Healthcare Private Equity

Part III: Due Diligence

This is the third article in our series on “Closing a Private Equity Transaction.” In Part I, the benefits of preparing for a transaction were explained, along with how best to prepare. In Part II, the letter of intent (LOI) was discussed, and key terms were identified and explained. Next, we walk through the due diligence process, which begins immediately after the parties execute the LOI.

Due diligence is used by both the buyer and seller to confirm the decision to proceed with an ultimate closing. Typically, the buyer’s examination of the seller’s business will be comprehensive and include information covering the past three to five years. This is necessary in order for buyer to understand what it will be purchasing, in terms of profitability, operations, business relationships, and potential liabilities. 
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Recently enacted federal law expanding criminal liability for kickbacks related to all payors, and increased government enforcement activity in behavioral health (see press release), has heightened the importance of clinical due diligence for private equity investors targeting deals and acquisitions in the emerging behavioral health space.  PE firms continue to target behavioral health opportunities as federal and commercial insurance coverage expands for mental health, including substance abuse treatment and telehealth services.  Such commercial coverage will only become more commonplace after a federal court this month found United Behavioral Health improperly denied benefits for treatment of mental health and substance use disorders to plan participants because United’s guidelines did not comply with the terms of its own insurance plans and state law.[1]  PE firms entering the behavioral health market, though, particularly opportunities related to substance abuse treatment and laboratory services, should carefully review a company’s compliance with the Eliminating Kickbacks in Recovery Act of 2018 (“EKRA”).
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Healthcare professionals, entrepreneurs and investors once again descended on San Francisco this past January for the J.P. Morgan Healthcare Conference (JPM). While the invitation-only JPM conference is the headline event, most people who come to San Francisco for the week are focused on what’s happening outside of the JPM, with learning and network opportunities literally around every corner.

With JPM in the backdrop, nearly two dozen healthcare and life science conferences and events occur simultaneously, nearly all of them within a four-block radius of JPM itself. These events cover a wide range of perspectives and topics, with innovation being the permeating theme. In a 24-hour period, an investor can take in presentations from a dozen private companies developing new therapies, seminars on disruptive technologies like artificial intelligence, and global perspectives on industry trends across multiple continents.
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