private equity in urology: becoming a platform
TRANSCRIPT
Confidential | Provident Healthcare Partners & Epstein Becker Green | 1Confidential
The Future of Health Care: Physician Practices and Private Equity Investments
Urology Practices:
The Newest Focus of Private Equity InvestmentOctober 31st , 2017
Confidential | Provident Healthcare Partners & Epstein Becker Green | 2Confidential
2
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Presented by
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Provident and EBG Introduction
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Firm OverviewProvident Healthcare Partners
113Healthcare DealsClosed
38Physician DealsClosed since 2014
12-15Landmark DealsPer Year
22 Deal Professionals
• Investment banking servicesdelivered exclusively tocompanies in the high-growthhealthcare industry
• An established track record asone of the most activehealthcare investment banksin the country
• Has emerged as an industryleading advisor to physiciangroups
• Experienced advisors to servethe complexities of broadshareholder bases and variedshareholder motivationsamong physician groups
• Focus on sell-side mandatesresulting in the best long-termpartnerships
Office LocationDeals Closed – Past 5Years
Puerto Rico
Recently CompletedTransaction
Has been acquired byHas been recapitalized byHas been recapitalized by
SERVICE OFFERING
• Investment bank focused exclusively on merger and acquisition advisory in the healthcare services industry
• The firm provides financial advisory services to a broad range of healthcare organizations including the following
physician specialties:
• Dermatology
• Eye Care
• Urology
• Gastroenterology
• Orthopedics
• Pain Management
• Dental Services
• Behavioral Health
• OB/GYN
• Primary Care/Multispecialty
• Ambulatory Surgery Centers
SELECT RECENT PHYSICIAN PRACTICE TRANSACTIONS
Has been recapitalized by
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Firm OverviewEpstein Becker Green
Epstein Becker Green
Epstein Becker Green was founded in 1973 exclusively as a health law firm
dedicated to the success of the health care industry which remains the firm’s focus
today.
The firm is highly regarded as a legal pioneer in the health care and life
sciences industry and have been nationally influential on health regulatory issues
and business solutions for over four decades.
Epstein Becker Green attorneys have significant experience leading major health
care company mergers, acquisitions, sales and affiliations on behalf of
national health care companies (public and private), private-equity backed health
care portfolio companies, and local and regional health care providers and
companies.
24Landmark Deals PerYear
168Physician Deals ClosedSince 2014
14Offices Across theCountry
250 Attorneys
120 Health Care Attorneys
70Health CareTransactions Attorneys
• Supported by a deep multi-disciplinary team of healthcareregulatory, antitrust, reimbursement,tax, employment, benefits & real estateattorneys to assist in due diligence andall aspects of preparing groups fortransactions and closings.
• Ranked among the top 10 firms in the2017 Modern Healthcare “LargestHealthcare Law Firms” list.
• Ranked in Healthcare Nationwide andin the District of Columbia, New York,and New Jersey in 2017 by ChambersUSA.
Attorney advertising.© 2017 Epstein Becker & Green, P.C. All rights reserved
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Goals of the Presentation
Defining Private Equity
Highlight Major Reasons Why Urology is Now a Focus of PE
Understanding Common Motivations for Pursuing a Transaction
Walk Through Key Elements and Considerations for a Transaction
Review top Health Care Regulatory Issues in Urology Practice Transactions
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Understanding Private Equity
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IncreaseGeographic
Density(De Novo)
ExecuteAcquisition
Strategy
RegionalAdd-on
AcquisitionsExit
Refine InternalInfrastructureand Establish
GrowthObjectives
Strategic Initiatives Leading to Growth
• Private equity refers to the investors and funds that seek to make directequity investments in privately-owned companies. With the capital ofLimited Partners and the expertise and management of General Partners, PEfirms have a record of market-exceeding returns.
• Limited Partners are passive investors expecting a higher return oninvestment than attainable in public markets
• Includes: institutional investors, pension funds, endowment funds,and high net worth individuals
• General Partners are a group of managers that raise money for individualfunds and manage the funds and investments.
• Compensation: Carried interest, a percentage of returns when aninvestment is sold, and management fees, a percentage fee appliedto the total funds invested by the LPs
• Private equity firms in the healthcare industry that invest in provider ormanagement services organization-based businesses view providers as real,tangible assets of a business
• Post-transaction, private equity firms seek to grow a business financially andoperationally, building out infrastructure to provide a foundation for futuregrowth
• PE firms DO NOT want to reduce administrative staff to save costs in thenear-term
• From a clinical perspective, private equity investors hope to maintain asimilar level on clinical autonomy in the business, in order to allow providersto focus on the practice of medicine
Private Equity Overview Common Misconceptions
• Hiring supplementalmanagement (i.e. VP ofBusiness Development)
• Open clinical locations inunderserved geographies
• Utilize PE firm as in-house“acquisition team” to identifyand execute on attractiveadd-ons
• Emulate platform growthprocess with add-onacquisitions in outsidegeographies
• PE firm exits platforminvestment to another PE firmor strategic acquirer
• Investments in clinicaltechnology and back-officeimprovements (EHR,Practice Management,outcomes capabilities)
• Dedicated marketing effortto improve regional brand
• Acquire competitors toincrease market share in thestate
• Build regional hubs that areclinically integrated
• Opportunity to roll equity intonew entity and participate inadditional liquidity events
The Value of a Private Equity Partner
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Private EquityStrategic
AcquirerMerger Health System
Continue
Operations
CashProceeds atTransaction
Close
Autonomy
Long TermEquity
Growth
Risk
Merger & Acquisition Options Traditional Options
Private Equity Versus “Traditional Options”
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Avista Capital Partners
Harvest Partner
OMERS Private Equity
Ophthalmology
Pain Management
Dental
The Spine Center & Sentinal Capital
Katzen Eye Group & Varsity Healthcare Partners
Great Expressions Dental Centers & Audax Group
Private Equity “Roll Up” Successes
Capitol Spine &Pain Centers
(1) Provident served as the exclusive sell--side advisor on all case study platform transactions
ExceldentFamily SmilesDentistry
Willow CreekDental
PhysicianPractice/Private
Equity Group
Add-on Acquisitions Exit Partner
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Why Urology is Now a Focus of PE
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Urology Growth and Transaction Drivers
Debt Markets
ReimbursementMethodology
Healthcare IndustryLandscape
Macroeconomic Growth Factors
As a result of MACRA, MIPS and a number of alternate payment models
changing industry dynamics, the healthcare industry is witnessing
EBITDA multiples as high as they have ever been, attributing to
significantly higher deal flow and investor interest.
As interest rates rise across the spectrum of debt capital markets in the
United States, the ability for private equity firms to obtain the levels of
leverage available today will diminish. Lower debt as a percent of the total
post-transaction capital structure will have a direct inverse impact on
cash at close.
Private Equity Interest
Healthcare Services Private Equity Deal Flow by Quarter
42 44
66
49
36
6454
6961
69 7264 61
9893 96
8677 81
39
0
20
40
60
80
100
120
$0B
$1B
$2B
$3B
$4B
$5B
$6B
$7B
$8B
Capital Invested ($B) # of Deals Closed
2012 2013 2014 2015 2016 2017
Source: PitchBook, Sg2 Health Care Intelligence
Supply and DemandImbalance
While a select number of statewide groups have formed through mergers,
there are very few fully integrated, platform caliber investment
opportunities in the urology sector. Coupled with significant market
fragmentation among urology practices, private equity firms see an
opportunity to embark on a roll-up strategy in the industry.
Heavily FragmentedMarket
A Market Positioned for Growth
0
5,000
10,000
15,000
2016 2020E 2030ESupply Demand
Projected Urologist Shortage
Urologists in a Solo Practice
37%
63%
2006
29%
71%
2012
15%
85%
2015
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Replicate Success in Other Specialties
Beginning with significant investment into the dental space in the late 90’s, private equity groups haveexperienced years of success in multisite, provider based business.
Private equity groups are looking to replicate the successes they experienced in other physician specialties such asdermatology and ophthalmology as urology shares a number of similar traits to those specialties.
SectorInvestment
DatePlatform Practice Private Equity Group
Current PrivateEquity Portfolio
Companies
Dental 1996 35
Pain Management 2008 7
Dermatology 2011 24
Ophthalmology 2014 12
Gastroenterology 2016 1
Urology 2016 1
OB/GYN 2017 * 4
Orthopedics 2017 * 1
* Provident represented the selling shareholders in these transactions
Mature
Infancy
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Transaction Structure and Consideration
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How Private Equity Deals Are Structured
Most Common Private Equity Structure
• Transactions with privateequity groups will be based onthe ADJUSTED EBITDA of thegroup*
• The valuation for a group willbe determined based on themultiples of ‘EBTIDA’ a buyeris willing to pay
• Example: $5million EBITDA ata 8x multiple is a $40 millionvaluation
• The exact multiple a privateequity group is willing to pay isdependent on a number offactors including (but notlimited to):
• Size
• Ancillaries
• Geography
• Growth
• *Adj. EBITDA explained onfollowing slide
• There are two types of privateequity deals: Minority orMajority
• A minority deal is equal to lessthan 50% sale.
• The vast majority of deals willbe a majority sale
• Most commonly, a deal will beanywhere between 60 – 80 %sold equity
• By pursuing a minoritypartner, a practice limits thenumber of PE groups thatwould be interested as mostfunds look to make a majorityinvestment
• There is a valuation premiumfor a majority transaction
• Any physician practicetransaction with a privateequity group will involve rollover equity
• Private equity groups wantphysician shareholders tomaintain a significantownership in the businessmoving forward
• Most commonly anywherefrom 20 – 40 %
• Allows private equity group toensure physicians are tied tothe business
• Allows physicians toparticipate in upside ofbusiness growth in future
• There are no two transactionsexactly alike
• Private equity groups arewilling to get flexible to meetthe needs and goals of theright group
• The exact equity split canreflect the goals of the group
• “Earn Outs” structured in toreward a group’s priorinvestment in growth
• Most deals feature significantcash at close, no claw backs,no contingency clauses, nobenchmarks, etc.
• Physicians maintain control ofdaily clinical decisions
A Multiple of “EBITDA” Minority Vs. Majority “Roll Over Equity” Flexibility
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Purchase Price
• Purchase price is calculated from Adjusted EBITDA and the purchase
multiple, so an increase in Adjusted EBITDA will therefore increase the
purchase price
Increasing Adjusted EBITDA using Add Backs
• Some add backs may result in a decrease in shareholder salary or
discretionary expenses
• However, shareholders will benefit due to the increased value subject to
the purchase multiple
Debt Capacity
• The amount of debt the a PE firm can use is based on a multiple of
Adjusted EBITDA
EBITDA Explained
EBITDA is a proxy for cash flow
• A private equity firm’s offer for total purchase price willtypically be a multiple of Adjusted EBITDA
• Adjusted EBITDA provides a buyer with a normalizedrepresentation of the cash flow by adding back:
• One-time nonrecurring expenses
• Expenses varying from the market rate (salaries, rent,etc.)
• Discretionary, non-business expenses of theshareholders
EBITDA is the earnings of a business before interestexpense, taxes, depreciation and amortization
• Interest is added back due to the assumption that thecompany will pay off any debt in a transaction
• Taxes are added back due to the change in tax structure as aresult of the transaction
• Depreciation and amortization are added back due to the non-cash nature of those expenses Implications of Adjusted EBITDA
Visualization of EBITDA in a Deal ProcessEBITDA Overview
Accounting
Deal Process
Revenue $10 Add Backs to EBITDA
Expenses $9 Normalized compensation $3
Net Income $1 One-time expenses $0.50
EBITDA Calculation: Discretionary expenses $0.20
Interest $0.50 Other Income $0.10
Depreciation and amortization $0.25 Adjusted EBITDA $5.65
Tax $0.10 Purchase Multiple 8x
EBITDA $1.85 Purchase Price $45.2
*All figures in Millions
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Transaction Motivations
• Strengthen leverage for contract negotiations with payors
• Expertise needed to augment acquisitive growth strategy
• By increasing size and scale, the organization can improve
access to care by offering greater sub-specialty expertise
Business Considerations
Access to Capital Resources of a Partnership
• Acquisitions to expand geographic reach & potentially
diversify service lines
• Investments in infrastructure needed to grow:
• Information technology/billing
• Hiring supplemental management
• Working capital for de novo growth
• Capital investments and debt will no longer be personallyguaranteed by shareholders
• Monetization of equity during a strong market reducesimpact of potentially significant future valuation changes
• Operational and financial business risks due touncontrollable outside influences will be diversified awayfrom shareholders
Pursuing a partnership (whether that be a private equity firm, strategic consolidator, payor, or health system) can provide a urology practice with
opportunities to drive growth by utilizing access to capital, key industry relationships, and expertise in creating efficient operations. These groups
look to align with physician shareholders in order to develop strategies that collectively benefit the newly capitalized organization, and physicians
are heavily involved in creating a shared vision for the organization’s future.
Shareholder Considerations
Risk Mitigation Liquidity Events
• Large upfront cash payment to shareholders
• In a PE transaction, shareholders can retain a percentage of
equity going forward, thus participating in the accelerated
growth of the company
• The potential exists for a second, third, and even fourth
liquidity event for those shareholders with longer career
horizons
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“In-Network” withMajor Payors
Investment inGrowth
Private equity firms look to make initial investments into a specific industry through a “platform” investment.There are a limited number of groups in urology that would qualify as a platform, providing limited opportunitiesfor investors interested in the specialty. We have identified the following factors that can set groups apart fromtheir peers and positively influence valuation from a qualitative perspective.
Ideal Candidate for Private Equity
StrongManagement Team
Strong Reputationin RespectiveCommunity
Diverse Payor Mix
Ancillary Services(E.g., Associated
ASC)
Strong InternalInfrastructure
(Billing, Finance,IT, HR, etc.)
Patient-CentricFocus & PositiveOutcomes Data
Confidential | Provident Healthcare Partners & Epstein Becker Green | 20Confidential
Choosing the Right Partner
Factors to Consider
Private equity firmshave varied approaches;some are very hands-on,while others are morepassive
Investment Approach &Strategy
When considering atransaction, philosophicfit is imperative andshould be one of themain decision factors
Cultural Fit & Personality
Groups that haveexperience with clinic-based healthcare sectorscan bring more value tothe investment
Related Portfolio CompanyExperience
Past investment returnsin healthcare varydepending on the fundand are key tomaximizing rolloverequity
Average Return onInvestment
What value can theybring in terms ofoperating partners orpotential executives?
Relationships to Leverage
Have they hadconversations with otherpotential add-onacquisitions in theurology sector?
Add-on Acquisition Pipeline
Other portfoliocompany executives canspeak to theirexperiences with theinvestor
Conversation withReferences
Do they haverelationships withpayors or hospitals thatcan be leveraged?
Cross-Selling Opportunities
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Major Considerations For Shareholders
Newer Partners & Mid-Career Late Career All Partners
RolloverEquity
• Retain higher equity percentage
• Participate in multiple transactions
• Retain less equity
• Second liquidity event
• Continue as an owner
• Secondary liquidity events
Cash atClosing
• Retire any medical school debt
• Address other investments on hold
• Diversify wealth beforeretirement
• Take “chips” off the table
• Multiple years of ordinaryincome at closing
Post-ClosingCompensation
• Productivity-based• Structured based on desired
role post-closing• Market-rate
LifestyleBenefits
• Focus on practicing medicine
• Less stress and risk as an owner
• Business development orCMO role if desired
• Potential board seat
• Focus on patient care, notgovernance
• Use an investor’s capitalinstead of personal guarantees
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Top Health Care Regulatory Issues inUrology Practice Transactions
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Overview
1. Due Diligence Process.
2. Common Regulatory Issues in Urology PracticeTransactions.
3. Preparing for Private Equity Transactions: Regulatory andClean-Up.
4. Questions.
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Overview of Diligence Process.
What is “due diligence” and why is it important to buyers?
Diligence requests ask for certain information and documents, such as:
• Financial records (e.g., P/L statements, billing and claims A/R, etc.).
• Organizational documents (e.g., certificates of incorporation, by-laws,shareholder or LLC member agreements).
• Malpractice insurance coverage and claims.
• Material contracts (e.g., insurance or managed care contracts, employmentagreements, etc.,).
How do buyers analyze the produced due diligence materials?
• Successor liability.
• Emphasis on compliance issues in health care billing and referral “arrangements.”
• Impact on “sustainability” of revenues and practice reputation.
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Common Regulatory Issues in Urology Transactions.
Coding and Billing
Stark Law and Self-Referral Prohibitions
Compensation, Investment and other Financial Arrangements
Arrangements with Hospitals and ASCs
Compliance Program – Existence & Implementation
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Common Billing and Coding Problems
Documentation and Medical Necessity.
• E.g., unnecessary flourescene in situ hybridization (FISH) tests
Utilization Review and Comparison to Industry Norms.
• Are procedures over-used as compared to industry norms?
Upcoding.
• E.g., Evaluation or management (“E/M”) coding
Physician Extenders
• Appropriate credentials (e.g., licensing, etc.)
• Appropriate supervision by physician
• Incident-to-billing
Coding and Billing.
Common Regulatory Issues in Urology Transactions.
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Common Regulatory Issues in Urology Transactions.
Federal Stark Law and State Self-Referral Prohibitions.
• Physicians may not make referrals for DHS to entities with which the physician (oran immediate family member) has a financial interest.
• Bills may not be submitted by an entity if a referral violates the Stark Law.
• UNLESS an exception applies.
Certain exceptions are particularly available to a “Group Practice.”
• e.g., In-office ancillary services (“IOAS”) and physician services exceptions.
• Productivity bonuses should be based on personally performed services.
“Group Practice” Definition – must meet multiple requirements.
Payments from hospitals (and other referral recipients) require an exception.
Stark Law and Self-Referral Prohibitions.
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Common Regulatory Issues in Urology Transactions.
Common Stark Law Diligence Concerns
• Does the urology practice rely on being a “group practice?”
oE.g., for IOAS Exception
• Does the practice meet the qualifications to be a “group practice?”
• Does it meet the requirements for the exception?
• If not, does another exception protect the arrangement(s)?
• Potential liabilities?
oCriminal, civil or monetary?
oSanctions or suspensions?
Stark Law and Self-Referral Prohibitions.
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How are shareholders, employees and mid-level providers paid?
Examining relationships with vendors, independent contractors,management or billing companies, hospitals and other referral recipients andsources.
• In writing, signed, fair market value & commercially reasonable.
Due Diligence Concerns
• “Tainted Business”?
• Liabilities?
• Sustainability of revenues, profits and growth projections.
Compensation, Investment and other Financial Arrangements.
Common Regulatory Issues in Urology Transactions.
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Examples of arrangements that warrant regulatory scrutiny:
• Medical directorship (and other professional service arrangements).
• Rental of space and equipment (both ways).
• The provision of services for free or below “fair market value” (both ways).
Other diligence concerns with hospital-urology group relationships.
• Restrictive covenants in contracts?
• Change of control/assignment prohibitions?
Arrangements with Hospitals and ASCs.
Common Regulatory Issues in Urology Transactions.
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Compliance Program – Existence and Implementation
Has the urology group adopted and fully implemented a corporatecompliance program?
• Review of policies, procedures and compliance/risk management programs.
• Is the compliance program functional?
Past areas of concern and actions taken to remedy previous deficiencies.
HIPAA privacy and security compliance?
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Preparing for Private Equity Transactions:Regulatory and Clean-Up.
Avoid issues during negotiations with investors by conducting pre-transactionassessments and “clean-up.”
Detect and correct potential compliance and regulatory risks.
• Monitoring and auditing with regulatory risk areas in mind.
• Implement systems to ensure corrective action is working.
Do not conceal potential compliance risks and violations in diligence!
• NDA/Confidentiality Agreement/Common Interest Agreement.
• Depending on the risk, the parties may address these problems withindemnification language and escrows and holdbacks.
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Questions?
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