A rapidly growing healthcare consulting firm has forked over $35.2 million to scoop up Care Team Connect, a 5-year-old Evanston, Ill., startup whose technology helps hospitals better coordinate care for their patients.
Washington, D.C.-based Advisory Board Co. is paying a lofty price for a firm that generated just $1.5 million in revenue and lost $3.5 million—before interest, taxes, depreciation and amortization—during the 12 months before the transaction closed last month.
Yet the price tag speaks to the high expectations the Advisory Board, with more than 3,600 hospitals and health systems nationwide, has for the fledgling company's co-founder, Ben Albert, and its software, which “listens” to the deluge of medical records hospitals produce, creating a step-by-step guide for a patient's care after discharge.
“Given the stage of the company, it's a very generous valuation, and kudos to Care Team Connect for negotiating it,” said Nina Nashif, CEO of Healthbox LLC, a Chicago-based health-startup accelerator that was not involved in the transaction. “Advisory Board is thinking about it from the perspective of the hospitals in their network they can push this out to.”
Although the deal was completed on Oct. 7, it was not made public until Advisory Board's Nov. 4 conference call to discuss earnings for the second quarter ended Sept. 30.
Before the transaction, Care Team Connect had just 21 clients. Asked by an analyst about the sales price, Advisory Board CEO Robert Musslewhite said the company's other recent deals also seemed high based on financial metrics.
“The reality is we're buying a small company that has huge growth potential ahead of it,” he told analysts. “We're hoping it's one of those that we look back on and feel like it was a very fair deal.”
If the company doesn't grow the acquisition, it will look like it paid “a little too much,” Musslewhite said.
The acquisition is Advisory Board's largest over the last five years, according to research note by analyst Ryan Daniels of Chicago-based investment firm William Blair & Co. The price surpasses the $34.5 million that Advisory Board paid for Vernon Hills-based Concuity, a vendor of contract management software for hospitals and doctors.
Yet, the price is relatively small when compared to the Advisory Board's annual revenue of $450.8 million, which it booked in the year ended March 31. The transaction does not include any earn-out payments, the company's CFO Michael Kirshbaum said in the earnings call.
The deal is a rich reward for Albert and his financial backers, who have invested a total of $9.9 million since 2010, including $2 million in convertible debt financing obtained in April, according to a filing with the Securities and Exchange Commission.
Albert and his senior executives plan to stay with the Advisory Board. The 40-employee business unit has been renamed Crimson Care Management, in line with the consulting company's other Crimson branded offerings.
Advisory Board plans to move quickly to start selling the software to its clients.
“…This is the first time—to our knowledge—that (Advisory Board) has immediately launched a product into its client base,” Mr. Daniels wrote. “Thus, we believe the quick launch indicates both robust demand and immediate need within the client base as well as strong confidence in the delivery capabilities of the novel solution.”
Better coordinating patient care has taken on new urgency as a result of President Barack Obama's health law. Hospitals are trying to improve post-hospitalization care as a way to tamp down unnecessary readmissions, which can lead to deductions from Medicare reimbursements. Medicare accountable care organizations—in which providers share in cost savings if they keep patients healthier, but are dinged if they don't—also puts a premium on improved communication.
“There's a big need, so (the deal is) just accelerating and putting more resources behind the marketing and behind what we do,” said Albert, 40.
He and a friend who was then a health policy grad student founded Care Team Connect in 2008. The idea for the company grew from their shared frustration over the difficulty their grandfathers had in navigating the healthcare environment after getting out of the hospital.
Albert declined to comment on the financial details of the transaction.
"Evanston health startup sold to Advisory Board for $35 million" originally appeared in Crain's Chicago Business.
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