Partners in the Business of Healthcare. Nelson Mullins Riley & Scarborough LLP Healthcare M&A and Finance Summit September 25, 2008

Transcription

1 Partners in the Business of Healthcare Nelson Mullins Riley & Scarborough LLP Healthcare M&A and Finance Summit September 25, 2008

2 Welcome and Introduction Glenn Sturm, Partner Nelson Mullins Riley & Scarborough, LLP Barry Alexander, Partner Nelson Mullins Riley & Scarborough, LLP

3 Nelson Mullins Riley & Scarborough LLP Overview

4 FIRM OVERVIEW Full Service Firm Founded in 1897 More than 400 lawyers in 2007 Benefits from the continued growth of SE region Ten offices (Atlanta, Boston, Washington, D.C. and throughout the Carolinas)

5 OUR APPROACH - Our Mission Statement To provide creative business solutions to complex problems and add value in the process.

6 FIRM BENEFITS Large firm pedigrees and experience Small firm focus and attention Top tier clients Hundreds of transactions Focus on private and public middle-market companies, sponsors and transactions

7 OUR APPROACH Large Firm Expertise Focus on Business-Oriented Solutions Active Partner Involvement and Supervision Leaner Staffing Lower Cost Infrastructure Superior, Cost-Effective Execution

8 FIRM RECOGNITION 54 lawyers recognized in The Best Lawyers in America (2007) Corporate M&A, health care and general litigation practices "among best in the region" - Chambers & Partners "Go-to firm" for corporate governance - BellSouth Products liability practice "among best in the nation" - Chambers & Partners "Go-to firm" for litigation - Wyeth, Georgia- Pacific and Whirlpool

9 Agenda

10 Nelson Mullins Riley & Scarborough LLP Healthcare M&A and Finance Summit September 25, 2008 How to Finance a Healthcare Deal in a Challenging Market: Back to the Basics Partners in the Business of Healthcare

11 How to Finance a Healthcare Deal in a Challenging Market: Back to the Basics Helen E. Quick, Moderator Nelson Mullins Riley & Scarborough, LLP Hector Calzada Deloitte Financial Advisory Service John Valentine Hyde Park Capital Partners, LLC David Yates ORIX Healthcare Finance

12 Helen E. Quick, Partner Nelson Mullins Riley & Scarborough, LLP Helen E. Quick is a partner in the firm's Washington, DC office and serves as a vice-chair chair the firm's National Healthcare Practice Group. Ms. Quick has served as an in-house general counsel for two companies where she managed the business development, human resource and legal l departments of each company. Ms. Quick has represented clients for almost 20 years in structuring, ring, negotiating and documenting private financing transactions, including asset- based, cash flow and real estate loans, purchase and sale transactions, actions, joint ventures and mergers and acquisitions. Ms. Quick provides guidance to a variety of healthcare companies,, including hospitals, healthcare systems, ambulatory surgery centers, pharmacies acies and physical therapy practices regarding general contracting, licensing ing and strategic planning. Nelson Mullins Riley & Scarborough LLP is a national law firm with almost 450 attorneys and a strong reputation in meeting the complex litigation, igation, corporate, securities, regulatory, and other legal needs of a wide range of companies and individuals, offering solutions that complement our r clients' values and objectives for more than 100 years.

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24 Impact of Recent Developments on Ability to Obtain Healthcare Financing Who has the capital? Economic Policy vs. Healthcare Policy Impact of Presidential Election Ever-evolving evolving Landscape Bear Stearns, Fannie Mae, Freddie Mac, Lehman Bros., Merrill Lynch, AIG, Goldman Sachs

25 Valuation of Healthcare Companies Volume of deals Small vs. Large Companies Changes in EBITDA Sale Multiples vs. Financing Leverage Multiples Adjustment of Expected Rates of Return for Private Equity Investors

26 Volume of Deals Deal Volume (No. of Transactions) Sector YTD Behavioral Health E-Health Home Health Hospitals Labs, MRI, Dialysis Long-Term Care Managed Care Physician Groups Rehabilitation Other Subtotal Services Biotechnology Medical Devices Pharmaceuticals Subtotal Life Sciences Grand Total 526 1,051 1, Source: Irving Levin Associates, Inc.

27 Volume of Deals (continued) Deal Value ($mm) Sector YTD Behavioral Health $ 140 $ 58 $ 1,771 $ 1,200 E-Health 5,845 1,505 4,863 4,100 Home Health 2,804 1, Hospitals 1,814 8,416 35,738 2,880 Laboratories, MRI, Dialysis 364 5,303 2,537 6,500 Long-Term Care 1,429 14,719 22,629 6,900 Managed Care 845 8,804 1,254 19,100 Physician Medical Groups ,100 Rehabilitation Other 8,386 14,245 30,888 8,000 Services Subtotal $ 21,863 $ 55,065 $ 100,912 $ 50,374 Biotechnology $ 76,358 $ 40,632 $ 36,407 $ 23,100 Medical Devices 62,215 57,936 53,268 42,200 Pharmaceuticals 34,122 72,862 77,851 46,600 Life Sciences Subtotal $ 172,694 $ 171,430 $ 167,526 $ 111,900 Grand Total $ 194,557 $ 226,495 $ 268,438 $ 162,274 Source: Irving Levin Associates, Inc.

28 Volume of Deals (continued)

29 Senior/Mezz/Equity Capital Structures Back to the Basics Tumultuous Times LIBOR Floors, Best Efforts Underwriting, the Demise of the Second Lien Market, and End of "Covenant- Lite" Era Cost of Capital Fees, OID, and Warrants

30 THE GOOD Attractive Industry Sectors: What's Hot and Why? Government Reimbursement Environment Industry Fragmentation Consolidation Opportunities Effective Management and Cost Containment Regulatory Barriers to Entry

31 THE BAD Challenged Healthcare Sectors Restrictions in Physician Referrals and Ownership Moratoriums Impact of Medicare Advantage/Part D

32 THE UGLY War Stories & Financing Distressed Debt Distressed Debt Finding the Good in the Bad War Stories "Do you feel lucky punk? Well, do you?"

33 Nelson Mullins Riley & Scarborough LLP Healthcare M&A and Finance Summit September 25, 2008 Top 10 Deal Issues That Keep You Up At Night (And How To Put Them To Bed) Partners in the Business of Healthcare

34 Welcome and Introduction Michael Hollingsworth, Partner Nelson Mullins Riley & Scarborough, LLP Ed Croft, Founder and Managing Director Croft & Bender, LLC Chris Joyce, Executive Vice President, Mergers and Acquisitions Alliance Imaging, Inc.

35 Discussion Framework: Recent Deals by Panelists Background Major Deal Issues Unique Issues Because of Current Market

36 Vetting Targets Huge Volume of Selling Activity Dislocated Assets Private Equity Exits Good Time for Strategic Buyers How Do You Vet Deals Without Getting Bogged Down? Geographic Footprint By Asset Category and Size Auction Strategies

37 Healthcare-Related Risks Reimbursement Fraud and Abuse/Carve-outs Unknown Malpractice Liabilities Facilities in CON States Target-Specific Risks Such as Independent Diagnostic Testing Facility Medicare Rules

38 Certainty of Closing in Financing Outs Unstable Market More Sign and Close Deals? Material Adverse Change Provisions Definition of MAC For Benefit of Buyer or its Lenders? Due Diligence Outs Reverse Break Fee as Seller's Exclusive Remedy

39 Risk Allocation Issues Survival of Representations and Warranties Longer Survival in Current Market? Larger Basket Instead of Pervasive Qualifiers in Reps and Warranties? Indemnification Rights Caps Baskets and Mini-baskets Carve-outs to Indemnification Limitations Escrows or Holdbacks Working Capital Indemnity

40 Customer-Related Risks Timing of Talking to Target's Customers How to Address Potential Loss of Material Customers Will Loss of Customers Trigger a MAC?

41 Purchase Price Issues Getting What You Paid For Financial and Operational Due Diligence Divisional Purchases with no Separate Financials Purchase Price Adjustments Working Capital Balance Sheet Other Metric Earnouts to Bridge Valuation Gap Disputes Common Hard to Define on Front End

42 Integration Post-Closing Matters Information Technology Cultural Integration Post-Closing Disputes Mediation or Arbitration Court Proceeding

43 Nelson Mullins Riley & Scarborough LLP Healthcare M&A and Finance Summit September 25, 2008 Partners in the Business of Healthcare Latest Trends in Healthcare: Key Drivers in Deal Activity and Hot Sectors for Investment

44 Latest Trends in Healthcare: Key Drivers in Deal Activity and Hot Sectors for Investment Barry Alexander, Moderator Nelson Mullins Riley & Scarborough, LLP Jim Millar FOCUS, LLC Jeff Villwock Genesis Capital, LLC

45 Barry Alexander, Partner Nelson Mullins Riley & Scarborough, LLP Barry D. Alexander is a partner in the firm's Raleigh office and chairs the firm's National Healthcare Practice Group. Mr. Alexander has spent over 15 years specializing in reimbursement and compliance issues arising under Medicare Parts A, B, & D, the Federal healthcare program's anti-kickback statute, the physician Federal self-referral or Stark law, and the Federal Civil False Claims Act. Mr. Alexander handles complex healthcare M&A, healthcare finance matters and frequently represents clients before the Centers for Medicare and Medicaid Services on healthcare policy, coverage, coding and reimbursement matters. He lectures and writes on Medicare payment issues frequently. Nelson Mullins Riley & Scarborough LLP is a national law firm with almost 450 attorneys and a strong reputation in meeting the complex litigation, corporate, securities, regulatory and other legal needs of a wide range of companies and individuals, offering solutions that complement our clients' values and objectives for more than 100 years.

46 James V. Millar, Managing Director FOCUS, LLC Jim Millar,, a FOCUS Managing Director, has over 20 years of financial and business expertise plus extensive management and business development experience as a senior executive with both large and earlier-stage companies. Mr. Millar has advised, managed, or led over 40 transactions with an aggregate value of over $1 billion. His expertise includes private placement of debt and equity, mergers, acquisitions and divestitures, valuation services, business formation, strategic planning and corporate finance. Before joining FOCUS, Mr. Millar was founder and Managing Principal of The Vine Group, a business advisory firm focused on the early-stage and middle market healthcare and medical device industry. There he led private placement activities totaling more than $150 million as well as both buy-side and sell-side side transactions.

47 FOCUS, LLC Who is FOCUS? Headquartered in Washington, D.C., with offices in Atlanta, Chicago, San Francisco and Los Angeles International investment bank serving the "middle market" Generalists with specific industry experience We specialize in M&A, corporate finance and direct investments in entities with $5-300 million in revenues We deliver a unique blend of operational experience and investment banking services, with an emphasis on M&A Rapidly growing due to repeat business, banker growth and referrals

48 FOCUS, LLC Segment Experience Healthcare Services and Medical Devices Technology: Hardware, Software and IT Services Business Services and BPO Telecommunications and Satellite Communications Manufacturing Energy, Oil & Gas Retail Food and Beverage International Government Contracting Security Products and Services Transportation

49 Jeffrey C. Villwock,, Managing Partner Genesis Capital, LLC Jeff Villwock is a nationally known investment banking professional specializing in healthcare services. His career spans over 30 years in the financial services industry. Mr. Villwock currently is a Managing Partner with Genesis Capital, LLC. As a two-time time Wall Street Journal All-Star Analyst in Healthcare Services, Mr. Villwock came to Atlanta in 1997 to lead the healthcare research group of The Robinson-Humphrey Company. He was later the founder and Managing Partner of Caymus Partners, LLC, a middle-market market investment bank, which was formed in 2001 to provide high quality investment banking services to healthcare service companies. That firm was sold in 2006 as Mr. Villwock rejoined a former Robinson-Humphrey colleague to build and operate Genesis Capital. Mr. Villwock has completed assignments in the hospital management, home healthcare, assisted living, surgery center, disease management, dialysis service, rehabilitation service and physician service industries.

50 Genesis Capital Provides Tailored Services Advisory Services Capital and strategic planning Board of Director and Special Committee advisory work Valuations Fairness opinions Hostile defense Mergers and Acquisitions Exclusive sales & divestitures Buy-side acquisition programs Management buyouts Restructurings Debtor and creditor representations 363 sales Refinancings Negotiating plans of reorganization Financing Private placements Majority / Minority equity Senior debt 2 nd Lien / Term B Subordinated debt Strategic investments Joint ventures Securities products & services offered through representatives of G.C. Securities, LLC, member FINRA/SIPC in states where the firm & representatives are registered.

51 Genesis Capital Clients: Driven by Need Not Size Engagements have ranged from < $10mm to over $1 billion in transaction size Clients have ranged in size from < $25mm to over $30 billion in enterprise value Fortune 500 and Large Companies Middle-Market Companies Private Companies

52 Why Genesis Capital? Our relationships and resources help us to distinguish ourselves and maintain key advantages over other middle-market investment and merchant banks Independent firm with major bracket Wall Street expertise Successful outcomes in complex transactions Comprehensive buy-side acquisition services Extensive transaction structuring knowledge Experience with global businesses Cross-border expertise Active relationships with major-bracket investment banks, when appropriate

53 Fundamentals of Medicare Le Pop Quiz Medicare covers physical exams. T or F? What part of the Medicare programs cover prescription drugs? Part A Part B Part C Part D

54 Le Pop Quiz (cont'd) What part of the Medicare program covers hearing aids and dental visits? Part A Part B Part C Part D You have to be at least 65 years old to be eligible for Medicare coverage. T or F?

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56 Inpatient Hospital/ SNF/HHA/Hospice Services Part A Prescription Drug Coverage Part D Part B Physician/Non- Physician Practitioner/ Ancillary Suppliers/ Outpatient Hospital Services Part C Medicare Advantage

57 Medicare Summary Parts of the Medicare Program & Coverage Part A Hospital inpatient services, hospice, SNF, home health Part B Physician services, Hospital outpatient services, durable medical equipment, prosthetics, orthotics and supplies ("DMEPOS"), Outpatient Surgical Services Part C "Medicare Advantage" alternative to Parts A and B, f/k/a the "Medicare Choice" Program Part D Prescription Drugs

58 Medicare Who is a Medicare beneficiary? "Beneficiaries" Part A no premium payment if: 65 years of age or older; paid Medicare taxes for at least 10 years; and receiving, or eligible to receive, retirement benefits from Social Security or the Railroad Retirement Board Permanent kidney failure requiring dialysis or transplant ("ESRD") (regardless of age) Entitled to Social Security or Railroad Retirement Board disability benefits for 24 months (regardless of age) Government employee, or spouse of government employee Part A with premium payment if: Did not pay Medicare taxes; age 65 or older; and a citizen or permanent resident of the United States Part B Eligible for Part A and payment of monthly premium

59 Medicare Who is a Medicare beneficiary? Part C Must be eligible for Part A Must be enrolled in Part B Must not have ESRD unless enrolling in an ESRD special needs plan Must reside in plan service area or continuation area Annual beneficiary cost-sharing sharing cap for Medicare covered- services ($3,250 for 2008) Part D Entitled to benefits under Part A or enrolled in Part B Lives in a Part D plan service area Guarantee issue Special rules for employer plans

60 New Medicare beneficiaries Dick & Lynne Cheney Simon AND Garfunkel Muhammed Ali Barbra Streisand Larry Flynt Joe Namath Pete Rose Martha Stewart Dick Butkus Ann Margret Calvin Klein Harrison Ford

61 Medicare Benefit Outlays, by Account and Provider Type ($ in millions, based on President's Budget 2009/prior Treasury actuals) [benefits net of Medicare refunds] FY 2000 FY 2005 FY 2006 FY 2007 FY 2008 Actual Actual Actual Actual Estimate Inpatient Hospital 86, , , , ,899 Skilled Nursing Facility 10,626 18,128 19,236 22,198 22,645 Home Health Agency 4,608 5,963 5,922 6,350 6,348 Hospice 2,818 8,318 8,515 10,008 10,454 Managed Care (Part C or "Medicare Advantage") 21,463 27,001 28,688 39,305 48,926 Part A Benefits Subtotal 125, , , , ,272 Physicians & Other Practitioners 35,946 57,282 58,226 66,433 61,048 Outpatient Hospital 8,438 19,604 22,119 20,735 21,597 Other Part B Carrier Services 1 7,164 15,183 15,269 16,003 17,108 Other Part B Intermediary Payments 2 6,013 11,767 13,291 12,092 13,015 Durable Medical Equipment 4,573 7,841 8,191 8,169 8,584 Home Health Agency 4,570 6,560 7,096 9,116 10,028 Laboratory 3,823 6,439 6,864 6,827 6,953 Managed Care (Part C or "Medicare Advantage") 3 18,348 24,110 27,489 38,150 46,002 Part B Benefits Subtotal 88, , , , ,335 Transitional Drug Assistance (Drug Card) NA 1, NA Part D Prescription Drug Benefits 4 NA NA 31,718 49,103 45,087 TOTAL MEDICARE BENEFITS 214, , , , ,694 1 Such as physician-administered drugs, free-standing ambulatory surgical centers (ASCs), and ambulance. 2 For institutional services, such as free-standing dialysis, outpatient rehabilitation, and rural health clinics. 3 Includes Part B transfers to Medicaid for low-income dual eligibles, to help pay Part B premium: $242 million in FY 2005, $264 million in FY 2006, $359 million in FY 2007, and an estimated $100 million in FY FY 2006 represents three-fourths of a year, as the Part D benefit became available on January 1, 2006.

62 Total Medicare Benefits

63 Fiscal Year 2000 Actual 1 Such as physician-administered drugs, free standing ambulatory surgical centers (ASCs), and ambulance. 2 For institutional services, such as free-standing dialysis, outpatient rehabilitation, and rural health clinics. 3 Includes Part B transfers to Medicaid for low-income dual eligibles, to help pay Part B premium: $242 million in FY 2005, $264 million in FY 2006, $359 million in FY 2007, and an estimated $100 million in FY 2008

64 Fiscal Year 2006 Actual 1 Such as physician-administered drugs, free standing ambulatory surgical centers (ASCs), and ambulance. 2 For institutional services, such as free-standing dialysis, outpatient rehabilitation, and rural health clinics. 3 Includes Part B transfers to Medicaid for low-income dual eligibles, to help pay Part B premium: $242 million in FY 2005, $264 million in FY 2006, $359 million in FY 2007, and an estimated $100 million in FY FY 2006 represents three-fourths of a year, as the Part D benefit became available on January 1, 2006.

65 Fiscal Year Actual 1 Such as physician-administered drugs, free standing ambulatory surgical centers (ASCs), and ambulance. 2 For institutional services, such as free-standing dialysis, outpatient rehabilitation, and rural health clinics. 3 Includes Part B transfers to Medicaid for low-income dual eligibles, to help pay Part B premium: $242 million in FY 2005, $264 million in FY 2006, $359 million in FY 2007, and an estimated $100 million in FY FY 2006 represents three-fourths of a year, as the Part D benefit became available on January 1, 2006.

66 Fiscal Year Estimate 1 Such as physician-administered drugs, free standing ambulatory surgical centers (ASCs), and ambulance. 2 For institutional services, such as free-standing dialysis, outpatient rehabilitation, and rural health clinics. 3 Includes Part B transfers to Medicaid for low-income dual eligibles, to help pay Part B premium: $242 million in FY 2005, $264 million in FY 2006, $359 million in FY 2007, and an estimated $100 million in FY FY 2006 represents three-fourths of a year, as the Part D benefit became available on January 1, 2006.

67 Medicare Benefit Comparison

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69 Top Growing Industry Segments Troubles in hospital sector with low volume growth and higher bad debt has made sector less attractive for investment Skilled nursing (nursing home) industry has done very well avoiding reimbursement reductions and continues to show good growth Home healthcare has seen a lot of transaction volume with operating results better than expected in 2008 Consumer-directed health care options (e.g., Mini-clinics)

70 Top Growing Industry Segments (cont'd) Business services to healthcare industry continues to be hot. Healthcare IT (including EMR and integration platforms) Outsourced products and services sold to healthcare industry Specialty Pharma, Hospice, Home Infusion Therapy and Home Health Equipment have also seen robust activity

71 Recent Industry Deals Despite continued concern in the financial and real estate markets, Healthcare M&A activity remained robust in Q With 100 deals in June alone, there were a total of 265 transactions in Q2 2008,, up from 223 deals in Q The Healthcare Technology sector led the way with 58% of the total deal volume The three most active sectors combined (Medical Devices, Pharmaceuticals and Biotech) saw 135 deals, or just over 50% The Healthcare Services sectors languished, reflecting some concern on behalf of investors

72 Recent Industry Deals (cont'd) $85.6 billion was committed to fund the Q Healthcare M&A activity The Technology sector captured $80.7 billion, leaving $4.9 billion for the services sector This represents a 210% increase over Q1 2008, and a 40% increase over Q The first six months of 2008 saw 488 transactions for a total of $113.3 billion committed Healthcare M&A will continue to be robust, particularly in the Technology sector

73 Recent Industry Deals (cont'd) M&A Volume - Q Devic es, Equipment and Supplies 19% Information Technology 8% Services 17% Lifesciences, Biotech and Pharma 31% Providers 25%

74 Recent Industry Deals (cont'd) Transaction Value - Q Providers 3% Lifesciences, Biotech and Pharma 28% Services 3% Information Technology 3% Devic es, Equipment and Supplies 63%

75 Recent Industry Deals (cont'd) Mean Revenue Multiples Q Q Providers Services Products

76 Recent Industry Deals (cont'd) Mean EBITDA Multiples Q Q Providers Services Products

77 Recent Industry Deals (cont'd) Health Care Venture Capital Deal Volume by Sector - Q Health Care Services 8% e-health 9% Medical Devices 27% Pharmaceuticals 10% Biopharmac eutic als 22% Biotechnology 24%

78 Recent Industry Deals (cont'd) Health Care Venture Capital Investment by Sector - Q Health Care Services 9% e-health 3% Medical Devices 26% Pharmaceuticals 13% Biopharmaceutic als 20% Biotechnology 29%

79 Reimbursement Challenges Short term fix of the physicians' Medicare reimbursement cuts (SGR) could cause more pain later CMS has attempted to reign in home healthcare reimbursement, yet companies seem to be upcoding (or managing documentation) to counteract cuts Uncertainty surrounds CMS' implementation of certain provisions in MIPPA (including competitive bidding for DMEPOS and LTCH provisions) Impact of potential decreased tax revenues and increased unemployment

80 Private Equity Surge Private equity remains very interested in healthcare services and healthcare IT Firms have significant amounts of capital to invest Leverage in transactions has been reduced, as has return expectations for private equity firms Genesis Capital nearing completion on healthcare staffing business

81 Healthcare M&A Trends Healthcare M&A, particularly the middle market, will remain robust Financial Sponsors have substantial "dry powder" to invest and will continue to actively look for quality deals Strategic Buyers have returned to the market as current debt market remains uncertain

82 Healthcare M&A Trends (cont'd) While large Biotech and Pharma deals have taken most of the spotlight, there is growing interest in mid-sized deals (NASDAQ-listed healthcare services) Healthcare M&A multiples remain high, driven by continued excess of private equity capital Leverage multiple contraction is beginning to impact purchase price multiples

83 Deal Pricing & Structure Credit will be tight favoring strong Strategic Buyers Deals are taking longer to get done and covenants are getting tighter Increase in mezzanine financing to fill gap in capital structure Increased use of Earnouts and Seller Financing

84 Capitol Hill Considerations Expect a new Balance Budget Act type bill to be introduced in 2009 Congress has held off from "fixing" Medicare until Bush Administration ends Republicans won't give Democrats a victory and vice versa Result = Stalemate

85 Capitol Hill Considerations (cont'd) Congress will likely address Medicare Reform in 2009 regardless of winner in Presidential or Congressional elections Result is probably across the board cuts along with spending mandates for IT Negative impact of 2009 bill could be worse depending on how Congress handles the reversal of physician pay cuts

86 Looking Ahead New Medicare Reform Bill likely enacted no later than October 2010 Medicare rolls explode starting in 2011 as Baby Boomers hit 65 By could become apparent that costs are again out of control

87 Looking Ahead (cont'd) Second Medicare Reform Bill could be enacted in Expectation is that this bill eliminates profitability of providing healthcare services to the Medicare population Commercial payors will emulate the Medicare cuts, eliminating profitability from commercial business

88 Looking Ahead (cont'd) Result of changes may be to make healthcare service firms like regulated utilities, with rates and profitability controlled There may not be enough time to start, grow and sell a new healthcare service business prior to these changes

89 Questions?