Volume 17, Issue 10 THE October 2012 Health Care …...Volume 17, Issue 10 October 2012 InsIde the health Care M&a Market INSIDE THIS ISSUE Hospital M&A Market There have been a lot

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Health Care M&ATHE

MONTHLY

Volume 17, Issue 10 October 2012

InsIde the health Care M&a Market

INSIDE THIS ISSUE

Hospital M&A Market

There have been a lot of announce-ments from the acute care hospital sector in the past several months, but very few are technically mergers or acquisitions. Affiliations, strategic partnerships and loose consortiums make up most of the “deals,” and sev-eral previously announced real deals are unraveling. Page 1

...Third Quarter M&A Results

The third quarter is usually the least active quarter of the year, and while this year was no exception, the drop in deal activity may reflect cau-tion before the presidential election as well as the continuing economic turmoil in Europe. Page 1

...In The Departments

Technology

Health Care Technology Page 3Deal Summaries Page 4Additional Transactions Page 5Pharmaceutical Market Page 6 Biotechnology Market Page 6e-Health Market Page 6Medical Device Market Page 10

Services

Long-Term Care Market Page 10Deal Summaries Page 11 Additional Transactions Page 12

Financing

Venture Capital Deals Page 15

For some reason, there appears to be a lot of recent media interest in the hospital M&A market,

with the belief that hospital mergers are increasing. The reality, however, tells a slightly different story. Part of the hype also involves a misunderstanding of what is really going on when various hospitals and health systems make their announcements.

In the case of transactions be-tween not-for-profits, the decision is often a multi-stage process, starting with the decision to talk, usually about affiliating or partnering, then a formal letter of intent to take it to the next level,

Perhaps it was the hot summer that did it, or more realistically the presidential campaign and

all the uncertainty around it, especially with regard to the acrimonious debates on health care policy, reimbursement cuts, controlling health care costs, who should pay for the uninsured and how, and everything else that can be thrown in for the talking heads on a daily ba-sis. Perhaps it was the looming tax on medical device sales that resulted in a sharp drop in medical device M&A in the third quarter, a sector that has otherwise consistently been one of

Hospital M&A MarketAcquisitions Dissolving, And When A Deal Is Not A Deal

Third Quarter M&A ResultsSummer Months Are Usually Slow; No Exception This Year

followed many months (or a year) later with the formal agreement signed.

It is that formal agreement that is subject to so much misunderstanding. Sometimes the transaction involves an acquisition of one party by the other, or a merger between two not-for-profits, but many other times the end result is a collaboration, an affiliation, a stra-tegic partnership or simply becoming part of a network, meaning doctors can share information and patients can have better access to medical resources from all members of a network. A case in point is what the Mayo Clinic

the most active. That remains one of the mysteries of health care reform, a highly successful American business being penalized for its success like no other. Why? Because the medical de-vice sector can afford it? Please.

But it wasn’t just medical de-vices. In the technology segment, only e-health transactions posted an increase in volume over the second quarter, while both pharmaceutical and biotechnology transactions suffered declines, although nothing like medical

(continued on page 2)


Page 2 October 2012The Health Care M&A Monthly


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(continued from page 1)

Care Network has been doing, when it added Evanston, Illinois-based NorthShore University HealthSystem to its “network” in September, together with Dartmouth-Hitchcock Health in New Hampshire last July.

These were not mergers or financial affiliations, merely an opening of communication and access to medical resources for the benefit of all. Other examples include the affiliation between St. Joseph Health and Hoag Memorial Hospital in California, where both entities will retain their faith affiliations, Catholic and Presbyterian, respectively. Another example is the very recently announced joint venture that will be teaming up Community Health Network and St. Vincent Health, both in Indianapolis, Indiana, with the six hospitals that make up the Suburban Health Organization outside the city, to form an “accountable care consortium” to focus on

innovative health care solutions for employers and com-mercial markets. Hospitals all thought that with more than 30 million additional people becoming enrolled in some sort of health insurance (if you really want to call Medicaid a real health insurance plan), the revenues would be rolling in. Given what we expect to happen with reimbursement, the margin on those revenues is going to drop, so everyone is trying to find some sort of partner, affiliation, or even an acquisition, that will give them a differential advantage. But these various agreements won’t necessarily deliver the goods, despite the best of intentions.

Most of these expanded relationships take place in the not-for-profit arena, but when a for-profit “acquires” another hospital, whether it was another for-profit, a not-for-profit or community-based hospital, it is usually a straight forward acquisition where operating control changes hands. Financially, the structure can be varied, such as a 10-year lease, funds to pay off the target’s debt, funds to build a replacement hospital, or money to fund a new local foundation or an underfunded pension plan for the hospital’s employees. The point is that in these situations, the local hospital is no longer in control of its destiny. And in not-for-profit combinations, the key is to see what happens to the target hospital’s board (usually the weaker of the two hospitals), as well as the two CEOs. So yes, there have been a lot of announcements this year, but many of them really don’t involve an actual merger or acquisition. They may eventually lead to that scenario, but initially it is a much looser relationship with no intertwin-ing financial commitment from one to the other.

In addition to an increase in these looser “affilia-tions,” what we are seeing is an increase in previously announced mergers or acquisitions being terminated by either party and for a variety of reasons. Last month we reported on the termination of the largest hospital trans-action of the year, the $3.9 billion proposed acquisition of a German hospital company by Fresenius SE (NYSE: FMS), after two local competitors of Fresenius purchased enough shares in the target company to essentially enable them to turn down the acquisition when it would come to a shareholder vote. But on this side of the pond we are also witnessing engagements being called off before the walk to the altar.

Consider the case of poor Landmark Medical Center in Woonsocket, Rhode Island. Putting aside that Rhode Island has some of the most archaic health care regulations in the country (last we checked incontinence was not allowed for residents in licensed assisted living


Page 3 October 2012 The Health Care M&A Monthly

Sector Deal Volume Combined PricePharmaceuticals 5 $ 2,841,300,000Medical Devices 5 784,200,000Biotechnology 9 299,686,000e-Health 9 197,400,000Total 28 $ 4,122,586,000

The Month in M&A at a Glance:Health Care Technology, September 2012


communities), there has seemed to be unusual interest in acquiring this 133-bed hospital that has been in receiver-ship since 2008. Originally, Caritas Christi Health Care had been in talks to purchase Landmark, but these talks ended when Caritas was purchased by private equity firm Cerberus Capital Management, with a name change to Steward Health Care Systems. Subsequently, Region-alCare Hospital Partners, a Warburg Pincus portfolio company, made a bid for Landmark, which was then trumped in mid-2011 by the newly recapitalized Steward. Steward’s bid, which we also believe included the 70-bed Rehabilitation Hospital of Rhode Island, included $30 million in capital projects, $19 million in routine mainte-nance, $7.6 million for net working capital, $4.5 million for physician recruitment and $2 million for forgiveness of debt previously owed to Steward’s predecessor company. This acquisition was supposed to be concluded by late July, 2012, but the Rhode Island Attorney General gave Steward a 60-day extension. Well, 60 days later, Steward dropped its bid for what seems like a bit of a flimsy excuse dealing with amending a long-standing Rhode Island law about how many hospitals a for-profit could buy every three years.

Not to worry. In stepped yet another buyer, acquisi-tive-minded for-profit Prime Healthcare Services, based in Ontario, California. The company has already closed on several hospital acquisitions around the country this year, and had been in the mix for Landmark a year ago with a few other for-profit companies but “lost out” to Steward. This time, they may actually get the deal, as we are sure everyone is tired from the merry-go-round situ-ation for what can’t be considered a plum hospital target, despite the seemingly unlimited demand. The sale has been approved by the local bankruptcy judge, and Prime Healthcare expects to “invest” up to $60 million in the hospital over the next five years plus an emergency cash infusion. The hospital has net patient revenue of just under $120 million and a negative EBITDA, so we have never quite understood the acquisition interest. The good news for Prime Healthcare is that in mid-September a Superior Court judge approved a deal resolving a contract dispute between Landmark and the local Blue Cross insurance network, a major local insurer. Other state approvals are needed, but for any bureaucrat to say no at this stage would probably result in a riot larger than the infamous Philadelphia wedding brawl earlier this month. In other words, this one has to be a done deal.

Given everything else happening in the market, that prognosis may be optimistic. After three months of due

diligence talks, not-for-profit Ohio Valley Health Ser-vices, the parent company of Ohio Valley Medical Cen-ter in West Virginia and East Ohio Regional Hospital in Ohio, has walked away from a potential acquisition by Community Health Systems (NYSE: CYH). Ohio Val-ley didn’t give much of a reason, but it did disclose that it will continue looking for another financial partner. It is possible that valuation and structure was the problem, since the financial performance of the small system was improving, with a net operating income of $6 million in 2011 and $5.3 million through August of 2012. What the two hospitals were looking for, however, was an infusion of cash to upgrade their equipment and emergency rooms, but that will now have to wait. We wonder if they have the phone number for Prime Healthcare Services.

In a more high-profile dissolution of a deal, and one involving a major hospital system and an insurer, West Penn Allegheny Health System has told Highmark, Inc. to bugger off after agreeing to be purchased by the insurer in June of 2011 for $475 million in cash and ap-proximately $1.0 billion of assumed liabilities. So much for brotherly love between not-for-profits. Health insurers have been taking a serious look at local health systems in order to better control their costs and quality of care, and this acquisition would have given Highmark the second largest hospital system in western Pennsylvania to help serve its 3 million members in that part of the state. At the time the deal was announced more than a year ago, West Penn had revenues of $1.6 billion and EBITDA of $33.3 million, but with more than $700 million of bond debt, the financial condition is shaky at best.

Highmark has already been lending the hospital sys-tem money, and it appears as if before going any further it wanted West Penn to restructure its debt so that Highmark would not be saddled with all of it. Although it sounds reasonable, and prudent, it was not what West Penn had in mind when the talks began. The problem is that High-



deal suMMarIes—teChnology BIoteChnology

deal suMMarIes—teChnology e-health

deal suMMarIes—teChnology MedICal devICes

TARgET LISTINg AcQUIRER LISTINg DATE PRIcEComplete Genomics NASDAQ: BGI-Shenzhen Private 9/17/2012 $117,600,000 Mountain View, California GNOM Shenzhen, China

In BrIef: BGI-Shenzhen is paying $3.15 per share in cash, or an 18% premium to the prior day close. Complete Genomics works in the area of whole human genomic sequencing, while BGI operates international genomic sequencing centers.

Eclipse Therapeutics Inc. Private Bionomics Limited ASX: BNO 9/17/2012 $10,000,000San Diego, California Therbarton, Australia

In BrIef: Bionomics is paying $0.4176 per share for 23.9 million shares for Eclipse, which is developing drug candidates that target cancer stem cells. This will expand Bionomics’ oncology pipeline.

Selexys Pharmaceuticals Corp. Private Novartis AG NYSE: NVS 9/19/2012 $665,000,000Oklahoma City, Oklahoma Basel, Switzerland

In Brief: Selexys has provided Novartis with an exclusive option to purchase the company and the drug it is developing to treat sickle cell anemia for up to $665 million, after the successful completion of the phase 2 study. MPM Capital invested $23 million to help pay for a boader clinical study.

Eurpoean Rights to Rigosertib Private Baxter International Inc. NYSE: BAX 9/19/2012 $50,000,000Newtown, Pennsylvania Deerfield, Illinois

In Brief: Baxter is paying $50 million upfront for European licensing rights to rigosertib, a novel targeted anti-cancer compound currently in phase 3 study for the treatment of rare hematologic malignancies. Milestone payments could add another $515 million to the value.

Rights to Galaxy’s Antibodies Private Roche Holding AG VX: ROG 9/24/2012 $8,000,000Sunnyvale, California Basel, Switzerland

In Brief: Roche has licensed exclusive worldwide development and commercialization rights to Galaxy’s antibodies targeting fibroblast growth factor 2 (FGF2) for the treatment of cancer. In addition to the $8 million upfront payment, there will be milestone payments contingent on vari-ous preclinical, clinical and regulatory development events, as well as royalties on product sales.

TARgET LISTINg AcQUIRER LISTINg DATE PRIcEChina Kanghui Holdings NYSE: KH Medtronic Inc. NYSE: MDT 9/28/2012 $755,000,000 Changzhou, China Minneapolis, Minnesota

In BrIef: Medtronic is paying $30.75 per share for the American Depository Shares, or a 22% premium to the prior day price, which comes to $755 million net of about $41 million of KH’s cash on hand. KH develops and manufactures orthopedic implants and associated instruments for trauma, spine, cranial and other severe injuries.

TARgET LISTINg AcQUIRER LISTINg DATE PRIcEMediware Information Systems NASDAQ: Thoma Bravo Private 9/12/2012 $195,000,000 Lenexa, Kansas MEDW Chicago, Illinois

In BrIef: Private equity firm Thoma Bravo is paying $22.00 per share in cash, representing a 40% premium to the prior day closing price. On a trailing 12-month basis, Mediware had revenues and EBITDA of $64.6 million and $13.64 million, respectively.

DigiPath Solutions LLC Private AccelPath, Inc. OTCBB: 9/24/2012 $2,400,000Spring, Texas Westwood, Maine ACLP

In BrIef: AccelPath is paying in cash plus 1,250 shares of its convertible preferred stock, a promissory note for $1,050,000 and a one-year consulting agreement for the founder of DigiPath. The company provides digital telepathology and laboratory development and management services.



TARgET LISTINg AcQUIRER LISTINg DATE PRIcEMedicis Pharmaceutical Corp. NYSE: MRX Valeant Pharmaceuticals Intern’l NYSE: VRX 9/3/2012 $2,600,000,000 Scottsdale, Arizona Montreal, Canada

In BrIef: Valeant is paying $44.00 per share in cash, representing a 39% premium, plus the assumption of debt. Medicis specializes in products treating dermatological and aesthetic conditions, and had annualized revenues and EBITDA of $785 million and $198 million, respectively.

Special Phage Services Private AmpliPhi Biosciences Corp. NASDAQ: 9/10/2012 $2,800,000 Sydney, Australia Richmond, Virginia APHB

In BrIef: AmpliPhi will be issuing a total of 20 million shares, of which 8 million will be held in escrow for warranty claims and up to 12 mil-lion shares for milestones. The target was formed in 2004 to address the rapidly escalating problem of antibiotic resistance.

CNS Therapeutics, Inc. Private Mallinckroft NYSE: COV 9/24/2012 $100,000,000 St. Paul, Minnesota Hazelwood, Missouri

In BrIef: Mallinckroft, the pharmaceuticals division of Covidien, is acquiring CNS Therapeutics, a specialty pharmaceutical company focusing on products for site-specific administration to the central nervous system to treat neurological disorders and intractable pain.

Rights to Huntexil OMX: NEUR Teva Pharmaceutical Industries NASDAQ: 9/27/2012 $26,000,000Ballerup, Denmark Petach, Israel TEVA

In Brief: Neurosearch A/S of Denmark is selling all its rights to Huntexil, a drug candidate being developed for the symptomatic treatment of hand movement, balance and gait disturbances associated with Huntington disease. The price will be paid over six months, plus possible regula-tory and commercialization milestones.

deal suMMarIes—teChnology PharMaCeutICals

addItIonal transaCtIons—teChnology Sector target acquirer DateBIOTECHNOLOGY BlueGnome Ltd. Illumina, Inc. 9/19/2012 Othera Pharmaceuticals Inc. Colby Pharmaceutical Company 9/19/2012E-HEALTH Wound Care Strategies, Inc. Net Health Systems 9/4/2012 Halo Monitoring, Inc. MobileHelp 9/5/2012 HEALTHCAREfirst Pamlico Capital 9/5/2012 Healthcare Data Services athenahealth, Inc. 9/13/2012 Qualtec Systems MTS Healthcare 9/18/2012 Inivia, Inc. MD On-Line, Inc. 9/19/2012 Quantim Nuance Communications, Inc. 9/27/2012MEDICAL DEVICES Stent Graft Technology Acacia Research Corporation 9/11/2012 BridgePoint Medical, Inc. Boston Scientific Corporation 9/19/2012


mark is in the driver’s seat on this one, and the last thing West Penn wants is to go hat in hand to another financial partner, and one that may not be as lucrative. Apparently, the Highmark loan turns into a grant if it is found that Highmark breached its contract, which is obviously what West Penn will argue. Although the dispute is definitely particular to the two parties, we have to wonder what it will mean for other acquisitions of hospital systems by managed care companies, for-profit or not.

In another deal that was announced early last year that now may fall apart, LHP Hospital Group has been trying

to purchase 175-bed St. Mary’s Hospital in Waterbury, Connecticut in what was to be a “joint venture” controlled by LHP but 50/50 on the governance side of the equation, especially with regard to St. Mary’s continuing to abide by Catholic ethical and religious directives, a common stick-ing point with Catholic-sponsored hospitals. Late in 2011 LHP announced that Waterbury Hospital would join the joint venture for a nice little threesome. The combined hospitals would have generated about $520 million in revenues, and the plan was to invest $400 million to build a new state-of-the-art hospital to replace both campuses and owned 80% by LHP. It was a great day for the people of Waterbury.



Third Quarter Results (continued from page 1)

Now, it may all fall apart if the parties can’t resolve how to deal with various reproductive services. One sensible idea was to put these services in a separate building across the street from the new hospital campus, but tubal ligations often occur during a C-section, and that would be in the main hospital, a definite no-no for a Catholic-sponsored hospital. There hasn’t been much new in Waterbury (other than the mall) since its last brass factory was built more than 50 years ago, so a new $400 million hospital campus would have been a tremendous boost not only to the local economy, but to the future health needs of the locals. Perhaps the creative juices will get flowing again to overcome the Catholic directives issue, but we have to wonder whether the fight, let alone the $400 million, is worth it to LHP. Stay tuned.

In a deal that will not be stopped because of Catholic directives, St. Louis, Missouri-based Ascension Health Alliance has signed an agreement to purchase Tulsa, Oklahoma-based Marian Health System and its 36 hospitals and more than 150 clinics in Wisconsin, Minnesota, Oklahoma and Kansas. Ascension Health is the nation’s largest Catholic and largest not-for-profit hospital system, and Marian is no small potatoes either. Consequently, while there will be no interference from The Vatican, this merger may face some antitrust regulatory scrutiny.

In a much smaller deal that should have few prob-lems crossing the finish line, 165-bed Skaggs Regional Medical Center, located in Branson, Missouri, has agreed to merge into CoxHealth, a four-hospital system headquartered in Springfield, Missouri. Under terms of the agreement, Skaggs will keep its board of directors but will become a subsidiary of CoxHealth, with financial re-sponsibility resting with the CoxHealth board. Both enti-ties are not-for-profit, and Skaggs will most likely benefit from being aligned with a larger health system. Perhaps it will find a way to change its name as well.

In the for-profit side of the hospital M&A market, the ubiquitous Prime Healthcare Services has closed on its second hospital in Pennsylvania with the acquisition of a 156-bed hospital located Bristol called Lower Bucks Hospital. In addition, in late September the growing company closed on the purchase of 155-bed Dallas Medi-cal Center in Texas. It is apparent the company does not believe in protracted discussions.

devices. While we are fairly confident additional transac-tions will turn up in forthcoming SEC filings (they usually do), we were as surprised as anyone by the decline, even though it was just 9% lower than 2011’s third quarter, a traditional slow quarter anyway. The pharmaceutical sec-tor is the most international of all, so maybe the economic uncertainty in Europe has caused some concerns from those buyers, or from potential sellers who will not obtain as high a price as they may in the future when things calm down across the pond.

In the services segment there were two bright spots in the third quarter. There was a nearly 45% increase in long-term care transactions, sparked by the investment appetite of the health care REITs, large and small, as well as the improving economics of the private pay seniors housing side of the business. Remarkably, even as future cuts to Medicare and Medicaid are mentioned on a daily basis, the acquisition activity for skilled nursing facilities remains robust, and some of the highest per-bed prices ever paid have transacted in 2012. The theory is that the low-cost producers (skilled nursing facilities among them) will benefit from any changes in the health care system, as long as they can deliver the goods on quality of care and not overpromise.

THE HEALTH CARE M&A MARKET – DEAL VOLUME BY SECTOR

Q3:12 Q2:12 % Q3:11 % Sector Deals* Deals Change Deals Change Services Segment: Long-Term Care 52 36 44% 43 21% Hospitals 11 23 -52% 16 -31% Physician Groups 8 21 -62% 28 -71% Labs, MRI, Dialysis 21 10 110% 6 250% Managed Care 6 9 -33% 5 20% Home Health Care 9 6 50% 6 50% Behavioral Health Care 3 4 -25% 1 200% Rehabilitation 3 3 0% 6 -50% Other 22 24 -8% 21 5% Services Subtotal 135 136 -1% 132 2% Technology Segment: Medical Devices 19 44 -57% 50 -62% Pharmaceuticals 19 29 -34% 24 -21% e-Health 25 24 4% 21 19% Biotechnology 18 22 -18% 12 50% Technology Subtotal 81 119 -32% 107 -24% Grand Total 216 255 -15% 239 -10%

*Preliminary figures





Sector Deal Volume Combined PriceLong-Term Care 19 $ 544,650,000Labs, MRI & Dialysis 4 338,000,000Hospitals 4 —Physician Medical Groups 4 —Home Health & Hospice 2 — Managed Care 2 —Rehabilitation 0 —Behavioral Health 0 —Other Services 10 1,444,086,000 Total 45 $2,326,736,000

The Month in M&A at a Glance:Health Care Services, September 2012

The other sector that jumped in acquisition activity is what we call labs, MRI and dialysis, a sort of catch-all group, the parts of which aren’t all that related. The M&A activity more than doubled from the second quarter to the third quarter, and was four times higher than each of the past five consecutive quarters. Unfortunately, we don’t have a good explanation for this sudden increase, but when combined with long-term care, the two accounted for 54% of the third quarter’s transaction volume in the services segment. It is doubtful that this will be sustained, but after the election in November, regardless of the out-come, at least the market will have a better understanding of the rules of the game, even though they may not like the game anymore.

sePteMBer’s deals

Transaction volume seems to average about 70 to 80 deals per month, and while September was not different in that regard, it is the makeup of those transactions that has been a bit different in the past two months. The red-hot long-term care market has been dominating the health services market, with back-to-back months of 19 or more announced deals, compared with the usual eight to 12 each month. That means it represented close to 30% of the deal volume (not dollars) in September, but less for the third quarter as a whole. After long-term care, e-health posted nine transactions in September, but only two came with prices, while pharmaceuticals had five and biotech had seven, most of which had disclosed prices.

Pharmaceutical Market. Last month we wrote about one of the largest pharmaceutical deals of the summer, which was Valeant Pharmaceuticals International’s (NYSE: VRX) acquisition of Medicis Pharmaceutical Corporation (NYSE: MRX) for $2.6 billion. Since then, it has been a relatively lackluster market. Other than the Medicis deal, which was announced over the Labor Day weekend, the transactions have been relatively small. The largest of which, coincidentally, was Valeant’s acquisi-tion of the U.S. rights to Visudyne, which is used to treat abnormal growth of leaky blood vessels in the eye caused by wet age-related macular degeneration. Canada-based QLT Inc. (NASDAQ: QLTI) sold the U.S. rights and inventories for $112.5 million in upfront cash plus up to $20 million in various milestone payments.

In a similar-size deal, the pharmaceuticals division of Covidien (NYSE: COV), known as Mallinckrodt, struck a deal to buy privately-owned CNS Therapeutics for $100 million cash. CNS focuses on products for site-

specific administration to the central nervous system to treat neurological disorders and intractable chronic pain. The acquisition is expected to close later in the fourth quarter but it is not expected to have a material impact on 2013 sales or earnings per share.

Biotechnology Market. The biotech sector didn’t report any major transactions in September either. The largest deal was the sale of Complete Genomics (NASDAQ: GNOM) to China-based BGI-Shenzhen for approxi-mately $117.6 million, or $3.15 per share. The price rep-resents an 18% premium to the prior day close. Complete Genomics is a leader in whole human genetic sequencing, which is used by research centers to conduct medical research to improve the treatment of various diseases. BGI-Shenzhen operates international genome sequencing centers. Latham & Watkins advised Complete Genom-ics in the deal, which is expected to close in 2013.

In another transaction which could become quite large, Baxter International (NYSE: BAX) is buying the European rights to Rigosertib from privately-owned Onconova. Rigosertib is an anti-cancer compound that is used to treat a wide range of bone marrow disorders and for pancreatic cancer. Baxter is paying $50 million upfront plus milestones and royalties that could add up to an additional $515 million. Separately, Roche Holding (SIX: RO) is buying the worldwide rights to California-based Galaxy Biotech’s cancer treating antibodies for $8 million cash upfront plus milestone payments. The deal will strengthen Roche’s already strong portfolio of antibody products. e-Health Market. The e-health market continues to be



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one of the most active sectors with nine announced ac-quisitions in September and 25 for the third quarter. How much of the activity is related to the hype around Obam-aCare is anyone’s guess, but interest has been very strong all year. In the largest deal of note in September, private equity firm Thoma Bravo has entered into an agreement to purchase Mediware Information Systems, Inc. (NAS-DAQ: MEDW) for approximately $195 million. Thomas Bravo is paying $22.00 per share in cash for the company, representing a 40% premium to the prior day’s closing price. Mediware develops and licenses clinical manage-ment information solutions and on a trailing 12-month basis had revenues of nearly $65 million and EBITDA of $13.6 million. The transaction is expected to close at the end of the year, and William Blair & Company served as financial advisor to Mediware, while Herrick Feinstein provided legal counsel; Kirkland & Ellis advised Thoma Bravo. Although no price was disclosed, another private equity firm, Pamlico Capital, purchased Missouri-based HEALTHCAREfirst from The Riverside Co., another private equity firm. The target company is a technology company serving the home health and hospice market.

Medical Device Market. In one of the largest transactions of the month, Medtronic Inc. (NYSE: MDT) has agreed to purchase China Kanghui Holdings (NYSE: KH) for $30.75 per share, representing a 22% premium. China Kanghui makes orthopedic implants and associated instru-ments for trauma, spine and joint reconstruction. Net of KH’s cash, the transaction value comes to $775 million. The company’s revenue grew from $37 million in 2010 to $52 million in 2011, and trailing 12-month EBITDA is about $26.4 million. This acquisition brings Medtronic closer to its goal of getting 20% of its sales from emerg-ing markets by 2016, and this is believed to be the largest acquisition of a Chinese health care company.

Other Deal News. There were a couple of noteworthy transactions in the Labs side of the health care market. Danaher Corp. (NYSE: DHR) has agreed to buy IRIS International (NASDAQ: IRIS), a manufacturer of auto-mated in-vitro diagnostic systems for urinalysis and body fluids. Danaher is paying $19.50 per share, representing a 43.5% premium, which comes to approximately $338 million net of cash but including assumed debt. IRIS will become part of Danaher’s Beckman Coulter Diagnostics business when it closes later in the fourth quarter.

In a transaction that may not get done, in mid-Sep-tember ProPhase Labs, Inc. (NASDAQ: PRPH) received an unsolicited offer for $1.40 per share from Matrixx Ini-

tiatives, Inc., which was a 32% premium above the price when news broke out on September 6. ProPhase rejected the non-binding offer, but Matrixx began the solicitation back in May and has just not wanted to let go. In early September, Matrixx purchased a three-year option to buy the 1.45 million shares owned by the founder and former CEO of ProPhase for $1.40 per share (hmmm, looks like he wants to cash out of his illiquid stock). Matrixx makes the Zicam line of cold products, while ProPhase makes the competing Cold-EEZE. As we were going to print, Matrixx bumped up its offer to $1.60 per share in cash, which comes to a value of $24 million. This is not high-stakes M&A, but we don’t see many unsolicited offers these days, so this one may be interesting to watch.

Also as we were going to print, Allscripts Health-care Solutions (NASDAQ: MDRX), which is consider-ing a leveraged buyout, apparently received first-round bids from Blackstone Group (NYSE: BX), Carlyle Group (NYSE: CG) and private equity firm Silver Lake Management LLC. The electronic health records com-pany, which is being advised by Citi, will be looking for second round bids later this month, so we may have more news in a few weeks.

Long-Term Care Market. As we mentioned, September nearly matched August in terms of the number of an-nounced long-term care transactions, but all of them were under $100 million with the exception of the anticipated announcement by Health Care REIT (NYSE: HCN) regarding who would be the buyer of the Sunrise Senior Living (NYSE: SRZ) management business after HCN closes on the purchase of the entire company and the nearly $3 billion of real estate assets. Of 19 sector transac-tions in September, 17 had disclosed prices, and the more noteworthy of these are in the table on pages 11 and 12.

Ever since Health Care REIT announced its acquisi-tion of Sunrise Senior Living in late August, there has been a constant flurry of activity, announcements and moving parts. We already reported on HCN’s progress in taking over full ownership of as many of the Sunrise joint venture assets as they could, the timing of which we have to as-sume was pre-planned as far back as early August. In other words, they knew exactly what they were doing. What did catch us by surprise was the announcement regarding the buyer of the Sunrise management business. With all the talk about Mark Ordan and his management team being so important to the transaction, and HCN stating that the



deal suMMarIes—servICes Behavioral Health Care

TARgET LISTINg AcQUIRER LISTINg DATE PRIcETimberline Knolls Private Acadia Healthcare Company, Inc. NASDAQ: 9/4/2012 $90,000,000 Lemont, Illinois Franklin, Tennessee ACHC

In BrIef: Timberline Knolls is a 122-bed inpatient behavioral health care facility located near Chicago. For the 12 months ended June 30, 2012, it had revenues of approximately $33 million. The buyer plans on completing an 18-bed addition already started.

deal suMMarIes—servICes laBoratorIes, MrI & dIalysIs

TARgET LISTINg AcQUIRER LISTINg DATE PRIcEIRIS International Inc. NASDAQ: Danaher Corp. NYSE: DHR 9/17/2012 $338,000,000Chatsworth, California IRIS Washington, D.C.

In BrIef: The price was $19.50 per share, representing a 43.5% premium above the closing price. The purchase was paid in cash plus assumed debt, and is net of cash assumed. IRIS manufactures automated in-vitro diagnostic systems for urinalysis and body fluids. IRIS will become part of Dana-her’s Beckman Coulter Diagnostics business.

deal suMMarIes—servICes long-terM Care

TARgET LISTINg AcQUIRER LISTINg DATE PRIcE3 Iowa Assisted Living Facilities Private CNL Healthcare Trust, Inc. Private 9/5/2012 $18,800,000Iowa Orlando, Florida

In BrIef: CNL purchased a 75% interest in the portfolio which includes 122 assisted living and memory care units, while a previous investor in the group purchased the remaining 25%. The joint venture has hired Provision Living to manage the portfolio.

Franklin Park Portfolio Private Capitol Seniors Housing Private 12/12/2012 $59,600,000Plano and North Richland Hills, Texas Washington, D.C.

In BrIef: This portfolio consists of two campuses with a total of 406 independent living units that were built in 2007 and 2009. In-place rev-enues and EBITDA were $10.7 million and $4.3 million, respectively, which should increase when one of the properties stabilizes.

Oakmont Gardens Private MBK Senior Living Communities Private 9/12/2012 $35,000,000Santa Rosa, California Irvine, California

In BrIef: AEGON USA sold the 163-unit community that has 124 independent living units and 39 assisted living units. In-place revenues and EBITDA were approximately $7.375 million and $2.65 millinon, respectively.

Seven Senior Living Properties Private Care Investment Trust Inc. OTCQX: 9/13/2012 $106,500,000New Jersey, Pennsylvania, Colorado New York, New York CVTR

In BrIef: Juniper Communities LLC is selling seven of its senior living communities to the REIT, which have a total of 410 units. Estimated annual revenues and EBITDA are about $24 million and $8 million, respectively. Overall occupancy of the portfolio is 94%.

Sunrise Management Business NYSE: HCN Kohlberg Kravis Roberts NYSE: KKR 9/14/2012 $130,000,000McLean, Virginia New York, New York

In BrIef: In connection with the purchase of Sunrise Senior Living, Health Care REIT announced the ultimate buyer of the management busi-ness, which is a consortium including KKR, Beecken Petty O’Keefe and Coastwood Senior Housing Partners. The investment group is paying $104 million for an 80% interest, and Health Care REIT will retain a 20% interest for the balance. Both transactions should close early 2013.

Leah Bay Portfolio Private Sentio Healthcare Properties, Inc. Private 9/18/2012 $49,000,000Texas and Illinois Orlando, Florida

In BrIef: The portfolio includes three Alzheimer’s facilities in Illinois and one in Texas with a total of 152 units. The buyer is paying cash and assuming $32.9 million of debt. JEA Senior Living, which will own a 20% interest, will continue to manage the properties.



deal suMMarIes—servICes Long-Term Care (cont.)TARgET LISTINg AcQUIRER LISTINg DATE PRIcE150-Bed Skilled Nursing Facility Private Cornerstone Core Properties REIT Private 9/20/2012 $15,000,000Galveston County, Texas Irvine, Texas In BrIef: This is a purchase/leaseback and the initial lease rate for the 10-year lease is 10%. Occupancy at the facility is about 90%, and debt financing was provided by GE Capital, Healthcare Financial Services.

Independence Village Private Sabra Health Care REIT NASDAQ: 9/24/2012 $26,500,000Frankenmuth, Michigan Irvine, California SBRA

In BrIef: Independence Village of Frankenmuth is a 249-unit, full-service independent living community. Sabra has entered into a triple net lease with Unified Acquisition & Development, LLC for 10 years with two five-year renewal options. The initial annual cash rent will be $2.12 million for an 8.0% yield. with annual escalators of at least 3%.

Sector target acquirer DateHOME HEALTH & HOSPICE Family Home Care Corporation Gentiva Health Services, Inc. 9/4/2012 North Mississippi Hospice Gentiva Health Services, Inc. 9/11/2012HOSPITALS Marian Health System Ascension Health Alliance 9/5/2012 Goodall Hospital MaineHealth 9/6/2012 Skaggs Regional Medical Center CoxHealth 9/21/2012 Dallas Medical Center Prime Healthcare Services 9/26/2012LABS, MRI & DIALYSIS Two Dialysis Centers in St. Louis, Missouri U.S. Renal Care 9/18/2012 Pan Labs Pharmacology Unit Eurofins Scientific, Inc. 9/20/2012 Calloway Laboratories Ampersand Capital Partners 9/25/2012LONG-TERM CARE Devon Manor (Arizona) Altitude Health Services 9/1/2012 The North Shore Retirement Hotel (Illinois) Horizon Realty Group 9/6/2012 Newcastle Place (Wisconsin) Life Care Services, LLC 9/6/2012 The Chamberlin (Virginia) Smith/Packett 9/8/2012 Fulton Villa (California) Local Owner/Operator 9/11/2012 Two SNFs in California The Ensign Group, Inc. 9/20/2012 71-Bed Memory Care Facility (Oregon) Cornerstone Core Properties REIT, Inc. 9/20/2012 New Dawn Memory Care (Colorado) Sabra Health Care REIT 9/20/2012 Highlands Nursing & Rehab (Kentucky) Aviv REIT 9/25/2012 Northview Manor (Michigan) Regional Owner 9/28/2012 Sumner on Ridgewood (Ohio) Concordia Lutheran Ministries 9/28/2012MANAGED CARE Easy Choice Health Plan, Inc. WellCare Health Plans, Inc. 9/6/2012 Amerigroup Virginia, Inc. Inova 9/28/2012PHYSICIAN MEDICAL ABQ Health Partners Healthcare Partners LLC 9/10/2012 The Endoscopy Center of Richmond Physicians Endoscopy, LLC 9/14/2012 Pediatric Cardiology of Austin MEDNAX, Inc. 9/17/2012 Digestive Health Associates Endoscopy Physicians Endoscopy, LLC 9/27/2012OTHER Molegro CLC bio 9/3/2012 ScripNet Healthcare Solutions 9/5/2012 ExitCare Elsevier BV 9/11/2012 Marlex Pharmaceuticals, Inc. ScripsAmerica 9/12/2012 Florida Medical Record Services, Inc. MRO Corp. 9/13/2012 MedVentive McKesson 9/24/2012 Paragon Biomedical Inc. Clinipace Worldwide 9/25/2012 Two Ambulatory Surgery Centers Hackensack University Medical Center 9/28/2012

addItIonal transaCtIons—servICes

deal suMMarIes—servICes other

Mediq NV ENXTAM: Advent International Corp. Private 9/24/2012 $1,330,000,000Ultrecht, Netherlands MEDIQ Boston, Massachusetts In BrIef: Mediq supplies medical devices, pharmaceuticals and the associated care. The price was EUR 13.20 per share, or a 53% premium, plus the assumption of EUR 258 million of debt.




valuation of the management business was not going to be that high, we had figured that Mr. Ordan would partner with Goldman Sachs as his equity investor to buy the management company, since he had such strong ties to Goldman. Wrong.

When the trio of Kohlberg Kravis Roberts (KKR), Beecken Petty O’Keefe (BPOC) and Coastwood Senior Housing Partners (Dan Decker) lost the competitive bid for CCRC operator Erickson Retirement Communi-ties a few years ago, and then went quiet on us, we had assumed they gave up on trying to make a major sector acquisition. When Dan Decker then went on Health Care REIT’s board, it seemed like another nail in their joint venture coffin. In a very hard to find release, just before the Sunrise deal was announced, HCN announced that Mr. Decker had resigned from its board to devote more time to his business interests with Coastwood. Those interests now include teaming up again with KKR and Beecken Petty to buy the Sunrise management company when HCN closes on its acquisition of the entire entity early next year. They are paying approximately $104 million for an 80% interest in what will be a new Sunrise management company, with Health Care REIT retaining

a 20% interest for a $26 million investment. The total “value” comes to $130 million.

Some people have been calling the price a bargain, others not, but whichever the case, we will only know several years from now because the real value will be in what the new team can do with it. There are so many moving parts, even before the primary transaction closes, that it is next to impossible to even get a handle on what numbers go where, so forgive us if we are wrong on some of our assumptions. By next year, it appears there will be three general groups of assets managed by Sunrise: the small number of leased properties (down to about 15), the properties managed for third parties (including other REITs) and the properties where HCN will at some point own 100% of the real estate. Total revenues from these three groups may be about $1.8 billion or higher. Excluding the leased properties, annual management fee revenues may be between $100 million and $110 mil-lion, with some reductions from current management fee income coming from HCN’s disclosure that it will reduce the fee from 7% of revenues to 6% on the properties it owns. The 15 leased properties that will be retained are apparently operating profitably, but there is certainly room to move on occupancy.

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The intriguing question is, How much of the current G&A expense, which was about $25 million in the second quarter, will be cut once the company goes private? We know there are non-recurring items such as legal bills, restructuring costs and financial reporting costs as a pub-lic company embedded in the current G&A number, but we have to assume that management already removed as much “fat” as they could. Most people assume that 30% to 50% of a management fee goes to the bottom line, but for a large company that is difficult to assume. If the number for the “new” Sunrise is about $110 million in management fees, the net cash flow on that could be $20 to $25 million, plus what they can make on the remaining leases. If that’s the case (and these are estimates), the KKR group may be paying about 4x net cash flow and 1.1x to 1.2x gross cash flow (management fee income plus cash flow above leases). Not bad.

The typical hold period for KKR is seven years, but it may be a little longer for this one because they want to jump-start the development business, with five to 10 new properties a year, and to grow that to any scale and reap the financial benefits will take at least five to seven years, especially as they have to locate new sites. Included in the deal are 12 development parcels, so we assume they will start with those. Growth by property acquisition will be tough because the REITs have the cost of capital

advantage, so we assume KKR will be looking at portfo-lio management contracts and will look to HCN to buy the real estate for any deals they turn up. One part of the process that we don’t think will happen is Mr. Ordan stay-ing beyond a transition period. When the deal has closed he will have accomplished what he was hired to do and made upwards of $30 million or more for his success, so we just don’t see him in the picture beyond 2013, despite the talk from Health Care REIT. Perhaps we are wrong, but the odds are with us.

The skilled nursing sector wasn’t quite as active as August, but there is one very interesting transaction that is occurring that was kept under wraps. Indiana-based Ide Management Group, which owns and operates 20 skilled nursing facilities in Indiana, Illinois, Iowa and Wisconsin, is doing what looks like a reverse merger with a company called Fortune Industries, Inc. (NYSE: FFI). Fortune Industries is a “professional employer organization” (PEO) which apparently has revenues of $60 million. Its operating assets will be exchanged for all the common and preferred shares owned by the late Carter M. Fortune and by CEP, Inc., which had previ-ously agreed to buy the company’s PEO operations. As a result of these exchanges, with Ide Management becom-ing a wholly-owned subsidiary of Fortune and founder Mark Ide controlling a substantial portion of the Fortune



Industries shares, Ide Management Group will essentially become a small publicly traded company. To add to the “intrigue,” on September 28 Ide Management closed on the purchase of seven skilled nursing facilities in Indiana, bringing its total to 27 facilities. It is unclear how that changes the merger, if at all. Stay tuned.

venture CaPItal and IPo Market

Is the IPO market opening up a bit for biotech and small pharmaceutical companies? The venture capital community certainly hopes so, especially as third quarter M&A activity took a dip this year from both the second quarter and last year’s third quarter. As we were going to print, Regulus Therapeutics (NASDAQ: RGLS) priced its 11.25 million share IPO at $4.00 per share with Laz-ard Capital Markets, Cowen and Company and BMO Capital Markets as the joint book-running managers. The good news is that the price has not dipped below the offering price. The company is advancing microRNA therapeutics toward clinical development in several areas, including oncology, fibrosis, hepatitis C and metabolic diseases. Waiting to go are Kythera Biopharmaceu-ticals with its 4 million share offering, and Intercept Pharmaceuticals.

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Sleep Foundation (yes, there really is one) has estimated that up to 18 million people in the U.S. alone have some form of sleep apnea, a disorder which occurs when someone’s breathing is interrupted during sleep, leading to lower levels of oxygen to the brain. Apnex Medi-cal recently raised an additional $10 million from New Enterprise Associates, Domain Associates and Polaris Ventures, on top of $50 million previously raised. The company is developing an implantable device that will de-tect a patient’s breathing pattern during sleep and provide electric pulses to the nerve that controls the muscles that keep airwaves open. If successful, not only will it result in a good night’s sleep for a lot of people, it could also save a lot of marriages. In other VC news, Third Rock Ventures announced the formation of MyoKardia, Inc. with a $38 million Series A financing. The company is developing a pipeline of novel small molecule therapeutics that address key clinical needs for patients with genetic heart disease. In another Series A round, Vascular Pharmaceuticals raised $16 million in a financing co-led by Intersouth Partners and MPM Capital. The company is working on new products to treat patients with complications arising from diabetes. They simultaneously signed an agreement with Janssen Biotech to sell the company to Janssen, at Janssen’s option, upon successful completion of a Phase 2 clinical study. Janssen is a subsidiary of Johnson & Johnson (NYSE: JNJ). No need for an IPO on this one.



Documents

Volume 17, Issue 10 THE October 2012 Health Care …...Volume 17, Issue 10 October 2012 InsIde the health Care M&a Market INSIDE THIS ISSUE Hospital M&A Market There have been a lot