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Nancy-Ann DeParle

Medical devices and instruments. Healthcare information technology. Hospitals and other facilities. Managed care. Biotechnology innovations. Administrative outsourcing. All these business sectors and more combine to lure investors of all stripes to the healthcare arena. Yet if you thought healthcare was hot last year, it's on fire now.

"I've been on this side of healthcare - the business of healthcare as opposed to the regulation or the legal aspects of healthcare - for about four years. I think there's more going on right now than I've seen since I've started," says Nancy-Ann DeParle, a senior adviser with JPMorgan Partners in New York. DeParle is former administrator of the federal Health Care Financing Administration (now the Centers for Medicare and Medicaid Services) and past commissioner of the Tennessee Department of Human Services.

DeParle says she examined potential deals in three cities during one week in May. "We don't usually take a trip just to see something. It usually has to be somewhat compelling to even make that step, and all of these were compelling on paper and compelling in person," she says. "We'll see what happens. There's a lot going on." JPMorgan Partners has been investing in healthcare for two decades and raised a $6.5 billion fund for the purpose in 2000-2001.

Specifically, DeParle says healthcare services stocks such as providers and insurance companies "are quite healthy and performing better than, I think, any sector other than the energy sector. They are performing better particularly in the last six months or so."

According to healthcare financial publisher Irving Levin Associates, 23 percent more venture capital was invested in healthcare in 2004 than in 2003 in the United States. In 2004, $6.9 billion was channeled into 390 such transactions. The first quarter of 2005 saw venture capital spending increase 19 percent over the previous quarter, setting the pace for another trend-setting year. Adding bloom to the rose, healthcare merger and acquisition activity reached its highest level in two years during the first quarter of 2005 with 248 deals, representing a 15 percent increase over the previous quarter and a 19 percent increase over the first quarter of 2004.

"I think one of the reasons why we're seeing so many interesting deals in the bricks-and mortar kinds of companies is that many of those facility-based companies depend to a greater or lesser degree on government reimbursements," DeParle explains. "With the election behind us, there is a period of visibility about what reimbursements are going to be." She says that because the reimbursement "question mark" has been lifted, valuations tend to be higher. Also, the Medicare Modernization Act "put a lot of money out there" for hospitals, managed-care plans and others in the provider sectors, she adds.Do today's demographics play a role in enhancing the provider sector? "Yes, on the one hand, the demographics are compelling. The baby-boomers will use more healthcare," DeParle says, "but it's also a little worrisome. ... When it's healthcare and the government is such a big player, you wonder at what point the government will decide its not going to buy it anymore. Also, I would suggest that when your really peel back the onion, at least some of the increased demand in some of the facilities sectors is supply-driven rather than demand-driven." She says one of the challenges for a smart investor is to recognize whether a sector is headed toward overgrowth, such as too many long-term care beds, and adjust accordingly.

Another result of the Medicare Modernization Act is that managed-care plans are getting into the Medicare business. As an example, DeParle pointed to Nashville-based NewQuest LLC, the parent company of several Medicare Advantage organizations in several states that contract with the federal government to administer their members' Medicare benefits. More than $134 million in private equity money was invested recently into NewQuest by GTCR Golder Rauner of Chicago. DeParle says NewQuest "set the pace for what's happening right now, which is a lot of interest in that sector."

Helping take the administrative burden off healthcare providers is another business service gaining steam, and thus gaining investors such as JPMorgan Partners. The outsourcing of revenue-cycle management, data gathering, insurance eligibility confirmation and a host of other services is a lucrative market. "We continue to be very interested in the tools hospitals and physicians and others can use to make their care provision more efficient, and also their billing and their collections work," DeParle says. Such opportunities, she adds, are "very scalable and tend to have a very good ROI (return on investment)." That goes hand-in-hand with investments in information technology, she says, although JPMorgan Partners isn't very involved in that sector.

DeParle also points to new technologies - from medical devices to pharmaceuticals - as promising investment opportunities. "Those tend to be the big bets" usually made by investors willing to wait longer for a return, she notes.

Asked if being first with a new technology or procedure is the key, she replies, "Yes, you want to be early with the latest and greatest, but you want to be sure that it's something that will get adopted by physicians, that will make their job easier and make it easier to care for patients. Also, you want to be sure that somebody's going to pay for it! I've seen some things out there recently that are interesting and compelling and as a patient I would like them, but I'm not sure who's going to pay for them."

It's all in the timing, she says, acknowledging that sometimes being "behind the wave" is better. "You don't want to be so far back that you become like LASIK and there's one in every shopping mall, but you don't want to be so far out in front that you're suffering the years wandering the desert trying to get docs to adopt it," she says.

She quips, "If this were easy, everybody would be doing it."

If there's one healthcare sector not at the top of its game, it's pharmaceuticals. In short, biotech valuations are down. "The whole pharmaceutical market is sort of down in the wake of what happened with Vioxx and the feeling that there's going to have to be a slowdown in approvals because of the concern about safety," DeParle says. In addition, Medicare and Medicaid are limiting prescription coverage to labeled uses, a move DeParle says could have "a dramatic effect" on drug sales.

DeParle says her firm has done some early-stage device investing, particularly with regard to implantable cardiovascular treatments, yet she admits that negotiating the maze of federal Food and Drug Administration approvals is "daunting" for a new drug or device. "There's a lot of clinical knowledge you have to have in order to make those type of investments in a smart way," she says.

Despite the emerging opportunities in life sciences, decisions still rest to some extent on the tried and true - the management team, she says. "Is there a management team at the company that would be able to execute all the things that need to be done to get through the FDA process? If there isn't, do you have one standing by to come in and help them, or do you have the ability to put together a team of consultants to get them through that process? If you don't, you won't make it," DeParle says. "There are various ways to skin the cat, but you have to have one of them figured out."

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