as those used to treat wet age-related macular degeneration (e.g., Lucentis, Eyelea, and Avastin), which are highly profitable. Investment in retina also poses challenges, however, as the price for such specialty practices is generally high.

5. Experts predict a flurry of growth followed by consolidation in this space over the coming years. Transaction volume is expected to accelerate in the near future, with additional platforms being formed and add-on targets being acquired. Experts caution, however, that there is the potential for growing too quickly, urging investors to take careful consideration in selecting practices with whom to partner.

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Healthcare & Life Sciences Private Equity Deal Tracker: Golden Gate Capital to Acquire Ensemble Health Partners

Posted in Healthcare Services Investing

Golden Gate Capital has announced it will acquire Ensemble Health Partners.

Ensemble is the revenue-cycle management subsidiary of Bon Secours Mercy Health, a health system serving communities in Florida, Kentucky, Maryland, New York, Ohio, South Carolina and Virginia.

Golden Gate Capital, based in San Francisco, is a PE firm claiming more than $15 billion of capital under management. The firm invests in several vertical markets.

Under the terms of the transaction, Bon Secours Mercy will sell a 51% stake in Ensemble to Golden Gate Capital. The health system will remain a minority owner and continue as a commercial partner to Ensemble.

News reports noted that the sale would net $1.2 billion in cash for Bon Secours Mercy, which will be reinvested in the health system.

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Assessment and Management of Known and Unknown Risks: 6 Points on Corporate Integrity Agreements, Ongoing Investigations, and Other Challenges and Opportunities

Posted in Healthcare Services Investing

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 companies operating under or negotiating corporate integrity agreements (CIAs). It is authored by our colleagues Tim Loveland and Helen Suh.

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Assessment and Management of Known and Unknown Risks: 6 Points on Corporate Integrity Agreements, Ongoing Investigations, and Other Challenges and Opportunities

By Tim Loveland and Helen Suh

There are opportunities and strategies for mitigating risk when investing in companies operating under or negotiating CIAs, according to experts who spoke on a panel at the Annual Healthcare and Life Sciences Private Equity & Finance Conference in Chicago on February 21 and 22.

Experts included Scott Brown, Vice President at The Edgewater Funds, David Campbell, Managing Director at Getzler Henrich, & Associates, LLC, Eric D. Coburn, Managing Director at Health Care Investment Banking, Duff and Phelps, Catherine Hess, Senior Counsel at McGuireWoods LLP, and Helen Suh, Senior Counsel at McGuireWoods LLP (moderator).

Here are 6 key points from the panel discussion:

1. There are multiple reasons to invest in companies currently operating under a CIA. Such companies, which may experience minimal growth during the term of the CIA due to the administrative burdens related to compliance, may be poised for significant growth once the CIA term expires. It is often difficult for such companies to balance sales growth and maintain the compliance obligations associated with a strict monitor. Changes in investment or ownership structures in companies with expiring CIAs may yield a revitalized focus on growth or provide novel opportunities for partnership. Sellers that are or have been subject to CIAs also demonstrate a particular resilience going through the process and coming out the other side. Such sellers have also made significant investments in compliance infrastructure, which may increase the comfort level of an investor partner, particularly an investor partner with a lower risk tolerance.

2. Continued enforcement efforts by the Office of Inspector General (OIG) have been focused on a number of high-risk markets. Some of the market areas where enforcement efforts have been focused in recent years have included compounding pharmacies, home health, hospice, nursing homes, and behavioral health (with a heavy focus on detox programs). The OIG’s investigation efforts infrequently result in CIA settlements, however, the cost imposed on companies that settle and agree to a CIA has also increased, as five (5) years is now the standard length of a CIA (previously, 3 years was common) and independent review organizations are required for many CIA parties. The OIG publishes an annual “Work Plan”, which identifies government enforcement priorities over the upcoming calendar year, and which provides invaluable insight into particular market focal points.

3. There are a number of different considerations for buyers and investors when engaging with target companies with existing CIAs or that are in the course of negotiations with the government regarding a CIA. It is imperative to ensure that a buyer/investor conducts comprehensive and thorough diligence on the target company prior to investment, including an in-depth inquiry into the circumstances giving rise to the CIA. As part of that process a buyer/investor should confirm that the target company is willing to address the issues that gave rise to the investigation or CIA. The target company should also be capable of incurring the ongoing cost of the monitor and other compliance obligations and have freely disclosed risks and documentation relating to the CIA during the diligence process.

4. There are also several circumstances in which the buyer/investor should reconsider the investment. For example, if the fraud alleged by the government goes to the core of the target’s business model, the business may no longer be viable after the implementation of a CIA. The investment risk would also shift substantially if the target insists on engaging in litigation rather than entering into a CIA, which may not be conducive to a culture of change and may lead to exclusion from federal government programs (and potential abandonment by commercial payors as a result). In addition, understanding the scope of the CIA is imperative, as prospective buyers/investors may inadvertently take on the risk that the CIA opens the buyer’s entire business to scrutiny as well.

5. There are several structural tactics to consider during deal negotiations with a company under a CIA which an investing party may utilize to lessen the impact the CIA may have on investor returns. Some tactics include longer and larger escrows, representation and warranty insurance (which could be very expensive for certain high-risk markets identified above and typically exclude known liabilities), escrow release dates tied to chart audits, or certain other special indemnities.

6. Seller should also consider how best to minimize the impact of the CIA on the value of the business moving forward. There are a number of operational tactics that might be employed. One such way to demonstrate the value of the business is to ensure that certain quantitative metrics are set up to track information to present to prospective investors. In addition, consistent management oversight, accountability, and involvement demonstrates commitment to the future of the business and may be viewed positively by prospective investment partners.

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Fertility and Women’s Health Investments – 6 Key Points

Posted in Healthcare Services Investing

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 fertility and women’s health. It is authored by our colleagues Erin Dine, Kayla McCann Marty and Holly Buckley.

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Fertility and Women’s Health Investments – 6 Key Points

By Erin Dine, Kayla McCann Marty and Holly Buckley

Heavy commercial and private payor mix, the potential for solid ancillary services, and international growth prospects currently spark strong interest by private equity investors in the fertility and women’s heath subsector, according to experts who spoke on a panel at the 16th Annual Healthcare and Life Sciences Private Equity and Finance Conference in Chicago on February 20 and 21.

Experts included Harry Cendrowski, Managing Director, Cendrowski Corporate Advisors; Adam Flisser, MD, FACOG, Director, Marwood Group; Gregg Osenkowski, Principal, Sverica Capital Management; and Mitchell S. Stern, Managing Director, Dresner Partners/IMAP. The moderator was Kayla McCann Marty, Attorney at McGuireWoods LLP.

1. As private equity dollars continue to swarm the healthcare industry, one area ripe for investment is the fertility and women’s health subsector. The fertility and women’s health subsector is gaining increased attention for various reasons including international opportunities, societal changes (e.g., women desiring the option to have children later in life), and environmental considerations (e.g., the intersection between tainted water supplies and infertility). The current commercial and private-pay payor mix is also an attractive feature of the fertility and women’s health subsector today.

2. There are 15 “mandated states” (i.e., states that have passed state laws that require infertility treatment to be covered by insurers), but a number of other states may be moving in the direction of becoming a mandated state or even requiring government reimbursement for fertility treatments. Reimbursement availability could drive volume and more patient opportunities, but this trend will also likely depress prices overall. Nevertheless, panelists indicated that reimbursement opportunities should not be viewed as a deterrent to investment in this area, due to thriving and strong fertility and women’s health practice models that have been developed in the United States and internationally with various payor and payment models.

3. Fertility and women’s health practices can obtain significant value from professional investment dollars and a private equity fund’s management experience. Panelists noted that professional investors often offer strategies to improve consumer/patient-facing aspects of the business and can assist in increasing the overall value of the practice. Further, investments can enable investment in ancillary services (e.g., mammography, egg banking, sperm banking). In today’s landscape, few fertility or women’s health practices have achieved the necessary scale to support an ancillary service line like a laboratory.

4. When looking at potential EBITDA multiples in the fertility and women’s health space, some publicly available statistics may be inflated. This inflation is partially due to the surge of new technologies in the med-tech and women’s health space, including fertility applications, and the increased attention and attraction to genetic testing. Though the panelists did not expect EBITDA multiples in this space to increase substantially in the near future, the current double-digit multiples for fertility and women’s health platforms with reasonable scale and sophistication offer a target practice an attractive price tag in exchange for a significant investment opportunity.

5. When investors evaluate potential partners in this space, they are weighing various factors, including payor mix, geographical footprint, volume of health care practitioners, age of key physicians, growth potential, infrastructure, and success rates. Investors are also placing a high value on a practice’s reputation or brand, and its anchor physicians. However, by placing such a high value on these factors, investors are expecting that the anchor physicians will remain part of the practice and are incentivizing such physicians to be partners for growth through a combination of compensation and equity opportunities.

6. New technologies, applications and individualized genetic testing opportunities are transforming the fertility and women’s health subsector. Despite the growth in this area, panelists noted that political, regulatory, and ethical concerns implicated by this space may be limiting the industry (e.g., ethical issues related to IVF and genetics and the overall lack of reimbursement in the space). Once these hurdles are navigated, the fertility and women’s health industry could offer limitless opportunities for practice growth and professional investment in this area. With this in mind, fertility and women’s health practices, as well as private equity funds, are poised to continue on a trajectory of growth in this subsector.

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