Broadlane, the group purchasing brainchild of Tenet Healthcare Corp., has completed a $50 million-plus financing that reduces Tenet's stake in the company by nearly one-third to a minority position. As the battered Tenet douses fires on numerous fronts, the San Francisco-based Broadlane also is re-emphasizing its ambition to fully cut the apron strings and likely become a publicly traded company.
Broadlane plans to announce the deal July 7.If so, Broadlane would break a new trail in the healthcare industry, shedding some regulatory sunlight on one of the industry's most stealthy and poorly understood business areas. Since Santa Barbara, Calif.-based Tenet spun off its group purchasing business in late 1999 Broadlane has waged an uphill battle to convince hospital customers that it was not a garden-variety group purchasing organization that was perilously entwined with an investor-owned hospital company. As a result, it has increasingly distanced itself from Tenet, which besides being a majority owner until last month, is also Broadlane's second largest customer after the not-for-profit Kaiser Permanente.
According to plan
"It's always been the plan since inception to become an independent company, and one requirement was to develop a business model and gain traction with members," said Charles Saunders, Broadlane's chief executive officer. "We intend to become a public company or achieve some other liquidity event for our shareholders ... and this is a step toward liquidity-restructuring capital and governance and getting customers down to below a majority ownership. If we did a public offering, no one would buy (stock) if they knew a shareholder owned more than 60% of the company."
The financing, which was completed on June 27, delivered more than $50 million in nearly equal parts of equity and debt to Broadlane. Approximately 80% of the financing-$40 million-went to retire a line of credit from Tenet and to repurchase some shares, leaving Broadlane with about $10 million in operating capital to grow the business, said Robert Brada, Broadlane's president. Tenet's share in the company now stands at 47%, down from 67% prior to the financing, although Tenet employees and former employees own approximately an additional 8% of the company.
The financing came from a syndicate of investors led by Falcon Investment Advisors, a Boston-based private investment firm. The consortium included General Motors Investment Management Corp. on behalf of the GM pension funds, NIB Capital Private Equity and Grandview Capital Management. The new investors own approximately 22% of the company, Brada said. Credit Suisse First Boston brokered the deal.
Sandeep Alva, managing director and founder of Falcon, was elected to the Broadlane board of directors on July 1 in Chicago after the close of the financing. A nationwide search is under way to select another new independent director. The remainder of Broadlane's board includes customers that also own equity in the company: two executives from Kaiser; one from Universal Health Services; one from Community Health Systems; and two Tenet representatives, including Trevor Fetter, Tenet's president and acting CEO and formerly Broadlane's chairman and CEO. Fetter remains chairman of the Broadlane board.
Saunders also holds a seat on the board. Saunders, an emergency room physician, was tapped in May to fill half of the position left open when Fetter was drafted last year to return to Tenet as a maelstrom of regulatory problems beset it (May 19, p. 17).
Saunders, who said the deal had "been in the cooker for about a year" and accelerated over the past six months, insisted that Tenet's troubles had nothing to do with the timing of the financing, although it works to Broadlane's advantage.
"I know the perception is there, but I can honestly say that Tenet's concerns are coincidental. On the other hand, the fact that we are achieving independence at this time is a little like the stars are coming into alignment," Saunders said. "Tenet is dealing with the issues it has to deal with and Broadlane is pursuing its path. The timing is right on so many different fronts. I think Tenet is probably focusing on its core business."
The amount of the financing is small potatoes for Tenet and would not make a dent in "anything this company does," said Harry Anderson, a Tenet spokesman. "There is nothing in the timing of this having to do with Tenet's situation or financial situation. Nothing could be further from the truth."
The financing actually represents Broadlane's second try in less than two years. In the late fall of 2001, Broadlane unsuccessfully tried to raise $40 million, which would have lowered Tenet's stake to 45%, Brada said. Saunders said the market at the time was "stone cold" when Tenet stepped forward to agree to continue to underwrite its subsidiary. Brada said Tenet's credit outlook changed for the better to investment grade, reducing its cost of borrowing. Broadlane couldn't refuse its offer to finance the company for another 18 months at such a favorable rate, he said.
Broadlane finds itself in a much better position now and in need of less capital than when the first financing was attempted, Brada added. In 2002, Broadlane turned profitable. The company declined to share financial details, but last year, its hospital customers purchased $3.4 billion in products and services and this year, that volume is expected to rise by 38% to $4.3 billion. The company counts 540 hospitals among its customers and employs 330 workers.
According to the prospectus for the unsuccessful try at financing, a copy of which was obtained by Modern Healthcare, Broadlane was doing business with more than 300 hospitals in 2001. In 2000, the company posted net revenue of $8.6 million and expected that number to grow to $29.4 million in 2001 and $57.2 million in 2002. The company employed 196 people, according to the prospectus.
At a time when the group purchasing industry has come under heavy scrutiny from the Senate Judiciary Committee's subcommittee on antitrust, spawning several federal investigations, Broadlane officials say its business model has evolved well beyond the practice of negotiating purchasing contracts. Saunders describes it as "a new breed of company" that delivers a range of outsourcing and management services to help hospitals improve business processes. Broadlane's first and still core business is focused on group purchasing and materials management, but it recently expanded its service offerings to the temporary labor arena and there are plans to add several more as-yet-undetermined services, Saunders said.
"Broadlane, I think, always had a bigger vision. The GPO model has been out there for some time, and I don't think people see it as a growth industry model," Saunders said. Rather than a GPO, Saunders now describes Broadlane as a BPO, an acronym for business process outsourcing. Although BPOs have not yet moved onto the healthcare scene, they are well-established in other industries, particularly in the information technology sector, he said.
Saunders said about 70% of Broadlane's revenue is generated by group purchasing activities and 30% from outsourcing, but the balance is shifting more toward outsourcing.
Broadlane has had several incarnations since it was first formed in an ill-fated joint venture with Ventro Corp. It emerged on the scene as an e-commerce company with Tenet owning a 76% stake and Ventro owning the rest. Broadlane ditched its partner in 2001, charging that Ventro's failure to create an electronic platform for Broadlane's group purchasing services had set the company back one year. Ventro has since gone out of business.
Meanwhile, along with MedAssets, an Alpharetta, Ga.-based GPO, Broadlane has in the last year gained a reputation as an aggressive upstart. Both GPOs have eschewed what they describe as the "one size fits all" contracting strategies of the two national GPOs, Premier and Novation-strategies that have come under fire for allegedly hampering the introduction of new technologies into the marketplace (Feb. 3 p. 22). In the beginning most customers signing on with Broadlane were investor-owned hospital companies, but more recently Broadlane's new customers all have been not-for-profit hospitals, which suggests that Tenet's interest in Broadlane has not resulted in the traditional line of demarcation between investor-owned and not-for-profit hospitals.
Since the first of this year, Broadlane has lured three new hospital customers, all not-for-profits: two-hospital William Beaumont Hospitals, Royal Oak, Mich., from Novation; 24-hospital Christus Health, Irving, Texas, from Premier; and eight-hospital Advocate Health Care, Oak Brook, Ill., also from Premier.
Saunders could not give a timeline on when the company might be ready to go public. While it could be within two or three years, it all depends on the market, he said. That stated goal would not likely surprise anyone.
"I think Broadlane understands that if it is going to pull in not-for-profits, they have to reduce the ownership of Tenet," said Greg Firestone, CEO of NCI, a Palm Harbor, Fla.-based consulting company specializing in the healthcare purchasing business. "What happened is they got enough pushback in the marketplace that said, `If Tenet owns you, then we view you as competition.' So that's why they decided they had to move away from Tenet ownership as much as possible."
Firestone said he knew Broadlane had been working toward that goal for more than a year. At one point Broadlane was having discussions with distributor Owens & Minor, which "expressed a high level of interest a long time ago in investing" in Broadlane, he said.
Broadlane is a different breed than other GPOs, Firestone said. "They really truly look at the supply chain from an operations standpoint. I'm not saying they don't have a GPO-like service, but I believe it's a very small portion of their business. ... I know MedAssets is attempting to do that as well and is heading in the right direction, but I think Broadlane is much further along than any of them."
Firestone said he doesn't believe hospitals will be frightened about doing business with a publicly traded, for-profit group purchasing organization. It is widely known that MedAssets also is moving toward an initial public offering, he added. Though the entry of investor-owned GPOs might change the industry, it only bodes poorly for the more established GPOs who are not sharing with their customers as large a portion of their administrative fees, Firestone said.
"I think what happens is things will become more difficult for Novation and Premier," Firestone said.
Broadlane is attempting a "pre-emptive strike" before "big players" move in to healthcare to fill the vacuum, Saunders said. "We're the first player and we actually sprang up from providers," Saunders said. "You don't have to be a neuroscientist to figure out where the confluence of forces are heading."