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Today, I spoke to Dr. Michael Dragutsky, Chairman of One GI, the latest private equity platform to take shape in gastroenterology. Memphis, Tenn. based Gastro One partnered with Webster Equity Partners to announce One GI earlier this week.
It’s possibly the ONLY medical practice deal to conclude during this crisis.
Watch this interview to gain insights on:
◘ Doing a deal at a time when everyone thinks it’s not possible
◘ How Gastro One took 9 months to form One GI with Webster Equity Partners
◘ Were valuations affected because of COVID-19? Will they dip?
◘ What’s likely to happen to PE deals post COVID-19?
◘ Will consolidation continue or stall?
◘ What about the “second bite”?
◘ What role would digitization of GI play in PE valuations?
The Transcribed Interview:
Praveen Suthrum: Thank you for taking the time and first of all, how are you? And how is the situation on your end? 
Dr. Dragutsky: Oh no, thank you for inviting me. We’re doing fine here in Memphis. We’re struggling with the COVID-19 pandemic just like everybody else in the United States is. Hopefully it’ll come to an end in the next month or so. I know it has affected all industries including medicine. Thank you for asking.  
Praveen Suthrum: So, my big question for you is, you pulled a surprise on the whole industry by doing a deal at the time where no one thinks it is possible to do a deal. So, I’m curious to learn what the process was on your end, how did it come about and more importantly, how did you decide? I’m sure you weighed pros and cons of doing it during this time. I’m just interested in learning the whole process right from the beginning. 
Dr. Dragutsky: Well. We’ll take it back several years. Historically, GastroOne has been a group that has believed in consolidation. In 2014, it was the merger of the two large groups in Memphis to from the largest group now in mid-south. And we have seen the benefits of consolidation in the local level and we’re in the camp that I think a lot of our colleagues are that consolidation is necessary to have a clout and have a seat at the table and as medicine changes from a fee-for-service platform to whatever it becomes whether it’s value-based medicine, population health, Medicare-for-all or whatever, it is important to have a large group. So, we’ve never had to be convinced that consolidation is necessary. We think that just like in any business, in the United States, outside of medicine which is showing consolidation that it is mandatory for medical practices, especially independent medical practices to band together to be able to not only survive but also thrive in the upcoming healthcare landscape. And we need these numbers to have to clout. So, again it was never an issue for us whether to consolidate or not. We saw what we were doing in Memphis and we’re thinking not just this year, but five-ten years in the future, it is important to have a larger group in a defined geographical area to again, have influence and clout with payors and healthcare systems.  
So, once we decided to do this, I was fortunate to meet William Lautman who is the Principal of Nexus Health capital, I think it’s one of the GI roundtable conferences, and we hired them as our independent banking advisor. Will and Nexus Health Capital has plugged in more deals, transactions in the GI space and in healthcare than most of the other banking advisors. So, we shared our philosophies together and then we put out like a confidential informational memorandum which is sort of like a prospectus. We got a significant amount of replies with tentative LOIs to about 50 and we basically interviewed a dozen of those and paired it down and made a decision as to a private equity partner. We had really great candidates. We looked at current consolidators and new consolidators and then chose Webster Healthcare or Webster equity partners as our partners in healthcare with GastroOne and formed our MSO called One GI 
Praveen Suthrum: Yeah. Thank you. So, how long did the process take?
Dr. Dragutsky: This process probably took about nine months from start to finish. A long process but very interesting process. It was a little harder for us to go through this process because we wanted to basically start from scratch by ourselves and it was also very important for us to lay the fundamentals of this platform. We have several groups in this area that will be joining us and are interested in joining One GI. So, as you know, when we develop what they call the “life after the deal terms” with private equity, those are sort of set to the future. We didn’t do it just with GastroOne. We sought the opinion, advice of several GI groups in the four-state area and what their thoughts are on “life after the deal” and then codify them in a transaction with Webster equity partners. So, for future consolidations and partnerships, it’ll be a much easier process. 
Praveen Suthrum: Okay. So, this whole “life after the deal” has it not changed? Did you think about it? I’m sure the when the final conversations were happening once the crisis started and did that have any bearing on physician productivity, or any estimates that Webster might have used coming up with the valuation or you know any of those things?
Dr. Dragutsky: Well, Webster… first of all I think they are looking at the long-term vision. They know what’s happening with COVID-19 but that didn’t deter them from proceeding with the deal as laid out in their original Letter of Intent. We did not bear from that at all. You know, Webster has an intimate knowledge of the GI space and they’re very physician centric. So, their motto is that they want to provide the business acumen and the financial backbone to enable growth and they do not want to interfere or affect the clinical practice of medicine. They see that GastroOne is doing an excellent job with taking care of patients. So basically, they want us to continue to provide excellent patient care and that’s really their mantra. So, nothing really changed in the deal as far as any of the specifics in the original pre- COVID-19 Letter of Intent.
Praveen Suthrum: Okay. You know, that’s great to know. Now, I would like to ask you what is likely to happen post COVID-19, right? Like, you know after the crisis settles down and this long flattening of the curve happens. How is that going to affect private equity-led deals?
Dr. Dragutsky: You know, during the crisis, as you know there has been basically a halt in private equity transactions. Deals have either been put on hold or have been blown off completely. So, as you said, we’re probably the only PE deal in the medical room that I know of that really concluded during this crisis. And you know, from our standpoint, we are accelerating as Webster has really allocated considerable resources to One GI. Again, they see a long-term strategy and they feel they’re very bullish on healthcare down the road and feel that the COVID-19 is of course a setback but just a blip in the road which may actually accelerate the private equity afterwards. But many independent practices have had trouble navigating the business side of medicine with all the changes happening even in the good times before COVID-19 and let alone through this pandemic.
And I think, the added safety in numbers is really true. I think a lot of physicians see the benefits of banding together and being able to withstand another pandemic or withstand external pressures from the healthcare industry that are affecting independent physicians. So, we really feel that consolidation will continue. Maybe it’ll put on a little hiatus because a lot of the other private equity companies are you know… have been over leveraged and have to put their resources into stability during this crisis. We’re fortunate that we have a private equity fund that has the resources to continue during this crisis. But I think, when the crisis hopefully comes to an end in the near future, that private equity transactions will pick up. 
Praveen Suthrum: So, this whole second bite of the apple. Are the initial deals that were done in GI were back in 2016 and typical private equity plays are between three to five years and average of five. Do you see that the current crisis would delay these exits from happening? What are your views and what have you been hearing from the private equity world? 
Dr. Dragutsky: Well, I haven’t heard anything specific. Audax, the private equity behind Gastro Health was established first and I understand that their plans were in the near future to entertain a transaction. I would imagine that by now that’s on hold as many of the potential buyers and secondary lenders and co-lenders in the transaction are now just watching to sort of see what’s happening as the economy improves and how long it takes to get out of the COVID-19 crisis. 
You had asked about the pros and cons of the deal and basically you know, starting with the cons, the biggest con of any kind of private equity transaction is change. You know, change takes people out of their comfort zone and it makes physicians nervous when they believe they will lose control of the business that they have been the sole owners of up until now. And that’s why I think it’s important to pick the right private equity partner. As I said earlier, Webster is very physician centric and they are leaving all the control of the clinical aspect in physician control. So, you know it is very important to us. My advice to somebody seeking out a private equity transaction is that your partner is like a marriage you know, you can be with them as you said from three to seven years and you really want to get a company or partnership again, will let the physicians practice medicine like they know how to practice and really, just bring the stability and the business sense to enable growth and consolidation. 
Praveen Suthrum: How are valuations going to change post COVID-19? Is that going to change because the number of procedures may be reduced, or all this is going to affect how practices are going to be valued by the private equity? 
Dr. Dragutsky: That’s a great question. I think that eventually we are going to catch up on procedures. Lot of our procedures were deferred but not cancelled especially since we postponed all elective procedures which people need and will be done after the crisis is over. But it may affect the valuation somewhat because the financial institutions will look at earnings over a certain period of time when they make their valuations and compute their EBITDA. 
But I’m impressed with my group that… the reason that we entered into a private equity deal was not to take money off the table. This was never an issue that we’re going to take so much money and put into our pockets and that’s it. The money…the financial aspect was always secondary. The reason for this is down the road to be…necessary to compete in the healthcare environment and we feel that consolidation is important for us to maintain our practice, both, the way we practice medicine but also maintain the financial upsides of an independent practice and that’s our long term goal. So, even if the valuation may change somewhat in the near term with private equity transactions… that is not important thing to me. The important thing, the important aspect of this whole reason to consolidate is looking five to ten years in the future that consolidation is necessary. So, to some the valuations may change but that’s never been in the forefront of our minds. It’s the end goal that is the important thing and I think that overall looking into the future, the upsides financially and to maintain independent practices outweigh any changes in valuation that may happen in the near term.  
Praveen Suthrum: Okay. And, while on the topic of valuation I had a follow up question. Clearly, gastroenterology is going the digital way, right? If anything. And I’m not just talking about telemedicine, but you know, I do think post COVID-19 the digital direction is going to accelerate. Now, a lot of these valuations are based on an old world that may not exist in the future, right? So, previously certain procedures were done in a certain way but then post COVID-19, the same thing might look differently, we might do procedures differently there’s a whole digital aspect to it. Just your reflection on how that might connect to valuation. 
Dr. Dragutsky:You are the guru of prognosticating the digital future of GI and I know you have a book coming out, Scope Forward that details this so we are all looking forward to that. But I agree that we are changing not just with telehealth, but we are going to the digital world and I’m not sure if it affects the valuation per se but, one of the attractions of gastroenterology from private equity is that we have a full set of ancillaries and ancillaries have been changing throughout time. We have been able to add ancillaries like infusion and pharmacy and research and we’re very diversified as a specialty goes which is an attraction in the financial world. I think that things will always change and as we go into the digital world that will be another ancillary that will come into play and it just exemplifies the place that gastroenterology has with this diversification. And that will continue through all the technological advances that are happening in medicine. 
Praveen Suthrum: Thank you and I wish you the very best in going forward and do stay safe, you and your team and I will talk to you soon.  
Dr. Dragutsky:Okay. Thank you so much. Stay safe and sound. 


By Praveen Suthrum, President & Co-Founder, NextServices. 

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