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BFD Expert Voices - Health Tech Deals

BFD Expert Voices

Pritzker Private Capital is exploring a potential sale of PathGroup, one of the country’s largest providers of anatomic pathology, digital pathology, clinical and molecular laboratory services, sources tell Sarah. 

Why it matters: Private equity has a long and generally good track record in the lab industry, and Nashville-based PathGroup is one of few remaining independent assets of scale. 

Lab companies are typically good cash flow businesses, which PE likes, although activity has been more sparse lately.  

Welsh, Carson, Anderson & Stowe, Metalmark Capital, KKR and Consonance Capital are some that have historically played in the space.

In early 2019 Australia’s Sonic Healthcare forked out $540 million for U.S.-based Aurora Diagnostics, and last November, in the middle market, Martis Capital took a majority stake in Lighthouse Lab Services. 

Zoom in: BofA is hired for financial advice, and sources expect a sponsor outcome to be the most likely scenario.  

PathGroup’s estimated 2022 EBITDA is close to $150 million, sources say. 

PPC, part of Pritzker Group, the family office of Chicago’s Pritzker family, recapitalized PathGroup in August 2016, taking a majority stake. Vesey Street Capital Partners, a PE firm focused on health care, co-invested.

State of play: The lab industry was doing well before the pandemic, but PathGroup, like every other player in this environment, experienced a spike in COVID-related testing work.

While some may have thought COVID testing is going away, it’s looking more like it is here to stay for several years — at least to a certain extent. 

Still, the COVID lift will likely be a consideration in the process. 

Yes, and: Hospitals and physician practices are so resource-constrained generally speaking that they are outsourcing more and more, but the former is less penetrated by the lab companies — creating white space for growth.

PathGroup, which started in Tennessee, has expanded into several states and now works with more than 95 hospitals — its dominant end-market — but it also serves thousands of group physician practices.

For industry behemoths LabCorp and Quest Diagnostics, hospitals have always been the holy grail, yet they haven’t penetrated this market to the extent they have with physician groups, one source explains.  

Separately, the anticipated sale comes amid recent changes within PPC's health care team. 

Michael Dal Bello and Ceron Rhee both transitioned into health care adviser roles as of December 2021, per their LinkedIn profiles, after several years each as investment partners. 

The bottom line: If a sponsor wants in on the lab space, this is a good potential way to get a nice slice of the market where having scale matters. 

Pritzker and Vesey declined to comment, while BofA and PathGroup did not return requests for comment. 

1. big thing: 🧪 Targeting pathology

Illustration of a hand holding a microscope slide with a liquid sample forming a dollar sign.

Health and biotech firms are on a fundraising roll, with several smashing their previous fund size records every year since 2020. 

Why it matters: The ramp-ups come even as the market continues to signal a significant pullback in the public market’s appetite for digital health and biotech companies and widespread discussion of a coming bubble burst for both sectors.

Driving the news: Arch Venture Partners, a firm known for its contrarian risk-taking philosophy, is raising $2.5 billion for its latest fund, called XII. That's roughly 1.4 times larger than last year’s Fund XI and nearly twice as large as 2020’s Fund X and Fund X Overage combined.

Details: Arch is far from alone in its commitment to ever-larger funds. 

Silicon Valley venture darling Andreessen Horowitz recently launched its fourth and largest-ever Bio Fund of $1.5 billion, after raising $750 million for its last such fund in 2020, $450 million for the previous fund, and $200 million for its first, in 2018.  

New York-based hedge fund Tiger Global Management has so far raised more than $11 billion for its latest VC fund expected to close in March, making it already one of the top 10 largest venture funds ever raised, The Information reports.

And ACME Capital today closed $300 million for two new funds, Fund IV and its adjacent Opportunity Fund, a rise of $100 million over its last fund, raised in 2019.

“I think if we went back and looked at our thinking at the time of the first Bio Fund, it was very much: Computation software [has] the potential to impact biology and health care,” a16z general partner Jorge Conde told Erin back when they launched Bio Fund III. “Over the course of that, the firm started to see the opportunity being broader.”

“We are at the very beginning of [a] revolution, with early gains seen in drug design, diagnostics, health care delivery, and even health care back office,” a16z general partner Vijay Pande, the founding investor of the firm’s first Bio Fund, tweeted recently.

“Great thing about being in biotech is you see investors in other stuff talk about volatility and it just doesn't resonate with you on any significant level,” Wilson Cheung, research manager at Slingshot Insights, tweeted yesterday.

The bottom line: VCs remain hellbent on pouring money into the health and science sector, bubble or no.

💰 2. The BFD: Funds galore 

Illustration of money pouring into a prescription bottle.  

If you ask Adams Street partner and U.S. health care lead Morgan Holzaepfel which sub-sector of health care has been juiced the most by COVID-19, she’ll point to two areas of particular interest, she tells Erin.

Details: In particular, the behavioral health and clinical trials sub-sectors have begun to boom, Holzaepfel says.

In clinical trials, Holzaepfel is betting on companies helping to conduct and diversify studies and those helping participants get paid.

In behavioral health, she has her eye on insurers — many of whom are increasingly taking on risk for patients — and employers who’ve seen the importance of mental health support amid the pandemic.

Why it matters: Despite the recent focus on telemedicine as the main investor beneficiary of the pandemic, several other areas are seeing just as much — if not more — activity, she says.

Driving the trend: Underlying the sudden bursts in activity in the above sectors are two (frankly depressing) realities:

Some clinical trials have been stifled by the pandemic as hospitals limit patient access and move to preserve intensive and emergency services for people most in need.

More people in the U.S. are experiencing depression and anxiety right now, likely linked to pandemic-era job loss, illness and death, and isolation.

The bottom line: “COVID's been a huge accelerant here, unfortunately,” Holzaepfel says.

Still, that means more opportunities for companies who might be able to help, whether by increasing access to services, lowering costs or boosting clinical outcomes.

3. Adams Street’s eye on mental health and trials

Illustration of a syringe made from a stack of coins at the center

ConcertoCare, a tech-enabled, value-based provider of home care for seniors, closed a $105m funding round led by Wells Fargo Strategic Capital with support from new investors including Obvious Ventures, Vast Ventures, The Schusterman Family Foundation, SteelSky Ventures and Pennington Partners and from returning investor Deerfield Management. https://concertocare.com/ 

Codoxo, an Atlanta-based startup using AI to reduce health care fraud, raised $20m in Series B funding. QED Investors led, and was joined by Sands Capital Management, 111 West and insiders Brewer Lane Ventures, Spider Capital and GRA Venture Fund. www.codoxo.com 

Goodbill, maker of a platform to help consumers evaluate and dispute medical bills, raised $3.4m in a seed round led by Founders’ Co-op with support from Maveron, Liquid 2 Ventures, and angel investors including Christian Sutherland-Wong (Glassdoor), Greg Rudin (Menlo Ventures) and Nick Soman (Decent). http://axios.link/uVlJ 

TRIPP, maker of an extended reality wellness platform, acquired EvolVR, a company that has assembled a virtual reality meditation community. https://www.tripp.com 

4. Deals o' the day

Cerebral promoted Rabail Bukhari to chief of staff. She was previously senior manager of care counseling.

Kaia Health hired Beth Jacobson as general counsel from Included Health. 

ResMed named Urvashi Tyagi chief technology officer from ADP, where she served in the same position.

Mindcure named Clare Kennedy Purvis chief product officer from Headspace Health, where she was vice president of clinical product and content development.

5. It's Personnel

Hello and happy Friday, health tech readers!

⚡Situational awareness: Erin has been dealing with power outages in the Tahoe area, so she's really off the grid now. Send her your good energy. 

🔌 While power-less yesterday, Erin spent most of the day out in the real world (fully masked, of course). Being around people, it turns out, is a quite an energy rush of its own.

🙏 Thanks for reading Axios Pro Health Tech! Please ask your friends, colleagues and family members to sign up.

February 04, 2022

1. big thing: 🧪 Targeting pathology