Installment #6:
PricewaterhouseCoopers Identifies the Top Nine Issues for Health Industries in 2009
Posted by CharlotteGee
This week El Paso Corporation reopened the high yield debt market which had not seen a new issue in five weeks. The natural gas production and pipeline company placed $500 million of 5 year notes at a staggering 15.25% yield.
But 15.25% is a good deal! That’s 25 basis points lower than an index of the 100 largest issues. A broader index yields over 22%. Is your Visa card starting to look cheap?
Because bonds have a par value, and often a coupon, it is arguably easier to see the true price of bonds as compared to equities. So the high yield market provides a useful data point on the price of risky assets. Adding a risk premium to the high yield market, it’s easy to see that the cost of venture capital today is 30-40%. In other words, company valuations are down and venture investors can buy equity for relatively cheap.
Risk taking has the potential for handsome returns in this market. At 30%, a $5 million investment would be worth $18.6 million after five years.
Why does venture capital have such a large risk premium over high yield bonds? Bonds are senior to equity in a bankruptcy; often bondholders can recover a portion of their investment from asset sales. Venture capital investments are almost always some form of equity and are not easily sold until the company is successful. Of course, venture investments are a bet on an unproven technology or concept.
But venture capital has advantages. The whole point of a venture capital investment is to develop a product or service that reduces costs or provides a cost-effective improvement in quality. Both are needed – especially in health care – regardless of the broader economic environment. Plus, venture companies are often a clean slate. New ventures do not have a bloated cost structure that was built for another time.
Investors with the skills to recognize valuable innovations will be rewarded with the most attractive risk-return trade-off in over a decade. But keep some dry powder to help portfolio companies weather what will likely be a very difficult fundraising environment for the next two to three years.
Posted by EWright (Eric Wright cut his teeth in early stage venture and now sinks them into the energy issues at Xcel Energy.)
Filed under: Uncategorized | Tags: economy, health it, start-ups, venture capital
[Fearing this might get lost in the comments, I wanted to highlight Henry’s note… we agree completely with his views: capital efficiency is king and start ups that combine the right mix of opportunism and discipline can survive and thrive in this environment. However, I do think there is a difference between disciplined capital efficiency (which relates to internal company decisions) and the systemic misalignment (e.g. mess) we seem to have now (which is all about external factors)… something to think about… Rob]
Yep, it’s true. “Money’s too hard to mention.” Silver lining? The benefits of undercapitalization are many. You hew closer to the most urgently needed customer value, delivering features and benefits in a very agile way (i.e. monthly and quarterly, not annually), and setting your company up for explosive growth when the alligator arms re-grow. (Alligator arms are what some people get when the bill comes to the table and their wallet suddenly is out of reach). Also, well-capitalized companies often end up overspending, delivering too much complexity, and learning bad habits that are hard to unlearn later. Yes, 2009 may be an endurance test. The companies with the most money are often the most risk-averse. But the risk takers, mavericks, angels, and (just maybe) a select few health industry innovators will reap the rewards in 2-3 years of some huevos today.
Posted by Henry Albrecht, CEO, limeade.com
Filed under: health policy | Tags: health policy, Obama Administration, politics
Here’s the first of Senator Daschle’s crew to be named – From today’s NYT:
“Jeanne Lambrew, who helped Daschle write a book about health care reform, will serve as deputy director of the new White House office. She also worked on health policy at the White House during the Clinton administration and currently serves as a senior fellow at the Center for American Progress, a liberal think tank… Leaders of health advocacy groups have described Lambrew as one of Daschle’s most trusted advisers on health issues. She will oversee planning efforts.”
(For the full text of Obama’s nomination click here.)
Posted by David Kreiss – among many things, former Special Assistant to the Administrator of CMS
Filed under: innovation, private equity news, venture capital | Tags: economy, health policy, innovation, long cold winter, politics, start-ups
Our methods are not scientific and I don’t know what you can reliably extrapolate from our results, but you heard it here first: It is already a very cold winter for health care start ups.
In the past week, I have received numerous calls from companies either (1) suspending their fundraising activities and cutting back to bare bones operations or (2) flat out closing up shop. After nearly 15 years in and around venture capital, I have never seen so many interesting, well positioned companies go through this existential crisis at the same time (not counting the decimation of waves of nonsensical business models in the early 2000’s).
Perhaps it is an effort to clean things up before the end of the year, but I am not so sure that what we are experiencing now isn’t a harbinger of much worse things to come. A few trends worth considering:
1. Waiting it Out. Many early stage companies pulled (or never launched) their fundraising efforts during mid-2008, hoping to relaunch in early 2009.
2. A Dustbowl. By all reports, venture capitalists with “dry powder” have pulled back and are sitting on their hands waiting to get a handle on the cash needs and time to exit for their current portfolio companies. Not that there has been much venture for early stage health care companies recently anyway, but this is creating a veritable Dustbowl.
3. A Dustbowl, Inside a Chasm? Not only is the industry segment traditionally (and especially now) underventured, but there is little capital for the size of deals needed by early stage health care companies. These companies need $500,000 to $5 million, but few if any are placing this kind of capital in health care start ups (much easier to raise $10-25 million, even in this market). This “Capital Gap” is a big problem, and will be hard to address with the capital and investors in the market now. Larger fund sizes mean larger deals – and most firms with long term health care specialty have been raising much larger fnds. And for funds that have been dabbling in the early stage, opportunities to move up the risk curve to positive EBITDA deals is very attractive in this market.
4. The Limitations of Angels. The only good news for companies raising capital this fall has come from regional angel networks – but these pools of capital are limited and often regional in their focus.
So, as we move into 2009, we expect to see the companies that have been trying to wait out the market finally launch fundraising efforts out of necessity – and the demand for capital will significantly outstrip the supply. Angel networks won’t be able to keep up and the traditional venture community will remain focused on less risky deals and reserving capital for their existing portfolio companies (which may not see an exit for much longer than originally expected).
While I hope to be proved wrong, we are predicting that these trends will lead to the continued loss of jobs in early stage businesses and potentially the lack of introduction of new innovation into the health care market over the next 12 months. The good news is that well capitalized businesses will have a hey day in this sector, as there is considerable opportunity to build and grow health care services companies in this market (even industry novices can pick up on the increasing clamor for efficiency, quality and cost effective access – all require new, technology driven solutions). But without the proper capital, there is certain to be a chilling effect on innovation and growth.
Sadly, I expect to be getting more phone calls from entrepreneurs scaling back and shuttering operations during this cold Winter… which might last well into next Fall…
Posted by RobC
Filed under: Uncategorized | Tags: Health Care Technology Network, health it, nashville market, seattle, seattle market, start-ups, venture capital
A few weeks ago, my colleagues at iMedExchange hosted the first meeting of the Health Care Technology Network. It was a remarkable event, especially considering that given the local density of health care-oriented start-ups this was the first time we had all had the excuse to be at the same table.
I was asked to speak about why I chose to move to Seattle to set up Faultline Ventures (if you are inteersted in reading more about the event and my comments, iMedExchange blogs about the event here).
Despite the crticial mass of resources in this region (human capital, entrepreneurial culture, academia, innovative payor and provider organizations, etc), there was broad agreement that it is difficult (if not impossible) to raise venture capital for health care companies locally. One of the most interesting comments of the evening came from the CEO of an early stage company that is actively raising money and has intentionally positioned itself in the software as a service industry (not health care) with potential investors… because there are more of them.
The sheer number of innovative early stage health care companies in the region should be enough to draw outside capital to the region (it is why we moved here)…and I believe capital it is the last key ingredient needed for this regional cluster to see explosive growth… but with the lack of new investment activity by exisiting funds it is unclear that the venture market will (or can) respond to the opportunity.
If the Health Care Technology Network catches on as a formal group for regular networking (and potentially the promotion of the opportunities in this cluster) it could help the cause of attracting capital. It could certainly provide an platform for raising awareness of companies operating in this region. The most successful organization of this type, the Nashville Health Care Council, has succeeded in bringing cohesion and a professional framework to the Nashville market place.
As someone said at the first meeting of the Network: “Seattle is a brand”. Now, for those of us in the health care business, we need to make sure we agree on what that brand is conveying to our industry and begin turning up the volume.
(By the way, visit some of the very interesting companies in attendance at the first meeting of the Network: iMedExchange, Array Health Solutions, Clarity Health Services, Health Phone Solutions, Health Unity, Limeade, QTrait, Raffetto Herman and SnapForSeniors.)
Posted by RobC
Filed under: Uncategorized | Tags: economy, health it, medicaid/medicare, Obama Administration, politics, uninsured/underinsured
The Center for American Progress, Obama transition team chairman John Podesta’s think tank, has just released a blue print for health care reform (The Health Care Delivery System: A Blueprint for Reform).
The book’s goal is clear – even stated right up front:
This book offers recommendations and path¬ways to systematically promote quality, efficiency, patient-centeredness, and other salient characteristics of a high-performing health system. The blueprint it lays out is a vision of how different parts of the system should be structured and how they should function. Even more specifically, it proposes policies that the next administration and Congress could enact over the next five years to improve our health system.
Since the people involved in creating this report are almost certain to end up in (or in close orbit around) the new Administration – and since every sign suggests that health care “reform” is going to be top of Obama’s list of priorities – this is an essential read for people in the industry.
We would love to hear your thoughts: from the perspective of health care’s importance to economic recovery to its role in the decline of American manufacturing; from the fiscal impossibility of continuing growth in spending to the moral imperative of taking care of our older and sicker populations. The ways that the public and private sector work together to “reform” and “change” the system will create a range of opportunities for innovators and have the potential to impact America’s social and economic well-being for generations to come.
Posted by RobC
Filed under: economy, Uncategorized | Tags: economy, health care jobs, politics
As blogger Merrill Goozner writes over at GoozNews.com, the only bright spot in the recent jobs numbers came from the health care industry:
Looking for a bright spot in Friday’s dismal job report? Think how bad it would have been had the health care sector not added 52,100 jobs last month.
That’s right. While the rest of the economy was shedding nearly 600,000 jobs and the nation’s once-proud automobile industry went begging for a bailout so it could continue to pay for, among other things, its employees and retirees health care bills, hiring remained robust at the nation’s hospitals, physician offices, diagnostic labs, nursing homes, and home health care agencies.
This raises an interesting conundrum for health care reformers who are primarily concerned about the unsustainable rise in health care costs. Who in the midst of a deep recession will be willing to whack away at medical waste when it is one of the only sectors generating lots of new jobs for thousands of fearful Americans?
Read through Goozner’s full post for some interesting analysis. We feel strongly that – especially during the economic downturn – segments of the health care industry are positioned well for growth. With the announcement of major (if still undefined) federal investments in health care technology, there is a possiblity these fundamental trends will be augmented by government spending.
Posted by RobC
Filed under: health policy, quality, value-based purchasing | Tags: health policy, quality, value-based purchasing
Remember the halcyon days of 2007, when the stock markets reached their peak? In the midst of the (seeming) boom, Congress instructed CMS to submit recommendations for an initiative called Value-Based Purchasing (VBP). In November 2007, CMS submitted its outline of a VBP initiative to Congress. The lynchpin of VBP is “to transform Medicare from a passive payer of claims to an active purchaser of care”.
Since that day, CMS, particularly Thomas Valuck, MD, MHSA, JD, the Medical Officer and Senior Advisor to CMS, has spoken widely about its plans to implement VBP.
In a nutshell, VBP proposes to link payments to results, including quality, efficiency, patient satisfaction, and other measures. CMS’s November 2007 proposal suggests that hospitals should be rewarded for sustained excellence and improvements from a baseline. On November 26, 2008 CMS issued a release regarding the development of VBP for physicians.
Back to the fall of 2007 – if Congress was contemplating VBP when times were good, then today’s economic woes seem likely to accelerate the concept. Senator Baucus’ plan advocates the implementation of VBP, though a bit more slowly than CMS has proposed. The Baucus plan, which incorporates many of the tenets of President-elect Obama’s plans and received the initial blessing of Senator Kennedy, is a possible launchpad for reform in the Obama administration.
If you ask a hospital executive what VBP is, you get various answers, and occasionally a blank stare. If you ask the Federation of American Hospitals, you get a lecture on how CMS adopts regulations (sort of like the old Saturday morning “Schoolhouse Rock” episode on how a bill becomes a law).
On the other hand, every hospital executive knows about POA and RAC and P4P and HCAHPS and Never Events and Core Measures. Many hospital executives have approached these initiatives as discrete (and unrelated) initiatives. Connecting the dots of these seemingly unrelated initiatives reveals the outline of VBP.
Ask a hospital CFO to estimate the amount of revenue at risk under POA and RAC and Never Events and P4P – most of them can get to 5-10% of revenue pretty quickly. Couple that with declining investment income, and hospitals should have a new urgency to understand where they are in a VBP environment.
VBP, in some form, is headed to a hospital near you. Hospitals have always ultimately adapted to changes in the financing of healthcare, but usually reluctantly and slowly.
Value can, and will, be defined for healthcare, and CMS is leading the charge. History suggests that private payers will not be far behind. If you don’t know your value proposition today in comparison to your peers, time is not on your side. If you don’t join the discussion of how value should be defined, others will fill that void.
Submitted by Hal Andrews
Installment #5:
Five ways new technology can make a physician’s life more satisfying
Debunking Five Myths About U.S. Healthcare
73% of Americans would prefer to die at home, but up to 50% die in hospital
About one in 10 physicians who provide vaccinations for privately insured children are considering dropping the services because reimbursements are too low
Obama’s Health Policy Options: 3 Scenarios
Posted by CharlotteGee
Next Things First 