Former home healthcare executive R. Dale Ross was in semi-retirement in 1992 when venture capitalists lured him back, asking him to lead a fledgling oncology practice company based in Colorado.
Ross had made his millions in 1989 when he sold Houston-based HMSS, a rising star in the then-burgeoning home infusion therapy industry, to Tokyo's Secom for $255 million. The sale price was a high-flying 37 times earnings.
Now Ross appears to have another winner on his hands. The once-small oncology company where Ross is chairman and chief executive officer went public last month as American Oncology Resources. It's one of almost a dozen healthcare services companies to make initial public stock offerings in the first half of the year.
The management of cancer services through physician groups may be "equally if not more promising" than the home infusion business, Ross said.
Investors recently seemed to agree, buying a whopping $114.7 million of the company's stock in the largest healthcare services IPO completed so far this year (See chart). The offering even surpassed last year's top healthcare services IPO-a $93 million offering by Quorum Health Group, a Nashville, Tenn.-based hospital chain.
"This is a real bell-ringer," said Jim Hoover, general partner of Welsh Carson Anderson & Stowe, which owned 69% of the company before the stock offering. It now holds 44%. The New York-based venture capital firm recruited Ross to the company in 1992 with stock options that are now worth more than $15 million.
In 1992, Ross moved the company to Houston and grew it into one that manages 12 oncology practices with 90 physicians in nine states.
American Oncology generated net income of $1.2 million on revenues of $20.4 million in 1994. That's hardly a giant. In fact, it's about on par with many run-of-the-mill rural hospitals.
Yet, one won't see many rural hospitals selling for $400 million, which is the current market capitalization of American Oncology. Thanks to its successful IPO, American Oncology now ranks second only to Nashville-based PhyCor in market capitalization of physician practice management companies. PhyCor had 25 affiliated clinics nationwide as of this year's first quarter and posted revenues of $242 million in 1994.
Despite its relatively modest bottom-line results, American Oncology's prospects on Wall Street ballooned. Originally, the company had filed to sell 3.75 million shares. Then investment bankers started sensing a popular new niche-disease management. Not only does American Oncology manage physician practices, already a sought-after habitat for investments, but it specializes in cancer, a multibillion-dollar field.
That prompted American Oncology's investment bankers, led by Alex. Brown & Sons, to increase the size of the offering to 4.75 million shares. They also boosted the price to $21 per share from $16.50.
When the stock went public last month, it was oversubscribed, meaning that the company sold nearly 5.5 million shares.
Shareholders must be thrilled. In just one month, the stock rose a mighty 41%.
Several aspects fueled the rise of the company: Ross' proven track record, Welsh Carson's reputation for investing in strong healthcare companies, and another Texas oncology firm's recent success.
Dallas-based Physician Reliance Network raised $48.8 million in its IPO last November, then went back to the market this year with a second offering that raised $43.4 million (July 10, p. 8).
Texas companies figure prominently in this year's healthcare IPO market. Of first-half IPOs, American Oncology, OccuSystems, Horizon Mental Health and Physicians Resource Group are based in the state.
Another Texas firm, Houston-based Owen Healthcare, filed a registration statement last month for an offering that was expected to be completed last week. Owen is the nation's largest manager of hospital pharmacies.
The second-largest offering was an issue worth $65.3 million by Dallas-based OccuSystems, which manages 109 physicians in 64 occupational healthcare centers, each of which is staffed by one physician and at least one physical therapist.
OccuSystems is led by John Carlyle, a former Medical Care America executive. Carlyle left the nation's largest surgery center chain in 1990 to become OccuSystems' president. Dallas-based Medical Care was acquired by Columbia/HCA Healthcare Corp. last year.
Carlyle traded one outpatient industry for another. Instead of setting up operating suites with surgeons, OccuSystems manages doctors who treat work-related injuries and provide physician examinations for employees.
OccuSystems' expertise lies in applying cost efficiencies to what has been a highly fragmented care system financed by workers' compensationinsurance. The company markets directly to employers, emphasizing its ability to treat injured workers at a lower cost.
Since its public offering in May, OccuSystems' shares are up 44%.
"The bottom line is that these companies have a specific focus on managing costs," said Chip Linnemann, director of the healthcare investment banking group at Advest Corporate Finance. That's true of OccuSystems as well as the other companies making IPOs, such as Houston-based Physicians Resource
Group, which focuses on eye care.
Controlling healthcare costs in specific niches is likely to be a popular theme the remainder of this year, he said. Hoover agreed, saying physician management and disease management companies will continue to be hot. Other previously hot sectors-subacute care and managed care in general-may have hit "air pockets" in the market, he noted.
Another niche company, Community Care of America, has filed to make an offering within a month. The Naples, Fla.-based company buys long-term-care facilities and uses them as a platform to develop rural healthcare systems. Executives expect to raise $36 million.