About the only thing longer than the collective resumes of Robert Grant, John Clarey and Glenn Stearns is their vision when it comes to defining a new segment of the healthcare industry with Strathspey Crown LLC, a newly founded private equity firm in Newport Beach.
Grant is a former president of the aesthetics division of Irvine-based Allergan Inc., and he more recently was chief executive of the surgical division of Bausch & Lomb Inc. in Aliso Viejo. He currently serves as chairman of Myoscience Inc., a Bay Area startup that is developing a medical device that uses needles and cryogenic material that disrupts nerves to prevent facial wrinkles.
Clarey is the founder of Clarey Capital LLC in Irvine, which acquired Newport Beach-based telecom company Integer Wireless two years ago. Clarey grew TeleCore Inc. into the largest independent integrator of DSL networks in the U.S. before the company was sold for $150 million in 2000. Last week, Clarey was appointed to the Orange County Airport Commission by the county board of supervisors.
Stearns is the founder and chairman of Stearns Lending Inc. in Santa Ana, which has grown steadily since the recession and now is one of the largest mortgage lenders in California and a leading wholesale lender nationally with more than 1,100 employees.
The trio is aiming to build a portfolio of medical device makers and other healthcare technology companies ranging from earlier-stage companies to others with “assets well in excess of $1 billion,” Grant said.
All will specialize in products for cash-pay patients with “lifestyle healthcare,” where procedures and services range from cosmetic dentistry and breast implants to elective hip replacements and corrective eye surgeries.
A common thread can be found in the optional nature of such services, with patients seeking treatment as a matter of personal choice rather than medical necessity.
That leads to another thread that’s crucial to the trio’s bid: a lack of any government reimbursements.
“We’re going to be aggregating cash-pay medical technology companies into the first Medicare-Medicaid opt-out manufacturer,” said Grant, who is chairman of Strathspey Crown, with Clarey and Stearns as managing partners. “They would be under one umbrella.”
$25B Market
The lifestyle segment of healthcare is a ripe-but-fractured marketplace, according to Grant.
“Across all of healthcare today, if you look at the pure cash-pay segment, it’s about a $25 billion market and growing rapidly,” Grant said. “The issue is that it’s broken up into all these different sectors.”
Strathspey Crown aims to gather up the potential under its banner. Its partners have not disclosed how much money they’ve raised so far, but have indicated that they are sorting through more than 40 potential deals. They’re counting on the focus on cash-pay lines of business to spark enthusiasm among doctors and scientists in the lifestyle healthcare sector and also draw additional investors.
A key to the strategy is the chance to eliminate the need to deal with layers of government regulations that often apply to lifestyle healthcare divisions of companies that count on government reimbursements in other areas.
Laws such as the recent expansion of the federal Sunshine Act have crimped companies’ relationships with doctors, requiring paperwork for disclosures of gifts as small as a $10 lunch, according to critics.
Various anti-kickback statutes and others prevent doctors from self-referrals. That’s the practice of doctors ordering procedures on patients and having them performed either by themselves or by a facility from which they receive financial incentives for the referrals.
Broad Brush
Such regulations apply to the cosmetic or aesthetic divisions of device and drug makers, even though they generally operate without reimbursements from the federal government. Indeed, many of the lifestyle lines of business were developed or acquired as a hedge against what are anticipated to be falling reimbursements in the wake of healthcare reform.
“Companies that are receiving funds from the government, either directly or indirectly, are being regulated because the government is their customer,” Grant said. “What that has done is served to create a significant impediment or obstacle to companies being able to work with doctors.”
Strathspey Crown hopes to clear those sorts of obstacles by opting out of government reimbursements. It hopes the move will allow close working relationships with doctors as both medical professionals and potential shareholders—and open the door for innovation.
Grant emphasized that the devices from any companies Strathspey Crown acquires will continue to be regulated by the Food and Drug Administration.
“We will make sure that we have companies in our portfolios that have the highest standards of quality and the highest standards of ethics,” Grant said.
Opting out of government reimbursements will give companies acquired by Strathspey Crown a clear path to the marketplace, Stearns said.
That could mean a leg up for some.
Investors
That, in turn, will give investors reason to take a new look at the lifestyle healthcare segment.
“If we execute what we’re talking about here and it goes the direction we think, this will allow the venture capital community to start to reinvest again in this space,” Clarey said.
Recent years have seen investors shy away from the lifestyle healthcare market, due in large part to what they often see as regulatory standards that create uncertainty and stifle innovation, he said.
Grant’s experience and demographic trends that point to more demand for cash-pay, lifestyle healthcare for an aging population offer good reason to reconsider the segment.
“In private equity, you’re always looking for trends,” Clarey said. “You’re looking for expertise, you’re looking for operators. And in this situation, you’ve got one of the best operators in the country.”
Grant’s plan is “very innovative and is taking advantage of a trend that’s going to run for probably the next 20 or 30 years in this country—the separation of government-reimbursed healthcare and personal-choice healthcare,” Clarey said.
Parallel Experience
Stearns sees a parallel to the rapid growth his mortgage company has seen since the housing meltdown and credit crunch.
Much of that growth came because his company is not a bank, which spared it some of the most onerous regulations put on lending in recent years.
“I see this as pretty similar to what I went through because of overregulation with Dodd-Frank and what happened in my industry—taking and adding so much regulation that it shook the whole industry to the core,” Stearns said.
Participating in Strathspey Crown “just seems like a nice fit,” Stearns said.
The fund’s emergence comes at a period of change in the Orange County healthcare industry. Shifts include the pending $500 million buy of Irvine-based drug maker Ista Pharmaceuticals Inc. by Bausch, Grant’s former employer; the appointment of John Barr to replace Grant as head of Bausch’s eye surgery business; and the pending retirement of James Mazzo as president of Santa Ana-based Abbott Medical Optics Inc. at the end of 2012.
That recent burst of activity helps explain why Grant, Clarey and Stearns decided to set up shop here.
“Orange County is actually the worldwide capital of lifestyle healthcare,” Grant said.
Now it’s up to Strathspey Crown to capitalize on the opportunity that presents.
