With $200 Million Of New Capital, Investors And Competitors Will Want To Keep An Eye On Ion Health

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December 2004 issue With $200 Million Of New Capital, Investors And Competitors Will Want To Keep An Eye On Ion Health Behind The Scenes Of The Largest Health Care VC Deal This Year, Plus Total Funding And Deal Volume Increase ... Health Care M&A Goes Out With a Bang: Largest Deal Of The Year In The United States Is Announced The largest deal of the year in the domestic health care market was announced; it would create a substantial entity in the cardiovascular device and cardiac surgery markets. See page 1 ... Public Equity Market More than twice the number of filings we reported last month have been made in the past 30 days: five initial public offerings and eleven secondaries were priced, plus several new and follow-on offerings are slated. See page 3 ... Venture Capital Market The health care venture capital market is still on the rise, with more deals and more dollars; based on preliminary figures, venture capital spending in the health care markets this year has already surpassed the total dollar amount committed during all of 2003. See page 6 ... Private Equity Market Health care companies might be feeling some healing from private equity firms: in the four weeks since our last issue, deal volume and total funding increased by 45% and 44%, respectively, and compared with what we reported for the year-ago period, 289% more equity has been committed. See page 11 ... Departments Public Market Chart P3 M&A Deal Chart P5 Venture Capital Charts P7-9 Private Placement Charts P11-13 Notes & Briefs P16 Sign up for a trial subscription and get the current issue! Read the past headlines.	With $200 Million Of New Capital, Investors And Competitors Will Want To Keep An Eye On Ion Health Armed with confidence, experience and copious venture financing, the management team at Ion Health Holdings, Inc. has its sights set on enrolling a sizable share of the approximately 600,000 people in the state of Pennsylvania, and many more throughout the Great Lakes region, who are eligible for Medicaid but are not yet members of a managed care plan. Ion Health, currently operating in several counties in western Pennsylvania, is enrolling new members at a rate of 200 or more per day. The company has not only secured the largest venture capital investment in a Medicaid managed care company, that we know of, but has also received the full sum from just one investor. After six months of waiting—while their vision for providing better benefits and more extensive care to the underprivileged, plus saving taxpayers money through preventative care initiatives, was under consideration by J.W. Childs—Ion’s management team along with financial advisor Merrill Lynch ultimately coaxed $200 million in new financing from the private equity firm, to continue building its business and expanding its regional penetration. Notably, Pennsylvania Governor Edward G. Rendell himself announced the financing. Ion Health will be joining a growing number of Medicaid managed care companies, several of which have gone public in recent years—Amerigroup (NYSE: AGP; 2001), which has been trading at levels four times its IPO price; Molina Healthcare (NYSE: MOH; 2003), almost three times its IPO price; Centene (NYSE: CNC; 2001), more than four times its IPO price; and WellCare (NYSE: WCG; 2004), the newcomer stock that debuted at $17 per share earlier this year and has since doubled in price. Ion Health’s management, as well as J.W. Childs, obviously are aware of the market performance of these companies, but they would not commit to any timetable for a potential IPO themselves. For now, they are concerned with growth and market penetration, and acquisitions will be on the table in 2005. To grow by acquisition would fit the company’s strategy, which includes plans to expand into Ohio first and then into other states in the Great Lakes region, and also matches a pattern seen in the activities of J.W. Childs’ other health care portfolio companies. For example, J.W. Childs acquired a stake in InSight Health Services, a network of mobile and fixed center diagnostic imaging facilities that completed a few acquisitions following Childs’ investment; separately, Universal Hospital Services, Inc., a provider of movable medical equipment, available for rent or outsourcing, acquired another outsourced medical equipment firm within a few years of becoming part of Childs portfolio. The $200 million venture financing is expected to carry Ion Health through the next one to two years, both by fueling organic growth and by funding acquisitions. The company is now in possession of a portion of the total capital committed, and expects to draw down other tranches when the right properties present themselves for acquisition. According to management, contracts are already in motion to move into the Ohio market. Although no official financial data on Ion was disclosed, we were told that Ion expects to break even by the middle of 2005. Ion Health has a few strategic advantages, starting with its CEO and founder Anthony Horbal, who literally has experience in Ion’s space, having started another Medicaid HMO in Pennsylvania nearly 10 years ago, Three Rivers, of which he is still a minority owner. (Oh, and he was at TennCare back in 1993 and 1994, but he doesn’t plan on getting into a discussion of that mess any time soon.) A good dose of credit is given to Mr. Horbal and his marketing team for the rapid pace at which Ion is enrolling new members; as of this publication, 8,000 Pennsylvanians had joined the program and a total of 10,000 are expected to become enrolled by the end of this year, in plans with an average rate above $200 per month. The size of the voluntary Medicaid-eligible market in Pennsylvania exceeds 1.5 million, but only about 900,000 are currently enrolled in a managed care plan (certain portions of the state instituted mandatory enrollment for Medicaid members in a health plan, while another 35% or so of Pennsylvanians retain the voluntary option to enroll in a plan, or not). It seems that the leadership at Ion doesn’t expect to feel much heat from its competition, which in Pennsylvania, they say, is comprised of Three Rivers, with membership of about 200,000; Gateway, established a few years before Three Rivers, with 250,000 or so members; and the University of Pittsburgh Medical Center, a multi-faceted organization with about 80,000 Medicaid managed care plan members. Another edge Ion has over the competition is that it offers services other Pennsylvania health plans do not. To a Medicaid population that is 61% under age 25, and a high percentage of young mothers and their babies, benefits are important. Among other aspects of its plan, Ion is working to offer more options for dental care, like false teeth, partial dentures and some other procedures beyond routine cleanings. The company is also working to gain rapport with the communities it serves, with programs such as school immunization clinics open to members and non-members alike, free use of the YMCA for qualified members, and free cribs for young mother who meet certain requirements. Last but not least, the people behind Ion have quite a bit of vested interest in the company’s success. Ion’s initial financing round of $13.5 million came directly from the company’s management. The CEO also noted that its legal counsel, the firm of Kirkpatrick & Lockhart in Pittsburgh, particularly Bob Zinn, has been a great asset throughout the investment proceedings and other corporate activities. Will all these advantages make Ion a high-rolling acquirer in 2005, or an IPO in 2006? Tune in next year.
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