This case deals with the dilemma faced by an entrepreneur named John Styles who was faced with the decision of whether or not to enter into a partnership with M.D. Anderson Cancer Center in Houston to build a Proton Cancer Therapy Center. The decision was clouded by the fact that most of the $100 million investment required for the venture would be invested in facilities and technology that could be used for nothing else if the project failed. In addition, the typical venture capitalists who would normally invest in such a venture would not find this deal enticing because of the long time lag to profitability.
Introduction
John Styles parked his car in the parking lot behind the office of his family business on Bellaire Boulevard in Houston and eschewing the elevator, walked slowly up the stairs pondering the unique opportunity afforded his company if he decided to accept it. It had all started with an offhand remark by his Sunday school teacher suggesting that Styles should meet a new member of their church who had also devoted his life to health care. Being one who seldom passed up an opportunity to meet someone else who made their living in health care, Styles agreed and soon was having lunch with Leon Leach, who turned out to be the executive vice president of The University of Texas M.D. Anderson Cancer Center (hereafter called Anderson) in Houston.
Over a long lunch, Leach gave Styles some interesting background on a proposed deal between Anderson and Tenet Healthcare to build a proton therapy cancer center in Houston. Unfortunately, the deal had fallen apart because Tenet had evaluated its corporate strategy and decided to refocus on its core managed health-care operations and sell its proton therapy subsidiary. One thing led to another, and soon, Leach and Styles discussed the possibility of The Styles Company answering a soon-to-be-released request for proposal (RFP). The company chosen in the RFP would be venturing into a partnership with Anderson to build the proton therapy center. Styles was excited and intrigued about the possibilities of such a venture but concerned about putting together a deal that would raise sufficient funds for the project.
It was now October of 2001, and Styles knew he needed to make a decision soon on whether or not he would undertake this project.
The Styles Company
John H. Styles, the senior member of the Styles Company, grew up in Seymour, Texas, and received a scholarship to play football at Baylor University in Waco, Texas. He had grown up under difficult economic circumstances with parents who worked hard to support the family. Styles often suggested to people that he could never have attended college if it had not been for the fact that Baylor offered him a scholarship. After completing a degree in Business Administration at the Hankamer School of Business at Baylor, Styles was offered a teaching/coaching job in his hometown. He took the job but was only able to coach and teach for 2 years on an emergency teaching certificate because he did not have certification in secondary education.
After a short stint in Wichita Falls, Styles went to work as the Controller/Chief Financial Officer for Providence Hospital (owned by the Catholic Church) in Waco, Texas, in 1966. It was during his time at Providence Hospital that he became aware of the payment provisions under the newly implemented Medicare law that would revolutionize the health care industry. It became clear to him that hospitals such as Providence, which had formerly operated at breakeven or a loss in the past, would now find themselves doing much better financially. One of the reasons for this was the guaranteed payments by the government for the elderly who were able to pay very little in the past.
Styles, secure in the knowledge that health care was the industry he was interested in, took a couple of other executive-level health-care jobs in Louisiana and Arkansas. In 1974, he moved to Houston, which, with the Texas Medical Center, was becoming a health-care mecca. Arriving in Houston, he became the Senior Operations Officer for LIFEMARK Corporation (previously Medenco, Inc.). This New York Stock Exchange company had grown from scratch and owned more than 50 hospitals and was sold in 1984 to American Medical International.
After the sale of LIFEMARK, Styles became a founding investor in HealthSouth Corporation and Founder/CEO of Outpatient Healthcare, Inc., and eventually, Mid-America Healthcare Group, which owned and managed numerous hospitals. Both Outpatient Healthcare and Mid-America were sold to Columbia/HCA in 1991 and 1995, respectively.
One of Styles's personal goals was to provide a good living for his family so that they would not have to face the scarcity that he had faced as a child, and if possible, he wanted to involve as many members of his family in the businesses that he started as wanted to be involved.
The success of the many health-care businesses that he founded gave him the capital and the personal motivation to continue to launch new enterprises. He developed a strategy of keeping his eyes open for promising ventures, assessing their potential value, and investing in those that showed the promise of providing the financial rewards that he needed as well as the satisfaction that he had helped others achieve a level of health care that they needed.
At the time of the proposal to work with Anderson, Styles had been actively involved in health-care-related business ventures for 35 years. Two of Styles's sons and one of his grandsons had also been involved all of their working lives with the health-care industry. John H. Styles, Jr. had more than 25 years of operational experience in hospital and health-care-related business. He had been involved in the design, construction, development, ownership, and management of businesses including acute care hospitals, rehabilitation hospitals, ambulatory surgery centers, medical office buildings, cancer treatment facilities, and cancer research facilities.
A younger son, Jason Styles, had been a cofounder and executive vice president of corporate affairs for Triumph Healthcare prior to its sale in 2004. He also had served as a corporate finance executive with Harris Webb & Garrison (precursor of Sanders Morris Harris, Inc.). At Harris Webb, he was involved in numerous transactions including private placements, valuations, equity and debt financings, and mergers and acquisitions. He assisted in the closing of more than $400 million in equity and debt offerings in various industries including health care. He also served in several capacities for Mid-America Healthcare Group prior to the sale of its assets to Columbia/HCA.
The Styles Company was formed as a vehicle to consolidate the management and operations of various investments of its principals--John Styles, Sr. and his sons. The investments were primarily involved in health care and real estate ventures. The Styles Company provided complete project development and management duties including the following:
* Feasibility studies
* Project financing
* Selection and management of architectural, engineering, and interior design
* Real estate acquisition
* Equipment procurement and oversight of installation
* Long-term management services.
Proton Cancer Treatment
The goal of all cancer therapies had been to selectively destroy cancer cells while sparing normal tissue. Some of the medical techniques that had been used for the treatment of cancer were surgery, chemotherapy, and radiation therapy. Proton therapy was just a newer form of radiation treatment.
The Proton Process
As early as 1946, the physicist Robert Wilson believed that protons could play a significant role in cancer treatment because of their advantageous dose distributions (Wilson, 1946). The process was such that when proton beams interacted with matter, they produced energy depositions that were characterized by a relatively low dose in the shallow regions of their path; however, near the end of the proton range, the dose rose sharply to a peak and then fell abruptly to zero. The result was that a high dosage of ionizing radiation could be delivered to a deep-seated tumor while not harming the surrounding normal tissues. Compared with an X-ray beam, a proton beam had a low 'entrance dose' (the dose delivered from the surface designed to cover the entire tumor) and no 'exit dose' beyond the tumor. See Figure 1 entitled 'Diagram of Proton Cancer Therapy' for a description of this process.
The outcome of this type of cancer treatment was so successful that by the year 2000, nearly 40,000 patients at 25 cancer centers around the world had received proton therapy treatment. One of the advantages of proton therapy was that this treatment had fewer side effects as compared with other types of cancer treatment.
Prospective Patients
Proton therapy was recommended for patients whose tumor: (1) was localized; (2) required high doses of radiation for control; and (3) was located near tissues or organs sensitive to radiation therapy. The types of tumors most often selected for proton therapy were cancers of the prostate, eye, lung, brain, head, and neck. Proton treatment had also been found to be useful in treating cancers in children.
[FIGURE 1 OMITTED]
Locations for Proton Therapy
In 2000, there were 19 proton therapy facilities around the world that had treated nearly 29,000 patients. Loma Linda University Medical Center was the first such center in the United States, and it opened in 1990. Other proton facilities were planned at Massachusetts General Hospital in Boston, Indiana University in Bloomington, the University of Florida in Jacksonville, and the University of Pennsylvania in Philadelphia. Table 1 describes the timeline for development of proton cancer therapy.
The M.D. Anderson Cancer Center
The M.D. Anderson Cancer Center was established in Houston in 1941 by a $1 million fund that was financed jointly by the State of Texas and the M.D. Anderson Foundation. The cancer center became a part of the University of Texas medical system. In 2000, Anderson was ranked as the number one cancer hospital in the United States by U.S. News & World Report primarily based on its reputation among board certified physicians and its low mortality rates. Since 1990, M.D. Anderson had been ranked among the nation's top two cancer hospitals. Statistics for the year 2000 indicated that during the past year, M.D. Anderson had treated 52,000 cancer patients and recorded over 448,000 outpatient office visits. Anderson also employed nearly 16,000 employees including 840 faculty members.
Patient Census Trends
From 1996 to 2000, M.D. Anderson's inpatient census increased by 16% while outpatient visits increased by 32%. In addition, over 43% of Anderson's patients were self-referred, which Anderson perceived to be reflective of the center's reputation and its marketing programs.
The Radiation Oncology ('RO') division was a leader within the M.D. Anderson system. The RO division employed over 350 professional faculty and staff in nonresearch positions, and in the year 2000, provided conventional radiation therapy to over 370 patients per day. The division projected net revenues of nearly $50 million and operating margins of 28% for 2001 and had experienced a 17% compounded annual growth rate in net revenues from 1996 to 2001. However, due to capacity constraints, over half of all Anderson patients who required radiation therapy used outside facilities such as community hospitals and freestanding oncology centers to obtain their radiation treatments.
Cancer Trends and Capacity Issues
The second leading cause of death in the United States in 2000 was cancer. Only heart disease claimed more lives than cancer. In fact, one in four deaths in the United States in the beginning of the twenty-first century was caused by cancer.
In the 10 years from 1990 to 2000, nearly 15 million new cancer cases had been diagnosed in the United States. Over half of all new cancer cases were located in the following four sites: lung, prostate, breast, and colorectal. The annual cost for cancer treatment in 2000 was $107 billion--$37 billion of which was devoted to direct medical costs, $11 billion for lost productivity due to the illness, and $59 billion for lost productivity due to premature death (Sanders Morris Harris, 2001).
Although the incidence of cancer in the population was expected to increase in the twenty-first century due to population growth and the aging of the population in general, cancer diagnosis rates were also rising because of better diagnostic tools. The earlier detection of cancer would increase the need for therapies designed to treat the newly diagnosed cases.
Since proton therapy was a type of radiation therapy, the question arose as to the ability of M.D. Anderson Cancer Center to handle the capacity needs of a growing population of cancer patients. Table 2 indicates the radiation oncology capacity surplus or deficit projections through the year 2006.
If a proton cancer therapy center were to be built in Houston, M.D. Anderson and the University of Texas System owned four acres of land near the Texas Medical Center in Houston where the facility could be located. The University of Texas System had suggested that arrangements could be made to offer a 60-year lease to the Center for its operations. The rationale for that was that M.D. Anderson was regularly identified as the top cancer hospital in the nation, and it made sense to locate this cutting-edge cancer technology nearby.
The Styles Company and Anderson had estimated that approximately 92,500 square feet would be needed for the facility, which would include state-of-the-art equipment, four patient treatment rooms, and a particle-accelerator-based proton system. In addition, the space would provide for research and patient support services to be offered. Calculations on the project concluded that the total cost of the facility would be $100 million, and construction would take around 3 years to complete. Anderson agreed to provide all clinical services and nonexecutive staffing for the facility, and the executive management would be directed by the Styles Company and Sanders Morris Harris.
A site drawing for the proposed facility was developed by Tsoi/Kobus & Associates Facility Design and Architecture firm. This firm had received national recognition and several awards. Five of these were AIA/Modern Healthcare design awards.
A proposed deal for funding the center would be put together by Sanders Morris Harris, an equity capital firm in which the Styles Company had an interest. The center would include several treatment rooms with a treatment couch framed by a 35-foot, 196-ton wheel that is known as a 'gantry.' The gantry rotates around the patient to direct the proton beam at the tumor. Dr. James Cox, head of Anderson's Division of Radiation Oncology, suggested, 'With this new technology, we will be able to increase doses of radiation, preserve healthy tissue and treat patients much more successfully.'
Proposed Equipment for the Center
Hitachi had been selected as the manufacturer to provide the proton equipment. The product they had developed for possible use in the facility was called PROBEAT. This medical technology was designed to deliver a proton beam to localized tumors and other conditions susceptible to treatment by radiation. The equipment had two main components. One was a beam delivery system whose primary responsibility was to ensure that the prescription parameters were properly delivered. The other was the equipment necessary to generate the proton beam and direct it to the beam delivery system.
The equipment was under review by the Federal Drug Administration and was expected to be approved by the time the facility opened. Hitachi had agreed to make a $50 million equipment loan for the project.
Reimbursement for Proton Therapy
The Medicare Program, which was the largest payer for health-care services in the United States, was considered at the beginning of the twenty-first century to be the 'gold standard' for payment and coverage issues related to health care. To distinguish between these two issues, 'coverage' referred to the procedure by which Medicare made a determination of whether a service was 'necessary and reasonable.' In addition, coverage did not necessarily guarantee payment, although payment could not be made to a provider unless it was a covered service. Therefore, Medicare had to approve coverage of a service before payment could be made (Particles Newsletter, 2000).
Medicare coverage decisions could be made at both the national and local level. At the national level, decisions such as this were made by advisory panels. At the local level, Medicare coverage decisions were made by a local Medicare contractor who worked with the Medicare Program to administer benefits in a particular geographic region.
In accordance with the Balanced Budget Act of 1997, the Health Care Financing Administration (which administered Medicare) agreed upon the following payment rates and coinsurance amounts on May 4, 2001.
* Proton treatment delivery, simple $414.49
* Proton treatment delivery, intermediate $906.85.
The difference between 'proton treatment delivery, simple' and 'proton treatment delivery, intermediate' was described as follows:
Proton Treatment Delivery, Simple: Proton beam delivery to a single treatment area, single port, custom block, with or without compensation, with treatment set-up and verification images.
Proton Treatment Delivery, Intermediate: Proton beam treatment to one or two treatment areas, two or more ports, two or more custom blocks, and two or more compensators, with treatment set-up and verification images (American Medical Association, 1999).
At the beginning of the twenty-first century, proton beam therapy was covered for most clinical indications by Medicare and was therefore routinely paid by insurance companies. Proton therapy itself had been recognized by the Health Care Financing Administration (the organization charged with the responsibility for setting payment policies for Medicare) as a standard therapy--rather than an investigational therapy--and enjoyed favorable reimbursement rates from Medicare carriers and other sources of reimbursement. By 2000, the reimbursement for this treatment was almost twice as much as the rate for the most advanced conventional radiotherapy such as Intensity-Modulated Radiation Therapy (Sanders Morris Harris, 2001).
Considering the Deal
John Styles had put together many health-care deals in his lifetime, but this deal was unique and required much more thought. In all of the projects he had undertaken before, he had learned that there are a number of risks factors that are inherent in the deal (Monroy & Folger, 1993). He considered the following the most important: market risk, people risk, technology risk, and money risk.
Market Risk
Most investors are concerned about the market opportunity of a new venture. If the idea does not involve a sizeable market, the investors and the equity capital firm will not be able to make the rate of return on the investment that they require.
Regarding proton cancer therapy, the statistics verified the fact that the incidence of cancer was growing as a threat in the United States and was the second leading cause of death in the United States.
People Risk
Andrew Carnegie, the famous American industrialist, once said:
Take away my factories, my plants; take away my railroads, my ships, my transportation; take away my money; strip me of all these, but leave me my people, and in two or three years I will have them all back again (Mason & Harrison, 1996).
In deciding whether to put money into a new venture, an investor will want to be assured that the people who will be running the company know what they are doing. A saying among equity capitalists is, 'A 'B' business plan with an 'A' entrepreneur is preferred to an 'A' business plan with a 'B' entrepreneur.' John Styles had proven his ability to generate the financing, construction, and management of health-care facilities in the past, and Anderson was often ranked as the number one cancer hospital in the United States.
Technology Risk
In today's high-tech world, being on the cutting edge of an industry's technology is extremely important (Roberts, 1991). Especially in the health-care industry, the latest technology, treatments, and medication for treating diseases with the highest mortality rates are a given for a start-up company. This risk was the most prominent one for Styles regarding his decision of whether or not to undertake this project. The equipment to be used in the center had not yet been approved by the Federal Drug Administration. In addition, past history indicated that new medical equipment normally had a limited life span before it was replaced with even more efficient technology.
Styles speculated, 'A question many investors would have would be: 'Is there a silver bullet out there that may be discovered in the future that would make this technology obsolete?' The answer to that is 'no' because this technology has been around since the 1940s, and it has only been at this time that computers were developed that could direct the proton beam during the treatment.' However, he did worry, 'If the equipment didn't work, we would have nothing but a hole in the ground with a building that could only be used for a very specific purpose.'
Money Risk
One of the greatest concerns for a new business venture is that it will run out of cash for operations before it becomes profitable. For the investor, an important consideration is the likelihood that the company will be able to go public in the near term so that the investors can cash out and invest their money in other attractive ventures. For this particular venture, the capital needs were high and the possibility of raising $100 million given the long amount of time to payout was troublesome.
Styles had undertaken projects just as large in the past, but they had involved multiple hospitals. He reflected, 'If one hospital did not do well, you knew you were spreading the risk over several hospitals. Here there is a single hospital and a new technology that would bear all of the risk.' In addition he suggested, 'Not many deals involve an investment of over $60 million in equipment. The MRI equipment was the most expensive I had dealt with, and the cost of that equipment was in millions--not tens of millions.' He also worried that if the investors lost their money, it would make his company and M.D. Anderson look bad. Not only that, but the University of Texas system had to approve this, and the people on the board had to trust that the Styles Company and M.D. Anderson knew what they were doing.
All of these risks rolled around in Styles's head as he considered undertaking the deal. He suggested, 'Another way of reducing the risk is by bringing qualified people onto your team. Our team would be the Styles Company, the investment bankers, the equipment people, and the medical care specialists at M.D. Anderson. When you have a team that is seeking all the answers to the right questions, it greatly reduces the risk of the deal.'
The Crucial Decision
John Styles, reflecting on the proton center deal, pondered what he had learned in his many years in the health-care industry about putting a deal together. He reflected, 'First of all, you have to structure the deal so that all of the parties can buy into it. Then you have to come up with a good story about the project that has sizzle-that catches people's attention. Then you must select the most appropriate target investors for the deal and develop a successful pitch designed especially for them.' Styles speculated that putting a deal together with M.D. Anderson would be a great capstone to his career.
Unfortunately, an early conversation that Styles had with a potential supplier of equity capital caused him to rethink his story and the target investor market. The friend had said, 'John, this sounds like a great deal for someone, but the time horizon is longer than our charter allows. We try to get in and out in five years, and it will take you five years to get this built.' Styles suddenly realized the traditional suppliers of equity capital he had worked with in the past wouldn't be interested in this deal. He knew they would have to find some sources of funds that had a much longer time horizon.
In assessing the risks involved, Styles often used the seasoned gambler as an example. 'A gambler often seems to be throwing his money away; but if he has played the game long enough, he knows the odds. He knows when to play and when to fold. That is similar to an entrepreneur doing a deal. If you've done enough deals in that industry (and for me it is health care), you know when to play and when to sit it out.'
Styles thought about his own characteristics as an entrepreneur, his background in health care, and the environment surrounding the deal and wondered how these factors affected his decision-making process.
As he sat down at his desk and stared out the window at the heavy traffic on Bellaire Boulevard, Styles took out a yellow legal pad from his desk, made two columns on the pad entitled 'Pros' and 'Cons' and began to reflect on whether or not he should undertake this deal. If so, he wondered how he could structure the deal to appeal to the unique set of investors that would be required.
Note to Instructors
John Styles, founder of the Styles Company, was afforded an opportunity by the CFO of M.D. Anderson Cancer Center in Houston, Texas, to partner with Anderson in financing, constructing, and managing a proton cancer therapy center in that city. The primary reasons for considering the construction of the center were that Anderson could not handle the high demand for radiation therapy that they were experiencing in the early years of the twenty-first century, and additionally, proton therapy was a much more refined and effective method of treating some types of cancer than other traditional radiation therapies.
The site plan for the proton cancer therapy center estimated that approximately 92,000 square feet would be needed for the facility to house state-of-the-art equipment that had not yet been approved by the Federal Drug Administration. The cost of the project was estimated to be $100 million, and the primary constraint in raising money was the fact that it would take several years to complete the deal and build the center. Therefore, payback on the investment would not begin until patients were treated in the facility--which would be as long as five or more years.
REFERENCES
American Medical Association. (1999). CPT Manual. Chicago: American Medical Association.
Mason, C.M. & Harrison, R.T. (1996). Informal venture capital: A study of the investment process, the post-investment experience and investment performance. Entrepreneurship and Regional Development, 4, 105-126.
Monroy, T. & Folger, R. (1993). A typology of entrepreneurial styles: Beyond economic rationality. Journal of Private Enterprise, IX(2), 64-79.
Naffziger, D.W., Hornsby, J.S., & Kuratko, D.F. (1994). A proposed research model of entrepreneurial motivation. Entrepreneurship Theory and Practice, 18, 29-42.
Particles Newsletter. (2000, January). The newsletter of Proton Therapy Cooperative Group. Issue Number 25.
Roberts, E.B. (1991). Entrepreneurs in high technology: Lessons from MIT and beyond. New York: Oxford University Press.
Sanders Morris Harris. (2001, October). Information memorandum for the proposed proton therapy center at the University of Texas M.D. Anderson Cancer Center, 4.
Wilson, R.R. (1946). Radiological use of fast photons. Cambridge, MA: Harvard University Research Laboratory of Physics.
Marlene Mints Reed is Visiting Professor of Entrepreneurship at the Department of Management & Entrepreneurship, Hankamer School of Business, Baylor University, Waco, TX, USA.
Rochelle Reed Brunson is Lecturer in Family & Consumer Education at the Department of Family & Consumer Education, Baylor University, Waco, TX, USA.
Please send correspondence to: Marlene Mints Reed, tel.: (254) 710-4868; e-mail: marlene_reed@baylor.edu and to Rochelle Reed Brunson at rochelle_brunson@baylor.edu.
