Deal creates diabetic giant
CLEARWATER, Fla. - In what one industry watcher called "a serious, serious play," a giant private equity group paid $630 million last month to acquire two large mail-order companies, establishing itself as a leader in the diabetic supplies market.
Warburg Pincus, the global private equity firm and a leading healthcare investor, acquired CCS Medical for approximately $360 million and MP TotalCare for approximately $270 million in separate transactions. The newly combined company will operate under the CCS Medical name. The merger creates one of the largest and fastest growing direct-to-consumer providers of diabetes and other medical supplies in the United States.
"It says a lot about the diabetes business as it relates to Medicare," said a well placed industry watcher. "What it says for Warburg Pincus is that, as a function of the Part B diabetes business, it is a very stable business that is large enough, and growth-oriented enough that they were willing to invest a significant amount of money."
Not only does the merger create a company that's stronger than its parts, it also creates a viable competitor to mail-order giant Liberty Medical, the current leader in this market segment. As Medicare Part B beneficiaries begin to see increased competition for their business, they should also see improved service, added the source.
CCS Medical is a major supplier of mail-order diabetic supplies, and, to a lesser extent, respiratory meds. MP TotalCare provides diabetes testing supplies, respiratory medications, urological and ostomy products and wound care supplies directly to customers throughout the United States.
The Warburg deal is a much stronger play than private equity group Sun Capital's acquisition of respiratory drug and vial distributor RDI in early 2004, say industry watchers. Following a bevy of problems -- debt and a major reimbursement cut for meds in 2005, to name just two -- RDI filed Chapter 7 bankruptcy Sept. 2, 2005.
From all accounts, MP TotalCare and CCS Medical are very well run companies
CCS Medical's Joe Capper will serve as CEO and president of the new company. While Liberty has built its business through TV advertising, Capper grew CCS by using an outside sales team and by stressing clinical outcomes.
"Joe's systems are very strong," said another industry source. "He'll give Liberty a run the money."
While Medicare reimbursement for respiratory meds could drop again next year, and diabetic test strips could be included in competitive bidding in 2007, CCS's size and business smarts should help it weather those storms.
"Warburg Pincus, those guys are smart, and if they decide to get into a space they have done their homework on, they will do well," said Dave Sturdee, an associate of the Canadian private investment firm Clairvest Group.
Warburg Pincus has about $12 billion under management and an additional $8 billion available for investments in a range of sectors, including health care, information and communication technology, financial services, energy, industrial, media and business services and real estate. The company has invested approximately $1.3 billion in 41 healthcare services companies.