In the December 2006
issue:
November’s Health Care M&A Market - Sixty-one
Deals Announced Worth A Total Of $34.2 Billion
While November’s 61 deals represent a one-fifth drop from October’s deal
volume, dollars committed to M&A activity more than doubled. With $234.7
billion committed in the first 11 months of the year, 2006 is already a
record-breaker.
...
Dealmaker Profile: CRC Health Group - Subacute Behavioral Health Care’s
Major Consolidator
It has been a banner year for CRC Health Group, with the company
establishing itself at the leader in subacute behavioral health care. Read
inside to see what factors stand behind the success of this industry
consolidator.
...
In The Departments
November’s M&A Market
Services
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Health Care Services
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Deal Summaries
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Additional Transactions
-
Transaction Updates
Technology
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Health Care Technology
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Deal Summaries
Additional Transactions
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Transaction Updates
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Articles Archive
Companies Mentioned in this issue:
December 2006
3M p16
A
Abbott Laboratories p15
Abrika Pharmaceuticals p16
Actavis hf p16
Actelion p9
Adventist Health p7
Almost Family p4
American Medical Systems p15
Americare At Home p4
AmerisourceBergen p9
Amoun Pharmaceuticals p16
Angelo, Gordon & Co. p3
AngioDynamics p15
Archer Capital p16
Ascension Health p7
Aspen Educational Group p2
B
Bain Capital Partners, LLC p2
Banc of America Securities, LLC p16
Barr Pharmaceuticals p16
Bessemer Venture Partners p14
Biomet p15
C
Campbell Memorial Hospital p4
Capella Healthcare p4
Capital International Private Equity Fund IV p16
Capital Senior Living Corp. p8
Cardinal Health p9
Caremark RX p3
Carraway Methodist Medical Center p7
Chester Valley Pharmaceuticals p16
CIBC World Markets Corp. p14
Citigroup Venture Capital International p16
CLW Health Care Services Group p8
Community Health Systems p4
Concord International Investments p16
Conor Medsystems p14
Cordis Corp. p14
CoTherix p9
CRC Health Group p1
CVS Corporation p3
D
Doctors Community Hospitals p7
E
eGetgoing p2
Essent Healthcare p4
Eureka Capital Partners p3
F
Frazier Healthcare Ventures p2
G
GE Healthcare Financial Services p8
Genentech p9
Google p8
GP Medical Ventures p7
Graceway Pharmaceuticals p16
GTCR Golder Rauner, LLC p4
H
HCA, Inc. p7
HealthCare Partners, LLC p8
HealthExtras p8
HealthSouth Corp. p8
HealthSouth Rehabilitation Hospital of Wichita Fal p8
HMA, Inc. p8
Hunt Assisted Living, LLC p8
I
IgG of America p9
Illumina p9
Insight Venture Partners p14
IRIDEX Corp. p15
Ironbridge Capital p16
J
J.P. Morgan Securities p14
Jefferies & Company p15
Johnson & Johnson’s p14
JSA Healthcare Corporation p8
Juniper Advisors p4
K
KMF Senior Housing Investors p8
Kos Pharmaceuticals p15
L
Lane Berry & Co. International, LLC p14
Laserscope p15
Lehman Brothers p14
M
McKesson Corp. p14
Meda AB p16
Mederi, Inc. p4
Merck p16
Morgan Stanley p15
Muskogee Regional Medical Center p4
N
Nabi Pharmaceuticals p16
National Home Health Care p3
Netsmart p14
Novartis p9
O
Oncobionic p15
P
Paradise Valley Hospital p7
Pediatric Services of America p4
Per-Se Technologies p14
Pinnacles Health Systems p8
Pliva d.d. p16
Prime Healthcare Services p7
R
RITA Medical p15
RXx Pharmacy Solutions p8
S
sanofi-aventis p16
Senior Lifestyle Corp. p8
Signature Hospitals p4
Smith & Nephew p15
Solexa p9
South Beach Community Hospital p8
St. Joseph Hospital p7
Standard & Poor’s p8
Stifel Nicolaus p8
Stryker Corp. p15
Subimo p14
T
Tanox p9
The Blackstone Group p14
TPG-Axon p8
Triad Hospitals p7
U
United Regional Health Care System p8
W
Wachovia Capital Markets p8
Walton Street Capital, LLC p8
Warburg Pincus p2
WebMD p14
Wichita Valley Rehabilitation Hospital p8
Z
Zimmer Holdings p15
ZiO Zdorovje p16
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Dealmaker Profile: CRC Health Group -
Subacute Behavioral Health Care’s Major Consolidator
Email Editor
We recently spoke with Dr.
Barry Karlin, CEO of CRC Health Group, about the banner year that
his company has been having. Headquartered in Cupertino, California, CRC
is a provider of subacute behavioral health care. Throughout its 11-year
history, the company has grown through acquisition, recently spending
$150.4 million in 2004, $148.6 million in 2005 and $332.6 million in 2006.
Maintaining a focus on private and commercial payors and decentralizing
management have been two major keys to the company’s success.
CRC owns and operates drug
and alcohol rehabilitation facilities and clinics that specialize in
treating chemical dependency, other addiction diseases and behavioral
health disorders such as eating disorders. Often, patients check in with a
dual diagnosis of chemical dependency and some other behavioral problem.
The company thus offers services including detoxification, inpatient
treatment, day and intensive outpatient programs, aftercare, therapeutic
living programs and opiate treatment programs. CRC delivers its services
through two segments: residential treatment facilities and outpatient
opiate treatment clinics.
CRC’s recent
acquisition history appears in the table on page 4,
which presents its three most recent years of dealmaking. As of September
30, 2006, CRC operated 103 facilities and clinics located in 23 states; it
also provides online chemical dependency treatment available through
eGetgoing. For the eight months ended September 30, 2006, it generated
revenue of $166.2 million, EBITDA of $41.2 million and net income of $3.2
million. CRC announced its largest acquisition ever at the end of the
third quarter, so we can expect significant growth in 2007.
The amount
CRC paid on acquisitions in 2006 was greater than what it paid in the two
prior years combined. The engine behind this growth spurt is the private
equity firm Bain Capital Partners, LLC. Effective January 31, 2006,
Boston-based Bain Capital carried out a leveraged buyout of CRC valued at
$723.0 million, making it the largest behavioral health care deal of the
year. Of that amount, $463.0 million was to pay former shareholders and
$260.0 million to pay off debt. The price to revenue (P/R) multiple was
3.1x and the price to EBITDA multiple was 11.0x. At that time, CRC
operated 89 facilities in 21 states treating approximately 22,700 patients
per day. It received 75% of its revenue from nongovernmental sources, with
54% coming from self payers and 21% from commercial payers.
At the end of
September, CRC acquired Cerritos, California-based Aspen Educational
Group, which runs programs for underachieving and at-risk youth at
residential treatment centers, wilderness therapy programs and summer
camps, among others. It operates 32 programs in the U.S. and one in the
U.K. CRC paid $296.4 million, or 1.99x 2006 annualized revenue and 17.4x
2005 EBITDA. The principal selling shareholders included such notables as
Frazier Healthcare Ventures, Warburg Pincus and Sprout
Group.
What
justifies the high P/R multiples CRC has been paying for its acquisitions,
relative to other behavioral health care deals? First and foremost, its
sources of reimbursement. CRC has an enviable payor mix: 75% comes from
nongovernmental sources, including self-payors and commercial insurance.
Dr. Karlin informed us that the company does receive Medicaid but no
Medicare at all. He reasons that Medicaid is less risky than Medicare
because there are as many Medicaid payors as there are states. Once Aspen
is integrated, the 25% governmental source will drop to about 18%. It
seems unlikely that CRC will court a higher proportion of governmental
sources; in any event, Dr. Karlin feels that the government diverts a
"minuscule amount" for behavioral health, even though such care offers
remedies for crime, safety and lost productivity, as well as their
financial impact.
Another key
is the decentralized management model CRC employs, allowing each facility
to accommodate local nuances and to respond more nimbly to individual
clients’ needs. As Dr. Karlin points out, "Health care delivery is local."
Keeping that mantra in mind, he believes, helps foster the best results
for clients.
With its
recent acquisition of Aspen, CRC has established itself in the eating
disorders, adolescent weight management and troubled youth markets. It
offers therapeutic boarding schools and healthy living programs. One of
Aspen’s programs is located in England. Although there are no immediate
plans for expansion there, Europe does represent an attractive market for
CRC so the English operations will be maintained rather than divested. CRC
has established itself as the premier provider of subacute behavioral
health care and is unlikely to diverge from that model. While there appear
to be no other similar companies of comparable size to buy, a number of
mom-and-pop operations remain and it is likely that CRC will continue to
grow through tuck-in acquisitions of such facilities.
While Bain
Capital recapitalized CRC earlier this year, it will certainly want to
recoup its investment and make a profit down the line. An IPO is
foreseeable in a few years’ time, depending on market conditions.
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