Older and Wiser
Though not yet four years old, Quantum Health Resources expects1991 sales of $77 million, has more than 250 employees, and has alreadydone an initial public offering. CEO Doug Stickney's secret? A management team with years of experience in the industry
"They managed to identify a niche within a niche and get their business going, and they've been profitable. Given the strength of the management, it seems to be they'll be able to grow beyond that niche." -- Jim Koch
Up on the fourth floor of a sleek office-park building outside Los Angeles, Doug Stickney paces. In fact, there's an area of carpet that's more worn than the rest because when Stickney is on the phone, he tramps back and forth, working out his nervous energy as he works out his ideas and plans.
Stickney, the 35-year-old founder and CEO of Quantum Health Resources Inc., hasn't wreaked too much havoc on the carpeting yet, though. For despite the magnitude of his responsibilities -- a business on track to do $77 million for 1991, a work force of 254 full-time and 88 part-time employees, and as of this past April, public ownership -- Quantum is only three and a half years old.
What the Orange, Calif., company does is this: for hemophiliacs and others with immune deficiencies it delivers drugs directly to homes or treatment centers. Revenues come solely from the pharmaceuticals, which, after being bought by the company at wholesale, are resold to end-users. Included for "free" -- that is, bundled into the drug cost -- are such services as nursing care, help finding additional insurance, assistance in personal matters such as financial record keeping, and emotional support.
"It's hard even for me to remember that the company still is only 40 months old," says Stickney. "It's just stunning. When you look at it in terms of infrastructure, in terms of critical mass, you can build a pretty strong case that the four cofounders accomplished far more than they expected to, in a far shorter time."
What have they accomplished? Here's a checklist:
The service. Quantum positions itself as a better option than hospitals, where clients have traditionally received their drugs and care. Customers pay 35% to 50% less through home care, says Stickney, which means savings both for insurers and for patients who copay. And the auxiliary services help make the difficult lives of customers easier.
Geographic growth. The company has 14 field offices nationwide. Each operates as an autonomous unit, with responsibility for profit and loss, marketing strategies, and sales efforts.
Corporate alliances. Two major pharmaceutical suppliers, Miles Inc. and Armour Pharmaceutical Co., are principal stockholders and have director positions with Quantum. The company was a customer with both before either bought in, but now is in an even more secure position with its suppliers.
Extraordinary financing. Between August 1988, when a private investor seeded the company with $300,000, and early 1991, Quantum raised $10 million in private and venture capital. Last spring it raised another $31 million in an over-the-counter offering. Some $3 million went to pay off bank debt, and another $2 million was earmarked to open four more branches by the end of 1992.
Savvy acquisition. In a stock swap with no cash payments, Quantum acquired a similar home-care company this past July. The purchase of $9-million Comprehensive Home Services gave Quantum a larger profile in California and more employees experienced in the industry.
All that in three years. Along the way Stickney managed to get married -- to Kim Mehl, general manager of the company's first branch office, in Indianapolis -- and to become stepfather to two young boys. He indulged one of his passions, baseball, by buying the Class A San Bernardino Spirits with his father. And he watched as Quantum's stature among customers and the investment community rose steadily. It's enough to keep him pacing for days on end.
If there is one key to Quantum's success, it isn't the alliances or the ability to raise money or even the quality of the company's service. What really distinguishes Quantum is the experience of its management team. It is an example of the extraordinary advantage a company has when it's started by players with complete command of their industry.
Stickney himself -- tall and lanky, with an easy grin and thinning hair unaffected by gravitational pull -- will talk half-jokingly about how naive he was when starting up. How, in retrospect, if it had been his money, he probably wouldn't have funded himself. But self-depreciation notwithstanding, the truth is that Stickney had the kind of background that seduces investors and intrigues customers.
For one thing, he came to the endeavor with something of a family legacy in the industry. Back in 1978, at the suggestion of a relative who was a hematologist, Stickney's father, Henry, cofounded Western Medical Specialty Corp., the company that discovered the niche of providing home delivery of drugs to hemophiliacs.
Doug had joined Western Medical in late 1983, in large part for the chance to be near his family again. (Hank Stickney's Air Force career had taken them all overseas in the 1970s, and Doug had left them in 1973 to go to college in North Carolina.) Joining his father was a good experience, says Stickney, and Western Medical was a good company.
The company's sales were about $1 million, and Doug's arrival marked a push into the national arena with more professional management. A statistician by training, the younger Stickney loves poring over numbers. ("This is one of my favorite folders," he'll confide, holding a manila file with charts on receivables, daily cash balances, payroll payouts, and branch revenues. "Doug," says one colleague, "can sift through pages of numbers and pluck out significant ratios faster than anyone I've seen.") By 1986 revenues at Western Medical topped $12 million, and in search of liquidity, the family sold the business to a general home-care organization, Caremark Corp.
The Western Medical staff was kept on until early 1988, when Baxter International acquired Caremark. A group of Western Medical managers suddenly found there was no room for them in the newly coupled operation. Stickney was among them.
"It was a shock, no longer being employed," he says. "The possibility had never really occurred to me that if there was a merger, I wouldn't be one of the survivors."
He and three others who'd been together before the first acquisition -- Mike Tront, Mary Ann Barth, and Steve Yamaguchi -- toyed with the idea of consulting, but decided to launch their own business when their first job fell through. "We didn't have jobs. That's a big reason this company was founded," says Stickney. Adds Barth, "We were too stupid to know what it was like to start a company, and we thought, This will be pretty easy."* * *
Of course, miscalculating the difficulty of starting a company didn't make Quantum's founders much different from anyone else lurching into a first venture. But while the team may have been short on nuts-and-bolts information on getting licensed or opening site offices, it did have extensive operating experience. Stickney handled financing and overall direction, Tront operations, Barth marketing, and Yamaguchi sales. Moreover, they had developed a set of strategic approaches to the marketplace.
For one thing, they knew the time was right to start the business. The merger of Caremark and Western Medical had left a gaping hole in the marketplace, says Barth. "There was really only one company, which had 60% to 70% of the home-care business." Quantum's line was that it was The Alternative, that customers had a choice, and that they'd get much more personalized service. Tront says that at around the time of the company's launch, there was a shortage of antihemophilic factor -- the plasma protein missing in the systems of hemophiliacs and necessary for blood to clot. "If anybody could secure product in a short market," he says, "we thought we could." Why? They were convinced drug companies would welcome a chance to sell to Quantum over Caremark. Caremark, after all, was owned by Baxter, a pharmaceutical company that was competing directly against the other drug companies. And Quantum's managers already had connections in the industry.
The founders knew that by targeting a narrow niche, they could build a stable base of steady customers. Hemophiliacs easily buy $40,000 -- and as much as $100,000 -- worth of factor a year. Physicians would be more likely to give referrals to an outfit that positioned itself as a full care giver for a few diseases, rather than a provider of one service or another. "If you talk about the disease itself and serving that disease, physicians relate to that," says David Edlund, who runs two Quantum branches. The disease-treatment approach also helps in long-term positioning: it's logical for Quantum to diversify into other chronic diseases such as genetic emphysema. The company anticipates that much of its future growth will come from that kind of expansion.
Founders with less experience in the industry might have assumed that physicians would flock to their company because of the services it was ready to provide. But Stickney and his managers anticipated the tough sell. It was to their great advantage that through their work at Western Medical, Stickney, Yamaguchi, and many of the field managers already had physician contacts. It's a small, close industry: there are only about 20,000 hemophiliacs in the United States. Quantum's 1990 revenues of $40 million came, in fact, from just 1,000 end-users.
Although the company suffered the perennial start-up woe, a longer-than-expected sales cycle of 6 to 12 months, its half a million dollars of initial capital kept it going during the lean months. Fortunately, and somewhat remarkably, Stickney's projections for the company's first three years, based on little more than educated guesses about how many contacts the company could make and the percentages it could convert into paid customers, have been right on target. Investors like that. "He's an extraordinary manager in terms of ability to attract high-level people and motivate them, combined with an outstanding understanding of the numbers," says Wallace R. Hawley, a general partner at InterWest Partners, a venture-capital firm that invested $3 million in Quantum two years ago. "That's rare. We don't often find people who are so good at both."
Quantum kept overhead low, since profits were dependent on that; the company also bought in bulk to lower the cost of goods. Stickney says the company now buys about 12% of the drugs manufactured for hemophiliac care, and has been able to leverage that into even better prices.
And Stickney knew that Quantum's relationship with insurers would be critical. The company tries, he says, to position itself "with the people who subsidize the care, in a kind of pseudo-managed-care role." Payers look to Quantum, he maintains, both as an expert on the different disorders and as a conduit for getting customers to become self-sufficient in their care -- and cheaper, subsequently, to care for.
Still, a crucial issue for Quantum is how well it collects from insurers. "If we blow that particular activity, shame on us," says Stickney. "We don't go back to the patient for the money. That's our job." Quantum built in quite a cushion for those collections; when the company started, it set aside 10% of billings for "uncollectible accounts" -- 10%. In 1990 actual bad-debt losses were 6.3%, fully $2.5 million on $40 million in sales. "It's a large number, but I think it's probably right in the middle of the road," says Stickney. Branch manager Edlund puts it this way: "You could say this company was built around paying attention to receivables."
While the founders learned a lot about their market from Western Medical, they clearly haven't built a clone of that company. One of Quantum's major differences -- and a key to its operations and growth -- is its decentralization. With regional outlets -- each staffed by pharmacists, nurses, customer-service reps, reimbursement specialists, and salespeople -- the company is poised to grow smart and grow fast.
Branches that have taken over collections during 1991 have been able to get their money faster -- in some cases cutting the time from 90 to 70 days. "If you're collecting from local payers, you just can't do it as well centrally as you can locally," says Edlund. General managers overseeing their own profit-and-loss projections get numbers from the corporate office within five days of each month's close. Bonuses are tied to the outlet's performance.
"We think of ourselves as a consultant group," says Yamaguchi of the relationship between the corporate staff and the general managers. Salespeople don't report to Yamaguchi; they report to the field and regional managers. General managers have autonomy in deciding which kind of diseases to target, given local demographics. They're given not just responsibility but authority. And they've been thriving.* * *
To date, the Quantum plan is working. Eighty percent of revenues are coming from a stable base of patients. The company has expanded gradually, with a third of sales now generated by people with disorders other than hemophilia. At the initial public offering, stock opened at $14 a share. It's now trading at $23.
"Since our IPO, we've definitely bred more competitors," says Stickney. "I take it as a compliment that there are more and more companies out there talking about meeting the needs of families with chronic disorders. But I don't believe there's anyone right now who has, on a national basis, the number of contacts and the credibility we have.* * *
"The last six months have been so new," Stickney reflects. "Working with analysts. Working with funds managers. Speaking at conferences. Trying to do some significant strategic partnering instead of just giving away my stock, which, it can be argued, wasn't very bright in the early days. For me, that's created a sort of Renaissance.
"I think one of the things we've all done pretty well is separating the personal from the professional," he continues. "This group can go out on a Saturday night and enjoy each other's company without having to focus on work. It's the ability to go and watch my boys, Christopher and Bobby, play soccer for four hours on Saturday and not worry about Quantum. In the early days I worried more, but there's a certain comfort in knowing we've got the momentum going, we're well capitalized, and we've got great people. That's pretty much what this is all about.
"By the way," he adds, his face brightening, "Christopher scored a goal on Saturday, and boy, I embarrassed him. I went crazy. The first goal of the year. It was huge." With that, Doug Stickney is on his feet again, outlining with his hands the brilliant play on the soccer field. And once again he's pacing behind his desk, elaborating on his passions with an infectious enthusiasm.* * *
($ in thousands)
Year ending 12/31/88* 12/31/89 12/31/90
Employees 12 100 200
Net sales $1,362 $12,845 $40,004
Pretax income $51 $347 $2,050
Total assets $1,748 $7,984 $19,689
Net owners' equity $1,012 $4,101 $10,724
*These figures represent financial activity beginning June 22, 1988, the date of start-up.