Tell us about how you built up your site network.
I started Medex Healthcare Research in 2001, originally in St. Louis. At the time, I owned and ran some medical clinics that performed disability examinations for the social security administration. Since these facilities employed physicians and psychologists, we felt we had the framework of providing clinical trial management to the pharmaceutical industry.
After building the St. Louis site, I relocated to New York City, where I opened the NYC site. With our location and access to millions of people, we became a high enrolling site. We built up a database of over 40,000 patients. Later, we opened a site in Chicago. I served as Principal Investigator at the NYC site, and CEO and Medical Director of the overall network.
And you were electronic fairly early on, right?
I actually moved to electronic source back in 2010. We deployed an EDC system as our eSource. We used it on hundreds of trials, until we became clients of Clinical Research IO. I was using eSource before it became commonplace. I never had a problem with it from sponsors or auditors, including the FDA.
Electronic source has allowed me to provide oversight and monitor the quality of work done at our other locations. It's cut down on errors, improved efficiency and allowed me to market our network to sponsors as a cutting-edge, high-data-integrity site. Just the other day, our QA Director was able to provide real-time oversight on a visit done by a relatively new coordinator.
So what made you decide to sell?
In the fall of 2017, I received a cold call from a private equity firm that was trying to purchase clinical research sites. A few months later, another firm called me. That got me thinking that it might be a good time to sell. Both of the potential acquirers had heard of me from referrals.
After these inquiries piqued my interest, I spoke to a couple investment bankers. I talked to them and realized we were probably too small to warrant professional M&A representation. However, one of the bankers gave me the names of five institutional investors that were looking to buy firms with whom I'd make a good fit.
How did you go about selling the network?
I reached out directly to the five referrals. I retained an attorney to help me navigate the negotiations and due diligence process. I signed an LOI with one of the firms, but as we went through the process, the potential buyer realized our accrued revenue was declining from the prior year, so re-adjusted the price downward. We ultimately couldn't agree on a figure, so I decided to walk away.
Coincidentally, at that time, a friend of mine who managed a large medical clinic network was in the process of working with private equity to help him significantly grow his business and one way to do that was to incorporate clinical trials. I still owned my disability clinics, so for me, this was an opportunity to exit both businesses, thus getting a better overall price. We ultimately closed in Dec 2018, and now I'm the Director of Research. My mandate is to grow the research business by partnering with the physicians in the existing network.
What was the sale process like? Anything in particular surprise you?
All the firms I spoke with use accrual-based accounting. Since I used cash-based accounting, we and they had to spend a lot of time converting my revenue figures from cash to accrual.
Overall, the due diligence these firms did was very rigorous. They reviewed my pipeline, my contracts, my payroll and expenses, and much more.
They wanted projections going forward on all of my studies. I had to put together a spreadsheet for each study showing the projected visits for each of our existing patients, the number of future patients we could enroll and when those would happen. They also reviewed the studies we were awarded, and the studies we had submitted for but were not yet awarded. All of these projections led to a sophisticated revenue forecast model.
We hear that pricing for your size tier might be in the 5-7x EBITDA range. Was that what you found?
Yes, that's an accurate reflection of pricing.
What advice would you give a site owner looking to sell?
First off, go to accrual-based accounting! It will give you the same vocabulary as the investors. Second, try to incorporate more rigorous forecasting as a process. If you have a good view of your revenue forecast, you can make an informed decision about when to sell your business and what type of price you could expect. You have to understand that your acquirer is going to do this exact exercise, and if they forecast a decline in revenue, your price will get adjusted downward.
Third, don't take any of the process personally. You may feel that in the due diligence process, everything you've been doing is being questioned. That's not the case. The acquirer is simply doing their best to understand your business and unearth all the risks. If, at the end of the due diligence process, the acquirer has a different view of the valuation, it's nothing to take personally. It's just the way the business works. Frankly, I would do the same in their shoes.
Finally, because you know that the initial offer you receive is the highest valuation you could get, know what your walk-away price is. This will help you negotiate if the price is adjusted later.
What advice would you give a network operator looking to acquire--especially, as you experienced, when there is quite a bit of competition for good sites?
I think it's about listening to and understanding the desires of the site owner. If the site owner is looking for a clean retirement, then it's really just a matter of agreeing to the price. If they want to stay on, then it's about coming up with an appropriately defined role and compensation. The post-sale role of the owner will be critical to that person - they'll want to know their total comp, whether they get equity in the institution, and whether they see themselves working there, getting along with their colleagues, and buying into the vision. So being highly customized in your approach is key.
Dr. James Greenwald was founder and CEO of Medex Healthcare Research, a three site network with locations in New York City, Chicago and St. Louis. In 2018, he sold his network to a multi-clinic Group, where he now serves as Director of Research. Dr. Greenwald previously served as Medical Director of a network of medical testing sites and Assistant Professor at Washington University School of Medicine. He has an MD and PhD from Ohio State University and did his residency at Johns Hopkins.
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