$2.1 Billion Not To Cure Cancer


Happy Friday, I hope everyone had a good week.
OneOncology’s logo is boring. It’s generic, non-memorable and reminds me of the pendulum art that’s gone viral as of recently.

Or a further stretch, the spin art that all the 90’s kids should remember.

But that’s the least of their concerns considering they were just part of a $2.1 billion acquisition. And the more I read into it, the more interesting it became.

Here’s The Craic

OneOncology is a group of cancer practices, plain and simple. Started with 3 locations in Nashville their idea was to create practices that put the physician at the center of everything. Patients come and go, but the physician drives the car. In this case that’s the oncologists.
What does that mean?
Their vision from the beginning was to scale, and to make this easier they focused early on standardizing operations, getting, training and retaining physicians, and using the cashflow from one practice to start others.
Cancer patients are everywhere, but hiring and keeping the doctors is more challenging, so optimizing their experience was a key to scaling.
Now, OneOncology has 15 practices, 940 providers, and a 520k patient population.

Yea, that’s a lot. But it’s also not. $2.1 billion for 15 practice sites? That’s $140 million per practice, and almost $5,000 per patient. You hear about customer acquisition costs being less than a dollar for some internet companies, but these patients are being bought for $5,000 a pop?
Let’s try to make some sense of this and talk about what’s at play for each party:

  • An offer you can’t refuse: That’s really all there is to it. Most companies get acquired for 2x-10x revenue, but $2.1 billion is 19x multiple, a huge payday for everyone involved. Again, only 15 practices.
Amerisource Biogen (ABC)
  • Value of patients (AKA customers): The value of patients is much higher when it comes to healthcare because the bills are higher, continued treatment keeps them coming back, and there are cancer patients everywhere so there’s an endless supply.
  • Doctor retention: Recruiting physicians is hard, and we’ve already talked about what OneOncology has done to be industry leading in this category. Why recruit physicians when you can just buy them?
  • Hospitals/private practices print money. They make so much money because the cost of care is so high, and they can charge whatever they want because there’s only so many places you can go for cancer treatment. Don’t feel too bad for the patients either, since most of them have insurance that is footing the bill.
  • One other factor, I’ll talk about later.
The big number may not phase you, everyone has heard of the billion-dollar mergers and acquisition of banks, big brands, etc.
But those usually happen at 10x multiples, not 19x. These types of acquisitions are becoming more and more common in healthcare which isn’t something we’ve seen in the past.
This is a huge price to pay for ABC, but at the same time it’s not that risky. These practices have strong cash flow, so there’s a high probability that they’ll recoup their investment over the next 20 years.
Businesses like ABC have a longer timeline; they can afford to break even 20 years down the road. And the doctors can chalk up a nice payday that they’ll enjoy during their lifetime.

There’s A Bigger Trend At Play

The acquisition of private practices is somewhat new, we’re seeing it everywhere. Pediatric clinics, dialysis clinics, and pretty much any other stand-alone doctor’s office you can think of are getting acquired and consolidated by big corporations.
This is even extending beyond human medicine, with several vet hospitals being acquired and rolled up into huge conglomerate offerings like VCA, Thrive, and Mission Veterinary Hospitals.
The way I see it there are a few main reasons for it:
  • Physicians who own private practices are getting older and looking to retire at the same time there is a huge doctor shortage, so there’s fewer candidates to take them over.
  • Patient population. Building a client base is one of the hardest things to do, but acquiring an existing one is much easier
  • Private practices print money. They operate with a much leaner staff and have a loyal patient base, so the profit per employee is sky high.
It’s been well known within the doctor community that owning and operating a private practice can be considered the pinnacle of someone’s career. In part because of work-life balance, and in part because it’s very lucrative.
The cat’s out of the bag, the secrets, and big corporations are finally catching onto this trend with eyes like Mr. Krabs.

This One May Be Slightly More Strategic

While the incentives may be obvious now that I highlighted them, there is another reason that led to this acquisition.
Amerisource Bergen (ABC) is a drug distributor, so this acquisition gives them more distribution channels. They have just added 15 practices and over 300 new sites where they can now push their product.
I don’t know about you, but something about this ~vertical integration~ play doesn’t sit well with me. Buying out practices with a key strategy being to use them to distribute your drugs seems like it could be a conflict of interest.

Final Thoughts

There’s no doubt that this trend is only going to continue, if not accelerate. As with anything there are pros and cons.
The cons? Probably customer service. As with any small local business the customer service and care is just better, you just feel more comfortable. With things now becoming more corporatized it may start feeling more like a McDonald’s than your local burger joint.
The pros? Access to care will probably increase. With the influx of cash and resources, I’m sure additional locations will open.
Another pro? These acquisitions are kind of setting a precedent for a new exit strategy. Instead of opening up a private practice and running it until you die or selling it/handing it down to another physician (who probably cant pay this kind of money) you could potentially sell it to a big conglomerate.
Whatever you think about it, it should be interesting to see what happens moving forward. Some of these companies are really starting to monopolize the industry.
Also, I’ll be travelling next week, so you likely won’t be hearing from me. Maybe once, maybe.

Let’s have ourselves a weekend.

from, matt

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