July 1, 2015
Interviewed by: David Snow
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Opportunities Created by the ACA

Steve Klinsky of New Mountain Capital says the Affordable Care Act has opened several opportunities for PE in the healthcare sector, including hospitals, home infusion, and home care.

Steve Klinsky of New Mountain Capital says the Affordable Care Act has opened several opportunities for PE in the healthcare sector, including hospitals, home infusion, and home care.

Opportunities Created by the ACA
With Steve Klinsky of New Mountain Capital

David Snow, Privcap: Steve one of the industries that your firm invests in is healthcare. Given that your firm is well known for doing deep dives into sectors before going out and looking for deals I’d love to hear about some of the key themes that you’ve identified with regard to healthcare that may translate into further deal opportunities.

Steve Klinsky, New Mountain Capital: Yeah, healthcare is an area that we’ve put a lot of time and attention to since the early days of the firm. The second transaction the firm ever did about 15 years ago was building up the largest privately held chain of outpatient surgery centers. We’ve had a medical device and pharma gas  called IKaria  that we just sold to Mallinckrodt that was a very, very good success for the firm. We’ve helped health insurers sell health insurance policy with advance software. And so we’ve been involved in a range of ways. I guess the basic themes I would say for private equity are we have a, we believe in the unit growth of healthcare. And we’ve always been concerned by the reimbursement risk of healthcare. So we keep trying to find ways that you know, they’re going to be more and more people who need healthcare. Healthcare is getting more affordable in certain ways. But how do you avoid the reimbursement risk?

So for example the most recent company we bought that healthcare related is a specialty distributor for the home infusion market. There are a million people chronically ill at home getting intravenous for chemotherapy or pain management. That population is growing. When the nurse gets to the home she needs a kit of parts from 200 different manufacturers at that home, and we’re the dominant provider that supplies, that distributes the parts. So we’re not subject to reimbursement, but we benefit as the industry grow. So we’re doing it that way, and we’re looking for those type of opportunities. And in our public fund we’ve done very, very well in the healthcare space. And one of the major correct judgments that the fund made was to for example invest in hospitals on the understanding that the Affordable Care Act could be good for hospitals. And it has been, and they’ve been in a number of other good picks. But that’s been our major themes.

Snow: Follow-up question on your investment in the home infusions market. Is part of that thesis that in order to bring costs out of the healthcare market people are going to need to do more things out of hospitals?

Klinsky: Yeah, so when we talk about you know, New Mountain focuses on deep dives. And this was two deep dives coming together. So one deep dive is specialty distribution in general where you can have advantages as a distributor you know, versus other distributors. So that, and then that was one deep dive. The other deep dive is the aging of America, demographics, healthcare moving from a very expensive hospital setting to a home setting, which is both more cost efficient and frankly much better for the patient, and much better for everyone involved. And also within that we did a particular deep dive in home infusion, which is a very much of a growing niche. And there are a number of drugs going through FDA testing now that would be done, infusion means intravenous, that would be given to you though intravenous versus a pill. And so in a sense that’s a third deep dive, and they all came together on this opportunity.

Snow: Very briefly, cause I know it’s a complicated topic, but why is the ACA going to be net good for hospitals?

Klinsky: Well the basic answer is that if patients can actually pay their bill because they have insurance it’s better for the hospital who is providing the service than people using the emergency room who can’t pay. And so the extension, the broadening of healthcare insurance to more people has actually been good for hospitals. And that’s through our public equity arm, and we have not bought hospitals in private equity. But we’ve done well with it through our advantage public equity funds.

Snow: What are some of the profiles of companies in healthcare that you’re looking for right now based on maybe a pre-identified trend?

Klinsky: Well I honestly don’t know what we’re going to buy next. You know, we’re trying, we’re looking in a range of areas, and if we can find the sort of defensive growth businesses that I’ve described with those characteristics, and hopefully not subject to reimbursement we’re very actively looking. But I don’t know what it’s going to be yet.

Snow: So it could be from a broad range of types of healthcare–

Klinsky: Yeah, we do look in niche devices. I mean if a device is really great, and saves lives, and has major advantages, and we can grow it, that’s what Ikaria was. It was a device and a gas that saved blue babies, and we built that value from about 600 million, and eventually sold it for 2.3 billion because of the quality of that product. So we are looking at those type of situations. And we’re looking at the field broadly.

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