After operating its own venture capital fund for four years, the Premier hospital alliance is changing its approach to strategic investing.
Last month, Premier invested $5 million in an emerging healthcare technology fund operated by Encino, Calif.-based Pacific Venture Group. That's a drop in the bucket for the 215-member alliance, which performs $10 billion in purchasing annually on behalf of its 1,800 hospital members.
But Premier Treasurer Ann Rhoades says Pacific could be one of several venture capital funds that wind up in the Premier portfolio. Just how many is unclear, as Premier has no defined budget for strategic investing. Premier's goal is to help its member hospitals tap into emerging technologies, as well as turn a profit.
Since it was founded in 1996, Premier and its key supplier partners have invested in new technologies through the Premier-managed Medical Partner Fund, which was started by American Healthcare Systems in 1995.
AHS, which merged with Premier Health Alliance and SunHealth Alliance to form Premier, had created the fund to capitalize on previous experience with start-up biopharmaceutical investing.
The fund invested in 11 companies, including Atrionix, a Palo Alto, Calif.-based catheter developer; LXN Corp., a San Diego-based maker of a diabetes home glucose test; and EndoTex Interventional Systems, a Cupertino, Calif.-based stent developer.
With the Medical Partner Fund's $36 million in assets fully invested last year, Premier was faced with the option of starting a second fund, as is typical in the venture capital industry. Premier decided against doing that. Instead, it will invest in independent funds and individual companies.
Premier Chief Executive Officer Richard Norling says the decision not to start another fund stemmed partly from overhead and partly from the realization that Premier can gain exposure to emerging technologies by dispersing its money more widely.
"I'm not saying it's a failed strategy," Norling says. "Three or four (of the Medical Partner Fund companies) are either being acquired or have gone public, and we think it will create competitive returns, but that's still years away."
Some Premier members, such as the Cleveland Clinic Foundation and Bon Secours Health System, Marriottsville, Md., have done strategic investing on their own, Norling says. But most lack the time and resources. Premier believes it can screen the pipeline of emerging technologies on behalf of all its member hospitals. For example, some Premier members want to know about a company in the Pacific Venture Group portfolio that is working on remote monitoring of intensive-care units, Rhoades says.
By investing in four funds, Rhoades says Premier could access as many as 100 nascent companies.
"If (hospitals) took calls from every early-stage company that knocked on their doors, they'd never get anything done," she says.
Yet investing in start-ups is financially risky, and returns--though potentially large--are typically slow to materialize relative to the stock market. Pacific Venture Group's first fund, started in 1995, has yet to provide a return for investors, according to the fund's managing director, Layton Crouch.
In contrast to Premier, the VHA healthcare alliance has taken a narrowly targeted approach, investing in joint ventures that include supply deals with its members. VHA Chief Financial Officer Curt Nonomaque cites its recent partnerships with MedicaLogic, a Hillsboro, Ore.-based clinical information systems company, and Internet purchasing ventures Neoforma.com, based in Santa Jose, Calif., and Healthvision, based in Irving, Texas.
Nonomaque views such partnerships as being low-risk, since VHA members supply a ready market for the companies' services.
"A venture fund clearly has to make a significant financial return, and they may or may not select an area that is of interest to our organization," Nonomaque says.
Pharmaceutical companies and devicemakers have been the largest investors in emerging technologies, but providers and insurers are becoming increasingly active.
Tenet Healthcare Corp., Santa Barbara, Calif., has been aggressively investing in e-health technology for about two years, starting with consumer World Wide Web sites such as iVillage. It's scoping out online education as a way to help nurses stay in the profession, says spokesman Harry Anderson. "I think we've moved away from just dabbling in the market for dot-com stocks," he says.
Tenet reported a $51 million gain on its e-venture investments for the quarter ended Feb. 29.
WellPoint Health Networks, a Thousand Oaks, Calif.-based managed-care company, invested between $2 million and $3 million in the Pacific Venture Group fund last month.
WellPoint created an e-commerce division in March and is exploring other ways to invest in new technologies, says spokesman John Cygul.
Premier's Rhoades, who formerly invested in healthcare companies for the Sprout Group, a New York-based venture capital fund, believes corporate investing has seen a resurgence. "I think people are realizing some of the potential that can come out of early-stage companies," she says.
With Barbara Kirchheimer