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HearUSA, Inc. (EAR) |
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CEOCFO
Interview Index |
This is a printer friendly page! The Medicare Prescription Drug
Improvement and Modernization Act has put HearUSA in position to receive a greater share
of the Hearing Aid market HearUSA, Inc. 1250 North Point Parkway Interview Conducted By: CEOCFOinterviews.com BIO: Dr. Brown: “We are
a healthcare company in the hearing care field with 156 company owned centers in 11 states
and 1 Canadian Province. In addition to that, we have a network of 1400 audiologists in 49
states. In the event we have a contract with a healthcare provider that needs coverage in
an area that we don’t have company-owned centers, we can use our network. The company
had revenue last year of $70 million dollars and trades on the American Stock Exchange
(EAR).” Interview with: Paul A.
Brown, M.D. Dr. Brown: “An
Audiologist is a college graduate with a Master’s Degree in Speech and Hearing.
In the last 2 or 3 years many audiologists have been earning a Doctorate of
Audiology. So, they are clearly scientists. The problem in this field is that you are
dealing with two very difficult populations. You are dealing with pediatrics and
geriatrics. Although, there is a shift away from the geriatric population as the
younger generation becomes hearing impaired. Because of the demography of our patients,
interpersonal skills are critical in order to discuss hearing loss. We have to find a
scientist with interpersonal skills. Since the patient will be asked to take money out of
their pocket, this necessitates marketing skills. We hire maybe 1 out of 5 Audiologists
who come to us and who can work in our type of environment. It is very different from
working in a hospital or doctor’s office where the doctor sends the patient down the
hall to the Audiologist with a prescription to buy a hearing aid. Here we are talking
about patients coming directly to us, from a physician, from a health insurance company or
because of family pressure…but it is a product that they don’t want to wear, so
it is real challenge for our professional staff.” CEOCFOinterviews: A lot
of the elderly are experiencing hearing loss and they really don’t want to address
it. CEOCFOinterviews: How is
the Medicare Prescription Drug Improvement and Modernization Act that was signed last year
going to help Hear USA? Dr. Brown: “This is
very exciting for us because the administration wants to increase Medicare Managed Care
membership by 9 million people bringing the total to 13 million by January 1, 2007. Of the
4.5 million current Medicare Managed Care Members, we have capitation contracts covering
600,000. This represents one third of the members with a hearing aid benefit. Maintaining
our percentage (13%) of the new members will generate significant revenue for the company. CEOCFOinterviews: What
is the current size of the hearing care market both in dollars and the amount of units
sold? Dr. Brown: “About
$2.8 billion a year is spent in the United States. This is about one third of the
worldwide market. Another one third is in Asia. The final third is in Western
Europe. There are about 2 million hearing aids provided in the United States. Of that
number, the government, through the veteran’s administration, provides about 320,000.
Another source that I consider noncommercial is the ear, nose and throat physician who has
an audiologist working for them. About 5% of the hearing aids are dispensed in that
fashion…or another 100,000. That means that the number of hearing aids that are being
provided through the commercial segment of the market is about 1.6 million hearing aids.
Of those hearing aids, 100,000 of them are provided through the Miracle Ear System,
another 100,000 are provided through Beltone and 50,000 are provided by HearUSA. The
remaining units are provided through 9,000 independent practitioners. This is clearly a
classic cottage industry…9,000 people providing 1.3 million hearing aids.” CEOCFOinterviews: What
is going to cause the market to grow and to what size? Dr. Brown: “Well,
the federal government believes that this industry is going to go from $2.8 billion to
over the $10 billion mark over the next ten to fifteen years. This would be from a
combination of factors. People are living longer. It is hard to believe, but we have over
70,000 people in the US that are over 100 years old and 200 people turn 100 every single
week of the year. Part of the reason for hearing loss is aging. The longer the population
lives the more hearing aids will be sold. The second reason is that people tend to buy one
hearing aid the first time when they actually need to buy two. As they progress in age,
they become less concerned about the stigma and more concerned about being able to hear
better. We are selling approximately 60% of the people today two hearing aids, when in
fact, 80-90% of the people should be wearing two hearing aids. So, for several reasons the
growth is going to come from the aging population. The next reason for the market to expand is from the youth of America who are traumatizing their hearing on a regular basis through everything they live with on a day-to-day basis. There was an interesting article in the Wall Street Journal, which indicated that, a study of people 45-65 years old shows that 18% are hearing impaired. Another study showed that 15% of college students today have a hearing loss equivalent to their parents. The people who are younger and hearing impaired are
going to be in the work environment. I think when there is a need for amplification from
the working population there will be a higher level of acceptance. I also believe these
employees are going to demand coverage from the insurance industry for their hearing aids.
Once the insurance industry is paying for hearing aids there will be concern about the
quality of hearing care. The whole industry will change dramatically and become a
regulated segment of healthcare.” CEOCFOinterviews: Now, do you see that happening soon? Dr. Brown: “I think
we are seeing increasing trends in that direction which is one of the reasons why we are
getting more contracts. We are the only company in the United States that is offering
capitated contracts to this segment of the business. The Joint Commission of Healthcare
Organizations has accredited us as a preferred provider organization in hearing care which
enhances our ability to obtain contracts.” CEOCFOinterviews: I know
you came out with your second quarter results, which were a little lower than the norm;
what accounted for this? Dr. Brown: “The new
Medicare legislation which was signed in the fall of last year included an opportunity for
the Medicare-Managed Care organizations to restate their benefits for 2004. Under normal
circumstances the health insurance companies have to file their benefits in the fall, are
approved on December 1st and go into effect by the first of the year. But
because this bill was delayed so long into the fall, the companies had already filed their
benefits for 2004. The government gave them a two to three month extension to go back and
review their benefits for 2004. As a result of that, our normal marketing program, which
consists of mailings to approximately a hundred thousand managed care members per month
was delayed until late spring. CEOCFOinterviews: How
much of the increase that you are talking about is coming from new business and will it
add profits? Dr. Brown: “We are
now talking to a number of organizations about either increasing their hearing aid
benefits or adding a hearing aid benefit for 2005, but not for this fiscal year. We have
told the shareholders that we make $.50 on the dollar for new sales. If we could add a
significant amount of new contracts or benefits for 2005, then obviously we will be adding
a lot of profits.” CEOCFOinterviews: So for
the balance of the year has earning guidance been given? Dr. Brown:
“We’ve given revenue guidance for only Q3. We have also given guidance for a
breakeven point of about $19 million for the third quarter, which means that the company
could have a positive cash flow of $600,000. If we hit the guidance, we will be well on
our way toward profitability.” CEOCFOinterviews: With
other companies entering into the market, what makes Hearing USA unique? Dr. Brown: “First
you have to look back at the structure of the industry; Miracle Ear is primarily a network
of franchises. Of those franchisees no more than 10% are audiologists. The Beltone
chain is a network of authorized distributors and includes only about 50% of audiologists.
If you believe this is going to be a medical business, then a healthcare organization is
not going to be signing a contract with Costco or WAL-MART. We have 500 contracts with
healthcare organizations and we don’t need any additional contracts to make money.
What we need is for our contract providers to get some of those 9 million people that are
going to be changing into managed care. We are unique because of our contracts, because of
our Accreditation from JCAHO. The government regulation for providing service under these
types of contracts is that you must have a facility within 20 minutes or 20 miles from the
patient population…something we do in New York, New Jersey, Florida and Southern
California and something our competitors don’t have. A final factor that makes us a little unique is that
we have an unusual finance arrangement with Siemens, the world’s largest manufacturer
of hearing aids. They have provided us with a $52 million finance package…a portion
of which does not have to be paid back to Siemens as long as we buy 80% of our products
from them. They are the world’s largest manufacturer and deliver a quality product on
a timely basis…it’s a great relationship.” CEOCFOinterviews: You
were operating in many of the markets under multiple names. Your ultimate goal was
to combine all of North America’s entities under the company name of HearUSA; has
this been completed? Dr. Brown: “No,
this hasn’t been done yet. Basically we have the following names: a. In Canada
where we have some 20 centers in Ontario Providence, we operate under their old
name—Helix; b. Our original stores (those that are accredited by the Joint
Commission) operate under the names of HEARx and HEARx West (HEARx in New York, New Jersey
and Florida and HEARx West in Southern California) and c. The remaining 80 stores are
operating under the HearUSA name.” CEOCFOinterviews: Why do
you believe investors should be interested in HearUSA? Dr. Brown: “Well, I
think there are a number of reasons. Number one—this is a real company. It has
$70 million of revenue and is about to turn the corner and become profitable. Number
two—it’s a growing market going from about $28 billion to $10 billion over
the next 10 years. Number three—the management of the company has had
extensive experience with the company. In addition, both the Chairman and the
President/CEO have had experience in running large successful businesses. My first company
is now called Quest Diagnostics and has annual revenue of $4.5 billion a year.
I started that company over 30 years ago with $500 in a two room apartment and when
I sold it for $140 million I had 3600 employees in three countries. Stephen Hansbrough who
is the President/CEO worked for the Haft family in Washington, DC before coming here 10
years ago. He ran 220 retail centers, including Track Auto, Crown Books and the Dart
Pharmacy Chain. He had thousands of employees and some $400 million in annual revenue.
So, we have the management talent to execute the strategy. Number four—We
have a unique financing relationship with Siemens. And Number 5—the value of
the company right now is absurd. The industry is trading at 1 to 3 times revenue and
HearUSA is trading at ½ times revenue. CEOCFOinterviews: In
closing, are future acquisitions a part of your growth strategy? Dr. Brown: “We have
a $25 million line of credit with the Siemens to make acquisitions, but I don’t think
this is going to be a major way the company is going to grow. disclaimers |
“This is very exciting for us because the administration wants to increase Medicare Managed Care membership by 9 million people bringing the total to 13 million by January 1, 2007. Of the 4.5 million current Medicare Managed Care Members, we have capitation contracts covering 600,000. This represents one third of the members with a hearing aid benefit. Maintaining our percentage (13%) of the new members will generate significant revenue for the company." - Paul A. Brown, M.D. |
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