On this episode of The Banker's Corner, McGuireWoods' Geoff Cockrell sits down with Geoff Smith, a managing director in and co-head of the Healthcare & Life Sciences Group at Harris Williams, and Charles Busch, a vice president in the Healthcare & Life Sciences Group at Harris Williams. They both have spent much of their careers working specifically in the physician practice management (PPM) and consumer healthcare sectors.

PPM and the consumer healthcare sector are often referred to interchangeably, but they have very different needs and areas of focus in the market. In consumer healthcare, patients play a more prominent role in their choice of providers, leading to a larger overall focus on the consumer experience. PPM, by contrast, is more often driven by referrals. But these distinctions are softening.

“One of the things that we've certainly seen over the last 20 years, which has really accelerated in the last few, is that the lines are blurring between traditional, pure PPM and consumer healthcare,” Geoff Smith explains. “One of the things that we've seen and work with clients to help them think through is exactly how to describe their company, how to describe their positioning, how to think about it from both a patient or a consumer perspective, as well as from a potential investor perspective.”

Geoff and Charles explore the appeal of PPM to investors, who are increasingly drawn to the market’s long-term tailwinds, positive supply and demand dynamics, and reimbursement stability. They also reflect on the current market and what trends they expect to see in the future.

Featured Guests

Name: Geoff Smith

What he does: Geoff is a managing director in and co-head of the Healthcare & Life Sciences Group at Harris Williams, where he has worked broadly across the healthcare landscape and spent a significant portion of his career focused on consumer healthcare and physician practice management.

Organization: Harris Williams

Connect: LinkedIn

Name: Charles Busch

What he does: Charles is a vice president in the Healthcare & Life Sciences Group at Harris Williams, where he spends the majority of his time in physician practice management, with a focus on dermatology and orthopedics.

Organization: Harris Williams

Connect: LinkedIn

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Banker's Corner, a McGuireWoods series, exploring investment trends, solutions, and business issues relevant in today's private equity and finance industry. Tune in with McGuireWoods' partner Geoff Cockrell as he and specialists share real world insight to help enhance your knowledge.

Hello everyone and welcome to another episode of our podcast, the Corner Series, where we bring together deal makers and investors and experts to talk through some of the issues and topics around healthcare investing. This is Geoff Cockrell, partner at McGuireWoods and your host. And today I'm thrilled to be joined by two of my good friends, Charles Busch and Geoff Smith, both from Harris Williams, two of the best healthcare investment bankers I know.

Today we're going to be talking a bit about PPM investing, which has been a hot topic for a long time. We're going to talk about kind of the state of that and what we think the future direction is going to take for physician practice management investing. But Charles and Geoff, maybe start with the two of you or if you could give a quick introduction and then we'll jump right into some topics.

Well, thanks for having us on Geoff. This is Charles Busch. I'm a vice president on our healthcare team. I've been a part of the Harris Williams Healthcare Group for going on eight years now. I've worked pretty broadly across our healthcare practice and these days spent most of my time in the physician practice management and consumer healthcare world specifically. I spent a bunch of time over the last couple years going deep on the derm sector and the orthopedic sector. So looking forward to the discussion today.

Yeah, thanks. And this is Geoff Smith, I'm a managing director and co-head of the healthcare group here at Harris Williams. Been with a firm for over 19 years now doing healthcare that entire time and have worked across lots of different verticals, but have spent much of my career in physician services broadly and consumer healthcare and physician practice management in particular. Have had the opportunity and continue to have the opportunity to work with a bunch of really great folks like Charles and a number of our colleagues to help continue to build out the practice that we have had here at Harris Williams in those areas, which is one we've had really ever since the start back in '02 and continues to be a very important and large part of what we do today.

Thanks guys. This will be a fun discussion. Maybe to start us off, there's a lot of discussion about some interrelated terms. We hear a lot about physician practice management, we also hear about consumer healthcare or retail healthcare and they can be used a bit interchangeably, but they're not exactly the same thing. Charles, maybe to start us off when you think of those terms, how are you separating them?

Yeah, I think that's helpful just to set the table, Geoff. So I think when we talk about consumer healthcare versus physician practice management, consumer healthcare, we really define it sectors where the patient has a lot of discretion over where to seek care and there tends to be a lot more emphasis from a provider perspective on the overall consumer experience. And then if you contrast that with physician practice management, we think about that typically as more referral driven sectors where the physician is the primary provider, care's often referral driven by another physician, and the patient doesn't necessarily have quite as much discretion over where they seek care or how they seek care.

I would note on that, I agree with everything that Charles said, that there really is a spectrum in our opinion it is, I mean certainly at each end of the barbell if you will, I think you can have a relatively clear definition as Charles ou tline. I think one of the things that we've certainly seen over the last 20 years and really accelerated in the last few is that the lines are blurring between of traditional pure PPM and consumer healthcare more broadly. So even you can find some businesses that are historically much more sort of physician practice, maybe even referral driven, dental is an example, for example specialty dental. But certainly there's a very large consumer poll aspect of that. And so I think one of the things that we've seen and work with clients to help them think through is exactly how to describe their company, how to describe their positioning, how to think about it from both a patient or a consumer perspective, as well as from a potential investor perspective.

One of the things that can further complicate some of those distinctions is while you're, I think, correct in how you're segmenting the market, those terms also have a legal overlay in my world. In my world, the physician practice management is often connected to a more pure technical structural element. Where if the business involves employing physicians for the services that they're going to be doing, kind of at any level, if you're employing a physician and you're in a state where there are limitations on the corporate practice of medicine, that means that an investor like a private equity fund is likely not going to be able to acquire the practice where those physicians worked. Instead you're going to have a relationship where a management company has a management relationship with that practice. And those dynamics can cover a bunch of different sectors in healthcare services. Whether you're talking retail kind of patient-oriented or even heavier hospital based sectors, the mere fact that you're employing the physicians can attach that designation in PPM deal. So it can get confusing, but I think your market presentation is exactly right.

So we've been at this for goodness 10 years across a bunch of different sectors. Geoff, how would you describe the state of PPM investing today?

Yeah, look, I think the state is probably easiest defined as still tremendously fragmented, it has been for a long ti me. I think people have continued to invest in the space. People more and more, both operators and investors are thinking more creatively about it and even sort of stratifying within sectors. So for example, Charles and I and Harris Williams have done a lot of work in the dermatology space broadly and historically I think people would think about that as medical dermatology and understanding of all that e ntails. If you think about the world of dermatology today, there's a much broader definition of how people think about that from aesthetics to cosm etics to med spots cetera. And so as you subdivide within these sectors, the fragmentation only increases and the opportunity to create real value by figuring out how to properly allocate resources among or between those types of businesses just continues to grow.

Charles, what are some of the characteristics in this space that have made it such an attractive investor sector?

Yeah, I mean I think there's a lot to love from an investor perspective. And I think the key macro trends across really a lot of different PPM verticals are, you have aging population demographics that are driving demand. You have a medical necessity of demand and recession resilience that is pretty much insulated from discretionary consumer spending. There're favorable provider supply demand dynamics just in terms of scarcity of physicians out there, stability of reimbursement over time. Like Geoff was hitting on the degree of fragmentation across these sectors. Even more mature sectors like dental are still incredibly fragmented. And then I think the macro thing that's really driving a lot of investors to look at PPM is the fact that there are real economies of scale and platform creation opportunities across a lot of different innings of the PPM lifecycle where they can come in and add value.

While there's still a lot of fragmentation, both in general and to varying degrees in specific healthcare provider services sectors, one of the topics that I think is being watched closely is as some of these platforms get bigger and a lot of the methods in which they get rolled together, as you start out with say a smaller firm that is cobbling together a certain number of them, getting them to say five or more million in EBITDA, they might sell to a fund who has them for a few years, sells it to a bigger one. But eventually you end up with very, very large platforms in healthcare provider services where it might be a billion, billion and a half company. Geoff, how do you see the big box buyers performing in this market and what do you think the future holds for those kind of end game scenarios?

Yeah, I think it's a great question and I agree with you, it's one that people are asking a lot right now. I mean, I think the answer is it depends. I think there's no question that there are increasingly large private equity funds that can do bigger and bigger deals, and we have seen instances of that. We've seen instances of firms teaming up together to increase their firepower and doing multi-billion dollar transactions across the consumer healthcare or physician practice space. So I think there's a long way to go for most of these businesses because the reality is there aren't that many really large sort of PPM or consumer healthcare businesses, although they are growing. I think there's frankly as much or maybe more focus right now on perfecting the models as they scale and making sure that investors and management teams are thinking through how do we make sure we've got the right balance between growth and continuing to deliver the highest clinical care possible.

So I think you'll see that for a while. And then look, I think there's absolutely, as people think to the future, A, examples where you've got institutional investors that are not on a traditional private equity fund timeline. So they much may have much longer time horizons, whether those are family offices or what we call patient capital, pools of capital that have different return and timing thresholds. Look, I think the big question that people will be asking over the next 5, 10, 15, 20 years will be what is the possibility and potential for public company exits for some of these businesses and what can those look like? And I think there is certainly a market for that and there will be in the future, but there's a lot more that goes into those models and the requirements to do that. Frankly, most of the companies just aren't quite ready for yet

A private equity buyer buying it. Some of these EBIDTA multiples, call it, 15 or more, those necessitate a certain kind of growth trajectory that becomes difficult to continue over time. There are also buyers that are viewing kind of purchasing in the high end, very, very large part of the market as being a very similar investment to investing in public markets where you compare those multiples, which they sound gaudy, but you compare that to multiples for a public company, it starts to look more similar. And so if a buyer is kind of purchasing a large healthcare provider services platform and their kind of cash flow expectations are more similar to what you'd see in a public market, I think it's easier to wrap your head around there being some terminal buyers that are not looking for the same exact growth trajectory. And part of why that's more tolerable for them at maybe a flatter growth trajectory is a healthy amount of the risk has been taken out of some of these businesses. So they may not be able to grow at 20, 30% year over year growth. But there's a lot of risk taken out of it and they cash in a way that makes them look a lot more like a direct investment in public securities.

So I think there's a room to be optimistic of what those kind of backend purchasers expectations are and how those expectations can actually be met in this market, which is clearly a driver for continuing consolidation. Because if those kind of end purchasers weren't doing well, it gets harder to see a consolidation model that's feeding up to them continuing to work. So I think the future does still look bright from that perspective.

Charles, maybe switching it to you. As you look at some of the sectors where there's still a lot of consolidation to occur, what are some of them that you guys are tracking that seem like there's still a lot of open space?

Yeah, used a great question, Geoff. I think to Geoff Smith's earlier point, even some of the sectors like dental that have been active from a private equity perspective for decades now, there's still an incredible amount of opportunity out there. I think as we look across the landscape, there are emerging PPM sectors like orthopedics and cardiology that are very much sort of in that land grab stage. And then there are others that are dermatology and vision ophthalmology and optometry that are more sort of in the professionalism stage. And then I think there are some sectors that are a little bit more mature and moving towards that consumerization stage like dental and physical therapy where no matter which sector you're talking about, there are still a lot of different levers investors can pull on to create value. I think the playbook is a little bit different within each sector and sort of PPM life cycle so to speak.

From where I sit I see lots of activity in a couple kind of thematic areas. One is areas where you can conceive of connecting an ASC to that business, there may be some ASC work already connected to that business. But if you can see a sector where adding an ASC in a particular market is another kind of source of revenue, those are interesting. So that might be ophthalmology, GI, all those areas that have ASC potential in them have been areas where there's a lot of interesting activity and a lot of interesting partnering and joint venturing with either health systems or large ASC management chains just because they bring some expertise or maybe a little bit better reimbursement. But areas where you can connect an expanding ASC presence has been one area where we see a lot of interest.

And then areas where you can wrap your head around doing more value based contracting. So whether that is primary care where you might be able to do value based contracting with Medicare Advantage contracts or orthopedic where you can conceive of doing kind of broader bundled payments than what has historically happened with just knees and hips. So those areas of either bringing in a new revenue line or being able to more directly dabble in value based contracting have been some of the more active areas to me.

I think that's all right and sort of agnostic of the individual sectors. We think about the PPM or consumer healthcare framework and life cycle from sort of a nine innings of baseball perspective where you have the first three inns are typically characterized by the land grab stage. That's where folks are very interested on in high velocity M&A, integrating a bunch of different practices, starting to lay the framework for building platform infrastructure that can support scalable growth over a long period of time. Then you move into innings four through six where it's more professionalization stage. I think at that point an investor has probably laid the framework for real professionalized platform with centralized infrastructure. The focus starts to shift a little bit more towards organic growth initiatives, so some of the things that you were enumerating like adding ASCs, building out ancillaries, accelerating physician recruitment and doing de novos. And then once you start to get into the more mature life cycles, which if it's sort of strictly consumer healthcare, we would call kind of the consumerization stage, or if it's more physician practice management, that's where you probably get into more value based care. I think at that point that's where a lot of investors are focused on optimizing operations, leveraging big data, potential for transformational M&A, payer contracting at scale. That's where some of those growth levers start to be more applicable.

That's definitely true. And then even looking across all those sectors, I still think there's some unifying characteristics of success. Look at clients that I've worked with and there's a few things that really, really shine through. The first is, and it all not surprisingly revolves around kind of physician relationships. There are CEOs that you might call them doc whisperers that are just able to maintain the confidence and trust of the physicians and that is a magical skill. Doctors are super well educated and they're very, very successful in their kind of primary area, it's difficult to build and hold that kind of trust when you're trying to manage all them. So having that kind of relationship with the doctors has been really a unifying theme as I look at clients that have either been successful or maybe not successful.

And then the other kind of related dynamic is, the platforms that have been very thoughtful and oftentimes creative about physician alignment in the economics of the deal, in the governance of the deal, how they talk about themselves. But physician alignment is a huge driver of long term success in these businesses because they can otherwise be somewhat fragile. Geoff, what would you say are some of the drivers of successful companies that you've seen?

Well, I mean I think you frankly just really got it kind of nailed them, Geoff, to be honest with you. I mean I think the aspect of physician alignment is single handedly the most important aspect of it. I would agree with you, your description of them is as potentially being very fragile otherwise. Think about these businesses or the way we think about them. You need to have the management company in these situations, their client is the physician in most cases. So, it's critically important that the entire organization is aligned around this principle of how do we keep our physicians feeling supported, providing them with the resources that they need, making sure that everything from compensation through the infrastructure to what's happening in the office or the clinic is aligned around the physician need.

And then the second piece is, how do we make sure that we are helping the physician to deliver the best experience to the patient, end user, consumer, whatever that individual is, both from a quality perspective as the physician views quality, which is going to be around the care, as well as the quality from the patient or the consumer's perspective, which may be different because for most of us it's hard for us to determine whether or not we're really receiving great clinical care. As well as thinking about quality from the consumer's perspective which can encompass a lot more than just the actual healthcare delivered, because in many cases a consumer patient doesn't really know whether they're getting the best care. Their perception is very much driven by the overall experience, the office that they're in, their interaction with the front office staff or with a nurse or a mid-level or whatever it may be in addition to the physician or the clinician.

So having a business that is entirely able to, I guess, to balance those two dynamics on both the physician side and on the consumer or patient side really is ultimately what determines whether one of these businesses can be successful over the long term.

Maybe turning the page a little bit, let's talk a little bit about some of the headwinds that this business is facing or this sector is facing. I'll start us off, one of the headwinds that feels like it is going to be growing is the government's view of some of this consolidation, whether that's state government or federal government. You mentioned that the areas where you have to show improvement through these PPM models of patient care physician experience, there are regulators that are not as certain that the consolidation is bringing a heightened patient care, is bringing a better doctor experience and frankly is bringing a reduction in cost as opposed to an increase in cost.

So you're starting to see a higher antitrust level of review by state regulators in particular who wants to say, well, in our state, let's take a breath here and make sure that this consolidation is best for the market, best for cost, best for care. That's an area where I think we can expect some higher level of scrutiny. And that investors and bankers for that matter need to be careful in how they think about some of these combinations, how they talk about some of these combinations. But that's an area where we can expect some higher levels of scrutiny. Charles, what headwinds do you think that we need to be cognizant of?

Well, I think you articulated well, which is that similar to how investors are looking at platforms and thinking to themselves, what is the real platform value here and what is justifying us making investments like this? Regulators are looking at combinations and asking themselves, is this ultimately better for the system? I think in some of the strategic to strategic transactions that we have done recently, we have seen a higher level of scrutiny around HSR topics and going really deep on not just sort of state level overlap of different businesses, but also market level overlap and lots of different ways to define market share, be it by number of clinic locations, number of providers, percentage of Medicare dollars that are flowing through those combined entities. And as a result of seeing a higher level of scrutiny, it's definitely something that we are proactively getting in front of more with our clients. And it does feed into some of the advice that we give them around how they think about potential strategic buyers and doing some of that work upfront to understand if there are potential HSRs we issues that we would run into during a process.

Yeah, I mean I would say I don't think in some ways it's any different than the bar has been raised by investors in terms of how they look at these businesses as they've gotten more sophisticated and they've seen more models that work and don't work. I think the government is doing the same thing and saying these businesses are becoming more prevalent and so we're going to look at them with a higher level of scrutiny. And that's just a reality of the market continuing to evolve. So I agree with Charles, I think it's becoming increasingly important to be thinking about that topic and those sorts of topics the same way you would be thinking about normal business operations and thinking about, how do we make sure that we're prepared to handle these questions that we're thinking about it in the C-suite very strategically because we know everybody else is.

Frankly, that level of attention to those topics should only benefit the businesses and those management teams in the long run because it's going to require really clear thinking, really clear articulation of strategy and real investment in infrastructure support technology, et cetera, that enables a company to be able to show that what they say they're doing, they're actually able to do.

So last topic here is where is all this heading? We've been at this for a long time. Charles, what's the near and intermediate term prognosis and direction for this sector? And then Geoff, you can give us the long term one.

Yeah, Geoff, I think sort of at the micro sector level, you'll continue to see what I was articulating earlier around the maturation of the PPM lifecycle. You will see individual sectors continue to move through the different innings of their lifecycle. And then from a macro perspective, just as private equity has continued to move through sectors over time and five, seven years ago, dermatology was the next PPM sector of focus and orthopedics has been a hot one, and you mentioned cardiology earlier. I think you'll see private equity continue to move along the continuum into emerging PPM sectors where there's similar opportunity.

And look, I'd say longer term we will continue as we have. I think we will absolutely see more consolidation across specialties and people thinking about that in different ways. I think for example, the Aspen Group is a really interesting model to think about that started as Aspen Dental is all dental focused de novo model. And what they came to realize over a period of time was that their real expertise was not in delivering dental services necessarily, but was in helping clinicians deliver physician services in a distributed healthcare services model. And so we have now seen them move into other verticals and sub-verticals, whether it's veterinary, whether it's dermatology and med spa, et cetera. I think we will see more businesses thinking about the world through a similar, albeit somewhat different lens based on which business you're talking about. And I think frankly, the very large private equity funds will be thinking about that both from a, what is the right way to continue building these very large businesses. And then two, if you do want to be able to go public at some point, and clearly the public investor has a different risk threshold, a different return expectation, what is it that those individuals want to see and how do we think about moving our company in the direction that is much better suited to be in the public markets?

We talked a little bit about some of the headwinds of being governmental and regulator anxiety as to what benefits the consolidation brings. I think the future is actually turns out on its head in that the future is really going to be a continued march towards a different system of healthcare as we move towards value based medicine, risk based contracting. That evolution requires capital and intelligence, and private equity funds are in particular built to lend both of those aspects. So whether that's making investments and analytics, a large practice is just not able to do that on their own. So private equity consolidation brings the tools that I think is going to enable ultimately bringing to fruition the goal that we all have of moving away from a fee-based system into a value-based care system. So I think the future is bright, but like you said, there's lots of innings left to play and we'll have to watch it all unfold.

But I want to first thank you you two for joining us for this episode. It's been super fun. You all are real smart and like I said, some of the bankers I have the most respect for our in your shop. So, thanks again for spending a little bit of time with us in adding your insights to this topic.

Well thank you Geoff. We really appreciate it as always and look forward to chatting more in the future.

Thank you for joining us on this installment of the Banker's Corner. To learn more about today's discussion, please email host Geoff Cockrell at GCockrell@McGuireWoods.com. We look forward to hearing from you.

This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.