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CEOCFO Monthly Analyst |
Listen……………………HEARx.
HEARx Ltd. 1250 North Point Pkwy. Dr. Paul A. Brown Interview conducted by: CEOCFOinterviews.com Dr. Paul A. Brown is Chairman and Chief Executive
Officer of HEARx Ltd.
He is a physician by training but a businessman by instinct.
His medical background is that he is a fully trained pathologist. He discovered early on in his career that his patients had
flat electrocardiograms and rarely talked back to him. So, he decided to go into business and borrowed $500.00 to
set up a medical laboratory, MetPath, in New York City in 1969. It grew
into the world’s largest clinical laboratory and was acquired by Corning
in 1982 for approximately $140 million.
The stock had gone from $.40 to $40.00 during that 12-year period.
He tried semi-retirement and went stark raving mad, having gone
from 3600 employees in three countries to one employee living with him in
Ridgewood, NJ who didn’t think she was an employee.
In 1987 he decided to go back into business and found another
segment of the healthcare field to change…the field of hearing care.
Dr. Brown was attracted to hearing care for the same reasons that
attracted him to the laboratory business.
It is a large, highly fragmented industry.
In fact, the field generates over $2.5 billion a year serviced by
11,000 providers, down from 14,000 in 1987.
It certainly meets the criteria of what people call a cottage
industry. Number two, it is
an unregulated business. To
go into this business in some States you just have to be able to spell
hearing aid and you can open your practice. There are no Federal or State inspections of hearing care
facilities anywhere in the United States.
This type of industry, which is non-regulated and nonprofessional
is fraught with fraud and abuse.
In fact, the industry has long had a reputation of being a cross
between aluminum siding and used car dealers.
Lastly, as a result of the fraud and abuse, the health care
industry, until after HEARx went into business, refused to reimburse a
patient for a hearing aid purchase. Those
were exactly the same areas that excited Dr. Brown about the clinical lab
business when he was in training at Columbia Presbyterian.
He changed the lab business with MetPath (renamed Quest Diagnostics
trading on the NYSE with annual revenues in excess of $4 billion).
Now, he is trying to change another segment of the healthcare field
with the same problems. Dr. Brown – To establish our credibility as a quality
provider of hearing care it is essential not to sell hearing aids to
people who don’t need them and to perform the diagnostic testing
properly. Patients have to be
able to hear better by coming to HEARx CEOCFOinterviews – Do you have offices around the
United States? Dr. Brown – Right now the company operates 80 centers in New
York, New Jersey, Florida and southern California with average revenues of
approximately $700 thousand per center.
Each facility has been designed to process between $2.5 – $3.0
million in annual revenue. In
these four states the market for hearing care is in excess of $600 million
or ¼ of the U.S. hearing care market.
CEOCFOinterviews – Does Medicare cover hearing
aids? Dr. Brown – No. Medicare still doesn’t pay for hearing
aids although Medicaid in most States does cover one inexpensive hearing
aid. CEOCFOinterviews – Will Medicare cover a doctor’s
visit or some of the medical expenses? Dr. Brown – Although Medicare will only cover a visit to a
physician, HEARx was able to convince a number of the insurance companies
with a Medicare/HMO product to offer a hearing aid benefit as a means of
attracting and or keeping their membership.
In fact, today we have over 170
contracts with health care providers and 1.3 million people under
coverage with HEARx. Our
large health insurance providers include Blue Cross Blue Shield of
Florida, Blue Cross Blue Shield of New York, Blue Cross Blue Shield of New
Jersey and our joint venture partner in HEARx West…Kaiser Permanente.
Dr. Brown –Three additional states (Pennsylvania, Texas and
Illinois) have the potential for generating a significant amount of
revenues as a result of the demographics of their population. Certainly
northern California will most likely come before any expansion into a new
State CEOCFOinterviews – When do you see entering those
states? Dr. Brown – The priority for this year is to get the company
profitable. We’ve announced to our shareholders that our target for
revenues for this year is more than $70 million and that we will only be
opening another 2-3 centers in southern California. Dr. Brown – It is a combination of quality, service and
price. If the patient is not
tested properly, then they are not going to order the right hearing aid.
If you don’t fit the person properly, then they are not going to
be happy with their hearing aids. There’s a joke in the industry that there are four types of
hearing aids; behind the ear, in the ear, in the canal and in the drawer.
A major portion of the hearing aids sold in the country often end
up in the drawer because of inadequate testing or improper fitting.
There are people who actually go door to door and sell hearing aids
at people’s homes or through magazines for $300.00.
These are the ones that are going to end up in the person’s
drawer. HEARx recently
introduced a Siemens’ digital hearing aid for $995.00…why buy anywhere
else? CEOCFOinterviews – Where do you advertise? Dr. Brown –Approximately, 40 percent of the patients come
from our 170 contracts with health care providers. The remaining 60 percent of the business comes as a result of
our spending 11% of sales in newspaper, television, open house and direct
mail advertising. Our budget
for marketing this year will be approximately $7 million.
CEOCFOinterviews – Who is Kaiser Permanente? Dr. Brown - Kaiser Permanente is the largest managed care
company in the country with over eight million members.
Our joint venture with them in southern California is HEARx West.
Which is operating in California.
“Kaiser” and HEARx both put up equity and HEARx loaned the
venture the necessary funds to build the current 19 centers. HEARx
receives a management fee for managing the venture.
“Kaiser” then contracted with the venture for its members.
Based on the “Kaiser” membership in southern California, their
members spend about $27 million dollars per year on hearing care.
CEOCFOinterviews – Do you see other joint ventures
with or expansion of the joint venture into the other states you mentioned
earlier? Dr. Brown – “Kaiser” is located all over California so
our goal would be to go from southern California eventually into northern
California and then into their other 11 regions in order to capitalize on
the relationship with their membership.
There are over eight million patients in the U.S. who get their
health care from Kaiser. Since
the average expenditure per year for hearing care in the U.S. is $10 per
person, Kaiser members throughout the country are spending over $80
million per year on hearing care. CEOCFOinterviews – How much are you spending on
R&D? Dr. Brown –We are a provider of a product.
As a provider of a service and someone else’s product, we leave
the research and development to the manufacturers.
CEOCFOinterviews – Your name is on the line and you
are using other people’s products; do you have someone going out to
oversee these products to make sure that the quality is what you want? Dr. Brown - We have a Vice-President of professional services
and an entire quality assurance department responsible for evaluating
products and selecting those manufacturers we are going to utilize.
Our centers are all accredited by the Joint Commission on
Accreditation of Health Care Organizations.
Because all of the centers are company owned
everything has been standardized so that the diagnostic testing that a
patient goes through, the fitting process, the products, the
pricing…everything is the same from center to center. CEOCFOinterviews – Are all the people in the
centers HEARx employees? Dr. Brown – Everybody is a company employee.
We now have 130 professionals with a goal for each professional to
generate approximately $750 thousand per annum in revenues.
This means that with the current staff, if we had an even mix of
business across all our centers, the company’s revenue could approach
$100 million…with no increase in the professional staff.
There are several thousand hearing professionals per year coming
out of school. There isn’t
a shortage…just a shortage of good ones.
CEOCFOinterviews – As far as a potential investor,
why should they invest with your company? Dr. Brown – Number one--is the size of the market.
This is an existing market. This
isn’t something that has to be created or invented.
There are $2.5 billion spent today on hearing care and the Federal
Government indicates, based on the aging of the population and the number
of baby boomers, that the number is going to grow to $10 billion over the
next 15 or so years. Number
two--we have a number of competitive advantages including: contracts, our
computer system and how we operate the business.
Number three—strength of our balance sheet. You don’t get to be
successful in executing a strategy unless the company is adequately
funded. Right now HEARx has some $4 million dollars in cash and has zero
long-term debt. In addition
to that, we have a net operating tax loss carry forward of $60 million
which means we are going to save some $30 million in taxes.
We will, therefore, have money for expansion without further
dilution to the shareholders. Number
four--the management of the company. I’ve already built a successful business and sold it.
The President of HEARx is Stephen Hansbrough and he is the former
Chairman and CEO of Dart Drugs. In addition, he ran Crownbooks and Trak Auto.
He had over 3,000 employees working for him and operated a $500
million business before joining HEARx in 1993.
So between the two of us we have the management skills at the top
to carry out the strategy. Number
five--this is an incredible opportunity from a timing point of view for an
investor to come in and take a position in the company. Although
healthcare companies are trading at anywhere from 2 or 3 times sales,
HEARx is trading at .2 times the target for this year’s revenues.
In addition, the largest provider of hearing aids was recently
acquired for three times sales. Since
HEARx is the third largest provider of hearing care in the country, we are
certainly an acquisition target. CEOCFOinterviews – What kind of incentives do you
offer your employees? Dr. Brown – At MetPath, I had 3600 employees and everybody
was a shareholder. When the
company was acquired, a number of millionaires from the employee base were
created. We have a similar stock option program at HEARx…hopefully with
the same results. Every
employee, from the receptionist to the executives, has stock options in
the company. In addition, the center staff does have economic incentives
on their revenues, although it is a small percentage of their income.
I believe that nothing motivates as much as private enterprise
does. That’s why we try to make sure everybody is an owner of the
company. CEOCFOinterviews—Where is the company going from
here? Dr. Brown - My goal is not to build a little company and sell
it but to build a big company and sell it!
We have spent the last ten or so years developing a sophisticated
point of sale system, a nationwide call center and an information
technology department second to none in the field of hearing care.
With minimal investments in people and facilities, this is a
company that could grow to $150 million in annual revenues. CEOCFOinterviews – What is the purpose of your
website; strictly for information? Dr. Brown – That is a very interesting topic.
People keep asking us when are we going to sell hearing aids on the
Internet. Well, once
you understand that 6 percent of our customers are between the ages of 90
and 100, 31 percent are between the ages of 80 and 90 and 37 percent are
between 70 and 80, you realize that they are not going on the Internet to
determine what they are going to do today and what they are going to buy
today…but their children are. So,
the purpose of our website HEARx.com is to have financial information for
potential investors, educational information for the children of our
potential patients. CEOCFOinterviews – What motivates you
personally? |
