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Blue Ox: Taking healthcare companies from the 2nd innings to the 6th innings

New York-based Blue Ox Healthcare Partners (Blue Ox) is a private equity investment firm providing capital to growth stage healthcare companies. The firm focuses on businesses in the middle market targeting the industry’s transformation to individuality and value-based care in healthcare services, HCIT, and medical and life sciences technologies, whose innovations, strategies and operations are poised for growth.

The firm was established in 2009 by Oded Levy when he left Oracle Partners LP, a hedge fund focused on healthcare investments. At that time, Levy was joined by Sheila H Schweitzer as Co-Founder Managing Partner at Blue Ox, after selling her company to UnitedHealth Group. Schweitzer has over 30 years’ experience in the healthcare industry and has served on numerous boards. 

"We have domain expertise in the middle-market and lower middle-market healthcare sector,” says Oded Levy, Co-Founder and Managing Partner. "We made a transformation of the company over a year ago when John Neczesny, a long-time investment banker formerly with Bear Stearns, joined us as Managing Partner and COO, and Dr Charles Kennedy, previously CEO of Aetna’s Accountable Care Solutions division, also joined us as Managing Partner.”

Discussing Blue Ox’s investment strategy, Kennedy remarks that the US has witnessed a response to what has historically been a hugely wasteful and unaffordable healthcare system with a move towards towards individuality. US physicians are now paid based on the value of services to keep individuals healthy; treating each case individually to create the best outcome. The financial incentives have therefore changed in the direction of individuality, he says.

“What the industry is trying to do with this notion of value-based care is change how we pay providers from a focus on the volume of services that are provided to a focus on the value of services that help people get healthy or moderate the course of their disease,” explains Kennedy. 

“As CEO of Aetna’s Accountable Care Solutions division, I was able to see how that transformation was taking place in the US healthcare industry. What I believe has been missing are the tools, the technologies, the drugs, the diagnostics that would enable providers to change how they do business and take care of patients on a value basis.

"What is needed in the US healthcare industry is really innovative new companies with new solutions that help to deliver healthcare more efficiently and more effectively. And that is what drew me into the world of private equity and Blue Ox specifically given our focus on investing in these types of companies.”

If one looks at the underlying science advances for clinical medicine, it’s headed toward precision medicine. "We’re sequencing people’s genomes and understanding their phenotypes, we know more about individuals’ diseases and many of the new therapies coming to market are more individually tailored than they used to be," says Kennedy.

Huge strides in technology, thanks to machine learning algorithms and sophisticated diagnostic tools using big data, have led to a revolution in how healthcare and biotechnology companies operate. Combined, technology, consumerism, value-based care and precision medicine are the core elements that go into how Blue Ox thinks about investing. 

“Companies aligned with individuality is what we look for at Blue Ox,” adds Kennedy.
One example of this is a USD52 million Series E funding round led by Blue Ox in San Diego-based Epic Sciences, a leading diagnostics company developing novel solutions to personalise and advance cancer treatment and management. Epic is transforming late stage cancer treatment by applying computer vision and machine learning techniques to match patients’ individual cancer cells to individualised drug therapies. The result is prolonged life and lower treatment costs. 

Epic is able to take a sample of blood and run it through their technology infrastructure to make highly accurate predictions as to which patients will respond to their drugs, and which patients will not. 

“One of the leading problems in healthcare is the affordability of these new powerful, but also very expensive drugs. We think Epic is well positioned for success. I sit on the board and we really try to be active investors,” says Kennedy.

“While they know the clinical research and pharmaceutical space very well, we help by providing them with additional knowledge around the implications of value-based financing, and how physicians and health plans and others involved in the delivery of healthcare might respond to their products. We bring that expertise to the table and are helping them draft their growth strategy in a new way to take advantage of these new incentives.” 

Blue Ox invests in companies that have an established revenue stream and have a philosophy such that the team is confident it can help them grow faster and/or help them pivot to increase their exposure in the marketplace, and therefore increase their value. 

The last two years have been very attractive for exiting PE investments, given how high valuations are, and in that sense Blue Ox is no exception. Levy says they will look at multiple exit exit scenarios: IPO exit scenarios, strategic exit scenarios as well as selling to PE managers.

“Over the last 12 to 18 months we’ve have had some nice exits – Delphi Behavioural Health Group in October 2017, followed by Apollo Medical in Q1 2018,” confirms Levy. “We sold Delphi to Halifax Group, a large PE group in Washington D.C. Three years earlier, in 2014, we had identified the early stages of a drug epidemic largely driven by the proliferation of opiates. Delphi’s philosophy was very boutique-like, meaning very small facilities with high numbers of healthcare providers (doctors, nurses) to provide a full array of services.

“We invested growth capital into the company and I became the de facto chairman, building the growth strategy, which comprised two stages: one was the acquisition of other, struggling facilities, and two, building our own facilities in different locations to expand nationally. Another aspect was to build a high-tech patient recruitment, engagement and follow-up process, which I think is the key to the future of the industry. 

“We went from 40 beds in 2014 to 300-plus beds in 2017 and took revenues from USD20 million to USD150 million.”

Levy uses a baseball analogy to explain what Blue Ox tries to do when making healthcare investments: 

“Our edge is to take companies from the second innings to the sixth innings and get them to a point where the bigger PE funds and strategics can come in and take them to the next level. We stay away from the minor leagues, which we view as more of a VC play.”

The Blue Ox team has many complementary skillsets and strengths when it comes to identifying target companies, each investment typically being up to USD30 million; although it will invest in larger opportunities on occasion. Kennedy has a lot of experience building companies on the provider side and the managed care side, while Schweitzer is very keen on technology and the revenue cycle and service side. 

Far from being limited by the investment universe, if anything Blue Ox is overwhelmed at present and is looking to add to the team to increase its bandwidth. For each portfolio investment, the Blue Ox team is very hands-on with management teams.

“Most of our deals are self-sourced. We do mostly growth capital investments, which help us to really structure favourable risk/reward profiles based on the creativity of the deals we put together,” states Levy. 
Each business is evaluated on its own merits before the management team is assessed. Evidence of strong leadership is vital, as is the cultural environment. Kennedy says that management teams typically view Blue Ox not just as an investor but as a member of their team to make their business successful and “make the best returns possible for everybody”. 

“For us, it is probably the most exciting, but also the most nail biting time in the US healthcare space,” says Kennedy. “What excites me is the pace of innovation shaping this industry.  Unmanaged innovation has the potential to break the system but aligning innovations with better value and individuality could provide a pathway to a much more successful industry.

“We’ve been able to identify companies that have the potential to provide a new path forward in terms of providing new levels of care not seen before, but also we think these companies can be pivoted and aligned with better value for the individual consumer including reduced costs of treatment.

“It’s exciting, but these innovations need to be introduced in a way that the market can accept and can afford. We sit right at that interface, helping companies move in the direction of being value-based, and we think the economic opportunities for these companies will be greater than doing health innovations in the traditional way.” 

Just like the ski run that inspired its name, Blue Ox works with each investee company to help them navigate the best route forward to open a new array of markets or products.

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