Eyeworld

30 February 2018 EW NEWS & OPINION by J.C. Noreika, MD, MBA Insights In today's perfect storm, private equity money provides an exit strategy for ophthalmic practice owners. Will it work this time? "J im, you old crook! What're you doing here? Don't tell me they let you back in the game." "Jay? Jay Noreika? You're still vertical? Last thing I heard you were in the witness protection program." "After what you got me into, I should have been. Do you have time for coffee?" In the back of the exhibition hall, Jim spotted an empty table at a kiosk promising fresh-brewed caffeine. Settling into molded plastic chairs, the two took a deep draught of the dark roast. The years faded away. "It's happening again you know." Jay took another sip. "I know. I recently saw a blog piece in Doxim- ity. Private equity is buying oph- thalmologists. The guy who wrote it was in grade school when you were rolling up practices." "That's why I'm here. It's hot again. Old guys are trying to cash out and there are folks writing checks." "Jim, what's different now?" "Well, a few who cashed out the first time did pretty good for themselves. Most didn't, but they got their practices back. The debt holders were mostly OK. The stock was good for kitty litter." "So what's different?" Jim looked at his Styrofoam cup. "It's the perfect storm. Any doc who owns a practice sees what's coming. strategy, efficiencies, economies of scale, best practices, 'just let me practice medicine.' Some say technology was prehistoric back then compared to today. Others say young docs are OK with being employees. Autonomy isn't their thing. I think the young ones have the toughest piece. Becoming a part- ner in the traditional sense isn't an option. And there are new hurdles. Regulations, legal challenges, reim- bursement from bigger and more powerful insurers, practice gover- nance. But hey, there's an awful lot of money floating around. It's all in the eye of the beholder, no pun intended." Glancing at his Rolex, Jim picks up his briefcase. "Whoa, I've got money to make. Wish we could talk longer. I'll send you a book. It's called This Time Is Different. I forget who wrote it but it'll answer your question better than I can." "Thanks, Jim. Just like the old days. I like the book's name. The four most dangerous words in finance." EW Editors' note: Dr. Noreika has practiced ophthalmology since 1981. He has been a member of ASCRS for more than 35 years. Join the discussion on this article and others on the EyeWorld blog at blog.eyeworld.org. Contact information Noreika: JCNMD@meditrends.net Ophthalmology is expensive—a big investment with a lot of fixed costs. He's tired of all the crap, it's not fun anymore. Private equity's out there. We're feeling tremendous pressure to get returns. A short horizon and on to the next deal. We expect to earn double, triple our investment. The world is sick with money that isn't working. Debt's never been cheaper. There are more than 2,000 PE firms in North America alone. Seventy-five hundred U.S. businesses are backed by our cash. This doesn't count venture capitalists and indepen- dent sponsors. The competition is cutthroat, risk is insane and winners become fabulously wealthy." The PA system intruded, "The exhibition hall will be closing in 15 minutes." Jim continued, "A small private equity firm specializing in health- care and a practice on the east coast put together a management com- pany sometime in 2014. Nothing new. The practice grows through acquisitions. It vertically integrates by adding optometric practices and surgery centers. PE likes surgery centers. The management company runs the back office. Practice owners get bought out, some cash, some stock. The PE firm is the majority shareholder. All the docs sign a new employment agreement with a bullet-proof restrictive covenant. Companies have different ways of making sure their new employees don't go to the beach. Stock might vest over years or, at best, find an illiquid market through a second- ary seller. Anyway, in 2016, this PE company takes a hit to the balance sheet with a $61 million loan to recapitalize. Femtos are expensive. Last summer, it sells to a $5 billion New York City firm. Financial terms aren't disclosed. So now the docs of the 12 or so original practices work for new owners." "I assume money guys are smart or you wouldn't be rich, Jim. What are you looking for?" "Rollups are tried and true. Any cottage industry with good cash flow is a target. Ambulance companies, funeral homes, waste removal, bus companies, the list goes on. You gotta understand a medical practice isn't a company of flesh and blood to a PE. It's a deal. Our time horizon to recoup investment is around 5 years. In low risk deals, we expect double our investment, even more in high-risk deals. That's hard to do in the service industry. Software companies are great. Write the app and sell a zillion. Medical practices don't scale like that. Lots of docs are already working at 110%. You can add services, maybe a femtosecond laser. Those aren't cheap and there are other costs. Marketing, integra- tion, information systems, keeping regulators happy, bricks and mortar. But here's the hammer. If you say no thank you, you are at a compet- itive disadvantage. Once big money comes in, the game changes." Wiping the table, Jay asks, "What's the end game? "There are a couple of op- tions. It's easiest early on when the founding company is flipped to a bigger PE. New money comes in. Or, there might be strategic reasons to merge companies. An IPO can be the ultimate strategy but as the old phy- sician practice management com- panies found out, that creates new problems. Remember trying to find a few pennies of earnings for the quarterly? Some opt for a full exit. The company is dismantled and the docs get to buy their practices back. Debt and equity holders will have something to say about that." "So what's different?" Laughing, Jim shakes his head. "You know, it's the same sell. Exit Four dangerous words J.C. Noreika, MD, MBA

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