Axios Pro: Health Tech Deals

September 12, 2022

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1 big thing: Heartland sits on the M&A sidelines

Illustration of a hand reaching out for a hand shake with another hand making a stop gesture.
Illustration: Aïda Amer/Axios

KKR-backed Heartland Dental, the biggest sponsor-backed dental service organization in the U.S., won't "keep on buying just to buy" as scaled dental M&A activity cools, says CEO Pat Bauer.

Why it matters: Difficult financing markets and labor costs have put pressure on the physician practice management deal landscape, and Bauer's comments substantiate market chatter that most $1 billion-plus physician practice management deals remain on ice.

What he's saying: It's going to be tough for any platform to get new capital for the next eight months or so, Bauer predicts: "Everybody is on hold for larger acquisitions."

  • The pipeline of solo practitioner acquisitions remains robust (Heartland is on track to do 120 single-practice acquisitions this year).
  • With inflation, rising wages, and an inability to increase rates, "the PPOs are just crushing the solo practitioner," he says.

Yes, and: Heartland, which Bauer says will surpass $3 billion in revenue, aims for 100 de novos this year.

  • It will target 150 and 200 de novos in 2023 and 2024, respectively, he adds — giving it a tremendous growth runway even without big M&A.

Catch up fast: KKR and Heartland in July invested in a newly combined Canadian DSO created via the merger of Peloton Capital Management's 123Dentist, Sentinel Capital's Altima Dental and Lapointe Groupe.

  • Financial terms weren't disclosed, but Bauer says Heartland injected $50 million into what is now the second largest dental platform in Canada after L Catterton's DentalCorp.

Yes, but: Why not just buy 123Dentist? "It was too expensive," Bauer says.

  • Heartland via the strategic partnership helps 123Dentist with purchasing power and systems operations, positioning it for another potential transaction opportunity down the road.
  • "At some point, it might be a better time to have a marriage, but today wasn't the day."
  • DSOs north of the border have better EBITDA margins, he notes, thanks to stronger same-store sales growth and the lack of lab fees.
  • That's perhaps reflected by diverging deal multiples: A single practice acquisition goes for some 8x-plus EBITDA in Canada, versus 4.5x EBITDA in the U.S., the CEO says.

State of play: Like other specialties, labor is the biggest pain point in dental right now, the CEO says.

  • Hygienists and dentists are graduating at an about 1:1 ratio whereas the ratio is closer to 2:1 in the dental office today, he says. "If you can’t recruit and keep doctors... it’s a big problem."

Between the lines: Heartland sits under KKR's core investments strategy, whose capital is geared at longer-term opportunities — meaning KKR is not rushing toward a liquidity event, Bauer says.

  • In contrast, Bauer expects some peers will be struggling: "They are growing long in the tooth [for their investors]."

What's next: As large strategics ranging from UnitedHealth's Optum to Amazon to CVS go after primary care, Bauer says it's not that crazy to think that some "wild card buyers" eventually turn to dental.

  • "Let's be honest: the mouth is the gateway to the body," Bauer says. "Every insurer knows that if they can capture people at their teeth and get them healthy, they can save a bunch of money on the medical side."
  • Heartland has been approached by large strategics interested in testing out a dental model, he says, but those conversations have yet to move forward. Bauer declined to name those parties.

Of note: Walmart has already dabbled in dental via its health clinics, charging a flat fee of $50 per checkup.

The intrigue: As dental platforms like Heartland, DentalCorp and Aspen Dental keep getting bigger, the logical buyer pool shrinks. If an IPO isn't the end game, maybe this "wild card" scenario isn't so wild after all.

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