Boston IVF CEO David Stern describes some of the challenges of private equity backed businesses. Griffin grills David on the models of Boston IVF and their parent companies.
Listen to the latest episode of Inside Reproductive Health to hear
David Stern talk about how little of their own money private equity firms typically use
Griffin press David Stern on whether business decisions and clinical decisions are always separated
David Stern and Griffin discuss the meaning of “trapped equity”
What happens when Private Equity doesn’t flip at the right time, who pays for claw back provisions, and what about those hidden fees?
David Stern talk about Boston IVF’s model for partnership
Transcript
Griffin Jones 00:04
Mr. Stern, David, welcome to Inside Reproductive Health.
David Stern 00:08
Thanks, Griffin. Pleasure to be with you today, there's probably 10 or 20 topics that we could have covered given your experience. But one of the reasons why I wanted to bring you on is because you had a talk recently at the Midwest reproductive symposium in Chicago. And you talked about some of the challenges that private equity backed companies can face. You are the CEO, as the audience knows by now, Boston IVF. And you have a bit of a different model, which we can talk about that later in the show. But can we start with what was the framework for your talk? And what are the challenges that you see of private equity backed companies where we could we could even do pros and cons if you want to start that way? Well, I Griffin, the original intro, I guess, invitation from Angie and the Midwest reproductive society was just to come talk about private equity, because there's been a lot of activity in reproductive medicine over the last really three, four years a little bit before the pandemic. And then, since the pandemic, we've seen a huge growth in private equity coming into this space. And so they wanted to have somebody talk about it, whether there's, you know, they're pros or cons. And I tried to approach it in a very open way. Yeah, Boston, IVF has a different model. We're not private equity. But I didn't want to come in and just have it be framed around our lens of how we look at the field, but really trying to take a step back and look at the bigger aspect. And first off, understanding the difference between venture capital and private equity. Because I think a lot of people, especially physicians, they use the term interchangeably, and they're not interchangeable terms. Yeah, I've talked about that on the show, too. And I'll have you review my definition, because I know that there's some overlap, but private equity, generally, purchasing existing businesses. Generally taking a controlling stake in the company generally looking to sell within three to seven years at a higher multiple, either by reducing costs, increasing profit, both and funded by limited partners, were venture capital, also funded by limited partners, but generally, purchasing or investing in companies at a non controlling stake that are nascent, and they are hoping to scale and then sell out at a much larger profit is that is that perfect, perfect definition, perfect recap of them and the differences. I've worked for venture capital back companies and women's health care. And generally speaking, they're making a minority investment, early stage and looking to help grow the business. Whereas private equity, as you said, is coming in to an existing business that's already generating profit, and making an investment and a majority ownership stake. And their goal is then to be able to maybe make the the company more efficient, be able to drive growth in profit, and then flip it. And so absolutely, you know, they're looking to be able to sell it at several times what they've bought it in a short period of time and then provide those returns back to their investors. And that's why they position themselves as a better investment option than just the normal stock market where maybe you get a 10% return in a good year. They're looking at multiples have that much higher return, but also higher risks. I want to talk about those multiples too, when when I when I try to explain the overlap to people. I can't necessarily explain the overlap. But what I tell people is watch Shark Tank because it's normally a venture capital move but every once in a while they make a private equity plan. You can actually see it in real time where Kevin O'Leary will just say, yeah, like I like your company it's make I don't want this product that you're trying to get me to invest VC, I want your company and I think it would be better if I was running it, I'll give you I'll give you this much money for this person. So you can actually see where venture capital and and private equity converge and I do want to talk about what they what they do to increase those multiples. Let's start with some of that. efficiency. What does it do? What is the efficiency that private equity, you know, purports to bring or aims to, to bring? Well, first and foremost, I think that's part of the pros, the pros of private equity is that they are typically operating multiple businesses in different fields. Sometimes you have healthcare, private equity that also have some dry good manufacturer or from a manufacturing company or, or some other things. And so they're not specific to fertility or even healthcare in general. And they have people who are very good operators. These are people that know how to run businesses. Again, they might not have any reproductive endocrinology experience, they might not have any healthcare experience. Sometimes they do. And sometimes they don't. But that's one of the benefits that they bring is they know how to operationalize a business so they can improve the efficiencies of the practices, they can bring back office improvements, maybe in how financing is done or reporting, customer relationship management, maybe under a centralized, electronic medical record. They also provide resources for growth. And so from that standpoint, those are some of the benefits that our private equity can bring.
Griffin Jones 06:23
So when Richard Groberg was on our show, who is you know, he's been the fractional CFO for companies before he's helped different practices buy in and buy back their practices from groups, he's helped them sell to groups. In his view, he doesn't think that the networks so far have been successful in bringing that efficiency dubare. What do you think?
David Stern 06:50
I think I would agree with Richard, for the most part, I believe an outlier is Prelude. I think Prelude has done a very good job at streamlining their network, where all the from my understanding, and you'd have to talk to TJ directly. But my understanding is that they're all utilizing an electronic medical record for their group. They're utilizing an app for patients. And what they focused on is using technology and infrastructure from an IT standpoint to improve the overall patient experience, and probably also improve the back office operations of their clinics. And so I do think that they have done a good job with that. You could probably, I think us fertility offers some of that as well, from an IT standpoint, obviously, they have an electronic medical record. They have some marketing, and, you know, so other programmes that I think they offer, but some of the other networks, I would question whether they've brought the value to the IVF centers that they bought, well, half of the rest of the ones who have been open for it's been around for six months. So, you know, it does seem like that. And there's a new one popping up all the time.
Griffin Jones 08:08
That's what I mean, there's always a new one, and I had some the, the the ladies that run rescript it on, and we were talking about the venture capital stuff. And I said, I'm not the jury, the market is the jury and, and only time will tell of all of these things. And in many cases, I'm not qualified to even analyze someone's business at that level. But it seems that at least many have not been able to provide that deficiency. And so why do you suppose that that is,
David Stern 08:44
I think IVF is still a very local business. And what I mean by that is IVF is complex, it's not easy. When you're running a dental practice. I think a dental practice is relatively easy, or another area of LASIK, you know, some of these areas that are some of these industries that private equity have gone into and healthcare is much more cookie cutter. And those can be approached in a very similar way. IVF has so much complexity, because just looking at how it is being reimbursed? Are you in a state that has insurance mandate, and when you're in an insurance mandated state, you have to practice differently than when you're in a state where patients are paying out of pocket, you can be a lot more I would say you can have a lot more staff, you there's a lot more room for expenses because the patients are paying out of pocket at a high amount. And you can still make a very good margin. When insurance is paying, you're already getting significantly discounted on what your fees are. And so you have to do a better job of being efficient in a practice and so for example Apple in a match in a Massachusetts, where we have insurance coverage, we can afford to have physicians do ultrasounds, we have ultrasound ographers to do it. So the physicians can spend their time seeing patients because that's what's generating more revenue is bringing more patients into the practice, not having a physician do an ultrasound. But if you're in a smaller boutique ei VF center, in a cash state, the doctors feel like it's actually a benefit to do the ultrasound because they get to see the patient every day, and they talk to the patient. And it's a way to add some additional bedside manner to the patient. And that might work very well for that type of practice. I want to talk about that efficiency with insurance that you talked about, because this seems like it should be an argument for but potentially being part of a network being part of a better group I just did an episode with on this with Holly Hutchison from Reproductive Health Centre in Tucson and the direction that employer benefits companies and insurance companies are going but I pose the the thought that was actually posed to me by a client, that it is better, you have more leverage being having more of a certain market than being a part of a larger network. So let's say we're, you know, let's just say that we're in New York, and, and we're a part of a big company, we can be part of the biggest fertility company in America, but we only have three dogs out of I don't know how many are in New York, 40 or 50, probably. And so we only have three dogs of those 40 or 50. And so they actually don't really have the leverage, despite being part of the biggest company, they don't have the leverage, whereas a group that maybe they're not a part of any network, but they're in a market that has 16 RBIs. And they've got 13 of them, that that's where the leverage is, what do you think, Oh, I totally agree with that. I think Shady Grove is a great example. Shady Grove owns the Maryland DC Virginia area, they have the most physicians, they have the most locations. And I would say Boston IVF. I don't know that I would say owns the Boston area, but we have a bigger than a majority share. We have 15 satellite locations, we have over 20 doctors. So we have a ger in that geography just like Shady Grove does in their geography, I would say where the large center. And we're able to have those economies of scale from a geographic standpoint. Whereas to your point, if you're in a, you know, kind of a smaller fish in a big pond, that could be very, very good from a profitability standpoint, from a revenue generating standpoint. But you're never going to be part of a very, very big group. But you're not going to own that geography, because there's so much more competition.
Griffin Jones 12:53
So I'm making a note of that. So we can talk about like, what, when a company like Boston IVF, that does have a lot of Mark market share in one area when you go into a new market, what that's like, but I'm making a note of that, because I want to stay on the limited partners of each of these funds for a little bit of what they need for a successful return and what that means for potential practice. And actually, this is why I asked you to be on the podcast, because when we were doing the q&a, I already asked you one question. I was like, Ah, I want this one answered. And so I gotta get David on the podcast so I can have. So I have more time and have answered this question. But I was reading a book by Rand Fishkin, who owned a very successful software as a service company called Moz. And they help people with SEO and digital marketing. And they're probably like a 25 $50 million company, something like that. At this point in Seattle, they got their VC funders early on. And what Rand Fishkin talks about in his book loss and founder is that there is a dis, there's a misalignment, between what the limited partners need and what the founding with the founders of the company might need to exit. And so it says, you know, if I'll just use round numbers, you get 10 people, or your your, your, your limited partners invest in a fund that is going to invest in 10 companies, they put $100 million into it, but they need, you know, half a billion or a billion out of it. Then if one company says like, oh, we, you know, we started at five, and we could exit now for 25. That's in the interest of the founders, we could 5x And, and we're ready to be done with this. But the limited partners see that or the the VC firm sees what they need to deliver for the limited partners and says, Well, if we let you out for 25, then we're only you know, then we're 10 percent, not likely to reach, you know, we're that much less likely to reach our 1 billion mark. And so they have to hold on and maybe they are able to grow to that unicorn status and maybe they're not does that first question is that? Is that uh? Have you ever experienced that second is that also present in private equity?
David Stern 15:24
I think Griffin what I learned in researching for the presentation at the at the Midwest reproductive society, I read several books and online articles about private equity. And I really educated myself and quite honestly, I was shocked by what I learned, because like you said, a private equity has limited partners. And the limited partners are the ones that are funding it. The actual financial sponsors, who essentially own the private equity company put very little bit of their money in, they're putting maybe 10% of their own money in and they're getting 90%, from outside investors. So as limited partners. And then part of the way the mechanism works, is when they buy a company. And you see this happening in the market today, the headlines for KKR, who's trying to raise $800 million to offset the cost of buying ie vrma, they're going to an outside fund a bank or a credit, private credit to take that money, and to offset some of the costs they're using to buy it. Now the debt to service that loan is borne by the individual company, not by the investors and not by the private equity. So if you have it's kind of like your mortgage, it's like, if you're paying $2,000 a month for mortgage, the company bought you and you're still paying the mortgage out of out of your operating expense
Griffin Jones 16:56
due to like, like any like any moron with a spouse that led to them getting divorced, something, let them talk them into, well, I got to take you off the deed but stay on the mortgage with me, it's kind of like that.
David Stern 17:13
Yeah, right, I need your income to be on the mortgage side qualify, but you're not gonna be on the deed. It's, it's, it's really like, so it kind of blew my mind some of the way that the financials work here, because there's not a lot of money at risk for the initial financial sponsors, the investors are the ones that are at risk. And then when they buy the company, they settled the company with debt. And then they charge fees. So they'll charge management fees to the company. And if a board member goes out to visit, if the management goes out to visit, they're charging that company for the visit, they're charging the company for like you take the doctors out to dinner. And guess what they're going to charge the company back for that dinner, they're not spending their own money to do that. So the doctors are basically buying themselves dinner. And it gets worse than that, because they're not just doing that, but but they're actually the due diligence and the legal fees. This was also mind blowing to me. When we go in and we purchase a practice, we hire lawyers to write up the contracts, we hire a financial firm to look at the make sure that the billing and everything is secure. We bear that cost ourselves private equity charges that back after the deal is done to that company. And so they're basically not putting again any of their money at risk. And they're pulling money out of the organization. So the limited partner needs that return. And you're right, there is a basic period of time where they can get that return. If they don't get the return. Typically what happens is they can recapitalize and the financial sponsors the private equity, sell, you know, they get their money back, the investors if they don't flip it for what they expected to, it's the investors that are ones losing out and not the private equity.
Griffin Jones 19:10
So I want to talk about how the Boston IVF model differs from that. But I wondering if you can speak to how this dynamic impacts younger Doc's buying in and there's a camp of people that say the really the only people that this benefits is the doctors who have built the practice that are within three years or so of retirement and this is their exit, and that the younger ducks do not have the opportunity to build that equity for themselves. I've also heard the contrary, there's a doc that I really respect that he was having lunch with a PCRs that that has sold recently who said this benefits the younger bucks the most because they have the opportunity to buy into something that's bigger the private equity group is going to, to sell and then they have the opportunity to, to be a part of that. And so the Where do you think?
David Stern 20:11
What's the truth? I don't know. I don't I think the truth is in the eye of the beholder honestly, I believe the reason why all this is happening, I think there's a perfect storm going on. And one of the one of the perfect storms is the physicians that founded the practices are entrepreneurs. I mean, I I've been in this field for for 28 years. And the amount of growth that's happened in IVF is fantastic. And the physicians like Michael Alper who's, who's one of the founders of Boston IVF, when they started Boston, IVF, 35 years ago, they left the hospital and started a private practice. It was one of the first private IVF centers in the United States, Michael Levy, arts Gaskin, who did the same thing they left they started Shady Grove, they took a lot of risk. And they didn't know that it was going to grow to what Boston IVF is today. And Shady Grove is today. So the physicians that were the entrepreneurs that started these practices and grew them, why shouldn't they be allowed to sell and make a return on that investment? They've put 2030 years of their lives into building something. And I don't think anybody should say, No, that's not fair. You can't do this. What's happened is because these companies, the IVF centers have become so big that a new doctor coming out might have loans, they might have student loans, and how can they afford to buy in? If the buy in is a million dollars or $2? million? Where can they come up with the funds to do that? I mean, one option, is that what you call Is that what you call trapped equity. Yeah, exactly. And okay, and so you said what you were talking, you were starting to, let's say, let's say a three physician practice is generating $7 million of revenue a year. And let's say they're generating $2 million of profit. And those three doctors founded the practice, if they want to sell, one of them wants to retire, either the other two partners have to buy them out and come up with whatever the multiple is, two, three years. So let's say it's three years of profit, that's 6 million, so the third owner gets $2 million. So the other two doctors each have to come up with a million dollars to buy that doctor out, or a new doctor coming in has to come up with $2 million. How do they come up with $2 million dollars to buy that doctor out of the practice, that's the trap equity, a private equity can come in and say, Hey, we're not going to give you three years of profit, we're going to give you seven years of profit. And we'll give you even more for that equity that you have that's trapped in your practice. And that's exactly why private equity is seen as a very good deal for the founding doctors because it's a way for them to recoup, and to be rewarded for all the blood and sweat that they've put into building that practice. So I would never begrudge them from doing that.
Griffin Jones 23:17
Nor would I, at the end of the day, it's it's it's someone's business, and it is hard work to build a business. So the question is the question I'm hoping to learn more about is, is it beneficial to the younger doctors when you talk about how this is often advantageous for the physicians because the private equity is its advantage to sell to private equity upon exit or nearing exit because they can give more than the potential partners who might have to put in a million dollars.
David Stern 23:55
Also there might be a catch. And that's why I think it's important to understand the contracts. Well, that's why I want to ask you about it because Wouldn't it have to be true in order for? Okay, this private equity firm is willing to give me more than I would have to get more upfront and have less in the earnouts? Like it seems to me like that would have to be the case as opposed to because couldn't they do an owner finance deal with the younger Doc's and they could pay them over time? They could? I think the question is different private equities have different models. So in some models, the person that is being bought out, needs to reinvest, I was on a board of directors of a company that got bought out by private equity, and the senior management had to roll some of that money that they got paid into, into the new new vehicle, the new private equity company. So it's not unusual that let's say the doctor gets bought out but they have to put in 20 or 30% of that money into the current business, and then we'll get an urn out at the end. When the private equity flips, the question is will the private equity flip. And if they don't flip at the multiple, because their targets, if you don't hit your target, then you don't get, you know that money back, that money is sunk gets lost, it's just like the investors you put money in, they didn't hit the targets, sorry, but you're never going to get that additional 30% that you thought you were going to get. And so that's where there have already been cases where physicians expected to get a quote, a second bite of the apple or another bump. And the private equity didn't hit their targets. And so the physicians, not only do they not get money, but sometimes there's a clawback provision that the doctor has to give some of that upfront money back, because the private equity didn't make the profit targets that they were supposed to make. Is that sometimes phase so you know, for example, we're looking at a profit sharing plan that accounts for, okay, if you don't make this profit threshold in q1, you can make it back in q2, and you can make it back for q1 You can make for the rest of the year. So is it ever phased? Or is it typically in one window, and if that one window isn't reached, then there isn't the opportunity to? The simple answer to that is it could be both. But I'll give you a real world example. My wife's best friend is an OB GYN who was bought out by a private equity in December. She does not she was given a term sheet. She's never seen her contract. She's never seen what her targets are. And all 40 of the OBGYN 's are below their targets. But the company that bought them hasn't actually showed them what their targets are. They just tell them that you're not achieving your targets. So there's not a lot of transparency there. And that's a real world example that that just happened not in reproductive health. But in OB GYN. And I think that happens a lot. You know, people are kind of learned by the shiny object of hey, here's all the money up front. But then they don't necessarily get the clarity on Well, what are the targets I'm going to have to hit? And Are they realistic targets. I've seen pitch books from investment bankers, where they're projecting through your growth rates, which are totally unattainable. And honestly, I would say fraudulent, there is no way that you can grow a top line revenue by 20%. And your profit by 100%. You know, you run a business Griffin, there's no way that you can bring in 20% more top line, but expect to, you know, unless you're going to cut, you know, all of your staff and be a one man show. It just isn't realistic. And yet some of these investment bankers show these pitch decks, and they, you know, show Oh, look at IVF it's growing at double digits, and we're going to be able to grow this. And really, I think now with the pending recession, a lot of those private equities might be sitting here and a year and saying, Wait, what happened in this growth of the investment bankers Promise me.
Griffin Jones 28:04
So you, people are pitching things that often include a window for achieving goals that perhaps from the pitch book, from the very beginning might be a completely unattainable projection? So why aren't doctor, maybe they are? In some cases, they are in a couple cases, why isn't it more common to see doctors say, Okay, we'll do an owner finance deal for the we'll do an owner finance deal for the practice, we'll do that. And people do that in real estate. Sometimes they'll say like, if they don't want to get hit with a capital gains tax, for example, they'll say, Okay, I'm your bank, and the equity of the house is what your is, is how I'm financing this, and you are paying me and you can write it up in such a way that if they default on payments, and maybe it's more complicated that but you can write up in such a way that if they default on payments, or if they sell that?
David Stern 29:00
I think that was I think that was probably more of the case, before private equity became involved, because that was the option. And basically, I mean, you're you're writing a promissory note, you're loaning somebody money, and they're paying you back every year, a certain amount or every quarter. So that's done. But it's, you know, you're at risk, right? I think it's a very good way to do it. But if someone is knocking on your door, and quite frankly, look, every doctor that you talk to every doctor I've talked to has been approached by multiple companies, private equities, other people wanting to buy their business throwing out these huge dollar amounts. And so it becomes a fact of do I get the money from the private equity like this? Or do I do a five year deal with my you know, associate physician so they can buy in and I retire in five years, maybe that works for some people, but it's not going to be at the same dollar figure, as they're going to be? offered by an external company,
Griffin Jones 30:02
I promised I will figure out the sponsorship scheme for inside reproductive health so that we can get people on advertising, sharing their content, without it being an endorsement from me, because there are so few companies, there might be one or two other companies that I would give an endorsement to. But so far, it has just been Engaged MD. And the reason is, I'm just not qualified to be able to talk about a certain company's performance, it would have, they would have to be so disproportionately positive. And that, for me has been engaged in D, I have more than half of my clients that have used engage them D, every single one of them loves it, many of them have started after we begin working with them. And they and every other person that I've ever spoken to that is a user of engaged MD talks about how much time and grief, it saves their nurses and their staff, that they don't have to do the same things over and over again, they have a much more scalable and efficient platform for educating patients building that rapport. So then when the nurse or the clinician talks to the patient, they're able to tailor that conversation to what the patient actually needs. And that repeating the same things to someone that's a deer in headlights, I keep hearing how much time engaged MD is saving fertility staff keep hearing how much stress it's saving them at a time when burnout is still crazy, people are still leaving positions left and right, when in my view, they shouldn't be, we still lack a lot of technical, logical solutions that I hope we have in the next 510 years. But engaged in DEA is one that is here now, and more than half of the practices in North America are using Engaged MD. So I hope that you are in that group. But if you're not, if you're still in the now on the laggard side of the bell curve, then I hope that you go to engage md.com/griffin. And they're going to give you a free workflow assessment, you're going to be able to see what other clinics, you're gonna get some insights from how other clinics have been structured. And you're gonna see a couple major areas that you can prove to keep your team from burning out to keep them from stress that's free, as long as you mentioned, my name and the podcast. And I ask that you share that with them anyway, because it's one of the things that helps give free content to you and to all of the listeners, but the real beneficiary is your team and your patients, because patients have a much better experience when they can be better educated when they can do things on their time. And then they can have what needs to be tailor fit to them. Truly personalized care. And so the real beneficiaries, our staff, and patients do it for them, not me. But it's nice to help other podcasts and get yourself a free workflow assessment by going to engage md.com/griffin. And now back to the show. So what could be the advantages for younger Doc's? And do you see that prospect that? Yeah, like we could buy into something much bigger and, and the private equity group can help us finance it? And then we can sell to the next private equity group when that when they sell in three to seven years? Is that? I would say?
David Stern 33:46
I think in theory, it sounds good. You are buying into it, if they let you buy into a network. I mean, there's always a question of, are you buying it at a local level? Are you buying it at a national level, or at a network level, a lot of these groups don't let you buy in at the higher level unless you're one of the senior doctors. So again, as a junior die as an associate doctor, who is not a current owner, you might be able to buy in locally, at the you know, profit that's being done locally, but I don't know if you have the opportunity to buy in a network scale. And so that's something that, you know, may or may be, but I I'm thinking oftentimes that's not the case that you could buy in locally. And yeah, there is a benefit that if it flips, but if you look at the history, in dermatology in dentistry in lasik, a lot of more of these companies have actually gone bankrupt, that have actually sold for huge multiples, and everybody walks away with that checks. So unfortunately, it's a lot of the nurses and the doctors that end up having to pick the pieces off of the ground because the parent company went bankrupt, and they're left without jobs or they now have to start a new business and try to find financing to build a business themselves. That's more the case in healthcare where private equity has been in for the last eight to 10 years that what happened with the Integra mat situation. That's yeah, and Tiger Man, I think Integra mat was honestly just bad timing. But you had Laura Katz Olson on your show. And she wrote this book ethically challenged about private equity in healthcare. And she has numerous examples from all these other health care industries, where one after the other has gone bankrupt. The doctors are interviewed. And they say I made the biggest mistake, I didn't realize this. So I think one of the things that's important for reproductive endocrinology, this is a new field for private equity. Doctors should just be looking at and talking to other physicians that have sold to that private equity that's trying to woo them and find out what their experience was. What is has it been? What's the track record? You know, Are there fees that are being charged? Have they written the company with debt, just talk to other groups that have already gone through with that same private equity to find out? I think I think that's, you know, that's kind of the doing deal doing diligence on the physician side that they should be doing. Sometimes they're worried about the NDA is the people that are in those deals, especially the people that are unhappy, they're worried about, will I be in violation of my NDA of if this person calling me asking me how my experience would work? But but but then again, some others aren't, I guess? Yeah, I think they won't go on the record. But it seems to me like many of them will talk to another physician, specially if it's a fabric one. In this book, there was a reproductive endocrinology practice that was interviewed. And one of the physicians is still there and very bluntly said, I mean, his name is in the book. And he says, they cut our nurses, they replaced them with medical assistants who were not trained, they don't let us buy supplies. When something is old, we used to replace it when we owned the practice ourselves. Now, we're told make do with what you have. So, you know, physicians, I think the real other aspect of this is a lot of the physicians are used to being their own bosses. They built the practice, they decide what they want to do. And now they have a business person who's telling them what to do. And that's another important question is who makes the decision? Is it a business decision? Or is it a clinical medical decision? And not often, you know, in what I've read, a lot of times the decisions are made purely on a business rationale for profit, not on what's right for the patient or what's right medically.
Griffin Jones 37:47
So it's not immediately obvious to me where business and operations and clinical operations begin. I don't think it's like a completely. There's not like a supremely thick line always in sometimes. It seems like there's overlap. And you use the example of ultrasound. I've used that example before. But you said like in the state that we're in what insurance reimburses for, we can't afford to have a doc using or doing ultrasounds, we have tax for that. And some Doc's would listen to that. David, say that's a business person telling me how I can practice because of business considerations.
David Stern 38:25
It's a well, I would argue, actually, that an ultrasonographer, who has credited accreditation and ultrasonography, it's probably and the doctors will, our doctors admit that they can do a much better ultrasound than the physician can, because they're trained and that's what they do. And a lot of, you know, we have ultrasound ographers that are per diem, where they'll work in a hospital doing ultrasounds, and they'll come, you know, a couple of days for us and do them. So they're more efficient, and they're trained, even though they're getting paid less. They're more of a specialist and a physician is who's doing ultrasounds, you could be 100% right about that, but there are still physicians that want to do it. Yeah. And you know, one of the important things, it sounds a little corny, but the Boston IVF our model is we want to do what's right for the patient, first and foremost. So we believe, and this is instilled because the physicians founded the practice, and I'm not a physician, I'm an MBA, but I can tell you, I don't mess with the lab. I don't mess with the physicians, because those are the two most important assets that we have in our company. And I'm never going to tell an embryologist if they want to use a certain media and they want to use a certain microscope or an incubator because they get better success rates. It's in my interest as a business person to make sure we get the best success rates that we can because our patients are going to be happy. Our referring physicians are going to be happy. Everybody's going to be happy. So I'm not going to cut corners and say hey, I got a great deal on this me Media, you know from ABC media factory, and it's not the same quality as Irvine or Cooper, but you got to use it because we're saving money. Same thing with catheters, we have physicians that choose different catheters, we don't have one catheter, we let the physician who's doing the transfer, use a catheter they feel comfortable with. It costs us more, but the physician feels like they're doing a better transfer, and they're more comfortable doing it. So who am I as a business person to tell a physician how to practice or an embryologist how to practice.
Griffin Jones 40:32
But even if it's the partner physicians, the most senior partner physicians that say, You know what, I use this catheter I use, I use catheter see all the time, it's cheaper than catheter B, and I use it all the time. And it works great. So everybody else is using catheter B because it's cheaper. And I think it's good. Isn't that still a business decision made for the rest of the group? When when things like that happen? Or in the case of ultrasounds, like, Okay, I'm the founding physician I've been and my part my senior partners agree with me. And we don't think we we believe that ultrasound tech can do a much better job than a physician and we can't afford to do it. Isn't that still a business decision that they get? The like, it's still it's a
David Stern 41:18
yes, it's a business decision, but it's being made by the clinician. And and I think the clinician is the one who determines whether will have an impact on the patient, or whether they'll have an impact on their success rates. And at the end of the day, the patients are coming to a practice. And they're, whether it's insurance, or a pacer and paying, they're paying to get pregnant, they're paying to have a baby. So if the clinician that, you know, senior physician has made that determination, they feel that it is maybe a business decision, but the practice medically is not going to suffer. I'm not I'm not qualified to make that decision. But absolutely a physician, if Michael Alper or medical director makes a decision from his medical director. He's he's the one who's the clinician that's making the decision. So
Griffin Jones 42:10
I think that's something that physicians need to take into account too, that I ate, that it can be other physicians, they don't always agree. You know, and so one
David Stern 42:21
of the things you know, one of the things that's unique when I was when I was on the industry side, I ran the US for EMD. Serrano, I ran global for Merck Serrano, I've been in my 20 plus years, probably 75% of IVF centers, the United States, there's a handful of IVF centers that actually look at key performance indicators, KPIs. Now, private equity is that's one of the benefits, they'll look at these KPIs. But one of the things that we do Boston IVF is we blind, the physicians, but we'll look at transfer rates, we'll look at pregnancy per transfer by physician with a blinded letter for each physician. And we'll be able to see how everybody stacks up. And if people fall below a standard deviation, we have that doctor go work with somebody who is above a standard deviation to get retrained. And it's done, you know, in a very respectful way, nobody's name is in front of anybody. Nobody knows who the poor performing ones are. But we look at this and we try to then make whether it's training or other ways, like we might have one of the top physicians in our grand rounds, do a 30 minute talk on how do they do an embryo transfer? What are their kind of secrets, so that everybody learns and improves? But you're absolutely right, you know, physicians will all have different opinions. And that's where the data, collecting the data, looking at the data on a regular basis. It's hard to argue with the data. Every physician always wants to see, you know, double blind, randomized control trial, because you can't argue with that data. It's the same thing if you have key performance indicators. Oh, well, the prioritization of those key performance indicators. That's another variable. But let's talk about the Boston IVF model, because that was a question. That was the question I did have for you at Mrs. Which is, is that okay? David? Like there's all the there's these considerations for private equity. But Boston IVF was acquired by a company that is traded on the European stock market. And so which of these considerations also apply to your model? And you gave your answer and I'll allow you to give your answer here. Boston. So let me just give you a little bit of a correction because Boston IVF is majority owned by Yujun. Group. Yujun is a Spanish IVF group, with IVF centers in Europe, South America, North America, where Boston IVF is in the United states, they just acquired trio in Toronto. But besides Evie RMA, probably the largest global IVF group. And they were acquired in 20, April of 21. By presenting us medical, and we follow Ujin falls under the Helios healthcare group in presenting us as a $29 billion market value company. They own a private group of hospitals, a largest group of private hospitals in Germany and Spain. And so the IVF group falls within that. So in their medical in their medical group, our model is we're strategic Yujun only does IVF Ujin doesn't have OB GYN or dermatology or anything like that. They just focus on IVF, worldwide, Boston IVF, we only do IVF. So we're a strategic. There are other groups in the US like that as well, that are strategic. But we're what we would consider a strategic acquirer. We don't have other health care businesses or non healthcare businesses. In our group, we're just doing IVF. Because we've been doing IVF, for 35 years where physician run with a management team, we make clinical decisions based on what I just said, the best interest of the patient. And for the 35 year history of Boston IVF. The mindset has been do what's right for the patient, and the money will follow. And so that's our philosophy. That's also Yujin is very hands off. They are obviously there are targets that we have financially, but they never burden a doctor with that. As the CEO of The Boston IVF network. Yeah, I have targets that I have to meet. And when I don't meet those targets, I've got to explain why we haven't met them. But we're not looking at we're looking at realistic growth, we're not looking at doubling, we're looking at what will the market grow at what we think is reasonable. And we set our own targets. And it's like any other business, when we set a target, we're expected to achieve on that target. But we're not going and saying we've got to grow at a 50% rate in one year, we have realistic targets. What we also do is, we see ourselves more as a physician partner, we're going to come in as a partner. And it's very, it's a very simple model, we don't have hold backs, you don't have to buy stock in Boston IVF. When someone partners with Boston, IVF, there's an agreed upon price, they receive cash. And in return, we receive a piece of the business, every year the profit is taken and distributed based on ownership. So if we owned 60%, of an IVF center, when the profit is distributed, we get 60% of that, and the physician owners get 40%. And every year we distributed based on that percent ownership, we don't do it based on oil, you didn't meet your targets. So we're going to hold Ben money back for their private equities that sometimes you don't get profit distribution until they flip. So even though it's accruing in a bank, you don't get it until they actually sell the company three to seven years down the road. And then you get it, you know, based on what you achieved. So we feel like we have a simple model. We don't come in and we don't tell people how to practice medicine for our partner groups in Utah and Ohio and Delaware. We don't come in and change a lot. If they want our help. We'll be happy to do that. We do have data analytics. So we have a team of data analysts that will help them look at their data and look at key performance indicators. We've got a group of marketers, we do a lot of social media, most of the groups that we've partnered with have never done marketing. And so we are able to provide that service as well. And we don't charge management fees. So what we do if there's a cost in the social media, there's a cost of the website. Yeah, they have to pay for that website. But we're not charging them for our time.
Griffin Jones 49:10
So the part that I'm think that I'm missing is why don't you have that? Oh, whatever. Obligation isn't the right word to Yujin. But you know, where where they are expecting a certain level of returns because why buy a company if you're not involved in the growth if you're not expecting a certain you know, certain metrics for growth,
David Stern 49:35
we absolutely are looking for growth, but we're not looking for growth in a year or two Ujin is not going to sell for as any as you know. I would hope that they're not going to flip there. The difference between private equity is they have a period of time where it's you know, this is what they do. Three to five years, seven years they flip presenting us is not looking to flip huge it usually is not what Kena flip Boston IVF. And so for that reason, we don't have time sensitive growth goals. We're in it for the long run. And so we expect that yeah, there will be growth. And we think some of the growth that we can do Boston IVF as a hub and spoke model, we know how to grow practices. We've built an oval practices in Syracuse, we're opening one right now, in Wilmington, North Carolina, we opened a new IVF Centre in New Hampshire, and we're building one in Providence. So we can do this to help. When we when we partnered with Ohio Reproductive Medicine in Columbus, we built them a brand new 17,000 square foot IVF centre, where because of our knowledge of how to design a lab and build a practice, we built that office, we didn't charge them a dime. But we expect that there'll be growth because now there's room to do more cycles. We're looking at expanding, maybe bringing additional doctors in. And so all of that over time, will benefit us on a growth. But we're not looking to get it back in three years. And that's one of the biggest differences is the longer term timeframe. When you buy into a practice somewhere, do you borrow money from Yujin? To do that? We do. So Yujun Yujun funds our growth, internally, they don't go out and saddled debt on the practice, the practice doesn't have to pay it off. So Boston IVF pays it based on the profits. So we're able to get finances my week is right. So talk to me a little bit how this is different from servicing debt that you would borrow and have interest on. Because the biggest difference is we don't put the debt. If we're borrowing money from our internal, we're not charging a higher reproductive medicine for that money. It's coming out of the profit that the bigger organisation is getting. So we're not saying to Rm Hey, we just took out let's say, x millions of dollars, you've got to pay back that loan for us. No, we don't do that. We pay back the loan ourselves.
Griffin Jones 52:07
I want to talk about whether it's this actually with this model for younger Doc's can. When can somebody buy in as a docket Boston, IBM, I just got out of fellowship, I'm going to work for Boston IVF in in New Hampshire, or wherever, let
David Stern 52:25
me give you let me two examples. When we acquired reproductive Care Centre in Salt Lake City, Utah, one of our former fellows, Christy Moss, came in and bought in and became a partner day one. So she moved from San Diego to Salt Lake. We did the acquisition, and she bought in and she is a partner. There are two additional physicians in Delaware when we acquired Jeff Russell's practice, to physicians, Amelia Bachman, and George Kovaleski, bought in day one, and they're now owners of that practice. So in those two situations,
Griffin Jones 52:56
that's when the existing practices that's like if I buy a house, and I'm like, alright, well, I'll go in with you, and you'll get we'll get we'll get one, you don't buy 50%. But we're buying a business or we're buying, we're buying 60% of the business. So we'll get 50 You get 10. Like so. But what about like, but they
David Stern 53:15
didn't have the opportunity to do that. So I know it's a great opportunity for them. But what about the people that are just like coming to work for Boston, IBM? And it's not an like an individual practice, like, how do they buy in? So we have we have a partnership track, if there's a time period, so there are a couple of components. But there's a time period involved. And basically, the way we work it is exactly what you were saying Boston IVF X is a bank. And we provide the physician that wants to buy in with financing over a period of time. We try to model it so that they get an increase in salary, they get a profit distribution, and their pay off every year would be more than covered based on their profit distribution and their growth.
Griffin Jones 54:02
How it for the you said that some folks can buy like for other networks they can buy in maybe at the at the group level, but not the network level when somebody's buying into Oh, you know when Boston IVF acquires a practice in in Smithtown USA. Is that person that and you have to bring in an REI and so and they're becoming a partner from day one is are they just a partner in the Smithtown practice or they also partner in Boston IVF. So
David Stern 54:33
everything is localized? And I think that's another advantage of our model. If you talk performs very, very well. And Ohio doesn't. Ohio, or Utah is not saddled with the loss in Ohio, Utah is its own entity. So they're responsible for their own if they do great, they share in those profits. If they don't do well. They're insulated and another practice it's doing good in our lives. work isn't affected by a practice that's not doing well. So I think there's a lot of security in that. So the answer to your question is if someone's buying in, they can buy in at a local level. Or if they want to buy in at a higher level, they can, but we don't force them to. So it's entirely up to them, if they want to buy in locally, or if they want to buy into the network.
Griffin Jones 55:22
While we're talking about younger physicians, I read a paper from Yale that talked about the benefits of buy and hold businesses just like just like the stock market, the buy and hold strategy is often better than the flip strategy. They cited a couple things. One is the equity that you're building yourself the compounding that comes from that the the capital gains and any other taxes that can come from selling, redeployment risk, if you sell and, and maybe you're not as successful as the next venture. So they made the case for start a business, invest in that business and hold it your own damn self until you're ready to not do it anymore. And so are our younger Doc's losing out by not doing that as much and because they're coming out saddled with debt, because practices are more expensive, but are they? are they losing out by because they're not creating a business for themselves, putting in that sweat, gotta sweat equity, them getting the other partners, them making the efficiency and then and owning, you know, 100% of it, or eventually until they sell to their other partner? Are they? Are they missing out? By not doing that?
David Stern 56:40
I think they could be absolutely, I mean, look at yourself as an example. You know, you build a business, you're growing it, obviously, and you're going to reap the benefits from that. I look at Spring fertility, a Peter cloud ski is a great example. You know, he got out he started a business and he's growing, and he's doing a phenomenal job of growing that. So yeah, I think the benefit of what you're saying is you're investing in yourself. And you're going to be, you know, either successful or detrimental. But it's your sweat equity. And, as a, I would much rather bet on myself because I have control. And I know if I want to work hard, I'm going to go see, you know, all these patients. And I think one of the one of the challenges of a model when private equity is buying out a physician, and you lose that incentive for the physician to have control over their own ability to grow. I would be concerned from a private equity. We think physician ownership in Yujin is very important. Physician. So Eugene's model is never to buy 100% We don't want doctors as employees, we want doctors as partners. And so that's a big difference. And I personally agree with you, my wife and I as a side business in real estate, this is for another podcast, maybe you'll do at some point. But you know, we've we've bought real estate, held it over many, many years, and then reap the benefit of selling as that, you know, as that value has accumulated. So that might still for those that are called to do it. It might make sense. I think one of the reasons why it's not happening more, David is that you talked about you mentioned that these doctors that founded or we're entrepreneurs, and I tend to argue that a little bit yeah, Dr. Arredondo on the show just wrote a book called medical printer. And I think in many cases, they're not entrepreneurs that they that many of the people that founded IVF practice, they're just not entrepreneurs in the real sense of the word that I agree with Andrew Miko when he says a barber is not somebody that owns a barber shop is and works as a barber, there is not an entrepreneur, there are a small business owner, that's fine. But the entrepreneur is the person that goes out and opens 20 barber shops. Yeah, and and I agree with that. And I think that there's a lot of people that inherited a model. I wrote this article in 2018. And of all the articles that I wrote that I'm like, I do I even still think that I read that article. And my guys still feel that that's true that that many practice founders in the 90s or so, inherited a model that was more or less the same as a the general practitioners model from the mid 20th century they made money and did well because they have a trade that is highly in demand and because their trade is so in demand that it allows you to not you don't have to be perfect in every area of business when you are that in demand and it allows for a lot of error that many other businesses they have to Get better at and that because of that, I think that there's a lot of people that started practices then that weren't entrepreneurs, but now entrepreneurs are in the space, whether it's Ujin, and shady grove and the Michael Alpers. And the Michael Levy's and the TJ Farnsworth, and all kind body and everybody, entrepreneurs are here now. And it's like saying, Yeah, I was a professional football player in the 50s. Versus I have a professional player in 2020. With Patrick mahomes. And, and Arnold, and everybody else in the Hello, Josh Allen. Come on. Yeah, yeah. Josh Allen, I didn't want to I just gave him a plug recently. But, you know, you know, Aaron, Donald and everybody else. And so it's like, yeah, a couple of those guys. And you mentioned some of them could have played in the league in the, in the could play in the, from the 50s could have played in the league as much as some of those folks in the 80s and 90s. Truly were entrepreneurs. And in some of them are still here now. But it's there is that level of difference? So I agree. 100%, with you, Griffin, and, you know, thinking about it. I would all I would add in Bill Schoolcraft. And Richard Scott and Alan Copperman. You know, these are people that are incredibly bright, gifted physicians who have changed the way we practice medicine in reproductive endocrinology. And so you can have both a business entrepreneur or you can have a scientific entrepreneur. And yeah, there's a lot of people, it's like anything else, you have the early adopters, and you have the people that are kind of driving forward. And then you've everybody else is just kind of like, hey, yeah, that looks good. And a lot of medicine is about, oh, I don't want to try it until somebody else does it and shows that it works. So I think you make a very, very good analogy. I think there's also an aspect where I've heard this from from many physicians, and I think this is true. When they were in residency, when they were in fellowship, when they were coming out, they worked weekends, you know, they worked late. And today, physicians coming out or saying, hey, I want to have work life balance, I want to work three days a week or four days a week, we have physicians that come in and say, I've got a young family, I want to spend my weekends with the family, I don't want to take call. And hey, that's great, good luck in a practice that might let you do that. But there aren't a lot of practices out there. I mean, you're you're kind of coming into a field where you've got to be available when the patients needed we do 365 days a year, we're doing retrievals on Saturday and Sunday. And if you don't want to take call on the weekend, and you don't want to, like maybe this isn't the best practice for you. So there's a maybe a little bit of a difference of people's mentality of what they're looking for. And maybe a little bit of an old school, hey, you know, you got to you got to put in a lot of time, you got to work really hard. I mean, it's like anybody starting a business, when you're starting a business, you know, you're working 24/7 You're not taking vacation, you got to get this thing off the ground, because it's got to be successful.
Griffin Jones 1:03:21
With regard to that, I know that I've pissed a bunch of people off by saying that, and I, I am not dismissing what people have, because I know that and have them will probably be my clients, but they're, you know, I if you built a group and you've had a successful practice, that that's a tremendous accomplishment. I'm making the distinction between small business owner or practice owner and entrepreneur, and I don't even put myself in the entrepreneur category. Yeah, David, I don't think I've earned it. I think entrepreneurs are faster, they put capital at risk more, whereas I will tend to, as opposed to putting capital at risk. For example, I'll I will stay in and do things myself for a little while, and then we can afford to do it and and then hire more people. So I feel that I'm expanding on the entrepreneurial spectrum. If Elon Musk is 100, and someone that never does any kind of venture is zero, probably, you know, I'm probably like 60s, I don't know, but and I and I'm moving towards that. But I don't think that I'm there yet. I think real entrepreneurs are the ones that they start companies, they put these entire systems in place. And many people are practitioners that have been able to have successful practices and that there's something to be said for that too. You can live a nice life like that. And, and maybe it's the life that you want a lot more than the other one too.
David Stern 1:04:38
But a lot of entrepreneurs also have a different way of looking at things. And so they have an idea that might differentiate, and then they have the I mean, a lot of people have great ideas, but the entrepreneur is the one that puts it into practice steps on the gas, you know, and ignites it so that it really becomes something
Griffin Jones 1:04:58
so I want to let you You conclude how you want to conclude. But before that, I do want you to look into the David Stern crystal ball that you don't have. None of us can predict the future of the economy. But you mentioned the recession. I've been preparing for recession since the last one man, I started my career in oh seven. I'm from Buffalo. I'm always ready for recession. David, my whole company is built on being ready for and I thought I said in 2014, I was like, this feels a lot like 2007. I've said that every year since then. And I've been wrong. And and so it might not happen now. What do you think is gonna happen? And what do you think that means for the fertility field?
David Stern 1:05:39
I think we're absolutely headed into recession. You look at the stock market, you look at it, the inflation. The US economically, it's not just the US, it's, it's everywhere. I mean, I was just at the Esri meeting in Milan, the euro and the dollar are right at the same price that hasn't happened in 20 years. So the globe, there's a global recession, that's happening. You know, you could argue as the war in the Ukraine, and Russia and oil and all these different things. But I think over the next, I think it's going to be bumpy, the next 12 to 18 months is going to be bumpy in the United States. What does that mean for IVF? When you're in a mandated state, if you have the employer carve outs, I think that will still be important. I think it will be harder, I was just talking to someone right before I got on with you who's telling me on the West Coast, they're already hearing that doctors are feeling they're not seeing the growth that they saw in 21. It's come back more to flat, they're not seeing the number of cycles, the number of new patients, their waiting lists aren't like what they were last year. So I think we're already starting to feel it and to see it. And in IVF, historically, it's the cash markets that see it a lot more. If you look at 2008 and 2009. I was running the US for EMD, Serrano, and we saw really big hits in Texas, Florida, California, in terms of volume. But in the managed care states in Illinois, Massachusetts, Maryland, New Jersey, we saw pretty much, you know, same four or 5% growth. And so that's what I would expect. I don't think we're going to be seeing double digit growth that we've seen in 21. But I do think that we're we're going to be hit in the next 1218 months. And we're going to see cycle volume drop.
Griffin Jones 1:07:37
We've covered a lot of bases today. How would you like to conclude with regard to buying selling funding and operating fertility practices?
David Stern 1:07:48
Well, Griffin, thank you so much for having me. I enjoyed it, it seemed like it actually flew by. One of the things I would say the most important thing is when we're looking at an IVF centre to partner with, we do due diligence. And the most important thing is thinking about it in a medium to long term. When you're getting married, there used to be a great analogy. Jeffrey here, Seth Godin, kind of a business author, originally, originally from Buffalo New Yorker, this cute cue ball head and signature glasses big. I'm a big Seth Godin fan. And Seth Godin used to talk about marketing, when you are dating somebody, and I know you're engaged.
Griffin Jones 1:08:32
You're now married now.
David Stern 1:08:35
Congratulations. So 2028 years. When you're when you're dating someone, your first date is not about getting married. You have to date someone, see if it's a right fit, and then get married. And I think we approach it the same way we want to date our practices that we're going to partner with see if it's a good fit, see if the culture is right. See if we have you know commonality and an IVF centre that's being approached by anybody a strategic private equity, venture capital, whoever should be doing the same kind of due diligence. Is there a cultural fit? Do you agree on what the midterm and long term goal should be? Where do you see yourselves in five years and having a very open discussion about what that looks like? And I'm talking about who makes the decision? Does business Trump medicine or does medicine Trump business? And those are important discussions to have before you know on those dates? Before you get married, I was you know, with COVID. We've gone out and it's very important. We go out and we do site visits. We want to look at the IVF center. We want to talk to the physicians we sit down with them. I can't tell you the number of deals that we haven't won, where the other party that wins has never set foot in an IVF center that they're buying. They've never met the physician face to face. It's all been on Zoom. And they do a video tour. And if I'm spending that kind of money now granted when private equity is doing it, it's not their money, it's someone else's money. But it's kind of like going into buy a house and doing it on a Zoom video never walking in that house. That's kind of scary. And so if a physician if I'm a physician so I my practice, and I never get to meet the person and they never come to see what my practice looks like, I would think long and hard about are they the right partner for me?
Griffin Jones 1:10:28
Yeah, yeah, you're not. It's definitely there's definitely missing something between that point in the date and marriage. But David, we're gonna link to your LinkedIn in the show notes so that if people want to can have this conversation with you that they can thank you so much for coming on inside reproductive health,
David Stern 1:10:49
Griffin, I appreciate it. My pleasure. enjoyed it very much. Have a great afternoon.
1:10:54
You've been listening to the inside reproductive health podcast with Griffin Jones. If you're ready to take action to make sure that your practice thrives beyond the revolutionary changes that are happening in our field and in society. Visit fertility bridge.com To begin the first piece of the fertility marketing system, the goal and competitive diagnostic. Thank you for listening to inside reproductive health