The Money Hunt

Main Medical Inc., based in Pittsburgh; founded in 1985

Industry niche
Health-care services in four business lines -- imaging centers and mobile ultrasound (operating in Pennsylvania); and nuclear medicine and nuclear pharmaceuticals (in six states)

Financial snapshot
$13 million in revenues in 2000; profitable

Financing history
The company was initially financed through a $20,000 development fee from a customer; in 1990 it raised $150,000 from a group of private investors. Bank debt and seller financing supported more than 15 small acquisitions from 1995 to 2000

Fund-raising goals
To raise $10 million to $15 million from private-equity (or equity and debt) sources to support a nationwide expansion of two of its divisions and to acquire a nuclear-equipment-servicing business

Recently, CEO John Tomayko raised more than $2 million through the sale of a few of Main Medical's health-care centers. He used the money to help pay down the company's debt from past acquisitions. But looking forward, he's convinced that the company needs significantly more capital to support expansion into what he believes could become a $50-million to $100-million national business. "There's no full-service nuclear-medical business in the country. I'm convinced that we could become that company," he says.

Tomayko has already proved that he can carry out a fast-growth strategy. Main Medical's sales are now 33 times as high as its 1990 figure of $400,000. But the business model Tomayko now envisions will be a high-cost proposition. He wants to acquire 50 or more nuclear cameras (at a price tag of anywhere from $150,000 to $350,000) and knows that he needs to upgrade his management and marketing teams in order to handle a full-scale expansion.

The good news, as he puts it: "We're a proven entity in the banking community. I think that we could borrow half the money we need from our lenders. There's also the availability of vendor financing to help support our equipment purchases." He pauses, then adds, "But we don't have those same kind of ties with the venture-capital community. And when I've approached people, so far, I've found that the biggest roadblock is that not everybody knows about nuclear medicine. I've come to realize that I've got to educate potential investors about my industry niche, as well as my company's prospects."

The experts

Richard S. Cohen
President of the Walden Group, an investment-banking firm based in Tarrytown, N.Y., which specializes in mergers and acquisitions within the health-care industry

"The reaction this CEO received from financing generalists is to be expected. Companies like this one would be wise to approach specialists who understand their market niche and the intricacies of executing their strategic and financing plans in the context of industry-specific dynamics.

"That said, I don't expect that this company will be a prime candidate for the top-tier venture capitalists that look for higher growth trajectories and rates of return. It doesn't have the advantages of strong intellectual-property protection or high entry barriers. Even though it has many positive attributes, it's essentially a service business with a geographical rollout plan. And the realities of the health-care industry are such that although competition in this niche may seem minor at the moment, large companies are likely to enter a sector that proves profitable.

"What I'd recommend instead is that they try to pursue other equity-financing sources. These might include venture-capital firms with more of a strategic industry focus or one that invests the funds of wealthy individuals or a single family. Perhaps a better alternative is to attract funding from an operating company within the industry that might also provide marketing and other resources. Many health-care-sector companies maintain their own venture-capital funds to seed opportunities that might later mature into an outright acquisition or public-offering candidate. Finally, I'd advise this CEO to consider some debt financing with banks that have already been supportive with what appears to be a proven concept."

Jonathan K. Layne
Partner and cochair of the Corporate Transactions Practice Group at the Los Angeles office of law firm Gibson, Dunn & Crutcher LLP

"This CEO has done his homework, and he knows that the market for nuclear pharmaceuticals is expected to grow from $1 billion to $1.6 billion by 2006. That seems like a lot, but it's really just a 60% growth rate over six years. If his company just grows at the average of the macro market, it would achieve a simple growth rate of 10% annually. That's not significant from a venture capitalist's perspective.

"Then there's the reality that this company is basically a middleman. It doesn't have proprietary technology. That means it won't be likely to produce extraordinarily high margins, and the barriers to entry from other competitors are not too high. That's a problem, too.

"My best advice would be, don't limit your horizons."

--Jonathan Layne

"My best advice would be, Don't limit your horizons. Raising venture capital won't be easy, especially since the capital markets have really started tightening since last April. On the other hand, there's plenty of money still around. If the CEO put together $5 million or more in debt financing, maybe from banks and vendors, he could start proving out his business model. And then he'd be in a better position to approach venture capitalists with expertise in this area or maybe to pursue a joint venture with a health-care company."

Janet Effland
General partner and head of the health-care team at Patricof & Co. Ventures, in Palo Alto, Calif.

"This wouldn't be a deal for us, but it might be of interest to another private-equity investor. The problem is, historically, venture capitalists haven't made money in health-care areas like this one. We're also skeptical about the large-scale-rollout potential in this industry niche. Nuclear imaging has been used a lot in academic hospitals, but it hasn't taken off nationwide. Maybe this company could make that happen. But maybe this CEO has been fortunate to be in the right kind of region, and he'll encounter lower demand and lower margins elsewhere. My gut says this will never become a $100-million company.

"There's another challenge: it's well-known among venture capitalists that there have been a number of health-care deals that performed extremely well on the regional level but didn't expand well when they tried to go national.

"But this CEO has proven he can grow his company. He might be able to educate potential investors who would share his vision. He might be better off approaching generalists, rather than nuclear-medicine or health-care specialists. He doesn't want to find people with preconceptions that could work against him."

Jill Andresky Fraser is Inc. 's finance editor.

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Published on: Mar 1, 2001