evaluating the brand value of healthcare entities

December 13, 2014

Evaluating the Brand Value of Healthcare Entities

Evaluating the Brand Value of

Healthcare EntitiesDecember 13, 2014

W. James Lloyd, CPA/ABV, ASA, CFE

Principal, Pershing Yoakley &

Associates, P.C.

Annapoorani Bhat, MBA, ASA

Sr. Manager, Pershing Yoakley &

Associates, P.C.

December 13, 2014


Agenda

• Healthcare Affiliations

• What’s in a Brand Name Anyway?

• Why Value Brands of Healthcare Entities?

• Brand Valuation Methodologies

• Evaluating Brand Strength

• Capitalizing on the Brand’s Value

December 13, 2014


Speaker Biography - Jim Lloyd

• W. James (Jim) Lloyd is a Principal in the valuation and dispute services practice

of Pershing Yoakley & Associates (PYA), an accounting and consulting firm

specializing in the healthcare industry.

• Senior financial executive experienced in valuation, mergers and acquisitions,

litigation, tax, and accounting matters.

• Substantial experience with valuing a wide range of privately-held companies,

complex business arrangements, and intangible assets.

• Litigation and expert testimony experience related to diminution of value, fraud,

intellectual property, lost profits, post and failed acquisition transactions, antirust,

and shareholder disputes.

• Professional credentials include: Certified Public Accountant (CPA), Accredited

Senior Appraiser (ASA), Accredited in Business Valuation (ABV), and Certified

Fraud Examiner (CFE).

December 13, 2014


Speaker Biography – Anna Bhat

• Annapoorani Bhat is a Senior Manager in the Valuation and Litigation Support

practice of Pershing Yoakley & Associates, P. C. specializing in valuation and

related consulting services for companies in the health sciences sector including

providers, pharmaceutical companies, managed care entities, and allied service

providers.

• Over 20 years of work experience with 11 years in providing valuation-related

consulting services. Primary area of expertise is in the valuation of businesses

and assets for regulatory compliance, financial reporting, and tax purposes for

healthcare and non-healthcare entities. Extensive experience in performing

valuations related to fee-for-service agreements for pharmaceutical companies

and fair market value analysis of physician compensation.

• Accredited Senior Appraiser (ASA) and Moderator at the Women’s Leadership

Counsel of the American Health Lawyers Association.

December 13, 2014


Healthcare Affiliations

December 13, 2014


Do you

know

these

names?

Giants in Health Care

December 13, 2014


Affiliations Everywhere

Cleveland Clinic • Advisory Services - Branded Affiliation

• Heart & Vascular

• Orthopedic & Spine

• Alliances, affiliations, network

Duke Medicine • Duke LifePoint – 11 facilities in NC, VA & PA

• Cancer programs affiliations

• Heart program affiliations

• Hospital patient safety and quality affiliations

MD Anderson• Partner members: NJ & AZ

• Certified members: 13 health systems, 11

states

• Affiliates: International

Mayo Clinic• Announced first affiliation in September

2011

• Since then approximately 30 health

systems have joined the network all over

the U.S.

December 13, 2014


Cleveland Clinic - Affiliations

December 13, 2014


Mayo Clinic - Affiliations

December 13, 2014



“You can tell a lot about a

place by the company it keeps.

Through affiliations with thought

leaders in the medical world like

Cleveland Clinic for heart care

and medical oncology and Ann &

Robert H. Lurie Children’s

Hospital of Chicago for pediatric

specialty care, Cadence Health

connects you with access to

expertise and top-ranked

healthcare, right in your own

backyard.” Cadence Health Website

Trusted experts in the field

December 13, 2014


Healthcare Affiliations“… our exclusive local affiliation

with MD Anderson Cancer

Network® strengthens the Saint

Francis Cancer Institute’s

commitment to providing

exceptional local cancer

care. Experts at MD Anderson have

developed disease-specific

guidelines for cancer treatment,

cancer prevention, early detection

and follow-up care that allow MD

Anderson Cancer Network-

certified physicians to bring new

hope and knowledge to local

cancer patients.” MD Anderson WebsiteHospital in Dublin, Ireland

December 13, 2014



• Motivating factors for the local entity:

Associate with high quality

services providers

Gain access to knowledge

and resources

Learn and develop protocols,

skills

Build own reputation for

quality

• Motivating factors for the “brand name” entity:

Capitalize on the investments

made in developing brand and

reputation in the market

Expand reach outside of

immediate geographic area

Promote further brand

awareness

December 13, 2014


What’s in a Brand Name

Anyway?

December 13, 2014


What’s in a Brand Name Anyway?

“…This is not just a new logo, signage, or new ads. This is

about who we are, how we are able to reduce costs while

continuously improve quality and where we are going as an

organization…”

John Fox, CEO of Emory Healthcare, September 2013

December 13, 2014



Reputation &

Quality

Reputation of the Health System

Reputation of Physicians

Perception around Safety

Reliability of Outcomes

Perception around Quality

December 13, 2014



Benefits to

Health SystemAttracting Top Quality Clinicians

More Philanthropic Gifts

Better Rates with Health Plans

Retaining Clinicians/Staff

Attracting Patients

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Brand

Strength Affected by

Patient Satisfaction

Marketing

Physician Referral

NetworksNational Rankings

Preference and Awareness

with Patients and

Providers

Reputation in the Market &

Competition for Services

December 13, 2014


Why Value Healthcare Brands?

December 13, 2014



“If a measurement matters at all, it is because it must have some conceivable effect on decisions and behavior. If we can't identify a decision that could be affected by a proposed measurement and how it could change those decisions, then the measurement simply has no value”

Douglas W. Hubbard, How to Measure Anything:

Finding the Value of "Intangibles" in Business

December 13, 2014



What is my brand

worth?

How much should I

invest in

developing my

brand name?

How much should

I pay for an

affiliation?

Am I allocating my

resources

appropriately?

December 13, 2014



• Resource allocation:

Marketing spend – is it effective and having a positive

impact on brand strength?

Campaigns to improve brand awareness – Pre- and

post-campaign assessment.

Building & maintaining brand equity – Help focus on

developing brand awareness on a sustained basis.

December 13, 2014



• Provides guidance for negotiating affiliation terms:

Should a fee be paid?

If so, how much?

What does the fee cover (just the name, or clinical

protocols, administrative support, etc.)?

What form should the payment take? For example:

royalty fee, upfront lump sum payment, equity interest,

etc.

December 13, 2014



What did I get?

What did I give?

December 13, 2014


Valuation Methodologies

December 13, 2014



Brand ValueHow to

value ????

How to

value????

December 13, 2014


Brand Value Continuum


Business

NameBrand

December 13, 2014


Build

Credibility

Brand


Build

Awareness

Create

Emotional

Connection

Create

Loyalty

Business

Name

December 13, 2014


Brand

Value

Income Approach

Based on the

economic benefits

anticipated to be

derived from the asset.

Market Approach

Based on transaction

data involving

similar assets or

services

Cost ApproachBased on the anticipated

cost to recreate,

replace, or replicate

the asset


December 13, 2014


Brand

Value

Income Approach

Based on the

economic benefits

anticipated to be


Market Approach


data involving

similar assets or

services


cost to recreate,


the asset


Difficult to determine

Floor Value

December 13, 2014


Brand

Value

Income Approach

Based on the

economic benefits

anticipated to be


Market Approach


data involving

similar assets or

services


cost to recreate,


the asset


Difficult to determine

Floor Value

Adopt a combination

of both methods

December 13, 2014



• Commonly used to value intellectual property assets

• Based on the theory that owning the asset avoids the

cost of licensing it

• Value = present value of royalty/licensing costs avoided

by owning the asset

• Key considerations: 1) royalty rate(s), 2) revenue base

and projections, and 3) discount rate

Relief from Royalty Method (RFR)

December 13, 2014


• Search public license/royalty rate

databases

• Review public filing, press releases,

disclosures, tax returns, legal filings to

identify terms of any existing

affiliations

• Review research studies on brand

licensing

Royalty Rate Research


December 13, 2014



• Evaluate comparability – industry/operations

• Evaluate profitability – (i.e. evaluate impact on

profitability from utilizing the brand).

• Qualitative comparison of subject entity with other

similar entities.

Thoroughly evaluate royalty rate data

December 13, 2014


Step 1

Step 2

Step 3

Step 4


Case StudySelecting Royalty Rate

• Researched more than 40 AMC’s to

identify agreements where brand name is

licensed.

• Researched public data for licensing

agreements involving brand name in

healthcare sector/university names.

December 13, 2014


Step 1

Step 2

Step 3

Step 4



• Evaluated earnings before interest and

taxes (EBIT) margins for 14 AMCs

indicated to be comparable to subject

entity in size and services to determine

royalty rate thresholds (based on 25%

Rule of Thumb methodology).

December 13, 2014


Step 1

Step 2

Step 3

Step 4



• Qualitative evaluation of brand strength

and position

• Evaluate rankings for 14 AMCs and

compare with subject entity

• Interview more than 20 stakeholders to

understand brand position for each service

line.

December 13, 2014


Step 1

Step 2

Step 3

Step 4



• Test value conclusions using corroborative

methods

December 13, 2014


Valuation MethodologiesData Evaluation

Internal Data

• Revenue and margins of subject entity

• Strategic plans for key service lines

• Internal Quality & Safety Report

• NRC research results

External Data

• Quality Metrics: US News & World Report, Leapfrog Group, Healthgrades

• Financial metrics - Margins for 14 academic medical centers (AMCs)

• Franchise/affiliation agreements –financial and other data for more than 45 AMCs and affiliates

• General market data on trade names

• University/College licensing agreements for consumer products

Interviews

• Service line and other executive leadership

• Marketing team

• Chief quality officer

December 13, 2014


Valuation MethodologiesIssues with RFR Method

• Finding a needle in a haystack

• Limitations on ability to

appropriately compare entities

• Sensitive data points

• Qualitative factors can be

difficult to assess/estimate

impact

• Corroborative methods and

appraiser judgment is key.

December 13, 2014



Percent of Purchase

Consideration

Residual Value

Calculation

Proxy Contract

Evaluation –

e.g. Duke-LifePoint JV

Corroborative

Methods

December 13, 2014



Percent of Purchase Consideration

• Estimate subject entity’s enterprise value.

• Review data on purchase price allocations

for hospitals where trade names are

identified.

• Consider percentage of value allocated to

trade name and evaluate in the context of

the concluded value indication .

December 13, 2014



Residual Value Calculation

• Estimate enterprise value less tangible

assets to ensure sufficient balance available

for other intangible assets.

• Use fair market value of tangible assets if

available, if not book value. Estimate value

of intangible assets apart from brand name

where possible.

• Estimate residual value attributable to brand

name and goodwill

December 13, 2014



Proxy Contract Evaluation

• Research public information on terms of

affiliations between health systems and

health care entities

• Evaluate what the terms of the agreements

imply for brand value

• e.g. Duke – LifePoint JV, internal contracts,

etc.

December 13, 2014


Valuation Methodology

Conclusion

of Brand

Value

December 13, 2014


Evaluating Brand Strength

December 13, 2014



Brand strength is generally service line specific:

• In a single hospital system, brand strength may be

substantially different within various service lines.

• Important to evaluate appropriate qualitative factors

that drive preference and perception of value.

• Many joint ventures are service-line specific (e.g.

cancer centers, etc.).

December 13, 2014



Factors considered in evaluating brand strength:

• Rankings, awards, recognitions

– Quality and Safety rankings- e.g. Leapfrog, Healthgrades

– Overall ranking: US News & World Report

– Patient satisfaction: Healthgrades

• Market preference – Internal data

• Competition

• Strategic Initiatives and affiliations

December 13, 2014



Brand

Strength Affected by

Patient Satisfaction

Marketing

Physician Referral

NetworksNational Rankings

Preference and Awareness

with Patients and

Providers

Reputation in the Market &

Competition for Services

December 13, 2014


Applications of Brand

Valuation

December 13, 2014


Application of Brand Valuation

Applications of Brand Valuation

• Structure joint ventures based on value contribution

• Allocation of resources related to improving brand

awareness, etc.

December 13, 2014



Examples of joint venture/affiliate contracting terms:

• Royalty rate on revenue/gross margin, etc.

– Ensure selected royalty rate adequately compensates for

all value contributed (brand name, protocols, intellectual

property, etc.)

– Royalty rate should generally be applied to incremental

revenue anticipated to be generated from using the

brand

December 13, 2014



Examples of joint venture/affiliate contracting terms:

• Percent of equity

– How would the value of the joint venture be measured at

the onset of the use of the affiliated brand name?

– Consider performing a with-without analysis to

understand the value contribution of the affiliation

– Consider how the business value will change over time

with the use of the brand name and ensure contract

terms do not lock you into unfavorable terms

December 13, 2014


Final Thoughts

A rose by any other name

would not smell as sweet…….

December 13, 2014


Questions

evaluating the brand value of healthcare entities

Healthcare

healthcare industry

diminution of value

nonhealthcare entities

brand strengthcapitalizing

established healthcare

health care page

valuation of businesses

business valuation abv