You know Merrill and Piper and Hambrecht and Cowen, Alex. Brown, Robertson Stephens, Bear Stearns and Dean Witter. But do you recognize some of the newest names in healthcare?
Interstate/Johnson Lane Corp. in Charlotte, N.C., and Everen Securities in Chicago are just two examples of investment firms that are hoofing it into healthcare. Each hopes to grab a piece of the multimillion-dollar healthcare underwriting and advisory business. Much of that business is produced by the booming initial public offering market, which has generated $3.9 billion of healthcare product and services IPOs so far this year, according to Hartford, Conn.-based Advest. That number doesn't even include biotechnology or pharmaceutical IPOs. Nor does it reflect secondary offerings in healthcare.
Recently, some older members of Wall Street's healthcare underwriting club have become more active in chasing healthcare deals, and firms like Robertson Stephens & Co. and Ziegler Securities have expanded their healthcare groups this year. Advest's healthcare investment banking group, based in Boston, now employs eight professionals, a 100% increase from two years ago, said Tyler Wick, an associate.
All are clamoring to raise debt and equity capital and structure mergers and acquisitions for healthcare provider and service companies.
"Healthcare is one of the two primary areas where emerging growth companies are looking to finance capital," said W. Brent Kulman, managing director of healthcare investment banking at Interstate/
Johnson Lane, a regional brokerage firm. The other, he said, is technology.
Kulman, who joined Interstate/Johnson Lane in February, helped kick off the healthcare group this spring. Although the firm hasn't closed any deals, it has engagements with physician practice management, pharmacy and geriatric-care companies in the Southeast, he said.
By expanding into healthcare, Interstate/Johnson Lane intends to feed retail clients' growing appetite for healthcare investment products. The firm is pursuing healthcare opportunities in its back yard-the corridor running from Virginia through North Carolina's Research Triangle to Georgia.
Recognized as a hotbed of biotechnology and life science companies, the Southeast also has begun to sprout physician practice management and other service companies that support integrated healthcare delivery systems.
Meanwhile, Everen Securities, a subsidiary of Chicago-based Everen Capital Corp., has assembled four or five bankers in healthcare corporate finance and continues to interview for other positions. Kathryn Burrer Hyer, managing director and head of the healthcare investment banking group, rejoined Everen in October. She had been with the securities firm, formerly known as Kemper Corp., for 11 years before becoming chief financial officer of the city of Cleveland.
Hyer's group is targeting the healthcare services sector, including hospitals, hospital management companies, physician practice management companies, biotechnology firms, pharmaceuticals and devicemakers. Everen intends to serve small and mid-size healthcare companies, from start-ups to those with $200 million in market capitalization. Nationally, it already has engagements in those areas, Hyer said.
Well-established healthcare underwriters are girding up, too. San Francisco-based Robertson Stephens recently announced the addition of a New York-based healthcare team. The firm employs close to two dozen people in all areas of healthcare investment banking, said Neil J. Sandler, a managing director in New York. In the healthcare services and information technology areas, Robertson Stephens has 12 bankers, including seven in New York, he said.
"Change is great for our business," Sandler said. The firm wants to help clients identify and act on trends that will make their businesses more attractive and anticipate how government might influence healthcare trends and practices, he said.
Change is spawning new posts in healthcare research as well.
"From my perspective, it's a recognition that this is an important, growing area where there's going to be a lot of strategies tried," said Larry Marsh, a director and health services analyst at Salomon Brothers. "You see bigger and bigger investment banks looking to target this area."
Marsh was hired to fill the newly created research position in New York-based Salomon's equity research department. The 13-year veteran of healthcare research at Wheat First Butcher Singer in Richmond, Va., will cover physician practice management, drug and medical supply distribution, and home-care companies.
When Marsh started covering healthcare services in 1987, most investment banking firms either didn't have a healthcare service analyst or had only one, he said. Now the typical investment banking firm has multiple analysts covering very specialized segments of the industry. The latest additions focus on hot investment areas, such as physician practice management.
Those newcomers include people like William J. Michalak, who joined Interstate/Johnson Lane as a research analyst in October. Within the booming physician practice management sector, he'll track vertically integrated practices and IPA management companies; PPO networks and utilization management companies; workers' compensation; and specialty practice and disease management companies.
Despite increased competition, underwriting fees haven't budged much from the norm. Generally, healthcare companies can expect to pay a fee of 5% to 7% of the total amount being raised in a public offering or private placement.
"For the better investment banking firms, there is not a tremendous amount of room for negotiation of price," said Steven Garfinkle, president and chief executive officer of Prism Health Group. In July, the Boston-based provider of post-acute-care management and staffing services completed a $12 million private placement of equity for home-care and subacute rehabilitation acquisitions and investments in information and clinical-care-management systems.
Prism, a company with $50 million in annual revenues, selected Alex. Brown & Sons in Baltimore to manage the private placement after interviewing three firms. Garfinkle said the fee was between 5% and 7% of the placement's value, although he declined to be more specific.
"I know they felt we were aggressive in the negotiation of the fee with them, but we had selected them before we negotiated the fee," Garfinkle acknowledged. Prism picked Alex. Brown because of its reputation, the quality of its research analysts and its experience in private placements.
Physician practice management companies aren't getting a break on fees either.
Two years ago, physicians didn't really have a place to find capital to grow their practices, said Don A. Carlson Jr., president and CEO of Ziegler Securities in Chicago. Now, a number of pockets of debt and equity capital have opened up. But that doesn't mean physicians can demand price breaks from investment firms or venture capitalists.
"It's not a commodity," Carlson said. "It still requires a real creative approach to structuring deals."
In some situations, though, there may indeed be some price competition for healthcare deals.
John W. Cumming, general partner and CEO of Hilton Head, S.C.-based WDI Capital Markets, has noticed some pricing flexibility on upfront retainer fees paid by healthcare clients he's advised. Some investment banking firms, particularly smaller, less-established ones, seek a retainer-$100,000 or more-before agreeing to underwrite a private placement or IPO, he said. But in the past six months, Cumming has found that some underwriters "are exhibiting more flexibility in negotiating or lowering their initial fees."
Some firms believe it's more important to secure the client and earn a fee on the IPO or private placement "than to get an extra $25,000 on the front end," he said. "You go for the deal."