Houlihan Smith & Company Global Healthcare Markets Group

Global Healthcare Markets Group

CONFIDENTIAL

Table of Contents

I. Houlihan Smith & Company, Inc. Overview

II Transaction Process OverviewII. Transaction Process Overview

III. Houlihan Smith Deal Team

ConfidentialGlobal Healthcare Markets Group1

Houlihan Smith & Company, Inc. Overview

• Houlihan Smith & Company, Inc. (“Houlihan”) is a full-service investment banking firmproviding financial opinions, valuation services, corporate advisory and portfoliovaluation to public and private businesses.

• Houlihan is a registered broker-dealer and a Financial Industry Regulatory Authority(“FINRA”) member committed to the highest levels of professional standards.

Th H lih i i h d l ki i Th Gl b l H l h• The Houlihan name is synonymous with deal making expertise. The Global HealthcareMarkets Group has worked with healthcare and pharmaceutical companies around theworld on engagements ranging from: M&A transactions, Fairness Opinions, PrivatePlacements, Valuation and ESOP Advisory.

• Houlihan’s professionals have represented dozens of Boards, Special Committees,Public Companies and Private Business Owners on a broad range of financial matters.

• Current in-house deal count of more than 100 deals under exclusive contract (70%financing, 30% M&A)


Houlihan Smith Expertise

• The Houlihan Smith firm is a unique blend of independent valuation services, investmentbanking offerings and seasoned professionals that intersect to provide a comprehensiverange of professional financial services to maximize value for businesses and theirshareholdersshareholders.

Independent Valuation Services• Fairness and Solvency Opinions• Financial Reporting Compliance

Seasoned Professionals• Unparalleled Leadership• Decades of Experience p g p

• Tax Compliance• Portfolio Valuation• Litigation Support

p• National Footprint• Highest level of Professional

Standards

Investment Banking• Mergers & Acquisitions• Capital Raising

Dedicated Healthcare Practice• Highly experience professionals• Expertise in a broad arrays of the

• Private Placements• Corporate Finance Advisory• Financial Restructuring• ESOP Advisory

healthcare industry• Comprehensive resources• Extensive exposure to capital

market


Unique Appreciation for the Middle Market

Management is a more crucial variable

More room for creativity with growth opportunities (“storytelling”)

Must make room in the process for investors to get to know management, sometimes even before submission of first round bids

More time invested in pre-launch phase of process

More granular due diligence requirements

Wider range of potential valuation outcomes

Requires anticipation of potential issues to avoid slippage in timetable and unwinding of competitive tension

Process Matters

Larger number of potential participants in process

Business is often not a “must have” for any i l i

Requires experience to narrow the field and to interpret first round bids

Need to walk a fine line between drawing investors into the process and conveying h h isingle investor

Transaction agreements are highly customized

Process can be taxing on limited management

strength at the same time

Contract negotiations cannot be divorced from the rest of the process

Ad i b d i ifi l dg gresources Advisor must be prepared to carry a significant load

GREATER SCOPE FOR ADVISOR TO ADD VALUE. NEED FOR SPECIALIZED SKILLS.

Confidential4

Sound Strategic AdviceH lih S i h diff i i lf b l i i id d• Houlihan Smith differentiates itself by leveraging our experience to provide soundstrategic advice at each of the critical junctures in the Transaction process.

Dedication to Critical Junctures in the “Front End” Marketing ProcessDedication to Middle Market

M&A / Cap Raise

Superior Senior –Level Attention at

Critical Junctures in the Front-End Marketing Process

• Identifying timing to initiate a process• Crafting the appropriate sale process• Identifying potential strategic and financial partners• Conveying the “story” and opportunities

Each Stage of the Process

Unparalleled Attention to Detail

• Deciphering initial indications• Assembling a competitive group of investors• Showcasing the Company and management to

investors

Attention to Detail

Outstanding Negotiation Skills

Critical Junctures in the “Back-End” Process

• Fully understanding all final proposals to develop a “true” comparison between bids

• Establishing the right next steps

Institutional Knowledge of Strategic and

Financial Buyers

• Determining the most advantageous time to negotiate with potential investors

• Developing counter proposal(s) and the best script with which to deliver them

• Craft a process to maintain leverage through closing

Confidential5

Specialized HEALTHCARE Investment Banking Advisory ServicesThe team has exceptional knowledge of valuation implications based on extensive knowledge of healthcare

• PRIVATE EQUITY: The team has extensive relationships and deal structure negotiation experience for both controlled and non-controlled private equity investments relative to healthcare entities

financials including Medicare/Medicaid reimbursement for both In-Patient and Out-Patient procedures, managed care reimbursement issues, professional versus technical fee issues, and Stark I & II implications.

• VENTURE CAPITAL: The firm has extensive relationships with Healthcare venture capital firms focusing on the specialized needs of medical device and healthcare services companies.

• MEZZANINE DEBT Th fi h i fi i k l d l i i d b i l di d l• MEZZANINE DEBT: The firm has infinite knowledge relative to mezzanine debt including deal structure relative to providing flexible financing structures align with strategic and growth initiatives relative to healthcare medical device companies. Mezzanine debt can also be a critical financing component in the acquisition of other medical device and healthcare companies.

• HEALTHCARE REITS: The team has extensive experience relative to sale/lease back transactions and construction financing and construction buy out structures for new and existing healthcare properties

• TECHNOLOGY LEASING/PARTNERSHIPS: The team has participated in technology l fi i h $100 MM l i h i l i d ili i flease financing arrangements greater than $100 MM relative to the implementation and utilization of ancillary and surgical medical devices for hospitals and outpatient surgery centers.

• PHYSICIAN/HOSPITAL JOINT VENTURES: The HS&C Global Healthcare Markets Group has extensive experience and knowledge regarding joint venture agreements with physicians and

Confidential

Group has extensive experience and knowledge regarding joint venture agreements with physicians and hospitals including the development of the Nebraska Orthopedic Hospital.

Representative Healthcare and Pharmaceutical Clients






Comprehensive Resources

– Provides real-time pricing, data, history, news, analytics and research for global financial markets

• Markets covered include government and corporate bonds, mortgage, money-market, indices, currency, commodities and equities

– Private equity, hedge funds, venture capital and growth capital investor database• Heavily relied on by most bulge bracket banks; detailed information on companies and

transactions

y, q

– Exhaustive database complete with information about industries, companies, and key decision makers

– Comprehensive source of business information including research, statistics, industry

– Leading provider of M&A deal information, including transaction value, deal terms and multiples

Comprehensive source of business information including research, statistics, industryreports and forecasts

and multiples

– M&A intelligence service reporting forward-looking origination and deal flow opportunities integrated with a comprehensive deals



– Healthcare M&A Monthly• The Dealmakers Form – Recent Healthcare M&A Deals• The Healthcare M&A Information Service – Healthcare M&A data by sector• Healthcare Corporate Finance News Venture Capital Financing

– Healthcare Advisory Board• The company has a team of more than 900 professionals dedicated to examining critical

issues related to every sector of the healthcare market

• Healthcare Corporate Finance News – Venture Capital Financing

– SG2 The Edge• Provides expert-led resources, tools and education to maximize clinical effectiveness



– Healthcare M&A Monthly• The Dealmakers Form – Recent Healthcare M&A Deals• The Healthcare M&A Information Service – Healthcare M&A data by sector• Healthcare Corporate Finance News Venture Capital Financing

– Healthcare Advisory Board• The company has a team of more than 900 professionals dedicated to examining critical

issues related to every sector of the healthcare market

• Healthcare Corporate Finance News – Venture Capital Financing

– SG2 The Edge• Provides expert-led resources, tools and education to maximize clinical effectiveness


Table of Contents


II Transaction Process OverviewII. Transaction Process Overview



Ways an Advisor Adds Value• Serves as an intermediary in negotiationsServes as an intermediary in negotiations

– Insulates the owners and management from the need to make immediate decisions– Ability to act as the ‘bad cop’ and not sour the buyer on the transaction or the owners and management

team– Provides the owner the ability to maintain an appropriate distance from the sales processProvides the owner the ability to maintain an appropriate distance from the sales process

• Leverages industry and financing experience– Prepares a company for the transaction process and can provide suggestions on how to enhance value

in the eyes of biddersin the eyes of bidders– Utilizes industry contacts and pre-existing relationships to target investors most likely to meet

shareholder objectives– Understands the implications of different deal terms and how to guard clients against disadvantageous

conditions

• Allows the management team to concentrate on the day-to-day issues of running the business– Avoid neglecting customers, vendors, and employees– It is critical that the business continues to perform well during the transaction processIt is critical that the business continues to perform well during the transaction process

• Heightens the sophistication level of the transaction and maximizes potential value– Investors assume they can acquire stakes in companies that lack representation at bargain prices

Representation translates directly into more advantageous transaction terms

ConfidentialGlobal Healthcare Markets Group

– Representation translates directly into more advantageous transaction terms

14

Common Reasons Deals Fail

• Unrealistic pricing expectations• Historical results or projections do not support

Critical Issues: Houlihan Smith Solutions:

• Comprehensive analysis of financials to determine potential synergistic benefits forHistorical results or projections do not support

valuation

• Negative surprises uncovered during due diligence

• Issues uncovered regarding sales, profits, customers,

determine potential synergistic benefits for strategic buyers & financial buyers

• Thoroughly discuss expectations with management as it relates to “market standard” deal terms and gain an in depthg g p

employees, environmental

• Inability of parties to agree on representations and warranties/indemnification language in purchase contract

deal terms, and gain an in-depth understanding of shareholder objectives

• Perform in-depth seller due diligence to identify problematic trends/issues, and present

i l f f bl l i• Inability of buyer to finance the purchase• Seller often has to be willing to offer some type of

financing or earn-out arrangement

• Deterioration of financial performance during

rationale or strategy for favorable resolution of issue

• Require potential buyers to document proposed sources and uses well in advance of

the marketing process the purchase agreement, and compare to current availability in the credit markets


Valuation Methodologies• In order to provide a more accurate estimate of the enterprise value for a company multiple• In order to provide a more accurate estimate of the enterprise value for a company, multiple

valuation methodologies are employed

Comparable Description: Identify the key publicly-traded comparable companies for the company and calculate and apply multiples of Revenues EBITDA and EBIT.Companies

(Public Comps)

Comparable

apply multiples of Revenues, EBITDA, and EBIT.Comment: A widely accepted valuation technique that provides current, market-based valuation information. Multiples are adjusted to reflect a premium for control and discounted for liquidity and size.

Description: Identify key comparable transactions for the company, and where possible, calculate and apply multiples of Revenues EBITDA and EBITTransactions

(M&A Comps)

Discounted

apply multiples of Revenues, EBITDA and EBIT.Comment: A popular valuation technique for measuring market valuations on a control basis. Precedent multiples are dependent on market conditions at the time of the transaction.

Description: Model the free cash flows resulting from the company’s financial projections and discount using an appropriate cost of capitalCash Flow

(DCF)

Leveraged

using an appropriate cost of capital.Comment: Arguably the most sophisticated valuation technique, providing real insight into divisional valuation drivers. Highly sensitive to numerous key assumptions.

Description: Using the same projections as the DCF, apply a suitable leveraged capital structure and solve the valuation using a 20 – 40% target equity rate of returnBuyout Analysis

(LBO)

the valuation using a 20 – 40% target equity rate of return.Comment: A useful alternative perspective since it implies a valuation level at which a private equity investor would typically be prepared to bid for the company.


Comparison of Buyer TypesTh i f i i d fi i l b• The two primary types of acquirers are strategic and financial buyers

– Each set of buyers typically evaluates an acquisition based on different criteria and goals

FINANCIAL BUYERS (Private Equity Groups)STRATEGIC BUYERS

• Typically public or private corporations currently involved in similar or

Raises capital in funds from various sources to invest in businesses with the expectation of exiting within a relatively short time period (typically five to seven years) to achieve a targeted rate of return for investors (generally 20% to 25%)

ycomplementary business line

• Places a greater emphasis on identifying and realizing potential revenue and cost synergies

• Does not have a similar business in existing investment portfolio

• Has a similar or complementary business in existing portfolio of investments

ADD-ON PLATFORM

• Rationale for acquisition more strategic in nature (i.e. reducing competition, enter new geographic markets, etc.)

• Typically concerned with generating long-term value from acquisition and

• Seeks entry into an attractive market with potential for growth and definable exit strategy

• Acquisition can serve to diversify investment portfolio and create a

• Acquisition drivers are typically similar to those of strategic buyers, but additionally driven by the need to put raised capital to work and grow investments before fund life expiresterm value from acquisition and

effectively integrating the target into the buyer’s existing operations

• Higher valuation could be supported by the realization of synergies

investment portfolio and create a platform for future acquisitions in the same space

• Identification of opportunities to create value through a strategic partnership

investments before fund life expires

• Often an ideal buyer as they have financial resources of private equity backing and strategic rationale to support a favorable purchase price


partnership

17

Characteristics of a Successful Partner/Investor

• Successful transactions are the result of pairing the right partner with the client;Houlihan Smith’s experience lends to the following characteristics of the right partner:

SUCCESSFULTRANSACTIONS


Assessing Deal Structure and Options• Number of transactions completed• Integration success of previous transactions• Integration planning effort• MarketingMarketing• Financing relationships• Credit approval process of financing source• Financing structure of current operations

– Equity available– Equity available– Returns to equity participants

• Deal with the decision makers who can allocate capital• Strong strategic fit – core business:

– Strategic logic: component module systemStrategic logic: component, module, system– Geographic reach; low cost sourcing opportunity– Capacity needs– Capable of identifying and implementing process improvements– Capable of bringing engineering and design improvementsp g g g g g p– Focused purchasing effort could generate material cost reduction– Customer diversification


Table of Contents


II. Transaction Process OverviewII. Transaction Process Overview



Houlihan Smith Deal Team

Richard HoulihanFounder and Chairman

Mr. Houlihan is a principal of Houlihan Valuation Advisors (since 1986), andp p ( )founder, former President and former Chairman of Houlihan Lokey Howard &Zukin, Inc. (1970 to 1977). Mr. Houlihan was also, the Founder, Chairman,President and part Owner of Solitude Ski Resort from 1977 to 1987. Prior toforming Houlihan Lokey Howard & Zukin, Mr. Houlihan served as Financial VicePresident for Carr-Sigoloff Industries Corporation (1969 to 1970) and as an AuditSt ff nd S ni r MAS Sp i list nd MAS M n r f r Pri W t rh s & CStaff and Senior MAS Specialist and MAS Manager for Price Waterhouse & Co.Management Advisory Services (1963 to 1969).

Mr. Houlihan is a Certified Public Accountant (licensed in Nevada & California), aSenior Member of the American Society of Appraisers, Business Valuation and aC ifi d G l R l E A i (CGREA N d ) H l i bCertified General Real Estate Appraiser (CGREA - Nevada). He also is a memberof the American Institute of Certified Public Accountants, the California Society ofCertified Public Accountants and the Nevada Society of Certified PublicAccountants. He has served on the National Business Valuation Committee of theAmerican Society of Appraisers from 1991 to 1995. Mr. Houlihan has served as anexpert witness relative to business valuation matters in both federal and state courtsexpert witness relative to business valuation matters in both federal and state courts.Mr. Houlihan authored “The Valuation of Minority Interests in a Closely HeldCorporation” and was a contributing author to “The Handbook of BusinessValuation” and “The Mergers and Acquisitions Handbook For Small and MidsizeCompanies.” Mr. Houlihan holds a Bacherlor’s Degree in Accounting from BrighamYoung University and a Masters of Valuation Science from Lindenwood College.


g y g

21

Houlihan Smith Deal Team

Andrew SmithCo-Founder and President

Mr. Smith was previously a Senior Vice President for EVEREN Securities, Inc.p y(formerly Kemper Securities, Inc., 1993 to 1996) where he was the Founder and Co-Head of the firm's Mergers & Acquisitions Group. For the past 25 years, Mr. Smithhas been active on a full-time basis in mergers and acquisitions and financingmiddle-market, private and public businesses. During this period, he has completedmore than 200 M&A and financing assignments. Mr. Smith was previously aM n in Dir t r t G n C pit l M rk ts (1986 t 1993) Mr Smith s nManaging Director at Geneva Capital Markets (1986 to 1993). Mr. Smith was anauditor for Ernst & Whinney from 1981 to 1984, where he specialized in servingfinancial institutions. From 1984 to 1986, Mr. Smith worked as an independentbusiness broker. He is currently the Chairman of Houlihan's Fairness Committeeand is a frequent speaker on business valuation and corporate finance topics.

He graduated with honors from Ohio Wesleyan University, earning a Bachelor’sDegree in Economics. Mr. Smith is a Certified Public Accountant, a Series 24General Securities Principal, a Series 27 Financial Operations Principal, a Series 7Registered Representative and is a member of the American Institute of CertifiedPublic Accountants and the Illinois CPA Society He is credentialed through thePublic Accountants and the Illinois CPA Society. He is credentialed through theAmerican Institute of Certified Public Accountants as "Accredited in BusinessValuation."


Houlihan Smith Transaction TeamKarl D'CunhaSenior Managing Director

As a leader of the firm’s financial advisory practice, Mr. D’Cunha’s primary responsibilitiesinclude providing financial opinions such as valuations, fairness opinions, and structuredfinance advisory He is the head of the firm’s Hedge Fund Advisory group and a teamfinance advisory. He is the head of the firm s Hedge Fund Advisory group and a teamleader of the firm’s Technical Standards Committee. Mr. D’Cunha has more than 12 yearsof experience in the alternative investments industry, including working with some thelargest hedge funds worldwide on valuation, accounting, and compliance issues.Additionally, he has been actively involved in investment company-related services since1997 and has prepared, supervised, or consulted upon assignments covering most facets ofp p , p , p g gvaluation and accounting relating to U.S. and international private equity, venture capital andhedge funds, investment advisors, mutual funds, and other entities.

Mr. D’Cunha is a member of the New York Hedge Fund Roundtable, the Hedge FundAssociation, the Canadian Institute of Chartered Accountants, the CFA Society of Chicago,ssociation, the Canadian nstitute of Chartered ccountants, the CF Society of Chicago,the CFA Institute, the Association of Chartered Accountants in the U.S., the AppraisalIssues Task Force, the Association of Latino Professionals in Finance and Accounting, theArts and Business Counciland, and the American MENSA, Ltd. Bank.


Houlihan Smith Transaction TeamReginald McGaughg gManaging Director

Mr. McGaugh is the head of the Global Healthcare Markets Group for the firm and hasresponsibility for transportation, energy and Asia clients. Mr. McGaugh has extensiveexperience and relationships in the healthcare sector including biotechnology firmsexperience and relationships in the healthcare sector including biotechnology firms,pharmaceutical firms, Tele-medicine firms, diagnostic imaging firms, healthcare medicaldevice firms, Healthcare REITs and direct professional experience with both healthcareproviders and managed care companies. Prior to joining Houlihan Smith, Mr. McGaughserved as a senior executive with a Merchant Banking firm that was involved in an $83Million acquisition of a specialty hospital where he served as interim Chief Operatingq p y p p gOfficer for the hospital and the associated ancillary facilities. His experience includes thedevelopment and project management of specialty hospitals and big box ambulatory carecenters specializing on hospital/physician joint venture structures.

Mr. McGaugh’s experience also includes the energy, telecommunications and transportationMr. McGaugh s experience also includes the energy, telecommunications and transportationsectors. Mr. McGaugh has served as an analyst/consultant with Harley Davidson FinancialServices, MidAmerican Energy Holdings (A Berkshire Hathaway Company), PeoplesEnergy, University of Nebraska Medical Center, Nebraska Orthopedic Hospital, RyderLogistics and WestLB Mellon Private Equity. Along with his focus on healthcare, Mr.McGaugh will also focus his efforts on the advisory side of deals structured in compliance

i h I l i L (Sh i ) i i l h fi d i Af i d h Middl Ewith Islamic Law (Sharia) principles as the firm expands in Africa and the Middle East.

Mr. McGaugh holds a Bachelor of Science in Finance degree from the University ofNebraska – Lincoln and a MBA in Finance from the Florida A&M University School ofBusiness & Industry. He completed a 2 year formal credit training program at Wells Fargo


y p y g p g gBank.

Houlihan Smith Transaction Team

Brian GorskiVice President

Mr. Gorski is a Vice President with Houlihan Smith & Company focusing onp y gcorporate finance and M&A advisory services. Mr. Gorski has extensive experiencein capital raising assignments including private placements of debt and equity,venture financings and institutional debt and equity raisings. He has worked closelywith executive management teams and boards of directors of both publicly tradedand privately held companies, advising on transaction structure, capital structure,nd str t i lt rn ti s Pri r t j inin H lih n Smith & C mp n Mr G rskiand strategic alternatives. Prior to joining Houlihan Smith & Company, Mr. Gorski

worked for Donnelly Penman and Partners, a Detroit-based investment bankingfirm. At Donnelly Penman and Partners Mr. Gorski rendered sell-side, valuationand capital raising services for publicly traded and privately held clients in theautomotive, manufacturing and financial services industries.

Mr. Gorski graduated from Miami University, in Oxford, Ohio with a Bachelor’sDegree in Finance and a minor in Latin America Studies and holds Series 7 andSeries 63 Registered Representative licenses.



Darcy BonnerAnalyst

Prior to joining the firm, Mr. Bonner worked with a sector of the U.S. Smallj gBusiness Administration in which he helped consult aspiring entrepreneurs andsmall business owners. He also assisted in weekly workshops that discussed varioustopics such as business plans, marketing, selling, and financial fundamentals. Mr.Bonner also volunteered his time within the financial sector at Bethel New Life. Inthis role, he assisted in weekly classes that taught low-income families theimp rt n f m n m n m nt nd dir t d sm ll b sin ss rksh pimportance of money management and directed a small business workshop.

Mr. Bonner graduated from Union College in upstate New York with a Bachelor’sDegree in Economics. During his time at Union, he also conducted a 25-weekanalysis on India and China's economy.



Maria Ika ErwinaAnalyst

Prior to joining Houlihan Smith Advisors LLC, Ms. Erwina was an Analyst forj g yAttucks Asset Management, LLC, an investment advisor that specializes in creatingmanager-of-managers portfolios. She was responsible for conducting managerresearch analytics, generating clients’ performance reporting, and constructing andevaluating investment structure design. Ms. Erwina also oversaw the company’sresponse to Request for Proposals from potential corporate and public institutionalin st rs Ms Er in b n h r r r s S ni r M rk t R s r h An l st f rinvestors. Ms. Erwina began her career as a Senior Market Research Analyst for alarge management consulting firm.

Ms. Erwina holds a Bachelor’s Degree in Mathematics from Beloit College. She is amember of Women in Pension.


Documents

Houlihan Smith & Company Global Healthcare Markets Group