Jenks Healthcare Business Report Jan 2004

	Jenks Healthcare Business Report
January 2004 issue The Venture Capital Train Rolls On For Health Care With the IPO market still lackluster, especially for health care companies, emerging firms that would have gone public in years past, with investors clamoring for their shares, went back to the venture capital well in 2003, raising more than $5.5 billion. Unless conditions improve in the IPO market this year, 2004 could be a repeat. See page 1 ... Public Equity Market Three new IPOs were filed, but one was pulled, receiving a private investment instead. Five secondary issues were priced, with a few more filed as companies take advantage of rising share prices. See page 5 ... Private Placement Market In the past 30 days, 16 publicly traded companies tapped the private market in deal sizes ranging from $1.2 million to $19.0 million. See page 8 ... M&A Market A total of 221 mergers and acquisitions were announced in the fourth quarter 2003, bringing the year’s total to just over 900 transactions. Based on revealed prices, $92.8 billion was committed during the year to fund these deals, almost half of which came in Q4. See page 10 ... Departments Venture Capital Charts 3-4 Stock Charts 6-7 Private Placement Chart 9 M&A Announcements 11 Notes and Briefs 12 Sign up for a trial subscription and get the current issue! Read the past headlines.	The Venture Capital Train Rolls On For Health Care Although not a record, our preliminary results indicate that 389 health care companies raised more than $5.5 billion in the venture capital market in 2003. The average investment was more than $14 million, relatively large and reflecting the lack of an IPO market during most of the year. Many of the more than 70 companies that raised at least $25 million last year would probably have been IPO candidates four years ago and skipped this last venture round. Until the IPO market gains some momentum, we can expect more large investments from willing venture capital investors. In the past 30-day period, more than 30 companies raised in excess of $610 million with deal sizes ranging from $2.5 million to $80 million. As in the past, most of the funds flowed into biotech, biopharmaceutical and medical device companies, while a few small deals were in the e-health and services sectors. But the largest investment of the most recent period, and one of the largest of 2003, was an $80 million infusion of funds into a private hospital company, something not seen in quite a while. On the last day of the year, Essent Healthcare, based in Nashville, Tennessee, received $70 million from Vestar Capital Partners and $10 million from Thoma Cressey Equity Partners. In 1999, Thoma Cressey provided the $45 million of initial funding for the company, bringing the total raised from venture capital firms to $125 million. The recent funding was used to finance Essent’s most recent acquisition of St. Joseph’s Health System in Texas, but first, a little history. The company was founded in the middle of 1999 by W. Hudson Connery, Jr., whose 30-year experience in the health care field included the post of chief operating officer of 110-hospital firm HealthTrust that was eventually merged into the former Columbia/HCA (NYSE: HCA) in 1995. He is joined by Joe Pinion as COO, who was previously the senior vice president for hospital operations at Health Management Associates (NYSE: HMA), and Mike Browder as CFO, who most recently was CFO of TMC Healthcare and before that served as vice president of operations finance for HMA. Operations began in April 2000 with the acquisition of Doctor’s Hospital in Wentzville, Missouri (which has been renamed Crossroads Regional Medical Center), followed two months later with a letter of intent to acquire Sharon Hospital in Connecticut, a deal that did not close until nearly two years later, which would become the first tax-exempt conversion of a hospital in Connecticut. For the fiscal year ended September 30, 2000, net revenues were $7.7 million, which grew to $16.6 million the next year. By the end of 2002, with the Sharon hospital acquisition completed and two additional hospitals in Massachusetts acquired, Essent operated four hospitals in three states with 338 beds, and had net revenues for the fiscal year ended September 30 of $73.3 million. The 78-bed Sharon Hospital is indicative of what Essent management is looking to accomplish with its acquisitions. The hospital had been losing money for three consecutive years, could not raise the necessary funds for physical plant improvements and modern equipment, and the local community feared it would lose its sole health care provider by closure. During the first year of ownership, Essent invested $2.5 million in plant and equipment, recruited six new doctors with more expected, is leading the development of a satellite nursing school program and, most importantly for the company’s financial backers, the hospital is now operating in the black and ahead of projections. This is exactly the type of financial turnaround management expects with its most recent acquisition. St. Joseph’s Health System, whose primary asset is a licensed 372-bed hospital in Paris, Texas, has been losing money on nearly $125 million in net revenues. Essent used the $80 million of new venture capital funds, plus $35 million of new term debt from GMAC Healthcare Finance, to finance the purchase and closing costs, and pre-fund one year of capital expenditures. GMAC also provided a $20 million revolver for accounts receivable financing. The transaction more than doubles the number of beds operated by Essent, and nearly doubles annualized revenues to $270 million. Although additional hospitals are in the pipeline, it is unlikely the company will close on any for at least the next six months while it digests St. Joseph’s and returns it to profitability. But as operations improve, and profits rise, Essent will continue its growth and may do one more venture capital round before it entertains an IPO. Also outside the biotech/biopharma arena, Lexington, Massachusetts-based deNovis Inc. (formerly known as eHealthDirect) raised $22 million in a third round, although the company would not confirm or deny the new capital. The three-year old company has now raised $100 million, and will use the money to further develop its transaction processing and information management solutions for the health insurance industry. Its major clients include Tufts Health Plan and a $50 million contract for the Centers for Medicaid and Medicaid Services. In addition to putting out money in young companies, venture firms (and others) continue to raise new capital. Burrill & Company announced the closing of its Burrill Life Sciences Capital Fund with a commitment of $211 million. The fund will make $5 million to $15 million investments in each company, concentrating on biotechnology, therapeutics, diagnostics, pharmaceuticals, medical devices and other related medical technologies. Separately, Eli Lilly & Co. (NYSE: LLY) announced it has formed a third venture capital fund under its Lilly Ventures venture capital arm. The $50 million fund will invest in companies developing new medical technologies, especially those involving synergies among medical devices, diagnostics and drugs. The fund intends to invest up to $5 million in each company, and Lilly Ventures’ three funds now have $175 million under management.
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