The coming boom — Edgemont's Jeff Swearingen on private equity's impending impact in orthopedics

Written by Eric Oliver | May 23, 2019 | Print  |

Private equity investment in orthopedics to date has been sparse, but the fuse is lit and the fireworks are coming.

Becker's Spine Review spoke with Jeff Swearingen, co-founder and managing director of the healthcare investment firm Edgemont Partners, to hear his predictions on healthcare investment over the next three years.

Question: What point are we in the second wave of PE investment?

Jeff Swearingen: I think we're still very much in that wave. The first wave with hospital-based specialties, like anesthesia and emergency medicine, lasted five- to six-years. The peak of that was about three years. There were three years in each of those specialties where M&A activity was at a frenetic level. I think we're still in the frenetic period of the second wave for dermatology and vision care, and we're in the prefrenetic period in gastroenterology and orthopedics.

Q: In this second wave, where has the majority of investment been? It seems there's been a wealth of ophthalmology-related days recently.

JS: I think it depends on how you measure it. The statistics we track say there's actually been more PE-backed dermatology plays, but I wouldn't disagree [that ophthalmology investment has taken off]. I get the sense that at the moment, in the last six to 12 months, ophthalmology and vision care have been the most active in terms of number of deals. There are fewer PE-backed platforms in the space, and that may help overall deal volume.

The other thing to keep in mind with vision care is you're thinking about three distinct subspecialties: optometrists, ophthalmologists and retina surgeons. We've seen activity across all three of those provider types.

Q: Fast forward three years — how will analysts reflect on those first waves of PE investment?

JS: You've had a tremendous level of consolidation through the first wave over the years. You've had several very large PE-backed players enter into those spaces.

For example, U.S. Acute Care Solutions was backed by Welsh, Carson, Anderson & Stowe in the emergency medicine and hospital medicine space. Welsh has been in it for several years now and everyone anticipates they'll pursue some sort of exit strategy in the next 12 to 18 months.

They've established a bit of a playbook as to how they'll achieve liquidity on their investment. They also had a successful investment in the anesthesia space through U.S. Anesthesia Partners. They built that business up to over 1,000 anesthesia providers and sold a significant stake to Berkshire Partners in a recapitalization. So that's what we think a potential outcome could be. We're seeing several groups with private equity backers pursuing secondary transactions.

Q: What sort of activity is happening in orthopedics?

JS: There's been a lot of activity and a lot of interest from groups. Many groups have elected to talk to folks like us and get educated on the options available to them. They are now in a little bit of a wait-and-see mode. I believe there will be several large groups that do transactions this year. I think when those happen it'll spur those practices who are in a wait-and-see mode to act. We saw this in the other specialties too. It takes a few larger groups to move on a transaction to validate the opportunity for other physicians in the specialty. Then they're more likely to move.

Q: How does changing reimbursement affect PE investment?

JS: That's a tremendous opportunity for a well-capitalized orthopedic group that can invest in their own ASC to capture a patient base. There's no doubt that in orthopedics, the list of procedure codes approved for outpatient will increase over time.

The growth in ASC volume will provide an opportunity for orthopedic practices with their own ASC and sophisticated capabilities around all the ancillaries to take on episode-of-care type reimbursement arrangements. Well capitalized practices will have invested in the data infrastructure to utilize data tracking and outcomes measurement to ensure they're distinguishing themselves in a more outcomes-oriented marketplace.

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