Since our last post, a number of notable IPOs have occurred that have import to the healthcare sector. Last week saw the first mainstream medical device IPO in the U.S. in over 18 months, with AGA Medical raising nearly $200MM in proceeds on October 20 in a deal priced at $14.50 per share, below both the original range of $19-21 and the revised range of $15-16. The Welsh Carson-backed company generated $170MM of revenues and $46.5MM of EBITDA last year. Despite the adverse pricing relative to expectations, Welsh Carson was able to sell nearly half of all shares offered as part of the deal. The stock has traded flat-to-down since the IPO, closing at $13.80 last evening.
This week has seen two additional IPOs in healthcare; VS Holdings, parent of the Vitamin Shoppe, and Addus Healthcare, both of which priced last evening.
VS Holdings priced at $17, above the indicated range of $14-$16, raising $162MM. VS is the first IPO in the “bricks and mortar” retailing space in two years, having generated over $600MM of revenues in 2008. Blackstone and Irving Place Capital (formerly Bear Stearns Merchant Banking) were the sponsors involved, and the shares sold by existing investors in the IPO represented 15% of the deal.
Addus came in below the indicated range of $11-13 per share, pricing at $10. The EOS-backed company raised approximately $50MM in a deal that saw an increase in the number of shares offered to 5.4MM from 5.0MM. Addus is a multi-state home care services company that generated $236MM in revenues and adjusted EBITDA of just over $17MM. EOS sold no shares in the IPO.
Reflecting on IPOs in healthcare this year, only the Mead Johnson spin off by Bristol-Myers Squibb is trading more than 15% above its IPO price. The average 2009 healthcare IPO is currently trading at 2% above its IPO price. The other commonality between these companies is that each one was a venture- or private equity-backed company. So what does all this mean? The IPO window is open, but the criteria are very tight, and if past performance is an indicator, all but the largest should not expect to see huge price spikes after the IPO, at least in the near term.
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While the U.S. IPO “window” has been effectively shut for much of the last year, recent events suggest that financial sponsor-backed companies seeking a public listing via traditional IPO may be re-opening, including companies in the healthcare sector.
After a long hiatus, we’ve seen a handful of notable financial-backed IPOs, including DigitalGlobe, OpenTable, and SolarWinds. This week, Avago Technologies, backed by KKR and Silver Lake Partners, raised $650 million in the largest sponsor-backed Initial Public Offering of the year.
On the healthcare front, Medidata effected an IPO this year, marking the first venture-backed IPO in the healthcare industry in over a year. In addition, EOS Partners filed an S-1 for its portfolio company, Addus HomeCare Corporation, indicating their intent to seek an IPO for the home care company. Addus is seeking to sell up to $69 million in stock in such a transaction. 2008 revenues for Addus were approximately $236 million, with adjusted EBITDA of approximately $17 million, according to public filings.
While a great deal of uncertainty still exists with regard to health care reform and the economy as a whole, the ability for such companies to raise equity capital via public markets suggests that investor enthusiasm is beginning to outweigh such concerns. We continue to monitor these events in the context of the impact on our clients, and remain hopeful that, despite likely changes to our healthcare system, this sector holds enormous promise for investors.
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One of the most frequent issues raised by clients and investors these days is “what is going to happen to the healthcare system?” More importantly, what strategic and tactical decisions should be made as a result? While a number of important elements remain to be determined, the primary issues include the following:
Some of these objectives appear to be at odds with one another, and others represent issues that many have previously tackled with limited success. Fundamentally, the herculean task in front of us is how to reduce cost and expand coverage simultaneously, while determining the appropriate level of government involvement. Certainly the projected costs of potential reform, currently pegged at $1.0 to $1.5 trillion or more over ten years, should give even our most craven politicians pause, despite the current government spending environment.
One way to address this apparent dichotomy is contained in the Administration’s reform outline, whereby hospitals may be expected to “own” the patient throughout the episode of care, including the 30 days after discharge. Another hopeful sign is the reliance on broader adoption of technology and information systems to improve communication and identify and reduce errors in care.
While many unknowns will likely play out over the coming months, one bedrock assumption of our healthcare system should continue to be challenged: just because our healthcare system is the most expensive, does not make it the best. Is it possible that, instead of ours being the Cadillac of healthcare systems, in fact the better analogy is the Hummer – big, expensive, inefficient and inappropriate for the world of today?
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A number of recent market signals may be indicating that the economic downturn may be reaching – or have already reached – a bottom. The U.S. stock markets have rallied significantly during the past six weeks, new unemployment figures are declining from their March highs, and many public companies – including those in the financial sector – are reporting better than expected results. However, we’ve seen “false bottoms” earlier in this downturn, only to be surprised by further declines in economic activity. The current situation in the auto industry continues to put pressure on both the economy and consumer sentiment, and worries continue about job losses. Even the healthcare industry has been adversely affected, with job losses in its ranks and significant enrollment declines announced today by leading HMOs as a result of layoffs.
With Gov. Sebelius on track to be confirmed as HHS Secretary, we expect greater clarity on proposed changes to the healthcare system, which has been reiterated by the Obama administration as a high priority. Rahm Emanuel, Obama’s chief of staff, recently stated, “We set the goals. The goals are getting health care costs under control…what we have to do is squeeze out all the basic costs in the system, before we talk about any other type of revenue. There’s a lot that has to be changed. Unfortunately, I know a little about health care reform from my family. The fact is, we had all the wrong incentives in the health care system. And if you change the incentives toward medical I.T., which we put in place, the resources to start basically having a way to control costs there; if we change the way the doctors are paid — so, rather than fee for service, we pay for outcomes; and reward people who take care of themselves and get their health together.”
What does this mean for companies and investors focused on healthcare? Lower cost alternatives that offer better outcomes for a given dollar spent will have a natural advantage. The “downspike” in valuations of many facility-based healthcare companies in early April appears to be a direct result of this direction in policy. Those who can deliver better, more cost-efficient care – and survive and prosper under the expected new regime – will perform well, and can expect to have many greater financial and strategic alternatives available to them.
Please feel free to contact us if you have any questions or we can explore ways for us to bring our capabilities to bear for you or your clients.
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In 1992, then Governor Bill Clinton ran on a promise that he would bring universal health care to America. The core agenda of the Clinton healthcare plan was to enforce a mandate on all private employers to provide their employees with healthcare coverage.
The plan also required each US Citizen or resident alien to enroll in some form of healthcare coverage similar to how drivers are required to maintain drivers insurance. The plan made perfect sense on the surface. But as the media, Republics, Democrats, and the general public began to dissect the plan there were flaws – hard to believe. A general consensus was reached that the universal plan was filled with so much bureaucracy and red tape that it wouldn’t ever get off the ground. At that time, people were clearly weary of big government overstepping its bounds.
Over 17 years have now passed, and its business as usual in Washington. The usual ideas and suspects have resurfaced in the current administration. On March 2, President Obama announced Nancy Ann DeParle will head the White House health reform committee. Ms. DeParle, the newly appointed “health czar” served in the Clinton administration, from 1993 to 2000 as Associate Director of the White House Office of Management and Budget and from 1997 to 2000 as Administrator of the Health Care Financing Administration (now the Centers for Medicare and Medicaid Services). It is also worth noting that Ms. DeParle has sat on over eight for profit corporate boards including: Cerner Corporation, Boston Scientific, Davita, Legacy Health Partners, Triad Hospitals, Medco Health Solutions, Guidant Corp, and Specialty Labs Inc.
It is now 2009 and it seems that the only thing that has changed is public opinion or lack thereof.
Is the administration trying to move as quickly as it can to take advantage of America’s growing interdependence on a welfare state? Act quickly and an exuberant amount of tax dollars can be appropriated to fund a system that may be too large to be regulated and too lackadaisical on oversight.
So who does universal healthcare really help, the consumer or the politician?
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On Monday March 2, President Obama announced Governor of Kansas Kathleen Sebelius as his nomination for secretary of health and human services and Nancy Ann DeParle to head the White House health reform committee. Ms. DeParle, the newly appointed “health czar” previously served in the Clinton Administration.
- 1993 to 2000, Associate Director of the White House Office of Management and Budget
- 1997 to 2000, Administrator of the Health Care Financing Administration (now the Centers for Medicare and Medicaid Services).
It is also worth noting that Ms. DeParle has sat on over eight for profit corporate boards including Cerner Corporation, Boston Scientific, Davita, Legacy Health Partners, Triad Hospitals, Medco Health Solutions, Guidant Corp, and Specialty Labs Inc.
Not since the Clinton Administration has the White House been so adamant about implementing government mandates that may include enforcing all private employers to provide their employees with healthcare coverage and requiring each U.S. Citizen or resident alien to enroll in some form of healthcare coverage similar to how drivers are required to maintain driver’s insurance.
It is uncertain if such an overhaul can occur in these pressing times. However, one thing is certain – whether universal healthcare succeeds or not, the government is on the brink of allocating large amounts of dollars to provide some form of health insurance to a number of the 48 million Americans currently living without it. This spells opportunity for companies involved in the healthcare sector. Strategic positioning and changes within healthcare centric companies to control growth will allow them to profit from mandates which will filter the previously uninsured into the system. Positioning should be assessed on an individual basis and can take several forms including but not limited to: expanding geographically, acquiring a broader spectrum of business divisions, merging with strategics.
If you are a business owner or investor please feel free to contact us if you have any questions or would like to explore ways for us to bring our capabilities to bear for you or your clients.
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In a surprise announcement yesterday – as President Obama had reaffirmed his support only 24 hours prior — former Sen. Tom Daschle withdrew his name from consideration for nomination to the position of Secretary of Health and Human Services (HHS). Widely believed to be a strong choice for the position, Daschle’s announcement sets back the presidential agenda to reform health care, as unlike many of the other appointments, Daschle was an early favorite for this slot. He was also expected to hold a second role in the administration as “health care czar.”
While this action alleviates some near-term political pressure on the new administration, it does raise concerns about the timing of expected reform. Effectively starting from scratch, Obama will need to move quickly to find Daschle’s replacement, of which there are many qualified candidates. Howard Dean, former governor of Vermont and former Chairman of the DNC, is also a medical doctor. Bill Bradley, former Senator and Presidential candidate, has the stature in Congress and a centrist approach that could appeal to a broader political spectrum. John Kitzhaber, former governor of Oregon, has also been mentioned as a dark horse candidate. However, none of them seem to be as well suited for the kind of change anticipated as Daschle.
The direction and magnitude of such reform is unlikely to be altered significantly, however. The anticipated first step in this reform is passage of the SCHIP expansion, which is expected today by the House, followed shortly by the President’s signing into law.
In December we asked, how does this affect our markets? In our view, the answer is still the same, but the only additional question is timing and degree (relative to what was expected with a Daschle confirmation), as the change set out is broad and deep, and requires a strong advocate. Will the new nominee be up to the task? Time will tell.
Please feel free to contact us if you have any questions or we can explore ways for us to bring our capabilities to bear for you or your clients.
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In addition to one of the most devastating financial markets in our generation, a greater uncertainty has been added to the equation: health care reform.
Health care currently comprises the largest segment of U.S. GDP, and continues to outpace inflation. The growth in health care expense impacts consumers, private enterprise and state, local and federal governments. In New York, which spends twice the national average on medicare, New York Times December 10, 2008, and across the country, the Medicaid budget threatens to overwhelm all other state budgetary needs. The present value Federal “off balance sheet” liabilities associated with present and future commitments related to Social Security, Medicare and Medical have been estimated at over $100 trillion (yes, that’s trillion), the vast majority of which is associated with non-Social Security liabilities. Something must be done.
The last Federal attempt to significantly reform health care met with defeat in 1993, due largely to strong resistance from the business community. This time around, many pundits believe that business supports a solution that will help alleviate some of the financial pressures – borne both by businesses and employees – associated with the current health care insurance system. President-elect Obama campaigned on, among other things, a reform of health care that would reduce this growth, provide increased coverage to the currently uninsured, and alleviate many of the issues associated with pre-existing conditions and the cost of individual health insurance. With the nomination of former Senator Tom Daschle to the post of Secretary of Health and Human Services, we expect many of these reforms to be pushed aggressively in the next legislative session.
How does this affect our markets? Uncertainty has an impact on both valuation and degree of interest, but many of our clients have business models that are expected to be largely unaffected by – or enhanced by – any potential changes in the health insurance system. In addition, many expect these changes to be incremental rather than drastic, at least in the near term. That being said, it is helpful to have thought through these issues before engaging in a financing or strategic discussion, and critical to have an outside advisor to provide guidance on threats, positioning and optimizing the opportunity.
Please feel free to contact us if you have any questions or we can explore ways for us to bring our capabilities to bear for you or your clients.
Related Links:
Congressional Budget’s Office:
A 125-Year Picture of the Federal Government’s Share of the Economy, 1950 to 2075
USA Today: Taxpayers on the hook for $59 trillion
Richard W. Fisher: Storms on the Horizon
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As we are experiencing one of the greatest financial upheavals in our generation, the most frequent question I get these days is “how is the financial crisis affecting your business?”
Although the degree of volatility that we’ve witnessed is unprecedented in my experience, we have actually seen an increase in business due to recent events. The downturn in credit and equity markets increased incentives for well capitalized players to explore opportunities with fundamentally attractive companies that been swept up in recent events.
Healthcare continues to consume the largest portion of any sector of U.S. GDP. Growth rates in healthcare are expected to continue to outpace inflation as well as overall growth. While there is clearly some uncertainty with regard to how political events and the pace of government spending will affect this growth, such uncertainty is more than offset by significant declines in valuations across the spectrum. In addition, many segments of healthcare are comprised of highly fragmented markets that are ripe for consolidation.
As well-capitalized strategic players and financial investors seek attractive opportunities to invest resources, the healthcare industry presents highly attractive fundamentals. The healthcare industry is driven by long-term fundamentals, including an aging population, the desire to provide adequate healthcare across the population, continued innovation in devices and pharmaceuticals, and a historical under-investment in healthcare IT relative to other sectors of the economy. As a critical expense, healthcare is largely unaffected during economic downturns.
Epsilon Securities continues to work on a number of transactions in the health care sector, and financing continues to be available on reasonable terms for compelling transactions. While the environment has required a greater level of creativity and flexibility, sources of capital and strategic parties continue to express a strong interest in health care, particularly given the perception that current prices present an attractive buying opportunity.
Please feel free to contact us if you have any questions or we can explore ways for us to bring our capabilities to bear for you or your clients.
Categories: investment
Tagged: credit, economics, equity, finance, healthcare, industry, investment, market
