As an investor, you can profit from drug companies, hospital chains, medical device makers and a myriad of other health care service stocks. But one important component of health care spending has largely escaped investors, physicians themselves.
VCs Enter the Picture - Can IPOs Be Far Behind?
Not to be deterred, venture capitalists in the U.S. have entered the picture through a couple of recent investments. Most recently, Boston-based Iora Health raised $75 million in a Series D round from a group of investors, most notably General Electric. Iora has raised $123 million since starting up five years ago and now has 34 clinics located in 11 metropolitan areas across the U.S., including Boston, New York, Seattle, Denver, Chicago and Las Vegas. Iora's model is somewhat of a cross between a standard physician's office, an original health maintenance organization model, and a new-fangled "concierge" practice, in which patients can pay an annual or monthly fee and visit as many times as they like.
On the West Coast, San Francisco-based One Medical raised $65 million in December 2015, through investors including JPMorgan and interestingly, AARP Innovation Fund, although the tech-savvy and metro-oriented practices seem to appeal more to millennials than seniors. One Medical has offices in seven metro areas, including San Francisco, Washington, Boston, Los Angeles, New York, Phoenix and Chicago. One Medical has raised more than $180 million to date and has reached the 50-office plateau with a recent opening in Chicago.
History Has Not Been Kind
This latest iteration of physician practice management companies follows hectic activity in the 1990s, which saw a number of physician roll-ups graduate from venture start-ups to public companies, the largest of which were MedPartners and Phycor, only to eventually disintegrate or be absorbed into hospital chains or other health care service providers. The main problem with these earlier business models seemed to be retaining and motivating physicians after the roll-ups. These physicians could retire or eventually leave and form new practices and bring over their old patients.
One Survived from the '90s
One physician practice management company has survived from the '90s and even thrived -- Mednax, which early on limited its scope to only neonatal practices. Neonatal medicine is the practice of taking care of premature babies, which is a small (but intensive) specialty tied only to those hospitals that operate highly technical neonatal intensive care units. Since its early days Mednax has branched out into anesthesiology practices and other maternal or pediatric-based specialty practices, but the solid growth and strong operating cash flow of the company's original business has rewarded early investors well.
Other health services stocks employ physicians, including Team Health and Envision Healthcare, but more on a contract or short-term basis, similar to staffing companies.
In the Long Term, Wait for New IPOs, but Until Then, Buy MD
Until Wall Street can line up a couple of new IPOs in the physician practice management space, investors can look to Mednax (MD) as one way to take advantage of an underrepresented but nevertheless key component of the health care sector.