Public stock offerings in 1995 took a new twist on the old "Dialing for Dollars" TV show. It could be called "doctors for dollars."
Of the year's top 10 initial public offerings in healthcare services, half were in the business of managing physician practices. That business is so hot it carries its own acronym on Wall Street: PPM, or physician practice management.
PPM companies operate in different niches, such as cancer or eye surgery. They typically buy the assets of physician practices, contract with the doctors for services and negotiate with payers for managed-care contracts. They also tout their ability to manage healthcare costs through the close monitoring of physician services.
Successful offerings by these firms demonstrate the viability of the age-old formula of willing buyer (shareholders) and willing seller (physicians). When you get those two parties together, the deals flow.
"Many independent doctors are beginning to realize they have to do something to compete with the large HMO organizations," said Robert Mescal, an IPO analyst at the Institute for Econometric Research in Fort Lauderdale, Fla.
No doubt 1995 was a banner year for healthcare services companies to raise money. Last year, there were 41 equity offerings that raised $3.5 billion for those companies, according to Hambrecht & Quist, a San Francisco-based investment bank. The tally includes both initial and follow-on offerings. That compares with 39 offerings for $1.8 billion in 1994 and 33 offerings for $1.4 billion in 1993. In other words, healthcare services companies last year raised more than the previous two years combined.
"Many of the markets targeted by services companies are either fragmented or are undergoing significant consolidation," said E. James Streator, managing director of H&Q's healthcare services group.
Opportunity in fragmentation also is mentioned by Chip Linnemann, director of the healthcare group at Advest, a Boston-based investment bank. "There's an estimated $200 billion in services provided by physicians. Even the largest of these companies controls a minuscule amount," he said.
The window for physician companies probably will remain open in 1996, these three experts agree.
Pending deals confirm that prediction. For example, West Palm Beach, Fla.-based PhyMatrix Corp. is planning a $100 million IPO in the next few weeks. That name may not be familiar to most because it's the new name for Continuum Care Corp., a physician management company owned by long-term-care multimillionaire Abe Gosman (Oct. 2, 1995, p. 58).
Fueling the rollout of IPOs in this area is strong performance in the after-IPO market.
For example, Pediatrix Medical Group went public in September 1995 at $20 per share, and its price had risen to $24 last week. Fort Lauderdale-based Pediatrix operates in a highly specialized niche of hospital care. The company provides physician management services to 24 neonatal intensive-care units, five pediatric intensive-care units and two pediatric departments.
Analysts like Todd Richter at Dean Witter, a New York-based investment bank, are bullish on the stock because of the growth in NICUs and Pediatrix's presence as the largest provider in that niche. Richter said in a recent report that most hospitals have difficulty collecting from payers, particularly Medicaid, for NICU services. He notes that Pediatrix's centralized billing improves cash flow and sometimes doubles a hospital's revenues from that unit.
Long-term care also was a popular IPO niche last year, as evidenced by four assisted-living IPOs and one in subacute care. The largest was Emeritus Corp., No. 2 in money raised by healthcare services companies.
The Seattle-based company was founded by Daniel Baty, former Hillhaven Corp. chief executive officer. Another company based in the Northwest, Portland, Ore.-based Assisted Living Concepts, tapped the IPO market in late 1994.
Assisted living typically involves housing and support services for people who need help caring for themselves but don't require 24-hour nursing care.
Although assisted-living companies have been handy at raising money, their Midas touch hasn't been felt by shareholders yet. Emeritus went public in November 1995 at $15 and at the end of the year its stock price was still at that price, according to Advest.
Two other assisted-living IPOs have suffered declines in share prices: Sterling House Corp., Wichita, Kan., and ARV Assisted Living, Costa Mesa, Calif. The two raised $65 million in IPOs in October 1995. Another, Regent Living, Portland, went public at $7.50 and has hovered near that price since then.
However, another long-term-care IPO probably has much happier investors. Unison Healthcare Corp. went public last month at $9 and was up to $14.50 last week. Unison changed its name from SunQuest HealthCare Corp.
The IPO didn't make Advest's top 10 list because its offering was fairly small: just $18 million. Unison is a subacute-care company that operates 47 skilled-nursing facilities and six assisted-living facilities with 5,080 beds. The company is based in Scottsdale, Ariz., but its facilities are located in other states, with heavy concentrations in Indiana and Texas.
Like many other healthcare services IPO companies, Unison has a top executive from the hospital industry. Chief Financial Officer Craig Clark formerly was CFO of Republic Health Corp., which became OrNda HealthCorp, Nashville, Tenn.