Recapping the JP Morgan Healthcare Conference 2018

Each January, JP Morgan’s annual Healthcare Conference draws industry leaders to San Francisco to discuss M&A, investment, and the business of healthcare. In recent years, the impact of the conference has extended beyond the four walls of hotel banquet halls into a four-day, city-wide ecosystem of entrepreneurs, practitioners, advisors, and investors – all focused on healthcare.

MHT Partners views the conference as a critical opportunity for understanding emerging healthcare industry trends and investor sentiment as we kick off the new year. Our healthcare team was on the ground, where we conducted over 50 meetings with investors representing over $20 billion of investable capital. These are our key takeaways:

  • Investors remain enthusiastic about healthcare services: There are dozens of investors with large amounts of dry powder who are intensely focused on investing in healthcare services. The appetite for high-performing businesses remains strong.
  • The MSO structure is primed to be applied to new specialties: Interest abounds to apply the managed services organization (“MSO”) structure for investing in provider groups to specialties with opportunities for consolidation and strong macro tailwinds. Orthopedics, women’s health, and gastroenterology platforms will receive outsized interest from investors in 2018, and landmark deals will be announced in each of those specialties. Conversations are also beginning to take place within specialties such as ENT, urology, and podiatry.
  • More mature specialties will begin to consolidate into a few large platforms: Dental, dermatology, and eye care businesses will continue to receive significant attention from investors, and a handful of larger existing platforms will come together as those specialties continue to consolidate.
  • Autism therapy is a growing area of focus: Adolescent behavioral therapy, including autism therapy, represents an emerging thesis for many investors. KKR announced the creation of Blue Sprig Pediatrics during the conference, and Autism Learning Partners traded to FFL Partners at the end of 2017. It was also recently announced that CARD will be coming to market in the near future.
  • Healthcare interest extends to the animal kingdom: A number of healthcare investors expressed interested in veterinary and animal health businesses, to which they can apply a similar multi-site treatment thesis without the reimbursement dynamics that accompany traditional healthcare.

2018 is poised to be a year of significant opportunity for strategically minded healthcare companies and investors. MHT Partners’ healthcare investment banking team is focused on identifying prevailing industry trends, positioning your business to capitalize upon them, and identifying the right partner for you going forward.

A Classroom Without Walls

Imagine if you could learn about a solar eclipse by experiencing it from outer space. Today, this is becoming a reality for some students, or at least a virtual reality.

Augmented Reality (“AR”), Virtual Reality (“VR”) and Mixed Reality (“MR”) (collectively known as “xR”) technologies are being leveraged to create out-of-this-world, or even out-of-this-time experiences in numerous settings, including the classroom. As an education investment bank, we are consistently asked by investors to help them understand the different technologies at play. AR is an emerging technology that uses a smart device’s camera to overlay digital aspects onto the real world (think Pokémon GO). VR creates an immersive, new digital environment, typically by using a wearable headset. MR is a combination of AR and VR that involves overlaying holographic images onto the real world using a headset or glasses. While xR has been around for decades, its applications in the classroom are just beginning to turn heads.

Education has fundamentally remained the same for centuries, consisting of lecture and study largely through traditional classrooms, paper and chalkboards. Like so many other aspects of our lives, technology is taking hold in the classroom as well, leading to a paradigm shift in how students of tomorrow will learn. Specifically, xR is being used to break down the obstacles that our brains face in the subconscious process of translating aural and/or written information into the visual/3D model that our brains prefer. In other words, our brains work in 3D, so shouldn’t students’ learning materials? By using 3D experiences provided by xR classrooms, students attain information faster, and retain knowledge longer, resulting in significantly enhanced learning and outcomes. Moreover, xR has the capacity to provide completely personalized learning experience for students.

Beyond leading a paradigm shift in education, xR provides access to experiential learning opportunities for more students, more often. For example, instead of reading about Galileo’s scientific discoveries in a textbook, students can travel back to the year 1610 and stand next to Galileo as he discovers Jupiter’s four moons, and even look through the same rudimentary telescope that he used to make the discovery! Do you think that astronomy lesson might stick with you for a while? This same concept can easily be applied to the medical field as well, where the exorbitant cost of operating a medical lab necessitates that it only be accessed by the most accomplished students and medical professionals. With xR, every student can have access to his or her own virtual lab.

Students, parents and educators are not the only parties taking notice of xR’s applications. An estimated $3 billion in 2017 in venture capital investment has been funneled into the AR/VR technology sector. In addition to private investment, big names like Google (products: Google Expedition Kits / Cardboard) and Microsoft (product: HoloLens) are also spending money on xR-focused research and development as they prepare to battle over the emerging markets of the virtual world.

In conclusion, xR’s promise of enhanced educational opportunities is one of many reasons why this technology has the potential to impact worldwide education.

Presented with an Investment Opportunity in Managed Services?

Secure. Convenient. Cost effective. Always on. There is a lot to like about managed IT service providers (“MSPs”), and recent M&A activity in the space would suggest investors agree. As enterprise clients continue to shift their IT spend from Capex to Opex, MSPs should continue to generate greater investor attention.

As with any due diligence process, investing in an MSP requires a careful understanding of the space and the target company under review. With this in focus, investors should consider/answer the following three questions at the outset of their diligence processes.

“Pure-Play” or “Broad-Based” MSP?
Some MSPs offer the complete outsourcing of IT operations to a range of end markets. This “Broad-Based” approach can often lead to increased competition on the basis of price. Other providers operate with a niche focus. These “Pure-Play” MSPs are often providing fewer, highly tailored services to a narrower range of end markets. This specialization often results in a stickier customer base, and the ability to sustain higher margins. As a result, “Pure Play” MSPs are often generating premium valuations relative to “Broad-Based” players. Regardless of the approach, investors should carefully study the target’s business model to understand its unique value proposition and ability to generate and sustain attractive margins.

How’s retention?
As investors look into retention metrics, they should examine the employee and customer base simultaneously. The quality and tenure of the employee pool will impact customer retention. At the same time, the demands of the customer pool will impact employee retention. This can become a self-fortifying cycle in many industries, especially in managed services. Not surprisingly, the quality of the company’s personnel drives operational efficiency, and in the managed services industry this means reaping more when sowing less.

What will enable further growth?
MSPs will have many opportunities to grow, but the question is how they’ll get there. For some, it’ll be an easy journey; for instance, a few organizational tweaks might allow for more sales’ wins and higher utilization. But for others, it won’t be as easy; for instance, some may have to make costly hires in order to support a growing customer base. Investors should carefully consider the incremental investment that will be needed to take the target to the intended destination, and whether or not the existing organizational structure is aligned to support that growth.

Conclusion
In any investment process, a few simple questions at the sourcing stage can save headaches later on. In the managed service industry specifically, carefully thinking through the business model, the customer and employee retention picture, and the roadblocks to growth will help investors as they navigate a complex and changing managed services landscape.

Private Label Wine: More Than Just Two Buck Chuck

Private label consumer goods are usually easy to spot on the shelf and on our favorite ecommerce sites.  Whether its Kirkland Signature® toilet paper, Safeway Select® ice cream, or AmazonBasics® batteries, the retailer name is front and center on the package and products are sold at a discount to national brands.  Private label has long been a lucrative component of retailers’ strategies, primarily due to the needs of value-driven consumers and higher profit margins for retailers generated by private label sales.  In the beer, wine, and spirits categories, however, only a few retailers have been emboldened enough to use their private label or “house brand” on the label.  Costco, the largest domestic wine retailer, is the clear outlier in all three categories.  The leading club retailer relies on a network of well-known wineries, breweries, and distillers to produce premium beverages sold at competitive (yet not rock bottom) prices, and loyal Costco consumers don’t seem to care that each label proudly displays the Kirkland logo.  Trader Joe’s takes a similar tact in beer and spirits, albeit with craftier, whimsical labels such as Trader Jose Mexican Style Lager.  In the wine aisle, Trader Joe’s largely relies on a different strategy, whereby consumers shop dozens of brands across varietals and price segments that appear to be national brands but actually represent the 474-store chain’s “retail exclusive” wine assortment.

While it might seem over nuanced to some, the term “retail exclusive” represents an important distinction, because consumers rarely realize that these brands are available at only one retailer.  Charles Shaw (AKA “Two Buck Chuck”), exclusively available at Trader Joe’s, is an obvious example.  Target added to its Wine Club box wine brand in 2017 with the launch of California Roots, a collection of five blends retailing for $5.00.  Above the $2.00-5.00 price point, however, wineries and wine buyers from retailers to restaurants are increasingly collaborating to launch premium/super premium/luxury price segment wines with artistic packaging closer in resemblance to a cult winery in Napa Valley than conventional private label products.  Consumers often have no idea that a new $12.99 cabernet sauvignon does not have a website, tasting room, or wine club, and if they like the wine, they’ll have to return to that retail chain for repeat purchases.  According to winecurmudgeon.com, retail exclusive products account for roughly 5% of U.S. sales today versus a 20% share in other food and beverage categories, but many of the larger, better-organized retail chains are centralizing wine buying decisions and targeting significantly higher levels of retail exclusive wines in the fastest growing price segments.  With retail margins on private label wine 10-15% higher than national brands, we should all be on the lookout for a proliferation of retail exclusive wines at our favorite retail chains.  Cheers!

A Cost-Effective Route to Employment

Is a bachelor degree worth the cost? The rising cost of higher education in connection with increasing student debt levels continues to garner both public and political attention. There is greater scrutiny of traditional colleges and universities as well as growing pressure to demonstrate their value proposition to students. As the post-secondary market continues to face headwinds, new tuition models in education have evolved, are gaining momentum and producing exceptional results.

Education companies with alternative tuition models are emerging in fields where the demand for qualified employees far exceeds supply. The revenue models for these businesses are unique in that these companies are shouldering the responsibility of helping students find a job in order to recoup their investment in the student.

Teachers of Tomorrow saw an opportunity to capitalize on the growing teacher shortage in the U.S. Since 2005, the company has placed more than 42,000 teachers into K-12 schools through its alternative teacher certification program. Teachers of Tomorrow’s deferred tuition model requires a low upfront payment from the student, with the remaining balance paid in monthly installments upon achieving a teaching certificate and securing a full-time position.

Several coding academies are also using alternative tuition models to capitalize on the growing demand for software developers. The Bureau of Labor Statistics projects 32.4% growth in employment for software developers, while the average growth for all occupations is 14.0%. Viking Code School, recently sold to Thinkful, offers its students income share agreements, where students only pay once they obtain a qualifying job. Companies such as Viking that make tuition contingent on student outcomes do more than just train students in web development, they help students make the leap to full-time employment – in many cases, at some of the most distinguished technology companies in the world.

The desire to fill the gap in skilled employees is not exclusive to students with bachelor degrees. MissionU seeks to produce data and business intelligence analysts through its career-focused curriculum. The company attracts high school graduates to participate in a one-year, tuition-free program. Instead of acquiring student loans to attend the program, students repay a small percentage of their salary once they launch their career.

As accountability becomes increasingly important in the realm of education, we expect to see more career-focused businesses with alternative tuition models. One commonality among these types of businesses is their strong student support services. In addition to basic training, interview and test preparation, these businesses have excellent relationships with partner companies in their respective fields. These relationships help to maximize opportunities for employment among their students and produce a strong and quantifiable value proposition for students.

Pills for Pooches

Like other facets of the pet industry, the pet pharmacy space has mimicked its human counterpart, the human pharmacy space. More specifically, the pet pharmacy space is a large, dynamic and evolving industry.

Within the pet pharmacy space, changes are afoot. Veterinarians (“vets”) have historically distributed the vast majority of pet pharmaceuticals due to their strong relationships with pharmaceutical companies. Moreover, vets rely on pharmaceutical sales for approximately 30% of their revenue. Notwithstanding this dynamic, vets’ historical distribution domination is deteriorating as pet specialty, mass-market retailers and e-Commerce players gain market share. Consumers’ appetite for convenience (evidenced by the exponential growth of pet e-Commerce players such as Chewy.com, Pet360, Jet, 1800PetMeds and Amazon), coupled with growing trust in non-veterinary distribution, is driving this transition. While recent shifts to non-veterinary distribution channels have disproportionately targeted over-the-counter medications, analysts forecast strong prescription expansion into these channels in the coming years. In particular, with market share approaching 20% of the pet e-tail market, online pet pharmacies have capitalized on industry growth. A 2016 study commissioned by VetSource shows that consumers whose pet medications were home delivered were 140% more compliant with parasiticides and those same, more compliant customers purchased $212 more medication per year per patient and drove 93% more profit than their traditional brick & mortar retail-shopping peers. On the regulatory front, the National Association of Boards of Pharmacy (NABP) has bolstered consumer confidence in online veterinary pharmacies by holding U.S. pharmacies to rigorous consumer safety standards. Moreover, The Fairness to Pet Owners Act, currently under review by Congress, promises to catalyze unprecedented online pet pharmacy growth, if passed.

So the next time Rover has an upset tummy, get out your smart phone rather than your car keys.

Measuring the Live Experience: Developments in Analytics to Estimate Experiential Marketing’s ROI

Conventional marketing approaches are giving way to less conventional, interactive approaches such as experiential marketing, which includes events such as product launches, tradeshows, and press events as well as other face-to-face experiences, such as mobile tours and promotions. Live experiences between brands and their customers offer more engaging experiences and allow brands to differentiate themselves from competitors. According to EMI & Mosaic, almost 80% of brands will plan more experiential programs and events in the coming year compared to last year. Despite experiential marketing’s promise, marketers continue to struggle with ways to measure its return on investment (“ROI”).

Challenges with Data and Analytics in Experiential Marketing

Historically, data from live events has been inconsistent and fragmented, making it difficult for brands to demonstrate customer behavior changes before and after an event. As a result, the experiential marketing industry has been focused on qualitative analysis and insights. As brands continue to recognize the impact of successful, engaging experiential marketing events and projects, there continues to be an unmet need for data, analytics, and insights to guide better experiential marketing decision-making.

Advancements in Analytics

Recent advancements in event management software and other experiential marketing technologies have allowed technology companies and tech-enabled marketing services companies to offer tailored solutions to help brands better gauge ROI. Some players are enabling a shift to quantitative analysis via innovative solutions with comprehensive event data and insights. Others are offering industry-specific modules tailored to each step in a given event (e.g., registration, check-in, contest, survey, sampling, social share and photo opportunities).

Brands can leverage these new technologies to capture data from every interaction and ultimately to report that data in a uniform, transparent, and timely fashion. The resulting key performance indicators (“KPIs”) help brands better understand their customers and alter the value drivers available to achieve the desired customer behavior from live events.

Experiential Marketing Analytics Going Forward

Despite these recent tech-enabled advancements, brands are still early in their transition to quantitative solutions. According to a joint survey from Cvent and Event Marketer, only 38% of event professionals say that they understand what their attendees do on-site extremely/very well. In fact, 75% of event professionals believe they are missing opportunities to integrate a wider range of data and information to develop and leverage more comprehensive attendee profiles. This demonstrates a void for additional data and analytics to complete the picture around attendee behavior and experience. According to the same report, just under 30% of event professionals believe their organizations are extremely/very effective at collecting data, and less than 25% believe they are extremely/very effective at using their event data. Technology and software providers have proven the value of their solutions and will continue to benefit from pressures on brands to optimize experiential marketing spend.

The industry tailwind has generated increased investor interest in the space, resulting in deals such as Cvent’s 2015 acquisition of AllianceTech as well as Condé Nast’s 2017 acquisitions of experiential agency Pop2Life and event technology platform Ribyt. As the trend towards analytics continues, leaders in experiential marketing technology are likely to continue attracting customer and investor interest.

The Shifting Terrain for Outdoor & Enthusiast Retail

Walking the floor of the Outdoor Retailer (“OR”) conference in Salt Lake City this summer, we were struck by an odd mixture of moods.  On one hand, demand for outdoor products remains strong, feeding the growing $120 billion U.S. market.  On the other hand, a pallor seemed to hang over the event.  These are good times, but an air of uncertainty crept into many of our conversations at the show.  Consumers want these goods, are willing to pay for quality, and the show’s participants are happy to supply them, but the issue of how products get from OEMs into end-users’ hands remains very much in question.

The source of this uncertainty is the explosive growth of the e-tail channel, and specifically Amazon.com.  Americans and consumers the world over have fully embraced online buying with its ease of 24-hour ordering, affordable shipping, free returns, instant insight into inventory, and curated (targeted) marketing and discounts.  Brick and mortar retail has been hammered across the broader economy over the past several years by the growth in ecommerce, and the outdoor recreation sector is no exception.  While the U.S. Outdoor & Sporting Goods segment grew by a healthy 5% last year, Amazon posted growth of 20% in the sector, according to One Click Retail, and clearly those sales are coming at a cost to other channels.  Companies are struggling to balance the allure of greater sales with control of their brands and channels.  Just prior to Summer Outdoor Retailer, Nike announced that it was entering into a pilot program to sell their products directly through Amazon, rather than through 3rd-party sellers.  As one longtime industry veteran and private equity operating partner attending OR put it to us, ‘make no mistake, this is a bellwether moment for the industry.  The biggest sports brand in the world just capitulated, acknowledging that it could no longer entirely control its channels.’

While old economy companies scramble to find their footing on the fluid landscape, the crisis has created opportunity for others.  Up-and-coming brands unencumbered by retail footprints have seized the opportunity to bypass stores, and even platforms like Amazon, and go directly to consumers.  KUIU, a California based company founded in 2010, for example, was founded on just this premise, selling authentic, high-end hunting apparel and gear to enthusiasts almost entirely through its website.  Many other brands have adopted an omnichannel approach, offering goods in big box retailers, as well as through their own websites, on mobile platforms, and through 3rd-party online vendors.

So, what does all this mean for outdoor and enthusiast retail?  Clearly, no stasis has been established, as the sands continue to shift.  But it is safe to assume that brick and mortar retail has seen its apex come and go, and outdoor enthusiasts will gain access to goods through myriad channels, sometimes simultaneously.  We anticipate the growth of smaller, more focused retail locations which cater to the most dedicated, and evangelical participants.  If you offer top-of-the-line fly flying equipment and have an avid, though dispersed, base of loyal customers, why not offer a location or two at fly fishing Mecca’s such as Bozeman or Anchorage (on the way to Bristol Bay)?  Perhaps these locations only exist to match demand during peak seasons – think of a ‘pop-up’ hiking store at the entrance to Glacier National Park carrying the latest and greatest gear.  No matter how things shake out, it is clear that only the most nimble, creative, and technologically savvy outdoor and enthusiast companies will survive the transformation we’re witnessing.

How Flipped Classrooms are Challenging Traditional Learning Environments

Technology has always been a driving factor in revolutionizing the learning experience. The printing press allowed for the mass production of books, the abacus can arguably be considered the first calculation device, and where would we be today without the calculator?

While classrooms have certainly come a long way since one-room school houses, the traditional instruction model has remained the same for over a century – teachers lecture in class, and students complete their homework outside of class. However, with the increased availability and use of technology, educators are beginning to defy the traditional classroom model.

The idea of inverting the traditional classroom model originated in the early ‘90s. A professor published an article challenging the age-old model and stressed the importance of using class time for “construction of meaning” instead of “information transmission.” However, it was not until 2007 when two chemistry teachers from Colorado, John Bergmann and Aaron Sams, began “pre-broadcasting” lectures for students. The two teachers, determined to maximize student engagement and face-to-face time in the classroom, discovered a software allowing them to record annotated lectures. Students watched or listened to the lectures at home, leaving valuable time in the classroom for applied learning. The concept, coined the “flipped classroom,” was a success and has been making headway ever since.

What is the flipped classroom?

New material is learned outside the classroom, and traditional homework activities are completed in class. Students learn the new material via pre-recorded video lectures or podcasts. Meanwhile, class time is dedicated to applying the knowledge from recorded lessons, with students focusing on problem solving or collaborating on worksheets and projects.

What are the benefits?

Flipped classrooms prioritize student engagement, and students benefit from real-time feedback and participation. Hands-on activities in class allow for individualized instruction, and struggling students are less inclined to abandon homework. At home, students learn new material at their own pace, with the ability to rewind and re-watch lectures covering difficult topics.

The emergence of flipped classrooms is just as significant to the marketplace as it is beneficial to students. Still in its infancy, the flipped learning market is estimated to grow at a compound annual growth rate of 35% between 2016 and 2020. The market is largely fragmented, with much of the projected growth driven through various submarkets, such as pre-created content (Khan Academy), video management platforms (Echo360, Panopto), content creation services (Adobe, Camtasia), and online course providers (Coursera, Udemy), among others. Many education and technology companies are expanding their services and functionalities as teachers deploy technology-driven learning models.

The growth of the flipped classroom model illustrates a broader underlying shift in the education industry – technology is redefining the role of educators and creating classroom environments focused on active learning and student engagement. As alternative pedagogies become increasingly widespread, the resources and tools students and teachers need are changing yet again, and companies are adapting in an effort to keep up.

This Ain’t Your Daddy’s Marketing Strategy

Digital marketing has evolved at a furious pace and there is no sign of deceleration. Driven by shifting consumer preferences and the continued penetration of mobile and other platforms in the consumption of content, the line between marketing and technology has continued to blur. For marketing savvy companies, what used to be two separate business functions with little interaction has evolved into a nearly seamless integration whereby the Chief Technology Officer and Chief Marketing Officer are increasingly looking like the same person.
The quest for a consistent brand experience across mediums has created a complex, intertwined web of marketing strategies and complementary technology. Omni-channel, native, programmatic, video, print and even experiential marketing are all strategies that need to be leveraged in conjunction with a company’s CRM, email, website and other systems in order to launch a coordinated, effective marketing effort. Further, marketers are increasingly utilizing data and artificial intelligence to better target the appropriate audience, whether business-to-business or business-to-consumer. This dynamic has created a surge to find technology solutions that not only streamline the creation and delivery of content, but also allow companies to measure the effectiveness of various campaigns and allocate resources to strategies and methods that deliver the highest return on investment.

This arms race has also fueled significant M&A activity. Large marketing companies are consolidating technologies and capabilities under one roof in an attempt to offer a “one-stop-shop” and to crowd out competitors by generating a network effect. On the smaller end of the market, there remains a fragmented group of independent companies that have carved out specific vertical niches or developed proprietary tools and unique service offerings. These smaller companies often compete with the larger agencies through industry-specific knowledge, better service and innovative and cost-effective methods/technologies.

MHT Partners believes that there will continue to be significant consolidation by large players in the space, as well as compelling opportunities for financial buyers to invest in great independent platforms.

At the current rate of change in the industry, it is difficult to gauge where things will go from here. As they used to say in the days of the radio, stay tuned….