Perspectives On The Role Of Private Investment In The Complex Consumer Markets

Transcription

1 Perspectives On The Role Of Private Investment In The Complex Consumer Markets The 2017 OPEN MINDS Technology & Informatics Institute Wednesday, November 8, :45am 11:00am Ken Carr, Senior Associate, OPEN MINDS #OMTechnology Jonathan G. Morphett, Managing Director, Head of Investment Banking, Avondale Partners Todd Rudsenske, Managing Director, Cain Brothers York Street, Gettysburg, Pennsylvania Phone: info@openminds.com All Rights Reserved.

2 Agenda I. Key Factors Driving Value in the Complex Consumer Market II. III. Perspectives On What Private Investors See in the Complex Consumer Market Jonathan G. Morphett, Managing Director, Head of investment Banking, Avondale Partner, LLC Todd Rudsenske, Managing Director, Cain Brothers Questions & Discussion All Rights Reserved.

3 Key Factors Driving Value in the Complex Consumer Market

4 Drivers Of Health Care Capital Financing Engaging Consumers Through Technology Population Health Management Data, Exchange & Analytics Industry Consolidation (Mergers & Acquisitions) Move To Value-Based Reimbursement Quality Outcomes & Risk All Rights Reserved.

5 Financing Options For Non-Profits Health care finance specialists who provide capital to organizations through accounts receivable purchase funding and/or asset-based loans. Angel Investors, venture capitalists, and Boutique investment banks are all sources of investment funds for opportunities that will provide a sizable return for the investor. Benefit corporations are a new option that may appeal to non-profits. Small business loans are a government-guaranteed source of capital (for those who have a tolerance for paperwork and bureaucracy). Lines of credit are sources of capital, typically from banks, that can be tapped at the borrower s discretion. Bond financing for 501(c)(3) non-profits. Grants, both corporate and government, are another source of capital for non-profit organizations All Rights Reserved.

6 Private Investment In Health Care Is Growing 1. Organizational profitability 2. Specialties services in demand by payers and other providers 3. Service lines currently in high demand in the health care sector 1. For-Profit Hospitals 2. Healthcare IT & EHRs 3. Laboratory Services 4. Medical Devices 5. Behavioral Health 6. Urgent Care 7. Dental 8. Ambulatory Services 9. Dermatology 10. Care & Case Management All Rights Reserved.

7 Mental Health & Wellness Tech Annual Global Financing History Mental health and wellness tech equity funding = Total of deals since 2013 across All Rights Reserved.

8 Value Of U.S. Mergers & Acquisitions 700 Value of M&A In US HealthCare and Life Sciences (In Billions) All Rights Reserved.

9 Perspectives on What Private Investors See in the Complex Consumer Market What does the private investor market look like? Why would someone want to invest in behavioral health, substance abuse and services other complex consumers? How do I need to prepare, or what competencies do I need to begin working with private investor? All Rights Reserved.

10 Jonathan G. Morphett, Managing Director, Head of investment Banking, Avondale Partner, LLC

11 November 8, 2017

12 Avondale Partners Overview Independent investment banking and wealth management firm Headquartered in Nashville Investment banking group provides M&A and financing advice primarily to healthcare companies Behavioral healthcare has been a long-term focus of our firm More than 200 transactions and assignments completed, totaling approximately $40 billion in value Advisory Services M&A Sellside M&A Buyside Fairness Opinions Independent Board Advice Joint Ventures Private Capital Financing Advice Private Equity Mezzanine Debt and Structured Equity Debt Advisory and Placement Capital Structure Advice Corporate Divestitures/Carve-Outs Avondale Partners 12

13 Avondale Overview Illustrative Behavioral Health Transactions A Majority Interest Has Been Acquired by A Majority Interest Has Been Acquired by Equity Private Placement Has Been Acquired by A Portfolio Company of Exclusive Financial Advisor to Beacon Specialized Living Services Exclusive Financial Advisor to Veritas Collaborative, LLC Exclusive Financial Advisor to SelfRefind Exclusive Financial Advisor to Defran Systems $86,250,000 Project Cornerstone Initial Public Offering Co-Manager Advisor to a behavioral healthcare SaaS platform Debt Placement Exclusive Financial Advisor to Origins Recovery of Texas LLC Avondale Partners 13

14 Key Industry Observations Significant increase in M&A and financing activity in the behavioral healthcare sector since 2010 Driving factors include: Federal and state legislation Consolidation opportunities given the fragmented nature of the space Increasing awareness and acknowledgement of impact of behavioral health conditions Substance use disorder trends, especially opioid addiction Relative attractiveness vs. other healthcare sectors Activity has been broadly spread across behavioral healthcare sectors Inpatient psychiatric Addiction treatment Outpatient mental health clinics and home & community-based services I/DD Eating disorders Autism Activity has occurred across both for-profit and not-for-profit sectors Avondale Partners 14

15 # of transactions Trends in Behavioral Healthcare M&A Trends U.S. Behavioral Healthcare Acquisitions by Buyer Type YTD through Sep. Strategic Acquiror Private Equity / Private Equity Backed Acquiror Source: Irving Levin Avondale Partners 15

16 # of transactions Trends in Behavioral Healthcare Private Placement Trends U.S. Behavioral Healthcare Private Placements by Buyer Type YTD through Sep. 1 Venture Capital Growth Capital REIT Includes debt and equity Source: Capital IQ Avondale Partners 16

17 Real Estate Investment Trusts (REITs) Opportunity to Monetize Real Estate While activity remains muted, Real Estate Investment Trusts (REITs) have begun to make opportunistic real estate investments in the behavioral health sector These investments are typically structured as sale-leaseback transactions, whereby the REIT purchases the real estate and then leases it back to the operator This can be an attractive way for behavioral health operators to monetize their real estate ownership while maintaining control of the operating business Recent examples MedEquities Realty Trust s acquisition of four behavioral health and substance abuse treatment facilities from AAC Holdings for $25 million (8/6/17) Care Capital Properties acquisition of six behavioral health hospitals from Aurora Behavioral Health for $380 million (4/10/17) Avondale Partners 17

18 Joint Ventures An Opportunity to Partner with Scale Players We are beginning to see an increased number of behavioral health joint ventures between for-profit and not-for-profit entities Benefits Infusion of new capital and/or other resources Facilitate service line expansion Potential to reduce costs Recent example Centene and Mercy Health of Arkansas have formed Arkansas Total Care, which will manage a Medicaid special needs population including those with high behavioral health needs and individuals with intellectual and/or developmental disabilities (10/25/17) Avondale Partners 18

19 The Capital Raising Process Potential Sources of Capital Types of investors Debt Growth Equity Real Estate Monetization Banks, specialty lenders, private equity, family offices, hedge funds Private equity, family offices Real Estate Investment Trusts (REITs), family offices Full Sale Strategic acquirors, private equity, family offices Advantages No dilution of equity ownership interest Helps fund and/or accelerate growth strategy. Investor may bring additional value No dilution of equity ownership interest. Helps fund and/or accelerate growth strategy. Retain control of operations Opportunity to fully monetize ownership Disadvantages Higher interest expense and lower priority claim in event of bankruptcy Dilution of equity ownership interest. Shared governance Higher rent expense reduces future profitability. Loss of control regarding expansion of facilities Relinquishment of control Avondale Partners 19

20 The Capital Raising Process, Cont d What Kinds of Attributes are Potential Investors Looking For? Strategic Value Differentiated business model Sufficient scale to constitute a platform Management team Growth Potential Size of market Organic growth opportunities service offerings, geographies, etc. Potential acquisition opportunities Current Operations Clinical quality Sales and marketing Technology platform Financials Legal and compliance Avondale Partners 20

21 The Capital Raising Process, Cont d Examples of Attractive Solutions Address care access, quality, and cost for chronic populations Expertise in value-based or atrisk reimbursement Technology or tech-enabled services Integrated care models Avondale Partners 21

22 The Capital Raising Process, Cont d Selected Hot-button Issues with Potential Investors In-House Labs Lab profitability relative to overall company profitability Frequency of testing Bundling of residential and lab payments Payor Mix Significant out-of-network reimbursement Risk of payment cuts, particularly for those businesses operating in a singlepayor environment Ability to transition to value-based reimbursement Quality and Compliance Quality and compliance processes Evolution to outcomes definition and measurement Avondale Partners 22

23 The Capital Raising Process, Cont d Process Timeline The capital raising process represents a significant commitment of time and resources Organization & Pre-marketing Solicit Investors Due Diligence & Final Bids Structure, Negotiate & Close (~6-8 weeks) (~4-6 weeks) (~4 weeks) (~6-8 weeks) Avondale Partners 23

24 Todd Rudsenske, Managing Director, Cain Brothers

25 Behavioral Health Industry Update November 2017

26 Disclaimer Confidential This document is for discussion purposes only and does not constitute advice of any kind, including tax, accounting, legal or regulatory advice, and Cain Brothers & Company, LLC ( Cain Brothers ) is not and does not hold itself out to be an advisor as to tax, accounting, legal or regulatory matters. We recommend that you seek independent third party legal, regulatory, accounting and tax advice regarding the contents of this document. The matters discussed herein are subject to our review and assessment from a legal, compliance, accounting policy and risk perspective, as appropriate, following our discussion with you. This document was prepared on a confidential basis solely for discussion between you and Cain Brothers and not with a view toward public disclosure. This document, and any oral information provided in connection herewith, shall be treated as strictly confidential and may not be reproduced, distributed or disclosed, in whole or in part, except with our prior written consent. Cain Brothers assumes no obligation to update or otherwise revise these materials. No representation or warranty, express or implied, is made as to the accuracy or completeness of the information contained herein and nothing contained herein is, or shall be relied upon as, a representation or warranty, whether as to the past or the future. Cain Brothers and our affiliates and our and their respective officers, employees and agents expressly disclaim any and all liability which may be based on this document and any errors therein or omissions therefrom. This document does not constitute an offer or solicitation to sell or purchase any securities and is not a commitment by Cain Brothers or any of its affiliates to provide or arrange any financing for any transaction or to purchase any security or act as an agent or advisor or in any other capacity in connection therewith. This document does not constitute a recommendation to pursue, and is not intended to provide the sole basis for evaluating, a particular transaction, and you retain full responsibility for the decision to pursue any specific transaction discussed herein or otherwise. 26

27 Industry Observations

28 Industry Observations Trends in the Behavioral Health Sector We are pleased to provide our viewpoints regarding the significant trends in the Behavioral Health Sector that are positively driving investor interest Fragmented and Consolidating Industry Positive Legislation Initiatives Greater Coverage Via Advocacy Media Raising Public Awareness to All Time Highs Demand Exceeds Supply Accelerating Movement Towards De-Institutionalized Care 28

29 Industry Observations Significant and Growing Market: Mental disorders are the most expensive medical conditions in the United States, costing $201 billion per year (1) These disorders also place a substantial indirect financial burden on society, with the Social Security Administration estimating the economic impact of loss of productivity, crime, criminal justice and medical costs unrelated to treatment to be around $300 billion per year (2) As a result of recent legislative trends such as the Mental Health Parity Act an increasing number of both public and private payers cover mental health treatment, increasing access to care and driving demand for treatment services It is estimated that the economic benefits of expanded diagnosis and treatment of depression has a ROI of $7 for every $1 invested (3) Top 10 Costliest Medical Conditions (2013) (1) ($ in billions) Mental Disorders Heart Conditions Trauma Cancer Pulmonary Conditions Osteoarthritis Normal Birth Diabetes Kidney Disease Hypertension $201 $0 $50 $100 $150 $200 $250 Key Industry Growth Catalysts Legislative initiatives expand and reinforce insurance coverage Evidenced-based outcomes reports and cost effectiveness studies support investment in clinical treatment Broader levels of treatment availability increase awareness and motivate individuals to seek help (1) Charles Roehrig, Health Affairs 2016 (2) Substance Abuse and Mental Health Services Administration and Office of Applied Studies (3) National Association of State Mental Health Program Directors. Increased advocacy and media coverage broaden acceptance and increase individuals propensity to seek treatment Increased prevalence of opioidbase painkillers and other addictive medications causing a substance abuse epidemic Human rights activists pushing for community-based care for individuals with disabilities 29

30 100% 75% 50% 25% 0% Industry Observations Significant Unmet Need for Inpatient Psychiatric Care 18.5% of Americans aged 18 or older suffer from diagnosable mental disorders and ~4.0% suffer from a serious mental illness (1) Deinstitutionalization trends and Medicaid IMD Exclusion have sharply reduced the number of state run psychiatric hospitals > Community Mental Health Act (1963) incentivized states to move psychiatric patients to community-based treatment centers by providing federal funding for community-based mental health centers > IMD Exclusion (1965) prohibits use of federal Medicaid financing for care provided to mental health patients between years of age at mental health facilities with 16+ beds; CMS issued a rule in April 2016 softening this exclusion to permit Medicaid plans to pay for short-term (15-day max.) inpatient treatment Significant supply / demand imbalance exists for inpatient psychiatric hospitals national shortage of nearly 100,000 psychiatric beds representing a compelling opportunity for providers and investors to penetrate new markets and bring local care to patient populations > Thirteen states closed 25% or more of their total state hospital beds from (2) > In 2012, the U.S. provided only 26% of the minimum number of public psychiatric beds deemed necessary for adequate psychiatric services (3) > Geographically diverse patient populations relative to constrained supply of psychiatric hospitals creates critical patient access challenges State Mental Health Agency Expenditures (4) (% of total expenditures) Community Mental Health State Mental Hospital - Inpatient 74% 69% 63% 59% 58% 49% 38% 39% 33% 48% 29% 23% Number of State Psychiatric Hospitals & Patients (5) (patients in thousands) Hospitals Patients (1) SAMHSA Results from the 2013 National Survey on Drug Use and Health: Mental Health Findings 2014 (2) No Room at the Inn, Treatment Advocacy Center (3) The Shortage of Public Hospital Beds, Treatment Advocacy Center (4) National Association of State Mental Health Program Directors (5) The Vital Role of Psychiatric Hospitals, National Association of State Mental Health Program Directors. 0 30

31 Industry Observations Substance Abuse: National Opioid Epidemic is Fueling Market Growth Substance abuse in the U.S. is growing at an alarming rate creating a large addressable market for treatment providers Addiction is a chronic disease that affects 23 million people (1) > 4.1 million people seek treatment for addiction annually (1) > $600 billion annual societal cost if other economic impacts such as missed work time, incarceration, etc. are included (2) Drug overdose is now the leading cause of accidental death in the U.S. (3) > 1,005 people die and another 6,748 are treated in emergency departments every day as a result of drug overdose or for the misuse or abuse of drugs (4) The substance abuse treatment industry is a highly fragmented industry ripe for consolidation > Over 16,700 treatment clinics with only two large public players (AAC and ACHC) (5) Nonmedical use of prescription opioids more than doubled among adults from 2002 to 2013 > Nearly 10 million Americans, or 4.1% of the adult population, used opioid medications without a prescription or not as prescribed in 2013 up from 1.8% of the adult population in 2002; abuse of prescription opioids frequently lead to dangerous heroin addictions (6) Illicit Drug Use in the Past Month Among Individuals 12 and Older (1) (% of respondents using) 21.2% 21.5% 21.4% 21.3% 21.5% 22.0% 22.3% 23.2% 20.2% 20.3% 19.4% 20.1% 19.8% 19.7% 19.6% Growth in Annual Opioid Related Deaths (3) (# of deaths, in thousands) CAGR: 8.2% % 11.2% 10.6% 9.9% 9.8% 9.5% 9.3% 10.0% 10.1% 10.1% 9.5% 8.8% 9.4% 8.8% 7.9% 5.8% 5.6% 5.5% 5.8% 6.1% 5.8% 5.9% 6.3% 6.6% 6.3% 7.0% 7.3% 8.3% 8.2% 8.9% to to (1) 2014 and 2016 National survey on Drug Use and Health (2) National institute on Drug Abuse (3) Centers for Disease Control and Prevention (4) National Comorbidity Survey (5) IBISWorld (6) NIH 2016 Report. 31

32 Industry Observations Eating Disorders: A Nascent Opportunity with a Lack of Quality Providers Eating disorders are among the most deadly of mental health disorders and have traditionally not received the same level of investor and provider interest About 5 million Americans per year and 30 million over their lifetime suffer from eating disorders (1) > Eating disorders are the most fatal type of mental illness in the U.S., with an average mortality rate of ~ % (2) The total market for intensive eating disorder care, including inpatient, residential, partial hospitalization and intensive outpatient care, approaches $3.4 billion annually; has the potential to expand substantially as only ~95,000 individuals, or 1.9% of those afflicted, currently receive treatment in an intensive care setting (1) > The Mental Health Parity Act and state-specific legislation seek to further reinforce coverage for EDs and other mental health challenges, while the Affordable Care Act has broadened insurance and coverage rates for young adults by allowing them to remain on their parents plans until age 26, making treatment more accessible to these populations (1) > However, there is still a severe lack of treatment options with only ~1,600 inpatient/residential beds and ~6,900 intensive outpatient/partial hospitalization slots available currently (1) Current Eating Disorder Market Size (1) ($ in millions) Large Expansion Opportunity: Substantial Number of Sufferers Do Not Currently Receive Care (1) IOP $522 RTC $443 $3.4 billion Inpatient $1,745 Only 1.9% of those afflicted currently receive treatment in an intensive care setting 5,000,000 PHP $775 95,000 Total Number of Individuals with an Eating Disorder that Receive Care in an Intensive Care Setting (1) Parthenon Group Analysis (2) UCSD Eating Disorder Research and Treatment Program. Note: Market size calculations excludes non-intensive outpatient market. Intensive care setting includes inpatient, residential (RTC), partial hospitalization (PHP) and intensive outpatient (IOP). Total Number of Individuals With an Eating Disorder per Year 32

33 Industry Observations Autism Spectrum Disorder (ASD): An Extreme Rise in Prevalence and Increased Funding ASD is the fastest growing developmental disorder and is costing families and tax payers billions per year According to the CDC, roughly one in 68 children have an autism spectrum disorder in, a 121% increase since 2000 Lifetime expenses related to autism amount to more than $2.4 million per individual diagnosed (1) > Cost largely driven by support for residential care, special education, wrap around supports and therapies and reduction in employment prospects > Tax payer funded public programs such as Medicaid provide the majority of the funding for care, estimated to be over $236 billion per year in total in 2015 and to increase 5% annually to $431 billion in 2025 (2) > To date, 46 states have passed insurance reform redefining and increasing coverage for autism-focused programs, allowing more children to access care (2) It is estimated that over half of individuals with autism have above average intellectual ability and that with early intervention and specialized education, they can be effectively transitioned into the workforce > According to the Economist, a 2013 study in Washington found that early coaching programs and therapy paid for itself within eight years, by reducing the need for extra help in schools, including day care programs (3) Prevalence of ASD in Children (2) (autism prevalence in U.S. children) Increased Coverage for Care: 46 States Have Passed Autism Insurance Reform Laws (2) (# of states that have passed autism insurance reform laws) Increasing ASD Expenditures (2) ($ in billions) 1/125 1/88 1/ CAGR: 6% $431 1/ $ Projected (1) JAMA Pediatrics (2) Autism Speaks (3) The Economist Beautiful minds, wasted (2015). Note: ASD expenditures incorporate non-medical expenses. 33

34 Industry Observations Intellectual & Developmental Disabilities (I/DD): Multiple Trends Driving Increased Demand Legislative efforts (Parity, ACA) and demographic shifts (aging care givers) are causing a substantial increase in demand for community-based residential services and other tangential supports The are ~5 million individuals with intellectual or developmental disabilities receiving care from a third-party provider and this market is expected to continue to grow due to a number of industry trends (1) > Advocacy and parity laws leading to de-institutionalization of care to lower cost community settings > Aging caregiver population pushing individuals who were formerly treated at home into third-party providers > Increasing prevalence of autism driving demand The I/DD care market is also highly fragmented, with the majority of providers being small and regionally isolated > Two largest providers comprise of <5% of the total market (2) Highly Fragmented Market (% of market share) Industry Growth Profile by Treatment Setting (persons in thousands) 2.8%2.0% Others 6 Persons or Fewer CAGR: 6% % ResCare The Mentor Network person settings 7-15 person settings 6 or fewer setting (1) State of the States in Developmental Disabilities (2013 & 2015), (2) public company filings. 34

35 Industry Observations I/DD: De-Institutionalization Means Less Expensive Care and Higher Quality of Life There continues to be a national shift towards smaller, non-institutional, community-based group settings > Parity laws and advocacy have led to state and federal funding for state institutions has steadily declined each year with more funding being shifted towards smaller group setting community services > Public spending for non-institutional community services has been increasing each year since the 1980s The total number of individuals in six person or fewer settings increasing significantly from an estimated 33,000 persons in 1982 to 500,000 in 2013 (1) > Alternatively, the total number of individuals in state institutions decreased to approximately 25,000 in 2013 and it is projected that state institution enrollment will be completely eliminated by 2031 (1) Increasing Spending for Community Services (1) ($ in billions) (In thousands) Continuing Shift from State Institutions to Smaller Settings (1) Annual Cost per Person by Setting (1) $50 $40 $30 $20 $10 $ Community Services Private / Public Institutions Source: State of the States in Developmental Disabilities (2013 & 2015) to 6 Persons State Instituitions $220,119 $126,262 State- Public Operated ICFs/ID Institutions (<16) for 16+ Persons $90,000 $85,000 Private ICF/ID 16+ (<16) $39,220 $26, Supported Non- Living / ICF/DD Personal Assistance 35

36 Industry Observations Positive Legislation Trends Affecting Mental Health Treatment Positive congressional legislation in the behavioral sector have created a favorable outlook for future enrollment and reimbursement for mental health services Healthcare Expansion Provision of PPACA Mental Health Parity and Addiction Equity Act Positive Legislation Essential Health Benefits Provision of PPACA Expansion of Autism Coverage Under these recent legislative initiatives, reimbursement for mental health treatment is expected to increase both pursuant to commercial insurance and government programs Source: Kaiser Family Foundation, Wall Street research. 36

37 The Behavioral Industry Update: Notable Platforms

38 Behavioral Industry Update: Notable Platforms The M&A market for behavioral health companies has been active, particularly in the addiction treatment and eating disorder treatment subsectors Target Acquirer Insights Strong opportunity for growth driven by the unmet need to treat growing substance abuse population Addiction Treatment Specialized providers are consolidating with larger programs to expand service offerings Private equity firms with domain expertise can provide additional capital to drive growth, or combine with relevant companies within their portfolio to further scale businesses Financial sponsors searching for growth opportunities through in-network residential treatment programs Opioid Treatment & MAT Strong acquisitiveness of large platforms, such as Webster Capital s BayMark, looking to grow quickly Continuing increase in medically assisted treatment programs Source: Company website & Capital IQ. 38

39 Behavioral Industry Update: Notable Platforms (cont d) Target Acquirer Insights Provides entrance to eating disorder treatment and a platform investment to consolidate the highly fragmented eating disorder treatment industry Eating Disorder Treatment Specialized eating disorder treatment providers make attractive bolt-on acquisition targets Buyers seeking providers with in-network contracts with prominent payers in their respective region Financial sponsors looking to deploy capital in the underfunded and fragmented autism treatment industry I/DD & Autism Care Increasing awareness and better diagnostic methods leading to increasing demands for autism care Growing interest in subsectors, such as special education and applied behavioral analysis (ABA) providers Source: Company website & Capital IQ. 39

40 Behavioral Industry Update: Notable Platforms (cont d) Target Acquirer Insights Capital will support continued growth and clinical development Geropsych Behavioral IT Inpatient Psych Strategic acquirers can combine regional provider s expertise with buyer s infrastructure in order to provide better care and outcomes on a regional level, while supporting the national footprint Sponsors can provide financial and managerial resources to help providers support and continue rapid growth Investments can accelerate existing product initiatives, which support the healthcare reform needs of behavioral healthcare providers Expanding programs into other relevant areas, such as long-term treatment for severe and complex mental illness Push for platforms to build bed count to grow geographic presence, both nationally and internationally Source: Company website & Capital IQ. 40

41 Questions & Discussion

42 Turning market intelligence into business advantage OPEN MINDS market intelligence and technical assistance helps over 180,000 industry executives tackle business challenges, improve decision-making, and maximize organizational performance every day. Mental Health Services Chronic Care Management Disability Supports & Long-Term Care Addiction Treatment Social Services Intellectual & Developmental Disability Supports Child & Family Services Juvenile Justice Adult Corrections Health Care York Street, Gettysburg, Pennsylvania