The Health Care Investor

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

Kristian Werling — 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.

Contract Research Organizations (CROs) Go Private; Another Segment of Opportunity for Investors?

Amber Walsh — Wed, 19 Oct 2011 12:14:00 -0500

PPD/Pharmaceutical Product Development, an international contract research firm that has just been named to the 2011 InformationWeek 500, is being taken private by affiliates of the Carlyle Group and Hellman & Friedman in a cash deal valued at $3.9 billion. The two PE firms have reportedly paid $33.25/share for PPD, a 29.6% premium over its September 30^th closing price. Subject to shareholder approval and regulatory regulations, the merger is expected to become final by the end of the year. Companies like PPD provide contract research services for all phases of clinical trials in the pharmaceutical, biotechnology and medical device industries, specializing in all aspects of data and biostatistics management.

The Burrill Report states that “the deal is a turn-around for private equity buyouts, which have been slowed down in the third quarter [2011] due to market volatility and a tough financing environment”.

PPD, according to a company press release, was recognized for its “…PatientView®, an innovative online portal linking clinical trial participants with biopharmaceutical companies, physicians and health care resources to enhance patient connectivity and improve patient retention in clinical trials”.

PPD, with offices in 44 countries and a roster of over 11,000 professionals, has clients and partners in pharmaceutical, biotechnology and medical device companies, as well as academic and government agencies. The company has recently announced its expanded clinical microbiology laboratory, further strengthening its testing services in infectious diseases, one of the leading arenas for clinical researchers and developers.

With the FDA Amendments Act of 2007, and its requirement for mandatory mega trials of new drug protocols and Risk Evaluation & Mitigation Strategies (REMS), the importance of national and international CROs are seeing increased valuation.

Many industry analysts believe that the contract research industry looks to be a positive investment possibility as international economic conditions appear to be recovering, particularly in emerging markets. Morningstar analyst Lauren Migliore reports, “The emergence of the strategic partnership model, which has seen the world’s largest drugmakers pair up with leading CROs…has helped fuel this return to growth in the industry.”

The PPD deal is the biggest PE buyout of a contract research company in the last three years. Others include Nautic Partners’ acquisition of Omnicare Clinical Research, Thomas Lee Partners’ buyout of InVentive Health, Avista Capital Partners and Ontario Teachers’ Pension Plan’s acquisition of INC Research and the Warburg Pincus buyout of ReSearch Pharmaceutical Services.

Other opportunities surrounding the growing research industry may also emerge, including high-tech business information systems for the medical research field.

How Effective is Your Healthcare Compliance Plan? Guidance for Healthcare Providers and Investors

Amber Walsh — Wed, 28 Sep 2011 07:21:16 -0500

We have discussed in prior posts the unique regulatory enforcement climate that providers and investors currently find themselves. It is critical that anyone contemplating investment in a healthcare business not only understand the regulatory risks and pressures of that industry but carefully review the target company’s compliance protocols for dealing with those challenges in a proactive way. And the Patient Protection and Affordable Care Act (aka PPACA, ACA or healthcare reform) makes having an appropriately structured compliance plan even more essential than ever.

Under PPACA, certain healthcare providers, as a condition to participation in Medicare, must have in place a compliance plan that meets the requirements to be laid out by the Secretary of HHS. The PPACA lists several detailed requirements for the compliance plans of skilled nursing facilities (SNFs), likely due to the industry’s historical scrutiny and highly publicized investigations from the SNF industry in the past few years. SNFs must implement these compliance plans pursuant to the requirements of Section 6102 of the PPACA within 36 months following passage of the PPACA, and regulations must be issued by the Secretary of HHS for SNFs with additional guidelines no later than two years following passage of the PPACA on March 23, 2010.

The Secretary of HHS is also mandated with determining which additional provider types must have compliance plans in place and what those plans must entail. HHS has informally indicated that it would likely roll out the compliance plan requirements on an industry-by-industry basis. Although HHS has been laden down with rule-making obligations resulting from PPACA in the past 18 months, the agency has indicated that the requirements for most industries will closely follow the key components of the DHHS Office of Inspector General model compliance plan published for healthcare providers in 1997, which has subsequently been updated. These core elements for a compliance program are as follows:

i. Compliance standards and procedures must be adopted and followed.

ii. Specific individuals with authority and sufficient resources must be assigned to oversee compliance.

iii. The organization must exercise due care to ensure that the above authority is not delegated to an individual with a propensity to engage in PPACA criminal, civil and administrative violations.

iv. The organization must take steps to educate its employees and agents of the compliance program.

v. The organization must take reasonable steps to achieve compliance with its standards.

vi. The standards and procedures must be consistently enforced.

vii. If an offense is detected, the organization must respond appropriately and prevent similar offenses.

viii. The organization must periodically reassess the compliance programs and make changes necessary to reflect changes within the organization.

When reviewing a company’s compliance plan, it is essential that the provider and investor not only ensure that there is a plan in place but also that the plan is well-tailored for that company’s key risk management needs. To be truly effective the plan must be specific to that company’s industry and risks, with associated useful training and response tools such that the plan can really be the guide for a full compliance program. Both providers and investors should ask, how is the plan truly used and made a part of daily operations? Understanding a company’s compliance culture can help everyone assess the risks it may be taking with investment in the company and what challenges, if any, may be on the horizon for the company.

McGuireWoods Announces 3rd Annual Medical Device, Durable Medical Equipment & Diagnostics Conference

Kristian Werling — Tue, 20 Sep 2011 22:39:33 -0500

Join us for our annual conference addressing key legal and business issues facing medical device, durable medical equipment and diagnostics manufacturers and distributors. Readers of thehealthcareinvestor.com can get a 50% discount on the attendance fee by using the discount code: MDC50 when registering.

The conference is a full-day event that features speakers from the Center for Medicare and Medicaid Services, Medtronic, Strkyer, Hollister, Baird Capital Partners, Smith & Nephew, Hospira, Baxter and many other leading medical device manufacturers and distributors.

Please join us! See the full agenda by clicking here. Questions? Email Krist Werling at kwerling@mcguirewoods.com.

Skilled Nursing Facilities Feel Medicare/Medicaid Slash

Geoff Cockrell — Mon, 19 Sep 2011 23:09:22 -0500

It appears that the glory days of investing in skilled nursing facilities (SNF) are over. In a report from Avalere Health, profits for these facilities are predicted to flatline by 2014, only three short years from now. As a result of the 11.1% reduction in Medicare reimbursement rates, estimates show that the skilled-care nursing industry will experience a reduction in overall margins, declining from 4.4% to 0.4%.

More onerous, the report, financed by the Alliance for Quality Nursing Home Care (AQNHC), reveals that payment reduction as well as group therapy changes in FY 2012 will reduce margins from 3.8% to 0.

A new regulation from The Centers for Medicare & Medicaid Services (CMS) will trim payments for this health-care sector by $79 billion over the next decade. These cuts come at a time when SNFs are already reeling from deep reimbursement cuts for Medicaid beneficiaries, with states besieged with huge budgetary deficits.

According to Avalere CEO, Dan Mendelson, “In the long term, there is concurrence among policymakers that SNFs hold the key to better patient management and cost reduction, but in the short term, these pressures on Medicare and Medicaid rates will be exceedingly difficult to manage.”

Alan G. Rosenbloom, president of AQNHC, concurred, “By adding substantial changes in payment methodology for therapy services, CMS also crossed the line from over-correction [of past inadvertent provider overpayments] into real Medicare cuts.”

To the health-care investor, it is of vital importance to be vigilant as to the outcome of this fall’s Congress’ Joint Select Committee on Deficit Reduction, the so-called ‘Super Committee’, which has been given the arduous task of uncovering $1.2 billion in cuts to the federal budget over the next ten years. Additional Medicare cuts would, undoubtedly, be calamitous to nursing home patients, deleterious for caregiver employment and deleterious to SNFs, which provide high quality patient care in a reasonably-priced setting.

Four Things Your Lender is Watching When You Finance an Acquisition of a Healthcare Company

Geoff Cockrell — Fri, 09 Sep 2011 11:56:15 -0500

In an acquisition of a healthcare company, the buyer has a host of issues to monitor and track during due diligence, negotiation and documentation of the transaction. The lender will be working through the same issues but will often have a slightly different focus that a buyer should understand.

What is your lender concerned about?

1. Do you understand the regulatory risks? It is critical that the lender is comfortable that the buyer understands and is prepared to deal with regulatory issues in the transaction. Nothing will give your lender pause like regulatory issues that are surfaced by the lender.

2. Are there issues in control over collateral? Healthcare companies often have structures dictated by regulatory necessity. For example, in many states, the corporate practice of medicine regulations requires that physician practice management businesses be owned by a licensed physician. The operative company in this type of business often has only a management agreement with a clinic or physician practice group. From the bank’s perspective, their borrower may not own the hard collateral. A buyer should be prepared to address these issues before the bank starts asking questions.

3. Is state regulatory risk spread over multiple jurisdictions? Many healthcare companies have state-specific regulatory risk. Much like when customer concentration raises the risk of something going materially wrong in the business, a business operating in only one or two states has increased concentrated state regulatory risk.

4. Does the business have strong relationships (and contracts) with referring physicians? While the structure may not give a lender collateral in these relationships, the lender often views these relationships as the most relevant business assets. Good relationships -- and enforceable non-competes where appropriate -- go a long way toward assuring the lender that these relationships will continue.

Buyers need to understand their lender’s concerns and be prepared to address issues before they arise.

HHS Announces Bundled Payment Initiative

Amber Walsh — Tue, 06 Sep 2011 06:19:08 -0500

On August 23rd, HHS anounced a new initiative to help improve care for patients while they are in the hospital and after they are discharged. Doctors, hospitals, and other health care providers can now apply to participate in a new program known as the Bundled Payments for Care Improvement initiative (Bundled Payments Initiative).

This new effort was authorized by the Affordable Care Act (aka PPACA, aka the Healthcare Reform Law) and has been launched by the new Center for Medicare and Medicaid Innovation (Innovation Center). As part of the HHS announcement, HHS released a “request for applications” (RFA). The RFA outlines four models, three of which involve a retrospective bundled payment and one which would pay providers prospectively:

“Applicants for these models would also decide whether to define the episode of care as the acute care hospital stay only (Model 1), the acute care hospital stay plus post-acute care associated with the stay (Model 2), or just the post-acute care, beginning with the initiation of post-acute care services after discharge from an acute inpatient stay (Model 3). Under the fourth model, CMS would make a single, prospective bundled payment that would encompass all services furnished during an inpatient stay by the hospital, physicians and other practitioners.”

Letters of intent for model 1 are due Sept. 22, and final applications must be received by Oct. 21. Letters of intent for models 2-4 must be received by Nov. 4 and final applications are due by March 15, 2012.

Federal Agency Healthcare Fraud Prevention Efforts Continue Dramatic Increase

Amber Walsh — Thu, 01 Sep 2011 07:00:16 -0500

In recent months we have seen a drastic increase in the number and size of federal healthcare fraud investigations and dollar recoveries. We've seen a renewed commitment to anti-fraud enforcement efforts in the OIG Work Plan. We've seen CMS begin to using predictive modeling technology just since July 1st to combat Medicare fraud on a national basis, technology similar to that used by credit card companies, which helps identify potentially fraudulent Medicare claims and stop them before they are paid.

According to a USA Today report, the number of federal healthcare fraud prosecutions from the first eight months of 2011 indicates that prosecutions may reach an increase of 85% over last year due to these robust fraud-fighting efforts. The report details the research of Transactional Records Access Clearinghouse, a non-partisan group, showing that there have been 903 prosecutions so far this year — a 24% increase compared to fiscal year 2010. In the past five years, Transactional Records Access Clearinghouse research shows that prosecutions have grown by 71%.

Department of Justice officials agree those numbers are accurate and say the increase is partially due to some particularly significant actions, such as the largest take-down to date, which brought in 111 physicians, nurses and executives accused of fraudulently billing $225 million to Medicare. According to the DOJ, convictions are also up significantly in 2011, with 23 trial convictions for Medicare fraud in all of 2010 and already 24 convictions in the first eight months of 2011.

The message to healthcare providers and investors is clear. This administration is serious about fraud prevention. Both providers and potential investors must closely scrutinize providers' internal compliance efforts, billing histories and patterns and a variety of other operational and legal aspects of the provider to better assess the provider's short term and long term outlook in this enforcement environment.

Four Key Strategies For Navigating Regulatory Issues at the Letter of Intent Stage When Selling a Healthcare Company

Geoff Cockrell — Tue, 23 Aug 2011 15:08:20 -0500

It is a rare healthcare company that has no regulatory risk exposure in at least a few material areas. As sellers of healthcare companies prepare them for sale, they will need to navigate first the letter of intent (LOI) stage with potential buyers and ultimately the more detailed definitive agreements.

The key differences between negotiating deal points at the LOI stage versus the same negotiation at the definitive agreement stage are leverage and information. At the LOI stage, the buyer is often still trying to get the deal (especially in an auction environment) and is operating with limited visibility into the potential magnitude of issues. The seller often knows more about potential issues but believes the realistic exposure (vs. worst-case scenario exposure) is relatively small. Once the LOI is signed, the leverage in the hands of the buyer often increases as the closing of the transaction becomes more certain usually a key desire of the seller and arguments that the buyer should absorb more risk usually devolve into re-pricing negotiations which the seller wants to avoid.

What should a seller do or not do at the LOI stage?

1. Do not try to minimize sell-side due diligence. While commissioning some level of sell-side legal due diligence will increase the initial expense of a transaction, it can avoid costlier pitfalls later in terms of late pricing renegotiations, risk to ultimate closing and delay. It is difficult for the seller’s legal team to shield or shade these issues in the dark. David Stienes, a Principal at LLR Partners, noted that “Dealing with prospective sellers who have performed preliminary work around the key regulatory issues and are willing to have open discussions in advance of an LOI is very comforting to us as buyers and allows greater certainty around our offers. From the sellers’ perspective, it can also be a valuable tool in assessing the knowledge and ultimate viability of us as prospective buyers. If interested parties are unwilling and/or unable to discuss these issues upfront, it could be a sign that they do not have a full grasp of the matters and will be educating themselves throughout the process. This will greatly impact both certainty and speed to close.”

2. Do not hide the ball. While slowly parsing information at the early stage is the best pathway to getting an LOI signed, it is the worst way to limit the cost of such issues in terms of pricing, escrows and indemnity exposure.

3. Negotiate indemnity cap/survival terms for known issues. This is often difficult prior to substantial due diligence; however, sellers can often pressure buyers to accept narrower limits at the LOI stage than later in the transaction process.

4. Force heavier pre-LOI diligence on known issues. It is unlikely that a buyer will do full legal diligence on issues at the LOI stage, but a request that buyers more fully review known issues can lead to more advantageous LOI treatment or at least swing some of the post-LOI leverage to the seller.

None of these strategies can fully insulate a seller from the impact of known regulatory issues on the sale process; but they can minimize the pain, expense and delay that these issues often cause.

McGuireWoods to Co-Host Current Trends in Healthcare M&A Breakfast Seminar in St. Louis

Amber Walsh — Sun, 21 Aug 2011 21:57:45 -0500

Current Trends in Healthcare M&A

Tuesday, September 20, 2011

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

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

Who Should Attend

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

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

Conducting Due Diligence on Medical Device Manufacturers: Changes in the 510(k) Process

Kristian Werling — Thu, 18 Aug 2011 21:24:53 -0500

FDA is clearing up confusion about what types of changes to existing medical devices require new 510(k) submissions by updating its 1997 guidance document, "Deciding When to Submit a 510(k) for a Change to an Existing Device." The 2011 Version has been published with the intent of clarifying the requirements in an effort to improve predictability, consistency, and transparency of the premarket review program. When conducting diligence on medical device manufacturers, investors should be aware of historical and planned changes to existing devices. These changes may need to follow the new requirements. Click here to read more. Contact Melissa Gilmore, McGuireWoods' FDA counsel at mgilmore@mcguirewoods.com.

Investment Opportunities in ACOs

Amber Walsh — Thu, 18 Aug 2011 17:50:14 -0500

Accountable Care Organizations (ACOs) have become a catchphrase within today’s healthcare industry. As we have discussed in prior posts, ACOs are intended to be a vehicle for providing physicians and medical centers financial incentives to continue offering high-quality medical services to their Medicare patients while keeping costs at an acceptable level. Currently, Medicare habitually reimburses physicians and hospitals more when patients are on the receiving end of more tests and additional procedures, increasing costs. By emphasizing preventative care and monitoring patients with chronic illnesses, the ACO approach is designed such that doctors and their institutions would receive higher reimbursements for keeping their patient population healthy.

Under the new law, which goes into effect January 2012, an individual ACO would manage the health care needs of at least 5,000 Medicare beneficiaries for a minimum of three years. ACOs will, ideally, systematize such components of patient care as hospitals, primary care and specialty physicians, as well as both in-home and institutional long-term health care, ensuring optimal patient care and physician financial benefits. Medical centers, health care practices and insurers across the country are looking to form ACOs that will include privately-insured patients as well as Medicare recipients.

Multispecialty groups have begun establishing ACOs throughout the country, with several initial efforts appearing in California. Large medical centers are buying up practice groups for a variety of reasons, a consolidation trend that now also has the additional benefit to some systems of formation of ACOs that would employ a majority of their providers. With more access to the necessary start-up capital, these institutions will, conceivably, have at least a monetary advantage over many smaller private practice groups. Some of the largest health care insurance providers in the country, such as Cigna, Humana and United Health Care, have also announced plans to form ACOs; these companies already collect a plethora of information on patients, vital for coordinating and reporting healthcare.

Start-up and first year cash costs will typically come from an ACO’s providers, with a CMS estimate of $1.76 million. As with any venture, particularly innovative ones, careful contractual delineation of the parties’ relative rights and responsibilities is paramount for success. For example, if funding obtained via financing, loan documents should be clear as to the extent to which ACO participants are obligated to guarantee such debt (e.g. dollar and time limits on the guarantees relative to the entire ACO investment, etc.). At the conclusion of each year, an ACO will either receive payment from CMS or, conversely, remit funds to the agency. These profits/losses will then be allocated to the participants. Investors may opt to place finances in escrow or offer bank letters of credit to ensure the availability of funds potentially owing back to CMS should the ACO fail to hit performance targets. Normally, an ACO would issue profits and losses based on a formula that incentivizes providers to meet the organization’s objectives, details of which would be included in negotiations, another aspect of ACO contracts critical in determining investors’ rights as well as risks.

McGuireWoods Announces 3rd Annual Medical Device, DME and Diagnostics Conference

Kristian Werling — Thu, 18 Aug 2011 07:55:23 -0500

Join us on November 2 in Deerfield, Illinois for an interactive conference designed for all stakeholders from medical device, durable medical equipment and diagnostic manufacturers and distributors. Speakers will be joining us from Baxter, Sg2, Medtronic, Stryker and more.

Topics Covered Will Include:

Structuring successful MedTech partnerships
Physician payment sunshine laws
Underlying changes in healthcare reimbursement and their effects on medical device companies
Preparing for venture funding and use of incubators to fuel start-up growth
New developments in regulation of mobile health devices
Many more topics for growth stage and established device, DME and diagnostics companies!

Please watch the blog for more agenda information and registration details. Please contact lsams@mcguirewoods.com with any questions.