Health service companies now attracting investors

May 10, 1994|By Joel Obermayer | Joel Obermayer,Sun Staff Writer

With impending reform sending jitters through the health care industry, investors are eschewing biotech companies that develop new drugs and genetic therapies -- the rage of just a few years ago -- in favor of service companies that can fill market niches.

At least that's the word from many of the venture capitalists and investment advisers at a health care seminar sponsored by Alex. Brown & Sons Inc. in Baltimore yesterday. The seminar brings together 135 health care firms and more than 1,000 potential investors and industry executives for three days of presentations.

Jeffrey M. Krauss, a general partner with New York-based Nazem and Co., said his firm has put together a venture capital pool, but unlike in the past, will not be seeking out small, research-oriented firms.

"We expect to do very few biotech investments this time around, given what's happening in Washington," he said. "One of the [federal] proposals is for price controls on new products. . . . That would definitely cut down the returns."

For investors, the opportunities are much more likely to be found among companies that provide services that help make hospitals and health maintenance organizations more efficient, or companies that provide services to nursing homes and other long-term care facilities.

One such company is Baltimore-based health care information company HCIA Inc., whose presentation at the seminar yesterday was standing room only. The company provides customized data bases to hospitals that help them pinpoint how their clinical operations can be run more efficiently.

"Historically, hospitals have been some of the poorest-run businesses out there," said company President and Chief Executive Officer George D. Pillari. The firm serves about 4,000 hospitals nationwide, and its sales have risen from $2.9 million in 1991 to about $25 million in 1993.

Mr. Pillari said the company, owned by New York-based insurer AMBAC Indemnity Corp., is likely to offer up a minority stake in an initial public offering soon.

M. Fazle Husain, an executive with Morgan Stanley Venture Partners in New York, said HCIA is in a strong position to catch investors' attention.

"This is the hottest area of heath care right now," he said. "These service companies are providing real product with real cost savings."

Another company that played to a attentive audience was nursing home operator Genesis Health Ventures Inc. of Kennett Square, Pa. The company caught local attention when it bought Meridian Healthcare Inc. last year and became the largest provider of nursing home services in the Baltimore area.

In addition to its core business of running nursing homes, Genesis also provides specialty services such as drug distribution to other nursing home operators in its markets. Chairman and Chief Executive Officer Michael R. Walker said the company expects its specialty services operation to represent 50 percent of its total revenue by 1996, up from 29 percent in 1993.

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