In another sign that healthcare has come to be considered one of the few safe bets with investors, the industry is dominating initial public offerings this fall.
In fact, healthcare firms were the first to test the IPO waters following the nation's longest drought of initial offerings since 1976. The lack of new offerings in any industry, not just healthcare, lasted from Aug. 13 to Oct. 3. So far in October, three healthcare companies have gone public, raising a total of about $324 million. As of last week, only two companies outside of healthcare had conducted IPOs, according to financial data companies.
The latest to go public was Boca Raton, Fla.-based staffing firm Cross Country, which raised about $133 million last week. According to the registration documents filed with the Securities and Exchange Commission, Cross Country derives about 80% of its revenue from supplying temporary nurses to hospitals and other clients.
Still, healthcare IPO volume this year might not top the busy years of 1999 and 2000, when biotechnology and e-health drew investor interest. In those years, healthcare offerings raised more than $3 billion, according to Dealogic, a New York-based financial data company. So far this year, about $1.4 billion has been raised.
It's no mystery why so many of the companies coming to market are in healthcare: profits. Most of those that have gone public recently can boast at least a year's worth of black ink.
"Companies in which investors can go to bed at night and know these companies will make their earnings are in demand right now," says James Forbes, managing director at Merrill Lynch & Co., which managed the Cross Country offering. After a profitable 2000, that company reported net income of $2.7 million on revenue of $222.7 million in the first six months of this year.
As of mid-October healthcare facility IPOs returned an average of 28% to investors since the first of the year, ranking the sector No. 1 in aftermarket performance among all industries that have had at least three IPOs completed this year, according to Dealogic.
Investors have been choosy, even when it comes to the relatively favored healthcare industry. Universal Hospital Services, a Bloomington, Minn.-based equipment leasing company, encountered a struggle when it attempted to go public on Oct. 16. Its offering price was slashed, reducing the total expected to be raised to $75 million from a range of $85 million to $95 million anticipated initially. Then, the deal was postponed indefinitely.
Company officials and bankers declined to comment, citing SEC rules mandating a quiet period before offerings. But Universal Hospital's lack of profits probably didn't help. According to its SEC filings, the company hasn't posted an annual profit in any of the past three years. In the first half of 2001, it lost nearly $1.7 million on revenue of $60.8 million, according to the SEC.
The IPO pipeline
As of last week, healthcare accounted for 37% of companies that have registered with the SEC to conduct IPOs in the coming months, according to Dealogic. In all, 21 healthcare firms were in registration to raise a total of $2.8 billion.
First up could be Anthem, an Indianapolis-based insurance giant expected to conduct an IPO of about $1.07 billion as early as this week, simultaneous with its conversion from a mutual to an investor-owned company. Anthem has 7.3 million enrollees and holds exclusive Blue Cross and Blue Shield licenses in eight states. For the six months ended June 30, Anthem had net income of $143 million on revenue of $5.1 billion.
Two Medicaid HMO companies are also in line to tap the public markets. AmeriGroup Corp., based in Virginia Beach, Va., expects to conduct an offering in November. Centene Corp., based in St. Louis, filed offering documents Oct. 9, but has no IPO date scheduled. Their offering documents highlight profitable track records and specialized focuses on Medicaid and related state programs.
Healthcare staffing is another hot sector, with firms poised to capitalize on the growing demand for nurses and other professionals. In addition to Cross Country, San Diego-based AMN Healthcare Services is scheduled to conduct an IPO in November. Also preparing to tap the public market in coming weeks is Dallas-based Odyssey Healthcare, a 5-year-old hospice operator with facilities in 21 states.
Despite a brightening picture for healthcare services companies in the equity markets during the past 18 months, enthusiasm isn't completely shared by venture-capital firms. Martin Felsenthal, managing director at Salix Ventures, one of a handful of firms that invests in healthcare services and healthcare information technology, says capital hasn't been flowing freely to firms that are looking for early stage funding of perhaps $5 million to $10 million.
Felsenthal, who works in the firm's San Francisco office, says investors are worried about unpredictable reimbursements. "There are a lot of healthcare services companies right now that are having a very difficult time getting financing, which really belies the success that their public-market counterparts are having," he says.