News

Health interests taking chances

By Daniel Connolly | The Commercial Appeal | Sunday, December 31, 2006

For many firms in the Memphis health care industry, 2006 was the year of the gamble.

Hospitals, medical device firms and related organizations made a series of expensive strategic bets, and in some cases, success or failure came within weeks.

In other cases, it will be years or even decades before the results are clear.

Rolling the dice

It was a year of expensive long-term investment in the local medical device industry. Grants from the Plough Foundation and other organizations helped nonprofit InMotion Musculoskeletal Institute launch this year with plans to help Memphis become a leading research center for problems of the muscular and skeletal systems. The nonprofit's leader, Dick Tarr, is hoping to gain traction early next year by hiring scientists and opening research labs.

InMotion's start is part of a bigger initiative. Organizations like the Memphis Bioworks Foundation want Memphis to become a global leader in the orthopedic medical device industry.

This year the Bioworks Foundation oversaw site preparation for the $450 million UT-Baptist Research Park on the site of the former Baptist Memorial Hospital. Groundbreaking for the first structure is expected next year.

And Minneapolis-based Medtronic was investing here too, breaking ground on a $40 million expansion of its Memphis spinal unit, which plans to add 600 jobs in the next five years.

Among hospitals, Methodist Le Bonheur Healthcare received state approval this month to spend $124 million to expand its Methodist Le Bonheur Germantown Hospital and another $327 million to expand Le Bonheur Children's Medical Center.

The nonprofit medical group hopes to use the hospital in affluent Germantown as a source of cash for charity care in other hospitals in its system. It also hopes the children's hospital expansion will make one of the best of its kind in the nation. It will be several years until it's clear if the investments have paid off.

Struggling, but still in the game

Some public health care entities ran into a streak of bad luck in 2006 and finished the year like card players running dangerously short on chips.

It was a hard year for The Regional Medical Center at Memphis, the government-funded hospital that provides more care to the uninsured and poor than any other in Shelby County.

In August, federal officials threatened to stop paying for some procedures at the hospital after finding problems, including sexual assaults in the hospital's prisoner detention unit.

The government lifted the threat after The Med submitted a plan of corrective action. But funding cuts and rising numbers of uninsured patients shook the hospital's finances late this year. The Med expected to have just nine days of cash on hand next month.

Experts say the number of uninsured is increasing in part because of reductions last year in TennCare, a federal and state program for the poor and disabled.

In June, Gov. Phil Bredesen signed the Cover Tennessee program into law to fill some of the gaps. Cover Tennessee will operate five separate programs for people who would otherwise lack coverage. The programs are in various stages of development and all are scheduled to start next year.

The dice are still rolling

The founders of GTx Inc. rolled the dice several years ago, and, well, they're still rolling.

In 1997, Dr. Mitchell S. Steiner of the University of Tennessee Health Science Center launched GTx Inc., a biotech startup. In doing so, he and investors, including AutoZone founder J. R. 'Pitt' Hyde III, agreed to accept years of losses in the hopes of scoring on a lucrative drug.

The firm has lost money every year it's operated: Between 2003 and Sept. 30, 2006 alone, total losses were $104.1 million, according to a recent Securities and Exchange Commission filing. The company now has two drugs undergoing testing: Acapodene, a drug for two different problems related to prostate cancer, and Ostarine, a drug against bone and muscle wasting.

Like a gambler weighing the odds, Steiner believes one or both will pass federal muster.

"All it takes is one drug," he said earlier this month.

And the company marked notable successes this year, including a multimillion-dollar deal with French pharmaceutical group Ipsen to market Acapodene in Europe and a successful $60.8 million additional stock offering this month.

Another entrepreneur with big ideas is Jim Phillips, who bought technology from scientists at the University of Tennessee Health Science Center and developed it into the VeinViewer.

The device uses infrared light and computer technology to project an image of the patient's own blood vessels onto the skin, allowing doctors to find them without repeated probing with needles.

Phillips' company, Luminetx, has received media attention from the likes of the BBC and The Wall Street Journal, and Phillips has numerous ideas for new applications of the VeinViewer technology. It's too early to say if Luminetx will be the lasting global success that Phillips wants.

Rolling the dice -- and losing

One of the area's biggest manufacturers is British medical device maker Smith & Nephew, which employs 2,600 workers making artificial hips, knees and other orthopedic products. This winter, Smith & Nephew made a purchase offer for Warsaw, Ind.-based Biomet Inc. in a deal that would have created one of the world's largest orthopedic firms.

But Smith & Nephew lost to a group of private equity investors who will pay $10.9 billion.

Now stock traders are speculating that Smith & Nephew will be the next takeover target, increasing uncertainty about its future. However, company representatives point to the firm's strong earnings and products and say the future is good.

A big score

Earlier this year, Neil G. McLean and Craig B. Watson were looking for a way to cash out their ownership of Delta Medical Center, a small, for-profit hospital in southeast Memphis. A suggestion by employee Pat Duffee led the owners to sell the hospital to workers.

The hospital can't be sold without the employees' consent and the workers will receive stock in the hospital that they can convert to cash through a retirement plan.

It was also a good deal for the former owners, who each received $10.5 million immediately and a promise for $5 million more each when a bank loan is paid off 15 years from now.