Becker's Hospital Review

Save the date! Becker's Hospital Review Annual Meeting – May 7-9, 2015 – Chicago 12 investment purposes, to include several broad cat- egories and dozens of niches. Healthcare includes provider-based companies, i.e., entities that actu- ally serve patients (such as Nashville, Tenn.-based hospital operator Hospital Corporation of Amer- ica); healthcare lite, i.e., revenue cycle manage- ment companies, or organizations that sell into or provide services to providers (such as Healthcare Property Investors, a healthcare real estate invest- ment trust); and life sciences, i.e., medical device and pharmaceutical companies (such as Johnson & Johnson). 4. Urgent care. There is a tremendous increase in interest in investing in urgent care. This includes investment in firms such as CVS' Minute Clinic (one of the first broadly rolled out urgent care companies) to standalone emergency depart- ments to simple urgent care units. There was an almost 20 percent growth in existing clinics in the past four years, with the total number of urgent care clinics exceeding 9,000, according to a Febru- ary 2014 McGuireWoods report. The expansion is expected to continue; IBIS World estimates proj- ect the sector will produce more than $18 billion in revenues in 2017 at more than 12,000 clinics. Private equity investment has driven the expan- sion in recent years. For instance, in 2013, Next- Care Holdings Inc., backed by Enhanced Capital Partners, purchased 11 PrimaCare Medical Cen- ters in the Dallas/Fort Worth region. 5. Specialized urgent care. Along with growth in urgent care comes the evolution of orthopedic- specific urgent care. This involves the development of urgent care models centered on particular spe- cialties. These are often created to feed an ortho- pedic practice, as well as for profit. For instance, OrthoNOW has established itself as a franchise business of specialized orthopedic urgent care cen- ters. The company opened its first location in Mi- ami in 2010 and became a franchise program last year with a network of urgent care centers. 6. Pain management. There has been a tre- mendous increase in investment interest in the pain management sector during the last several years. This is driven by the core pain business and revenues from ancillary services — such as lab testing and ambulatory surgery centers — di- vided by pain management physicians. Activity in this space since 2010 includes Chicago Growth Partners' acquisition of Advanced Pain Manage- ment, Sentinel Capital Partner's investment in National Spine & Pain Centers and the 2012 for- mation of Prospira PainCare, which was created with the backing of three private equity firms and has acquired pain centers across the country. 7. Dental practice management. There has also been great growth in dental practice management during the last couple decades. In the past decade alone, more than 25 private equity firms have invested significantly in dental practice manage- ment, and some large companies in the sector have seen annual revenue of more than $100 mil- lion. This has evolved to the point where there are at least 10 large-scale dental practice manage- ment companies. This is an area that serves either commercial or private payer interest, as well some companies that are heavily focused on Medicaid. There has been an increase in scrutiny in the den- tal practice management area. In 2013, a Senate committee investigation into DPM practices in the Medicaid program concluded that some prac- tices should be excluded from the program. 8. Dermatology. The dermatology arena has also experienced significant growth. Again, like pain management providers, dermatologists offer pro- fessional services, and there are opportunities for specific situations in dermatology where people make outsize profits. Some examples of recent dermatology deals include Audax Group's 2102 ac- quisition of Advanced Dermatology and Cosmetic Surgery and Candescent Partners' 2013 acquisition of Dermatology Associates of Tyler(Texas). 9. Lab businesses. Over the last few years, the OIG has increased scrutiny on lab businesses due to expansion in this area. For example the growth rate of lab business billed to Medicare is three times that of other businesses. The lab business, both on a large scale and small scale, remains a huge area for investment, coinciding with a fo- cus on preventive care and coordinated efforts to treat patients with chronic disease. For instance, Levine Leichtman Capital Partners has invested $110 million in Genova Diagnostics Inc., a spe- cialty clinical laboratory with a testing approach tailored to personalized treatment and prevention of chronic disease. 10. For-profit hospital operators. There contin- ues to be great interest in for-profit hospital com- panies. There are huge, publicly traded for-profit companies that have enjoyed large growth in the last couple years, such as HCA and Franklin, Tenn.-based Community Health Systems, as well as smaller private equity hospitals that continue to aim for growth, such as Capella Healthcare, based in Brentwood, Tenn., and others. In one example of why for-profit hospitals attract inves- tors, HCA's share prices skyrocketed in 2013 (up 53 percent over the year), and the hospital opera- tor's main investors — such as Bain Capital and KKR & Co. L.P. — sold additional stakes in the public company for billions. Private equity firms have also profited from recent mega-mergers in the for-profit space. For instance, Blackstone Group LP — Nashville, Tenn.-based Vanguard Health Systems' largest shareholder — collected more than $600 million from Vanguard's sale to Tenet Healthcare Corp. in Dallas. 11. Medical devices. The medical device arena continues to focus around the five to 10 largest companies. However, there are hundreds of small and mid-sized device startups and small compa- nies that are either trying to be entrepreneurial middle men or direct providers of devices. Medi- cal device sales are expected to grow 4.9 percent annually through 2016 as a result of technological innovation and the aging population. Although the industry faces some challenges (such as re- duced reimbursement, the Patient Protection and Affordable Care Act's 2.3 percent medical device tax and the FDA regulatory process), sectors such as orthopedics, telehealth and mobile health have still experienced growth. For example, Wall Street Health Partners has invested $50 million in RTI Biologics' purchase of Pioneer Surgical Technol- ogy, Inc. — a prominent provider of orthopedic and other biologic implants. 12. Care and case management. With healthcare delivery changing, and the number of managed care entities growing, a new kind of care man- agement company has evolved. The companies provide case management for dual eligible pop- ulations and to various kinds of Medicaid and commercial covered populations. Managed care entities and plans have drawn interest from inves- tors. For instance, in 2011, global growth private equity firm TA Associates completed an invest- ment in Senior Whole Health, which provides managed care plans for patients who are eligible for both Medicare and Medicaid. 13. ACO back office services. With the growing number of ACOs in the U.S., a great deal of com- panies — small, mid-sized and large — have devel- oped around providing services to ACOs. Valence Health in Chicago — a provider of value-based care solutions — helps hospitals, health systems and physicians switch to value-based care models by providing software, consulting, data aggregation and other services. In June, Valence was chosen by Centegra Health & Wellness Network — an as- sociation of primary care physicians and special- ists — to support its clinically integrated network. There are other companies that provide more fo- cused services to IPAs, physician-hospital organi- zations and ACOs. For example, Optum, a division of UnitedHealthcare, focuses on information and technology enabled health services. As the healthcare industry transitions to value- based care, private equity firms have invested in companies that provide services to ACOs. For instance, earlier this year, the private equity firm Great Point Partners helped bankroll the merger of Orange Health Solutions and MZI HealthCare. Orange Health, founded by former UnitedHealth Group executives, providers services to hospitals and healthcare organizations to help establish value-based care models and ACOs. MZI helps providers, health plans, ACOs and other health- care entities with data analytics, predictive model- ing, medical care management and health benefit management technologies. 14. Anesthesia practice management. During the last few years, there has been an evolution in the number of anesthesia practice manage- ment companies in the country. These companies serve both major hospital systems and a number of smaller companies that provide services on a regional basis or to physician-driven ambulatory surgery centers. Private equity groups, such as Madison Dearborn, Blackstone Group and Goldman Sachs Private Capital Investing Group, have invested signifi- cantly in anesthesia practices. 20 Healthcare Investment Niches and 3 Things to Know: The Evolution of Healthcare as an Investment Area (continued from cover)

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