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Tailwinds for pharma services extend beyond covid, says LLCP

"There is so much research occurring in real-time, so we do not need to overlap with the venture end, but rather attach ourselves to the growth aspect," said LLCP’s Mike Weinberg.

Pharmaceutical services is one healthcare subsector that Levine Leichtman Capital Partners has been investing in recently. The firm bought Prime Global Medical Communications a year ago. As part of our ongoing series profiling private equity firms investing in healthcare, PE Hub spoke with Mike Weinberg, managing partner at LLCP, who has been with the firm for 14 years.

Lowering costs, improving outcomes

“Big picture, we are investors in healthcare with a focus on activities that reduce the cost of healthcare, while improving outcomes,” Weinberg told PE Hub. “LLCP deviates from other healthcare specialists in that we like to avoid businesses that have less controllable risks such as reimbursement.”

One example of a less controllable risk would be medical payers.

“I would say payers limit our control. If we are the provider, our revenue is dictated by the insurance companies and in some cases, Medicare,” Weinberg said. “We can do all kinds of work to understand what the trends are, but in the end, you have less of an ability to impact that.”

Pharma services

“Recently, we have focused on pharmaceutical services, where we believe that tailwinds exist beyond covid, as evidenced by the amount of research and market penetration of successful drugs in controlling cost and improving outcomes,” he said. “Just think about how drug enhancement is impacting success rates in treating disease, improving quality of life for chronic illnesses, and there’s more to come. There is so much research occurring in real-time, so we do not need to overlap with the venture end, but rather attach ourselves to the growth aspect. It is an exciting sector.”

Prime Global is a good example. The company works with pharmaceutical companies, both pre- and post-commercialization to help healthcare practitioners become aware of the benefits of these drugs, and ultimately, to get them into the hands of patients. In January, Prime bought HCD Economics, which conducts research and collects proprietary health economic evidence for market access, pricing, and reimbursement.

Prime Global “works to connect the science with the users, and we do that through producing medical communication collateral to support the pharmaceutical and bio-tech companies,” Weinberg said. “It is growing rapidly, both organically as well as through acquisition.”

On the opposite end of the spectrum, LLCP also owns a continuing education company called Therapeutic Research Centers, which made an add-on acquisition last year.

“TRC helps pharmacists and nurse practitioners comply with the continuing education requirements of their licenses and keeps practitioners up to date with all the latest and greatest clinical developments,” Weinberg said.

Scarcity of care

“We have also assessed the provider space from the perspective of: where is there scarcity of care? Unfortunately, the behavioral sector, and specifically eating disorders, has a growing supply/demand imbalance,” he said.

Within this subsector, LLCP back in 2015 purchased Monte Nido, which provides residential and outpatient behavioral care for patients suffering from eating disorders. Monte Nido acquired Walden Behavioral Care last year. 

PE Hub reported back in October that LLCP is preparing the company for sale, but LLCP declined to provide an update on the sale process.

“Our clinicians work with patients to manage their disorder, tackle recovery challenges, and re-enter their everyday life with limited relapse,” he said. “This is consistent with our big picture theme of reducing costs and increasing outcomes.”

Differentiation

“We differentiate ourselves by how we invest, as we don’t pursue a traditional buyout strategy,” Weinberg said. “Rather, we invest through what we call structured private equity, which involves investing in a combination of equity and debt together. We use less third-party debt and provide for a less dilutive solution to management and owner/operators, allowing them to own a larger piece of their businesses. In our view, it results in a greater alignment of incentives.”

He noted that the firm focuses on businesses that have an ability to grow their EBITDA.

“We believe that when companies have a visible path to growth – both organically and inorganically – they will be valuable in any market environment,” he said. “In the case of Monte Nido, for example, the company built new units, we added beds, increased the average census, and used M&A to expand its platform geographically and by service offering.”

Discipline is critical

“I think there is still a supply/demand imbalance in private equity, which is creating this heightened level of valuation, or at least contributing to it,” he said. “As such, it is key to stay disciplined on asset selection, as the qualities we look for in a business don’t change just because the market values move up and down.”

The firm seeks “market leaders” with strong management that want to retain or increase their ownership in the business, and that are offering their customers something proprietary or differentiated.

“How the industry invests and manages its portfolios is being tested right now – given the current macro challenges, including supply chain and inflation,” he said. “Discipline has always been core to LLCP, but it is especially critical today.”

He said that due diligence is also a very big part of the firm’s underwriting today.

“We’re spending a lot of time during due diligence to understand the macro risk factors, and whether that is going to be a challenge for a company,” he said. “We haven’t made investments in businesses where we weren’t satisfied and confident.”

Weinberg added that on the services side, the firm tries to successfully mitigate wage increases by raising prices. And “it goes back to the original underwriting, in that, is your product or service really needed by the customer?”

“On the industrial side, you’ve got to be able to source products from alternative suppliers when appropriate and make sure you have sufficient safety stock,” he said. “Again, we’re continuing to watch this and work proactively with our portfolio companies on a real-time basis.”

Exit strategy

“We do tend to have a four-to-five-year hold,” he said. “But in reality, our exit timing is really dictated by the realization of our business plan and our investment case.”
Weinberg said he views LLCP’s job and the PE industry in general, “as changing the trajectory of growth in a business.”

“And our team is very talented supporting portfolio companies with the value creation tools to do that, which is different for every situation,” he said. “In healthcare specifically, you can do that through factors, such as expanding the end market, expanding of products, expanding of different services, and expanding geographies. We are constantly learning and applying new lessons to new opportunities, while overlaying the current challenges of the market, to ensure we can still accomplish those same objectives with the management team.”

Firm facts

Founded in 1984 and based in Beverly Hills, California, Levine Leichtman Capital Partners has managed approximately $12.9 billion of institutional capital since inception. The mid-market private equity firm invests in non-cyclical, less-correlated to GDP sectors through one structured PE investment strategy with three dedicated platforms.

Recent investments

LLCP invested in Prime Global in last year; it invested in Suveto in 2020. (See sidebar blow for more information.)

Recent exits

LLCP exited Caring Brands International in 2021 after initially investing in 2015; exited ZorgDomein in 2020 after initially investing in 2017; exited Sequel Youth and Family Services in 2013 after initially investing in 2009.

LLCP’s healthcare portfolio highlights

(Dates refer to initial investments.)

Capsa Healthcare: A provider of products that increase efficiency and reduce costs, enhance medication security and tighten inventory control across healthcare settings worldwide. Core offerings include mobile workstations, medication management solutions and pharmacy automation products sold to thousands of end customers, including leading health systems, senior care communities and major retail and institutional pharmacies. (2017)

Prime Global: A global medical communications and market access group that provides biotech, pharmaceutical and healthcare businesses with full-service professional communications, including healthcare strategy and consultancy, scientific and medical communications, consumer health, patient-integrated science, and market access. (2021)

Suveto: Provides veterinary professionals with opportunities to create a better veterinary future. Through a network of veterinary hospitals (Suveto Veterinary Health), financial loans (Calico By Suveto), and online networking (Harbor by Suveto), the company empowers veterinary professionals to take ownership of their careers, as well as financial, personal, mental and professional well-being. (2020)

Monte Nido: A provider of treatment programs and services to adults and adolescents suffering from eating disorders. With facilities across the US, Monte Nido offers a continuum of care encompassing residential treatment, partial hospitalization, intensive outpatient and transitional care. (2015)