New firm intends to buy niche health companies

Startup: Calvert Health Partners seeks out businesses specializing in the changing market for medical care.

February 08, 2005|By M. William Salganik | M. William Salganik,SUN STAFF

Medicare reform, changes in state Medicaid programs and a drive for "consumer-directed" health programs have created a variety of niche health companies - many of them startups - specializing in such areas as managing the care of frail elderly or handling prescription benefits.

Now, there's a startup that wants to buy them.

Calvert Health Partners LLC, which will announce its launch today, is looking to buy health companies with "tremendous proficiency in a very specific niche," said David R. Nelson, president and chief executive officer. It plans to apply some centralized functions - particularly information technology - to expand and improve the profitability of the companies it buys.

Nelson was president of Baltimore-based Sierra Military Health Services. Under his leadership, it went from a handful of employees to 750 after it won a contract in 1998 to provide health services to more than 1 million active military, retirees and their families in a 13-state area.

But Sierra Military began shutting down a year ago after losing out to another incumbent as the Pentagon consolidated regions for health services.

Nelson didn't officially leave Sierra Military until last month - layoffs have been phased, beginning in August, with 40 employees scheduled to work until April. But he and other executives "put our minds together, started with the team, and evolved into a model that was salable, scaleable and accomplishable."

Nelson and seven other former Sierra Military executives now constitute the entire work force of Calvert Health. The eight have provided most of the financing themselves, along with a few outside investors.

"Our acquisition schedule is aggressive," Nelson said. He expects one acquisition this year and perhaps two next year, which could bring employment at its downtown Calvert Street headquarters to 100 or more.

`Next generation'

Calvert Health doesn't have the money in hand to start snapping up companies. Rather, Nelson said, as it identifies acquisition targets, it will turn to its unnamed financing partners, seeking the "tens and hundreds of millions of dollars" to make the buys.

Potential acquisition targets are what Nelson calls "next generation" health companies that spring up as the health marketplace adapts to new demands.

"When Medicare changes the rules, it triggers startup companies," said Thomas A. Carroll, a health analyst at Legg Mason Wood Walker in Baltimore. A new Medicare law, passed last year, takes full effect next year.

There are examples of new Baltimore companies responding to the changes in Medicare. XLHealth Corp. does "disease management," helping to coordinate care of patients with chronic diseases; the new Medicare rules require more disease management. Elder Health Inc. runs health maintenance organizations for the frail elderly, making it eligible for a new, higher level of Medicare reimbursement.

Within the past two months, Elder Health and XLHealth have announced new rounds of financing, with each getting more than $50 million in new investment.

Calvert Health isn't a venture capital firm, which would offer financing to help companies get going. Rather, it's looking to buy companies that are up and running - and whose venture capital partners may be looking to sell out at a profit.

The Calvert Health model combines elements of two traditional models for acquiring companies after the startup phase.

Frank A. Adams, managing general partner and founder of Grotech Capital Group, a 20-year-old venture capital firm based in Timonium, said that after the venture stage companies sometimes go public on their own, and sometimes sell either to "roll-up" companies, which buy a number of nearly identical companies to combine into one big one, or to merchant banks, which buy different companies and let them run on their own.

Calvert Health plans to buy companies that are somewhat different from each other, and to combine some, but not all, functions. Nelson said it will be "a health services organization, focused on acquiring, integrating and leading organizations."

The theory is that specialized, nimble startups will have an advantage competing with "a lot of old companies with a lot of old technologies," said Lin Pearce of Potomac, an investor in Calvert Health. By applying centralized technology, Calvert Health should be able to "apply automation to drive higher margins," said Pearce, co-chairman of a company called Pyxis Link that provides management advisory services to early and midstage companies.

`I'm a listener'

Nelson said Calvert Health will look nationally for companies to buy, but will seek, over time, to have several companies in a particular market. In choosing acquisition targets, he said, Calvert will be looking for "scalability" - the potential to take a model from one market and apply it in others.

To make the model succeed, said Adams, the venture capitalist, an acquiring company needs to be "visionary and missionary" - to convince companies they will do better as part of the larger entity than on their own.

But from the view of an investor in startups, Adams said, "If they're talking cash, I'm a listener."

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