The firm in May paid an undisclosed sum for Kepro, a cost-control specialist serving both government and private sector clients. The company is expected to benefit from shifting reimbursement models and changing regulations in an industry that soaks up about a sixth of U.S. GDP.
“There’s a big drive toward cost containment, and it’s driving a lot of change,” Benjamin Edmands, managing partner and co-founder of Consonance Capital Partners, told Buyouts. ”When there’s change, there’s opportunity. We think there are a lot of opportunities for innovative companies with proven business models to continue to grow.”
Consonance Capital Parters, whose popular first fund closed ahead of its $350 million target, finds itself with plenty of company in its move to find deals in the cost-cutting vein.
Rising to the same opportunity, several specialists have sprung up over the years in the lower middle market and middle market, including Altaris Capital Partners, Beecken Petty O’Keefe, DW Healthcare Partners, Enhanced Equity Funds, Lariat Partners, Linden Capital Partners, RoundTable Healthcare Partners, Shore Capital Partners, and Varsity Capital Partners. All told Buyouts has identified at least 15 middle and lower-middle market healthcare firms in the fundraising market in the past year with a total of about $3.2 billion in capital commitments already secured and a collective target of nearly $4 billion.
These and other contenders are moving into a deal landscape inhabited by venerable names in the business such as Audax Group, The Carlyle Group, Warburg Pincus, Welsh Carson Anderson & Stowe, Waud Capital Partners and Water Street Healthcare Partners.
All told, they’re playing in a big universe of deals. With 260 acquisitions by U.S. sponsors since the start of 2013, health care ranks as the fourth most popular of 12 industries tracked by Thomson Reuters. Deals from the sector accounted for about 9 percent of the 2,829 acquisitions between Jan. 1, 2013 and Oct. 15 of this year. (Only five transactions cracked the $500 million mark out of the class of 260, landing the overwhelming bulk of health care buyouts in the middle market.) Disclosed dollar volume for health care deals totaled $12 billion during the period, accounting for 4.5 percent of the total pie of $266.5 billion.
“LPs and GPs view specialization as bringing tangible benefits such as the ability to understand insurance payments and the influence of government and politics,” said John Haggerty, managing principal of LP advisory firm Meketa Investment Group. “It’s a huge industry but you can misstep by not understanding reimbursement risks, for example. With one health care pool, you can get exposure to a diverse set of business types.”
Along with its acquisition of Kepro, efficiency also played a role in Consonance Capital Partners’s move in April to pay an undisclosed sum to recapitalize Enclara Health LLC.
The company is a player in the hospice pharmacy benefits manager (PBM) space, with its eye on taming cost pressures and regulatory requirements. In August, Enclara Health paid an undisclosed sum for ExcelleRx as an add-on to help it become the largest national full-service mail order and PBM supplier of medications and clinical services for the hospice and palliative care industry. The deal was designed to increase operational scale and efficiency to support the hospice provider and patient community, executives said.
Consonance Capital Partners’s Edmands said finding deals remains challenging, but the firm is still able to identify targets.
“We’re paying full fair value, but a lot of our strategy is trying to find companies and sectors that not a lot of people are spending time on, and having a point of view on the company to create value,” he said. “We still feel there’s robust opportunities to create a return, but you have to work hard to find really interesting deals.”
Enhanced Equity Funds traces its roots to 2005 when Welsh Carson veteran Andrew Paul founded the firm. It raised $225 million for its first buyout fund in 2005 and $380 million for its second in 2010.
One of the firm’s Fund I investments is NextCare urgent care clinics, which has been built up with add-on deals. Enhanced Equity Funds also invested in Starus Medical Group, which works with Medicare Advantage plans to help contain rapidly rising costs of health care faced by seniors.
The firm continues to look for companies that help contain costs in the health care system, with an eye on driving improvements in payment systems. Many companies tend to be expensive, however.
“We’re value based, we’re not going to pay 10x or 12x EBITDA for businesses,” said Matthew Thompson, vice president of Enhanced Equity Funds. “Right now we’re seeing high multiples.”
Tim Dugan, managing partner, Chicago-based Water Street Healthcare Partners, said the firm’s sports medicine and rehabilitative orthopedic products platform Breg Inc is a play on the cost-cutting trend in healthcare.
The sponsor has increased Breg Inc’s business to a 10 percent growth rate in revenue and even faster expansion in EBITDA after buying the company in 2012 from Orthofix International for an undisclosed sum. In a major add-on deal for Breg Inc, the firm was able to buy United Orthopedic Group for a “good price” through a series of talks that began about two years ago, Dugan said. Essex Woodlands, a Palo Alto, Calif. based healthcare investor that owned United Orthopedic Group, agreed to retain a stake in the combined company in the deal, which closed on Oct. 15.
“The talk was less about purchase prices and more about the potential of the combined company,” Dugan said. “With the merger, we have a much more complete product offering than each company had on its own and much stronger market position nationally and internationally.”
Sifting For Deals
Welsh Carson continues to see opportunities related to the Affordable Care Act, such as companies that provide technology solutions for health care providers to improve efficiency, quality of care and managing costs. From an investment point of view, the act provides roughly $1 trillion of incremental spending over the next decade for health care services.
Tony de Nicola, co-president, Welsh, Carson, Anderson & Stowe, said the firm invested about $118 million in two follow-on acquisitions to grow scale at its portfolio company, U.S. Anesthesia Partners. It’s also invested a total of $100 million in Springstone, a buy-and-build platform in the behavioral health care space.
“If you believe in the concept that a rising tide lifts all ships, the Affordable Care Act provides an environment where health care providers are going to benefit from having more clients who are able to pay,” he said.
Elizabeth Weatherman, managing director and head of the healthcare group at Warburg Pincus, said the firm in October named three new executives-in-residence, David Kirchhoff, Philip Gioia and Richard Hassett, to help explore investment opportunities in consumer-driven healthcare, biopharmaceuticals and population health—all areas that could either benefit from efficiencies or help people manage their own health and reduce the need to see a doctor.
“Their skill sets fit with what we’re interested in,” she said. Across the sector, Weatherman said interest has picked up among sponsors around applying mobile technology and software to help with patient engagement and patient management as a way to manage health care expenses.
Warburg Pincus continues to weigh investments and growth equity transactions to “build durable growth businesses” and scale them up, she said. The firm competes for deals ranging from start-ups to the lower middle market and up to big transactions such as its $4.5 billion acquisition of Bausch & Lomb in 2007. It sold the company to Valeant Pharmaceuticals for $8.7 billion last year.
Weatherman said the late 2012 acquisition of JHP Pharmaceuticals, a Parsippany, N.J. maker of sterile injectable drugs and less expensive generic products for $195 million illustrates the firm’s focus on identifying strong management teams and deals where the firm has a unique angle on a business. The company was sold to Par Pharmaceutical Companies Inc this year for $490 million.
Warburg Pincus’s 2010 investment in Home Dialysis Plus (HD Plus) fits into the thesis of finding game-changing medical devices that help patients take greater control of their own care and manage costs.
As Warburg Pincus ponders future deals, cost containment and leveraging technical advancements remain two big priorities for health care targets.
“We’re happy to pay full value for something but we do need to see a clear path toward sustainable growth going forward,” Weatherman said. ”We make thesis-driven investments and specialize in identifying attractive niches with strong macros and digging deep into the dynamics of specific subsectors.”
Sidebar: Opportunity to combat Ebola
Tim Dugan, managing partner of Chicago-based Water Street Healthcare Partners, said two of the firm’s portfolio companies could contribute their products and services to help with preventing and addressing the Ebola virus
They are Temptime Corp, which makes and distributes devices to help monitor the temperature of vaccines, and Bound Tree Medical, which distributes equipment and supplies to the emergency medical services market.
Given the amount of time it may take to put a deal together, it could be “difficult to react quickly enough to make a new investment that’s responsive to any demand created by the Ebola outbreak,” he said. But, he added, the disease could prompt more demand for business down the road.
“There may be opportunities for companies that produce or provide services to distribute products,” he said. “Those could be longer-term opportunities.”
– Steve Gelsi
(Correction: Warburg Pincus sold Valeant Pharmaceuticals for $8.7 billion last year. The original version of the article said $8.5 billion.)
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