Healthcare IB

Health Care banking can be split simply into two categories: Services and Life Sciences (some may argue that Managed Care deserves it's own split, but I guess technically it's a service provided).

Services include hospitals, assisted living / skilled nursing facilities, HC IT, healthcare staffing, CROs/CMOs, labs, managed care, equipment suppliers, distribution, etc. These companies tend to have capital structures which allow them to take on sizable amounts of debt and on the whole the clients are much bigger companies. Their financial statements look very similar to every others (with the exception Managed Care, which look similar to FIG companies). However, for facility-based companies with heavy proprietary real-estate assets, you may use EBITDAR instead of EBITDA (and subsequent ratios such as Adj. Debt / EBITDAR, etc.).

Life Sciences companies include big pharma, biopharma, biotech, medical devices, diagnostics - basically anything requiring heavy R&D expenditures that don't provide a service. These companies can be big (GSK, Wyeth, Teva, Forest Labs, Abbott, Stryker) or tiny start-ups. The bigger companies typically need the same investment banking products as any other large, publicly traded corporation. The smaller companies tend to focus on equity products - namely, going public.

A hard science background is not needed for health care banking. Unlike a group like Consumer or Industrial, you won't see a ton of bankers jumping ship to be researchers or vice versa (although by nature of interest, more people with hard science backgrounds tend to be interested in health care, but not many). Bankers are purely there for financial expertise and execution, rarely do they provide any product advice to the clients. Usually the clients they are speaking to have hard science backgrounds and could run circles around the bankers. That doesn't mean the bankers don't do their best to understand the products and the science behind them, but they don't fool themselves into thinking they are going to provide value to specific company about the products themselves. It's more high level - i.e. "your company has a product that is going off patent soon, generics will be squeezing any margins you may have, why don't you acquire another smaller company that's currently in Phase III with a similar Hepatitus C drug" etc.

Maybe when I have more time and it's not nearing the end of a long and hungover Friday that I'll go into my 5-10 year view of the health care industry, but hopefully that helps. If you have an interest in health care, don't let the rumors about the hours scare you off. I think you should put personal interest and cultural fit first when choosing a group.

I'd be interested to see that 5-10 year view.

Great summary from GameTheory - a couple other things I'd point out on healthcare:

-As he alluded to, you will tend to gain more "finance" exposure in terms of modeling if you work in healthcare services but you will gain more "market" knowledge if you do life sciences because you work with a lot of tiny startups and big companies looking to acquire tiny startups.

Of course, with current market conditions there aren't too many debt deals/LBOs going on, so who knows how true this generalization is currently. Just my observation from some healthcare IB friends over the past few years and what they learned in different groups.

-A lot of people on this board have asked about "recession-resistant" groups, and I think healthcare is at or near the top of that list. Perhaps life sciences are more risky, but healthcare services are needed regardless of what the economy is like or how many writedowns banks report.

You're unlikely to see many mega-LBO deals like HCA over the next several years, but I'd say overall dealflow in healthcare will probably be stronger than in higher "recession-beta" sectors like consumer/retail.

-Although you don't need a hard science background to do it, I think having some kind of background or showing a strong interest definitely gives you an advantage. That was my experience when interviewing for various industry groups 2 years ago anyway.

If you had done business development at Genentech for a few years and then did a finance MBA, for example, that would be great positioning for healthcare IB.

But if you haven't, that's fine too - just make sure you have some compelling reasons for why you want to do it.

I do not work in healthcare IB so not sure what the best source of info. is on related deals, but I would imagine the same sources as for other industries (The Deal, WSJ etc.).

http://www.mergersandinquisitions.com/
Mergers & Inquisitions

GameTheory I would love to hear the 5-10 as well

Sounds pretty interesting, if you could find the time I would like to hear it as well.

Thanks for all the info guys, I appreciate it. I definitely think Healthcare is a group I will push for during FT recruiting.

And GameTheory, add me to the group that would love to hear your thoughts on the sector over the next few years.

Ditto

every time i see this at the top of the recent posts i think that gametheory responded!

I doubt my response is anywhere near as earth shattering as you guys may be hoping for. Everyone is aware of the macro factors that are driving the proliferation of the health care industry these days - things like the aging population of the United States, rising health care costs, and up until recently, the reimbursement environment.

Obviously what happens with the much of the services industry is highly dependent on what happens come November. For those of you unfamiliar with the government reimbursement situation in the 90's, the Cost Plus system that the government had adopted to reimburse Medicare, Medicaid, etc. (that is, using a flat reimbursement rate program across the board), allowed many otherwise inefficiently run sectors (i.e. nursing homes, hospitals - anyone with large amounts of government reimbursement risk) to thrive relatively easily. Once the government switched to the PPO system of reimbursement, which changed the levels of reimbursement by level of acuity and complexity of care, there was a tough transition period while inefficiently run organizations either died off or evolved rapidly. It's easy to note that while this claimed the lives of many large, publicly traded health care companies and put many of the healthiest companies on life support, the administration at the time (Bill Clinton) did nothing to from a government standpoint to ease the transition period. It's ironic that organizations like the SEIU are deathly afraid of private equity buyers in the nursing home space (putting images of our nations' poor elderly being put out on the streets) but it was our own administration that did the most damage to the industry in the late 90's early 2000's, but I digress...

Looking into the future it's clear that reimbursement rates are getting cut and will continue to see a decline. It will be interesting to see how the Democrats deal with the funding of government reimbursement programs in the face of implementing universal health care. There is already an active shift of several at-risk facility based companies to pursue a better "payor mix" - that is, more private pay and gov't reimbursement per patient base - with an emphasis on private pay backed patients and an emphasis on adding higher acuity care to capture higher reimbursement. It's hard to see this sector as the crown jewel it once was for leveraged buy-outs, especially with most private equity firms (including mine) shunning all reimbursement risk (the days of playing the arb card of system inefficiencies are over). The big business of utilizing the real estate assets of facility-based companies by layering on CMBS is, for the time being worse-off than even the traditional credit markets. I don't think anyone wants to be touching any pre-packaged, ratings-traunched real-estate products for some time...

The managed care sector will obviously be the most affected come November and beyond. Assuming the proper implementation of a universal health care system that provides adequate care for all who choose to use it (at great cost to the average American taxpayer, no less) will, no doubt be earth-shattering to the larger managed care players. Personally, it's difficult for me to see an easy way to provide universal health care in a legal environment that comes just short of encouraging frivolous medical malpractice lawsuits by rewarding plaintiffs with outsized damages. From a banking perspective, it's difficult to get M&A work out of these companies as they do much of the smaller acquisitions in-house. Most of what you'll see from them is larger follow-on offerings and debt offerings. In the instance of the impending Wellcare acquisition by Humana or United, you'll find there is seldom any loyalty to any firm when you're that big - expect large bake-off processes.

One area which I think there's always upside for is PBMs and other drug distributors. Brand name or generic, there will always be a need for large distribution players. While there is much threat from overseas (namely China and India), until people can get comfortable with their quality control and regulatory environment I think you'll see a good amount of dominance in the U.S. Unfortunately it's hard to see much M&A in the sector as there are really only 3 or 4 major players - although I do think many are looking to move downstream and acquire large retailers and pharmacies.

As far as the life sciences go, it's interesting to see how much of a roller coaster ride it's been for biotech in the equity markets. They come in and out of favor - lately it seems that people have been looking for good biotech plays but none have been able to have enormous amounts of success (except of course, the U.S. listed or dual listed China IPOs). Of course, less access to public markets will make them cheaper targets for bigger corporations. As far as the macro environment goes, however, if you have a good product and the ability to find funding there's always some sort of liquidity event out there, whether it be public filing or acquisition by one of the hungrier, bigger pharma or biopharma companies that need to keep their pipelines alive and their stock prices up.

As it pertains to banking, I see quite a bit of growth in places like Brazil, where universal health care is simply not working and large managed care players are catching all of the fallout from those who can afford private health care plans. You'll see many IPOs coming from that market alone. China and India as global suppliers, manufacturers, and eventually research and development in the long term. Health care staffing is another interesting sector to watch that has been able to weather the economic storm thus far, anyways - there continues to be high demand for qualified health care professionals. Also, I'm somewhat bullish on specialty off-site treatment centers. Radiation therapy centers, kidney dialysis centers - anything that makes treating a debilitating condition without making the patient drive for hours. Low cap-ex (the equipment is usually leased) and most of the centers are privately run - consolidation is obviously a major factor here. I'm keeping an eye on the RTSX/Vestar buyout.

As a former Healthcare IB analysts, I agree with Game Theory's sentiment on HC.

I covered the HC Services sector with a heavy emphasis on hospitals, home nursing, hospice, respiratory therapy, durable medical equipment and HCIT.

Understanding the dynamics of the healthcare industry can give you a headache at times as there are many moving parts...CMS reimbursement rates, annual gov't regulations, various compliance measures, etc.

Although time will tell how HC will evolve after November, the industry will continue to grow as the aging population and life expectancy continues to increase. The services sector is highly fragmented. Although the M&A market may be slowing down somewhat, I believe there exist significant opportunities for consilidation in HC services.

good thread, thanks guys!

Hmmm. Interesting perspective Game Theory... particularly interesting to read that you are bullish on specialty off-site treatment centers. I will disagree with you.

I've been working on an analysis of multi-facility dialysis treatment centers and most of them are simply NOT profitable. We're more often concluding on a fair value based on net fixed assets vs. cash flows. Sure, capex is low... what does equipment cost on average? Oh I'd say a typical dialysis machine is about $18K. Leased? Yes. But so what. In spite of the low overhead, simply put, cash flows are not there unless the facility is lucky enough to be run by a Medical Director or Medical Group who has a big following in the area or who is closely connected to a local hospital and thereby is a rainmaker with patients. The reality is that more often than not and dependent ofcourse on geography, most of these types of "off-site" facilities are cannibalized by competition, most have negative margins, most are operated below capacity and most have challenged patient mix profiles. I would not be bullish.

Just my 2 cents...

Definitely agree with your analysis aadpepsi. I guess maybe since I added it in as a last minute thought I didn't expound on why I think it's a good play. When I said "most are privately owned" I didn't mean that as a good thing. I meant the industry is fractured and a consolidation play is key, there are doctors by profession who aren't businessmen by training running these centers inefficiently (and we all love inefficiency). Maybe they have the ability to drive traffic to their sites through their relationships with mid-sized regional hospitals and the like, but like you said, probably not. Where the upside comes is a regional or even national player snapping up selective sites in good locations and utilizing their existing relationship network to drive traffic and kill off any stragglers that are poorly run (not from a medical standpoint, but from a business standpoint). Many doctors who have partnerships and have small local chains of off-site treatment centers are heavily invested on a personal level and are always looking for the next liquidity event. And oftentimes the price they will exit for they measure in terms of absolute dollars and not necessarily IRR or however else we may look at it. Or, if it makes sense (or the leases are unfavorable), build de novo locations to compete with existing facilities.

From a concept standpoint, it makes perfect sense, however. A patient who needs dialysis will need it for the rest of his or her life, or until a kidney transplant is received. Radiation therapy obviously has less gaurunteed recurring cashflow (patients who need radiation therapy will either move to chemo or go into remission) but with the general trend of cancer rates and subsequent treatment increasing, it makes sense. The alternative being a mid-sized regional hospital, which can result in long waits and long drives, neither of which is desirable to the patient if it can be avoided.