The Health Care Investor

Patient Protection and Affordable Care Act - The Rebuttal

Amber Walsh — Wed, 16 May 2012 08:25:21 -0500

In prior posts we have discussed financial data released by the Obama administration regarding the financial upside of the Patient Protection and Affordable Care Act (PPACA), the healthcare reform law. Recently, we discussed a current study by the Centers for Medicare & Medicaid Services (CMS). Not surprisingly, opponents of the law are eager to publish findings supporting their point of view. But in response to an inquiry from House Ways and Means Committee Chairman Dave Camp (R-Mich), 71 Fortune 100 companies (out of 100 polled) stated that they could save approximately $28.6 billion in 2014 alone by not providing health insurance for their nearly six million employees.

The facts: PPACA requires employers with more than 50 employees who meet the legal definition of full-time workers, to offer health insurance that meets the qualifications for being affordable, beginning in 2014. The law imposes employer fines, payable as an excise tax; employers that do not offer coverage must pay $2,000/employee after exempting 30 employees. If said coverage is deemed to be unaffordable under the law and employees qualify for subsidies in the health insurance exchange markets (which are to be in place in 2014), employers will be fined $3,000/year for each employee who receives the subsidies. The penalties will be indexed to the average per capita premium for health insurance after 2014.

The report, BROKEN PROMISE: Why ObamaCare Will Force Americans to Lose the Health Care Coverage They Have and Like, authored by the committee’s majority staff, states that PPACA “threatens the stability and sustainability of the employer-based health insurance system—even among the nation’s most prosperous companies”.

In an article by Sara Hansard, writing for Bloomberg/Bureau of National Affairs, the GOP avers that the majority of these giant companies would save $422.4 billion from 2014 through 2023 by eliminating employee health insurance coverage and paying any penalties. Since the cost of paying the penalties is much cheaper than the cost of providing health care coverage, employers will need to make a tough economic choice. This conundrum could affect some 10.2 million employees and their dependents. Individually, these companies could save an average of $402.3 million or $4,821/employee on an after-tax basis in 2014, by opting to pay the fines instead of health insurance. From 2014-2023, the average employer responding to the survey could save $5.9 billion or $9,999/employee, according to the report.

Eighty-four percent of the employers who responded to the poll felt that future health care costs will increase at rates higher than the increases of the last five years, the report continues. Employers’ costs, which increased 5.9% annually over the last five years, are predicted to rise 7.6% annually over the next few years. These increased costs, companies aver, could lead to increased unemployment as many businesses will simply not be able to afford the cost of insuring their workers.

In 2010, some 170 million Americans received health coverage benefits from their employers, the largest source of health insurance in the nation. Representative Camp argues that “Anyone who gets insurance through their job should be worried what will happen next, because there is a distinct financial incentive for employers to terminate health care coverage under the Democrat’s health care law”.

In response, spokesman for the Ways and Means Committee Democrats, Josh Drobnyk, rebutted the Republicans stance, saying that the Republican report’s assertion that employers may eliminate workers’ health insurance is “a cynical assertion that ignores the fact that the largest and most successful American businesses for years have voluntarily chosen to offer health coverage to workers Employers provide coverage because it a valuable recruitment tool and retention benefit and because it helps keep their workers healthy and productive.”

Paul Dennett, senior vice president for health care reform at the American Benefits Council, which represents mainly large employers that provide both health and retirement benefits to over 100 million Americans, told BNA that employers’ decisions to continue employee coverage post-2014 will involve “many other dimensions than just the question of the after-tax expense of health care vs. the cost of the penalty”.

And the debate continues.

Patient Protection and Affordable Care Act on Trial

Amber Walsh — Mon, 07 May 2012 12:21:27 -0500

From March 26 through 28, 2012, the U.S. Supreme Court heard oral arguments in the multi-state challenge to the 2010 healthcare reform law known as Patient Protection and Affordable Care Act (PPACA). Our McGuireWoods colleagues published a very insightful discussion of the arguments heard each day that week and an overview of the key substantive issues under debate, which can be found here.

On March 30, the justices met to deliberate and select an opinion writer. The opinion is now being written pursuant to the Court's internal process, and the outcome of the Court's decision on the case may change depending on the course of the opinion-writing process.

In the interim, the Centers for Medicare & Medicaid Services (CMS) continue to release information in support of the law. CMS expects the 2010 healthcare-reform law to generate over $200 billion in savings through 2016 by ending disproportionate payments to private insurers that offer Medicare Advantage plans, as well as by implementing anti-fraud policies. The estimate, from the CMS Office of the Actuary, also said that senior citizens and others in the traditional Medicare program should see about $59.4 billion in savings during that same period through lower cost-sharing and premiums.

CMS states in the report, "The Affordable Care Act: Lowering Medicare Costs by Improving Care", that reducing disproportionate Medicare payments to private insurers in Medicare Advantage could save some $68 billion. Changing provider payments to improve productivity could save another approximately $85 billion, while anti-fraud efforts should realize savings of approximately $7.8 billion; these savings to occur over the next four years. This could mean a costs savings of about 20%-30% of our National Healthcare Expenditure, which, as of 2009, was $2.5 trillion.

According to CMS acting Administrator Marilyn Tavenner, “The Affordable Care Act is the key to lowering healthcare costs in a way that improves care for beneficiaries, instead of cutting services. In the short term, both taxpayers and beneficiaries will save billions thanks to the healthcare law. Over the long run, the Affordable Care Act will allow us to invest in new models of providing care that will save money and deliver higher-quality care.”

In a proposed rule, CMS said it expects operating payments to acute-care hospitals will increase by about 0.9% in 2013. That figure includes a 2.3% net payment update, which accounts for inflation, productivity improvements, coding changes and other adjustments and policies in the rule. Overall, CMS said that total Medicare spending on inpatient hospital services could increase by about $175 million in fiscal 2013. Under the proposed rule, payments to long-term acute-care hospitals are expected to increase by about 1.9% or about $100 million in 2013. That projection is based on a 2.1% payment increase to those facilities that is then reduced by 1.3% to account for one-time budget-neutrality adjustment, which brings the actual payment-rate increase for long-term-care hospitals to 0.8% for next year. These figures are from an article by Jessica Zigmond writing forwww.modernhealthcare.com.

Of course opponents of the law, including the 26 states that consolidated to challenge the law in the case that ultimately made it to the U.S. Supreme Court, claim otherwise. In addition to concerns regarding constitutionality of the law, opponents express concerns regarding a variety of economic factors, including a negative impact on state budgets and what they ultimately believe will be minimal impact on federal spending.

For now, the nation will wait to hear the fate of the law from the highest court in the land and whether the scenarios of financial doom and financial salvation will have a chance to play out.

Dental Investing Filling Need for PE Investing - Part II

Geoff Cockrell — Mon, 30 Apr 2012 12:36:24 -0500

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.

Dental Investing Filling Need for PE Investing - Part I

Amber Walsh — Tue, 24 Apr 2012 12:32:55 -0500

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.

Investing in Health Information Technology (IT) - Part III

Geoff Cockrell — Wed, 28 Mar 2012 09:16:28 -0500

The importance of healthcare-focused information technology as a way to improve the quality while reducing the soaring cost of healthcare in this country and around the world cannot be overemphasized. The American Recovery and Reinvestment Act (ARRA), enacted in 2009, encourages the use of electronic health records, albeit with accompanying penalties against regulatory deadlines, to assure an easily-accessible, secure and integrated medical industry.

Galen Partners, a leading private equity healthcare company, focuses on growth equity investments in healthcare technology-enabled services, medical devices and specialty pharmaceutical companies. It has invested in over 70 companies since its inception in 1990 and has almost $1 billion under management. Galen actively participates in its investments ranging from $10 million to $30 million of P.E. capital; it currently has more than 22 active investments. Galen focuses on healthcare-related companies with proprietary products and services. Their investments focus on healthcare venture capital medical devices & technology, information technology & services and specialty pharmaceuticals.

A recently-completed deal is Sharecare, a provider of an interactive healthcare platform for end-consumers looking for information on health-related concerns from physicians, hospitals and other healthcare consumers; it also provides a platform upon which medical centers can establish a connection to share research.

Carefx, a subsidiary of Harris Corporation, focuses on closing the inevitable industry gaps in information technology. Their proprietary product, Fusionfx, provides improved clinical, financial and operational outcomes vital in providing accountable healthcare. Investors include The Carlyle Group, one of the world’s largest private equity firms, with more than $75.6 billion under management; Appian Ventures, a venture capital firm that is focused on Applied Connectivity technologies and which targets early-stage investments in real-time enterprise applications and infrastructure management software companies; CB Health Ventures, which manages $150 million of P.E. funds focused on investment opportunities in healthcare services, medical IT, biotechnology and genomics; UV Partners, an early-stage P.E. investment group that provides the basis for development of early-stage entrepreneurial concepts in IT and Life Science companies; and Village Ventures, which manages a network of early-stage venture capital funds in emerging technology centers, joining Bain Capital, Highland Capital Partners, Sandler Capital Management and Janus Capital Corporation supporting this endeavor.

Bain Capital Private Equity has raised 10 global funds and made over 250 investments since their inception in 1984. The private equity activity includes leveraged buyouts and recapitalization with a diversified portfolio. One of the leading investment firms in the world, Bain has approximately $60 billion in assets under management. Their 250 professionals oversee investments in the healthcare, telecommunications/technology, financial services and consumer products industries.

Bain Capital Ventures portfolio includes the following companies intrinsic in the healthcare IT field, as well as other areas of importance in the healthcare arena: ABILITY Network, a healthcare IT company that enables physicians and hospitals to connect securely via the internet to Medicare, other payers, and each other to process claims and exchange clinical information, is the largest, web-based, secure healthcare network in the United States. It makes possible millions of transactions daily and has more than ten thousand healthcare providers as customers, including most hospitals in the country. Enclarity provides information solutions to payers and large healthcare companies by combining multiple data sources, advanced analytics, and healthcare expertise into a master data set. Humedica, a next-generation clinical informatics company, provides innovative SaaS-based business intelligence solutions for the healthcare industry. Humedica provides healthcare providers, government agencies, financial services firms and life sciences manufacturers with the IT solutions needed in today's ever-evolving health care market. MedeAnalytics provides performance management solutions to hospitals, payers, and other large health care institutions to improve operational, financial and clinical outcomes. They perform by collecting data from divergent sources, delivering information in a prescriptive manner to allow the transparency necessary to bring accountability to the system.

U.S. Supreme Court Begins Much-Anticipated Oral Arguments re Healthcare Reform

Amber Walsh — Mon, 26 Mar 2012 17:49:12 -0500

It is virtually impossible to turn on a TV, radio or podcast . . . or pick up a newspaper or peruse the internet . . . without hearing that the U.S. Supreme Court today began three days of potentially landmark oral arguments over the constitutionality of The Affordable Care Act (aka the "healthcare reform law"), which was signed into law in 2010. Today a majority of justices seem ready to hear the substantive points at issue in the case, appearing to reject procedural points raised by government attorneys claiming the case is not yet ripe for decision.

Assuming that the case survives those procedural challenges (which are largely premised on an obscure federal law, The Anti-Injunction Act), the Court will decide three key legal questions in these appeals:

1) Does the law overstep federal authority in the "individual mandate" requiring most Americans to purchase health insurance or pay a financial penalty?

2) Must the entire PPACA be declared if that key provision is unconstitutional (or, in contrast, are the offending provisions "severable" such that the constitutional provisions may stand without them)?

3) Are states being "coerced" by the federal government to expand their share of Medicaid costs and administration, with the risk of losing that funding if they refuse?

As the arguments proceed and the justices deliberate, we will continue to provide Twitter updates (theHCinvestor) and further blog discussion.

Investing in Health Information Technology (IT) - Part II

Amber Walsh — Tue, 20 Mar 2012 13:27:55 -0500

Information and the means of communicating that data in a cost-effective, secure, user-friendly and legally compliant manner is critical in any industry. Targeted healthcare-related IT, information technology specifically designated to improve patient care and advance quality and efficiency throughout the healthcare community, is the focus of our recent blog series.

The Centers for Medicare and Medicaid Services (CMS) awarded $2.5 billion in 2011 from about $27 billion, to promote healthcare-related IT.

Separately, one requirement for being named an ACO (accountable care organization) by Medicare, is implementing state-of-the-art electronic medical record keeping. Supporters of the ACO model, and a fundamental premise of this aspect of federal policy, is that by increasing the quality of healthcare while decreasing costs, ACOs are thus eligible for meaningful financial incentives from the government.

Electronic health records (EHR) have become a virtual necessity for monitoring high-risk and chronically-ill patients, whether institutionalized or at home. Both private health care plans and Medicare are requiring improved disease management and prevention under ACO contracts that reward quality and efficiency with monetary rewards.

The proposed Stage-2 meaningful-use requirements set forth by the CMS would significantly increase the necessity of using healthcare information technology, including electronic prescriptions, computerized physician order entry (CPOE) and electronic recording of patient-health measures. Under Stage 2 standards, hospitals and eligible professionals (including physicians not employed by hospitals) would be required to use CPOE for more than 60% of medication, lab and radiology orders; double the requirements under Stage 1 rulings. According to Modern Healthcare, the CPOE is one of over 12 core objectives that hospitals and EPs would need to meet to demonstrate their “meaningful use of electronic health-record systems, which would make them eligible to receive federal health IT incentive payments”.

Other Stage 2 objectives include using electronic prescriptions more than 50% of the time, recording demographic data for over 50% of patients, tracking smoking statistics for more than 80% of patients and recording vital signs for over 80% of patient encounters. In addition, Stage 2 would necessitate over half of patients be provided online access to their health records and show that at least 10% had accessed the information.

CMS is soliciting comments on the proposed rules. Several of our McGuireWoods colleagues publish frequent updates on all EHR, IT and HIPAA updates. A link to their most recent discussion of the Stage 2 proposed rule in found here.

Investing in Health Information Technology (IT) - Part I

McGuireWoods — Wed, 14 Mar 2012 09:03:18 -0500

When looking for the latest investment opportunities in the healthcare arena, one major priority for many investors is information technology, IT.

A National Venture Capital Association recent survey showed that 61% of venture capitalists feel that investments in health IT will increase this year. By contrast, the survey shows that medical devices and biopharma are still less desirable as a health care investment prospect, a position that remained fairly consistent over the past several years as we have written in past blogs. As discussed in a recent article on MedCity News, ‘angel investors’ are also cautious about speculating in the medical device arena. The executive director of the Minnesota Angel Network described the investment outlook for medical devices, “worse than bleak”.

VCs are prospecting in the burgeoning information technology sector. Approximately two-thirds of venture capitalists anticipate an increase in technology initial public offerings this year as compared to 2011; only 18% expect more life science IPOs. During the third quarter of 2011, the number of venture capital life sciences deals decreased to its lowest level in almost three years, reports MoneyTree. Conversely, investment in health care-related IT increased about 20% to $460 million in 2010, according to a report from Dow Jones VentureSource.

Why are investors switching their focus from devices and drugs? Health IT is a hot area, in large part, due to federal and state incentive programs for implementing electronic health records technology (thus, increasing first-time users) and the various ways in which providers can work together to integrate systems (impacting changes in IT vendors and products). Other industry analysts point to cost efficacy; while medical apparatus and pharmaceuticals are seen as cost-increasing, medical IT is viewed as cost-reducing. While normally perceived as an industry asset, IT/cost reduction is a must as we enter the era of increasing government supervision on Medicare and Medicaid spending and integrated delivery systems such as ACOs.

While cutting high overhead costs, health IT is also expected to increase efficiency by improving patient-monitoring, augmenting clinical support for medical personnel and streamlining communication among healthcare providers, patients and payers.

Orphan Disease Therapy Investments

Geoff Cockrell — Sat, 03 Mar 2012 13:23:42 -0500

Perhaps despite not having the cache of ‘guaranteed-weight-loss’, ‘quit smoking now’ or even a cure-all for cancer, pharmaceuticals for the treatment of rare diseases can be an attractive investment strategy.

Amicus Therapeutics is the developer of small molecule, orally administered drug called pharmacological chaperones for the treatment of human genetic diseases. The company is currently developing drugs for the treatment of Fabry disease, Gaucher disease and Pompe disease. It focuses on lysosomal storage disorders and diseases of neurodegeneration.
Active investors in Amicus include CHL Medical Partners (formerly known as Collinson Howe & Lennox), Canaan Partners, Frazier Healthcare Ventures, New Enterprise Associates and Prospect Venture Partners.

CHL Medical Partners is a premier venture capital firm that partners with entrepreneurs and inventors to create and finance innovative biotechnology, molecular diagnostic, healthcare service and medical device companies. They are known throughout the industry for identifying scientific ideas and healthcare service models and creating businesses with excellent market potential. They have invested in over 80 start-ups and are currently investing their sixth fund, the $120 million CHL Medical Partners III, L.P.

Canaan Partners, founded in 1987, is a venture capital fund that invests in all stages of development, notably Series A & B financing. Headquartered in Gurgaon, Haryona, India, the firm typically invests $1 million to $20 million in its portfolio company.

One of the country's leading providers of venture and growth equity capital to emerging healthcare companies, Frazier Healthcare Ventures partners with outstanding entrepreneurs to build durable companies that deliver therapies and services to largely unmet healthcare needs. The firm has invested in over 100 companies in the biopharma, medical device, and healthcare service sectors since their inception in 1991.

Menlo Park, California-based New Enterprise Associates invests primarily in the information technology sector with a focus on communications, software and services as well as the electronics and healthcare industries. The venture capital group concentrates on energy technology, biopharmaceuticals, medical devices, healthcare services and healthcare information technology industries.

Prospect Venture Partners is a venture capital firm with over $1B of capital currently under management. The firm, dedicated to investing in outstanding biopharmaceutical and medical device companies, invests in companies with a wide variety of development and financing requirements including new company incubations, first and second venture financing rounds and later stage private and public companies with proven business models requiring expansion capital. They typically have representation on the board of each of its portfolio companies and serves as an active partner.

Private Equity Investing in the Dialysis Sector - Part III (Overseas Investing)

Amber Walsh — Tue, 21 Feb 2012 12:15:34 -0500

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.’”

Private Equity Investing in the Dialysis Sector - Part II

Amber Walsh — Wed, 15 Feb 2012 13:08:27 -0500

Part II of our series on private equity investing in dialysis discusses other dialysis companies backed by private equity and highlights some key considerations for investors and companies.

Funded in 2000, U.S. Renal Care (USRC), is another dialysis company (generally considered an “MDO” or mid-sized dialysis organization) that involves private equity investors. URSC comprises a network of 85 dialysis centers as well as home and specialty hospital dialysis programs, with facilities in Arkansas, Georgia, Maryland, New Jersey, Ohio, Oklahoma, Pennsylvania, South Carolina, Texas and Virginia. Like many other SDOs, MDOs and LDOs, the company also manages a number of acute-setting dialysis programs in conjunction with community hospitals. USRC includes among its financial partners Cressey & Company, SV Life Sciences, Salix Ventures and Select Capital Ventures.

Chicago-based Cressey & Company is a private investment firm focused on the healthcare industry, whose principals have been healthcare investors for nearly three decades. They have recently completed transactions in such other healthcare-related companies as Innerchange, Homecare Homebase and Regency Hospital.

SV Life Sciences, previously Schroder Ventures LifeSciences, is a venture capital adviser and manager for companies requiring funding within the human life sciences sector, including biotechnology and pharmaceuticals, medical devices and instruments, healthcare IT and services. The company, established in 1993, advises or manages four funds with total capital of approximately $900 million.

Select Capital Ventures is a private equity investment firm focused on the healthcare industry. The company has invested in more than 30 healthcare companies, many of which have completed public offerings. Members of their investment team have personally led four companies to IPO’s, including two NYSE traded companies that achieved revenues in excess of $1 billion.

Salix Ventures is a Nashville-based venture fund founded in 1997 to pursue high growth investment opportunities in health care services companies (including health care information technology). In 2011, Salix exited several investments, including surgery center company Titan Health (sold to United Surgical Partners International) and Pathology Partners (sold to Caris Diagnostics).

Investors in the dialysis industry should understand the key regulatory issues and reimbursement pressures facing the dialysis industry, from transition to the Medicare bundled payment system (now thirteen months “old”), to the role of nephrologists and dialysis programs in integrated delivery systems such as ACOs, to physician compensation and other regulatory risk issues. We have addressed many of these issues in more detail in prior blog posts.

Private Equity Investing in the Dialysis Sector - Part I

Amber Walsh — Tue, 07 Feb 2012 21:44:31 -0500

Private equity investors have been active in the dialysis sector for decades. In Part I of this series on dialysis investments, we describe the recent emergence of three companies with private equity backing.

First, in 2010 Bain Capital Ventures and KRG Capital invested in Liberty Dialysis, which in 2011 then acquired Welsh Carson-backed Renal Advantage and sold the entire combined company to Fresenius. As with other consolidations, that three-party merger will also result in the divestiture of approximately 50 dialysis clinics nationwide due to FTC demands. The resulting buyer could be one of a variety of players in the market.

Bain Capital Ventures was formed as a separate arm of Bain Capital to focus exclusively on growth investments. Their investments range from several hundred thousand dollars up to $100 million and focus on companies in the business services, consumer, healthcare, internet & mobile, and software sectors.

KRG Capital is a private equity investment firm specializing in acquiring controlling interests in middle-market companies and growing them into significantly larger enterprises through the combination of internal growth and selective strategic add-on acquisitions. They invest in companies with a history of operating profitability and strong growth prospects in specialty or "niche" manufacturing, distribution or service industries.

Getting confused yet? Don’t be. Consolidation in the dialysis industry has been common for many years, with multiple waves of consolidation of some of the largest companies into “supercompanies” (and, in some cases, resulting in forced divestiture of clinics following a FTC antitrust analysis).

Second, in 2011, Frazier Healthcare Ventures and NEA invested in DSI to purchase 30 dialysis clinics divested following the 2011 DaVita-DSI Renal merger.

Frazier Healthcare Ventures, founded in 1991, provides venture and growth equity capital to emerging healthcare companies. Since its founding 30 years ago, NEA has backed over 165 companies that have gone public and invested in more than 255 companies that have been successfully merged or acquired more liquidity events than any other venture capital firm. With offices in the U.S., India and China, NEA specializes in the information, technology, energy technology and healthcare sectors, with $11 billion in committed capital.

DSI Renal (a separate company from DSI but involving much of the same management team) was formed in 2006 with backing by private equity fund Centre Partners to purchase clinics at that time divested pursuant to the Fresenius-Renal Care Group merger.

Third, 2011 also saw American Dialysis Corporation partnering with Jefferies Capital Partners to acquire and build dialysis centers across the United States. American Dialysis Corporation, headed by Thomas K. Langbein, who had served as Chairman of Dialysis Corporation of America (DCAI) until selling the company to US Renal in 2010. Jefferies Capital Partners, a private equity firm that manages more than $1.6 billion in equity funds, centers its investment activities in later-stage growth companies and management buyouts in support of corporate expansion and industry consolidation. Their areas of focus include consumer, energy, financial services, healthcare, manufacturing and distribution, media, telecommunications and transportation.

U.S. Renal Care (USRC) itself and other small-to-mid-sized dialysis organizations (SDOs and MDOs, respectively) are also backed by private equity. In Part II of this series on private equity investment in dialysis, we will describe additional companies and their investors.

Sony Makes Inroads into Health-Care in a Big Way

Geoff Cockrell — Tue, 24 Jan 2012 14:59:24 -0500

Put aside your Sony flat-screen TVs and Blu-Ray players and make way for ---flow cytometry. Why is Sony Corporation, a proven global manufacturer in the field of audio, video game, communications, key device and information technology, venturing in the turbulent, albeit often lucrative waters of medical applications? Because they can.

Less than a year ago, Sony Corporation of America announced the acquisition of iCyt Mission Technology, Inc., a leading producer of high-performance cell sorters used for stem cell and disease research. iCyt, headquartered in Champaign, Illinois, designs, manufactures and sells flow cytometers as well as associated reagents and services. Sony brings to the laboratory table a cosmic level of technological and engineering experience. Indisputably one of the international leaders in technology, Sony has long been exploring healthcare applications for its heretofore consumer-based optic technologies, such as microchips used for Blu-Ray disc players, as well as its advanced data processing systems.

The acquisition of iCyt by Sony hurls the global giant headlong into the burgeoning field of biological instrumentation. Keiji Kimura, Sony Executive Vice President, opined that “…marrying Sony’s expertise in manufacturing consumer products with iCyt’s technological assets will accelerate development of the business.”

At the recent Congress of the International Society for Advancement of Cytometry, Sony and iCyt announced two new, state-of-the-art cell-sorters; SYNERGY, an advanced bench-top cell sorter/analyzer, and ECLIPSE, a multi-color automated bench-top analyzer. These machines, which range in price from $250,000 to $1.4 million, have been optimized for use with iCyt’s latest comprehensive line of flow cytometry reagents.

Current developments in regenerative medicine have brought to the forefront the necessity of cell analysis -- flow cytometry – as an indispensable instrument for research. Sony’s application of its core technologies should enhance and epitomize its venture into the world of life science instrumentation and related technology. Sony and iCyt have, jointly, been accelerating the development of next-gen cell analysis systems, distributing these revolutionary devices to private and public research institutions, pharmaceutical and biotechnology companies and large medical centers around the world.

Sony Corporation, which recorded consolidated annual sales of approximately $87 billion for fiscal year ended March 2011, is uniquely positioned to expand its data processing expertise into the realm of health care.

iCyt, will be able to utilize Sony’s international resources and reputation to deliver innovative solutions to the cell analysis market. Other major players in the field of flow cytometry include BD Biosciences (part of Becton, Dickinson & Co.), Beckman Coulter and Danish company Dako A/S.

McGuireWoods to Host 9th Annual Healthcare & Life Sciences Private Equity & Finance Conference February 22-23

Amber Walsh — Sun, 22 Jan 2012 11:55:07 -0500

We have recently published the final agenda for our upcoming 9th Annual Healthcare & Life Sciences Private Equity & Finance Conference to be held on February 22-23 at The Ritz-Carlton in Chicago. We are again co-hosting with McGladrey and are pleased to have another outstanding group of speakers and panelists from various healthcare and life sciences sectors as well as from the investor, lender and professional services sides. We will feature additional keynotes this year, including Steve Levitt of Freakonomics fame, Senator Evan Bayh III (McGuireWoods LLP) and Harry Kraemer (Madison Dearborn Partners) in addition to keynote roundtable discussions that we think we will be particularly insightful.

The full agenda is available here. Please feel free to contact the authors with any questions.

A Decade of Private Equity Investments

Amber Walsh — Tue, 03 Jan 2012 07:00:25 -0500

Pitchbook has reported on a decade of private equity investments in a four-part series focusing on investments, fundraising, exits and fund returns. The highlights are illuminating of the period from 2001 through 2010, with the unsurprising peak in 2007 and drop thereafter.

Highlights from the investments portion of the report include the following:

The decade saw 17,361 private equity deals totaling $1.73 trillion of invested capital.

Lower middle-market companies accounted for 81% of the decade’s deal flow .

The median private equity investment multiple peaked at 11.5x in 2008.

The average time between investments dropped from six months in 2002 to 2½ months in 2007.

Add-on deals accounted for 46% of PE buyouts by the end of the decade.

Texas saw more PE deals and invested capital than any other state.

Business Products and Services was the top industry for PE activity.

Pitchbook is an independent research firm providing data, news and analysis to the private equity industry, with a variety of online and other products.

Help is Out There for Providers Interested in Accountable Care Organizations

Amber Walsh — Sun, 18 Dec 2011 10:36:35 -0500

We have descrived in prior posts the opportunities available through Accountable Care Organizations. ACOs are intended to provide physicians and medical centers financial incentives to continue offering high-quality medical services to their Medicare patients while keeping costs at an acceptable level through a variety of mechanisms that reward providers for keeping their patient population healthy. It remains to be seen how successful the model will be, and there is much speculation about the most effective long-term structures for ACOs (including the participants to be included in an ACO model).

It is critical that providers considering an ACO understand and adhere to the final Medicare Shared Savings Program regulations released by Centers for Medicare and Medicaid Services (CMS). In the final rule published this November, CMS reconsidered many of its core positions set forth in the proposed regulations issued earlier in March 2011, with the goal of reducing burdens and costs for participating in the Medicare Shared Savings Program.

Several of our McGuireWoods colleagues have jointly authored a series discussing the opportunities and parameters for ACOs. Most recently, the series discussed the final ACO rule changes as they relate to the governance of an ACO. A link to the series is available here.

Urgent Care Group Shot-in-the-Arm for Investors, Patients

Amber Walsh — Mon, 12 Dec 2011 16:18:12 -0500

Urgent Cares of America, a North Carolina-based owner/operator of urgent care facilities, founded in 2001, was acquired by The Comvest Croup in November 2010. The transaction was brokered by Plutus Capital Partners LLC. Three months following that transaction, Urgent Cares of America Holdings, LLC, announced the acquisition of Tri-City Express Care, PLLC, expanding the company’s holdings into the Arizona market.

Urgent Cares of America, now FastMed Urgent Care, launched its new corporate identity in May. CEO John Randazzo, stated “Launching our new brand identity and plans to consistently upgrade our clinics is another important and very tangible step…to build a family of urgent care clinics that is driven by quality, convenient and personal care…”

The Comvest Group is a private investment firm that focuses on providing both equity and debt capabilities to lower middle-market businesses. The firm is comprised of “seasoned, senior-level operating executives at all levels who partner with managers and owners of companies to grow businesses and create long-term values.” Comvest has invested over $2 billion of capital in more than 160 public and private companies since 1988. They recently announced the closing of their fourth private equity fund, Comvest Investment Partners IV (Comvest IV) with capital commitments of over $580 million, surpassing their goal of $550 million.

Plutus is a boutique advisory firm with offices in New York City and Nashville, providing global banking investment services. The company supports clients with investment banking services on capital raises as well as advisory services on mergers and acquisitions, divestitures and licensings. Their main areas of expertise include healthcare, technology, business process outsourcing and financial services.

Urgent care chains have been attractive targets for private equity funds. According to Urgent Care News, “Private equity firms that make purchases of this size usually plan to invest $100 million to more than a billion dollars over the course of five years. Thus, in the next few years, one might expect the emergence of several large chains with hundreds (maybe thousands) of clinics in the USA.”

Other recent transactions in the field of urgent care include: MedExpress, which was owned by private investment firm Excellere Partners, was purchased by global growth equity firms General Atlantic, LLC and Sequoia Capital (September 2010) and Concentra, which was purchased by Humana (November 2010)for $790 million.

One challenge for investments in the urgent care sector is the availability of large platform companies for investment. Many funds seek a platform with at least ten to fifteen locations with positive cash flow. As the urgent care space continues to mature, it is likely that additional funds will snap up new platform investments.

US Supreme Court to Hear PPACA Healthcare Reform Challenge

Amber Walsh — Sun, 20 Nov 2011 23:02:31 -0500

The Supreme Court announced earlier this week that it would rule on challenges to the Patient Protection and Affordable Care Act (PPACA), President Obama’s healthcare reform law. After four Federal Courts of Appeal had reached conflicting conclusions on the constitutionality of all or parts of the law, many experts had expected the Court to hear the case this fall. Others had believed the Court would hold off on hearing the case until after the 2012 election, due to concerns fboth of influencing the election and of “ripeness” of the case.

At the heart of the legal battle is the "individual mandate", which requires all Americans to buy health insurance by 2014 or pay a penalty. The Court could uphold all of PPACA, strike down just the individual insurance mandate or other provisions, invalidate the entire law or even put off a ruling on the mandate until it is fully ripe (ie after the individual mandate has taken effect in 2014).

A group of 26 states had joined to argue that Congress exceeded its powers and that all of the law should be struck down. The states also challenged the expansion of Medicaid on the grounds Congress unconstitutionally forced the expansion on the states by threatening to withhold funds. The Obama administration has argued that Congress could adopt the insurance purchase requirement under its powers in the Constitution to regulate interstate commerce.

Oral arguments should take place in March, and the ruling is expected by June 2012. We will continue to track progress of the case and discuss its impact on various healthcare sectors.

McGuireWoods Announces 9th Annual Healthcare & Life Sciences Private Equity & Finance Conference

McGuireWoods — Fri, 18 Nov 2011 10:30:09 -0500

The healthcare and life science markets are in a period of dramatic change.
Despite this change, successful private equity funds can still execute deals and achieve capital growth by implementing the right strategies in the right markets. Join us at the premier two-day healthcare-focused private equity and finance conference as we continue to explore new ways to successfully close transactions and achieve growth.

Please join McGuireWoods and McGladrey on February 22 and 23 in Chicago for our annual healthcare private equity and finance conference. Speakers will include Steven Levitt, co-author of Freakonomics and Senator Evan Bayh as well as many speakers from leading private equity funds, lenders and healthcare and life science companies. This year’s conference will again include presentations by companies seeking investment or financing.

Register online at www.healthcareprivateequity.com.

For more information, please contact Missy Austin at 312.750.3512 or maustin@mcguirewoods.com. A full agenda will be posted in the coming weeks.

Diagnostic & Monitoring Device Companies Attractive Investment

Geoff Cockrell — Wed, 26 Oct 2011 08:31:10 -0500

Since the beginning of 2011, medical diagnostic and monitoring device companies have been performing in an established and even an exceptional manner. To date, these specialized medical device businesses have shown double-digit EPS growth and organic revenue growth in the middle-to-high-single digits.

Sales from medical tool companies have risen 14%, diagnostics companies 15%; up 5% as compared to the Standard & Poor. The prior year saw the diagnostics/tools sector up nearly 30%. Perhaps the most desirable companies are those that have been in existence for a number of years in such emerging markets as China and India, where they are able to capitalize on the resources of the region.

A most interesting classification is the role of genomic testing in clinical diagnostics. DNA sequencing, a combination of chemistry and engineering is, arguably, the most dynamic segment of the medical device market, as well as the fastest growing.

Of the approximately 300 leading healthcare companies that are actively investing in all types of medical products and services, about 10% are in the areas of diagnostic and monitoring devices, with diagnostics seeing four times more companies than monitoring.

Besides monitoring and diagnostic device companies, other tools, services and software being developed by healthcare companies include therapeutic and surgical devices, pharmaceuticals, drug delivery systems, medical records, hospital/patient/clinic services, biotechnology, elderly/disabled care, laboratory services and medical supply companies.

Companies with rapid growth in the fields of diagnostic and monitoring devices include: Securus Medical Group, which has raised $750,000 of a planned $1.5 million Series A venture funding; Intuity Medical, which has raised Series D funding of $76 million and NanoDetection Technology, which has raised Series A funding of $2.3 million from its lead investor.

Monitoring and diagnostic device companies look to be poised to lead healthcare manufacturing and technology companies into the new year.