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Qualcomm on Pace to Spend $8M on Lobbying

San Diego Business Journal, Writing

Qualcomm Inc. isn’t in the clear, yet. As it once again faces several key regulatory decisions this year, the fabless semiconductor company spent $4.29 million in lobbying in the first half of 2019, according to the Center for Responsive Politics’ lobbying database. 

That puts Qualcomm on pace with last year, when it spent a total of $8.01 million in lobbying. At the time, Qualcomm faced a hostile takeover from Broadcom Ltd., which President Donald Trump blocked over national security concerns stemming from its purported ties to China. Broadcom has since shifted its headquarters from Singapore to San Jose.

At the beginning of the year, Qualcomm spent more than electronics companies IBM Corp., and Apple Inc., according to OpenSecrets, of the Center for Responsive Politics. It was outspent by Microsoft, which spent $2.79 million in lobbying. Qualcomm spent most of its lobbying dollars between Covington and Burling, a large lobbying firm in Washington, D.C., and its in-house lobbying team.

While it’s difficult to measure lobbying outcomes, Daniel Auble, a senior researcher for the Center for Responsive Politics, said companies clearly see some value in it.

“It’s highly important to have established connections in Washington so that when an issue comes up, they’re able to react quickly and they know the landscape,” he said.

Most public disclosures refer to instances where companies will send lobbyists to meet with government officials, whether in-person or over-the-phone. The entire process is more subtle than one might expect, Auble said. Rather than pushing to introduce or kill a bill, for example, companies might look to insert or remove a sentence during committee hearings.

Generally, companies spend more on lobbying in the year after an election, and less in the year before an election, Auble said. But at the end of the day, it depends on what’s going on with their business.

“It’s typical to see a company or a trade group have a spike (in spending) in a year when something about their business becomes a public issue, or some kind of regulation or new legislation that would affect their bottom line is proposed,” he said.

Qualcomm faces two major regulatory decisions this year: whether it will be able to continue to do business with Huawei, one of its major customers in China, and whether the company will have to redraft its licensing agreements after losing an antitrust case brought by the Federal Trade Commission.

China Relations

In May, President Donald Trump blacklisted Chinese telecommunications company Huawei from doing business with U.S. firms. Chipmakers have been quietly fighting the ban, with lobbying group the Semiconductor Industry Association saying it would erode the competitiveness of the U.S. semiconductor industry.

According to SIA, the U.S. semiconductor industry had a $2.5 billion trade surplus with China last year. Huawei is a significant customer for Qualcomm, Intel and other chipmakers. Both companies reportedly have had conversations with the U.S. Department of Commerce since the ban was instated, according to Reuters, and the White House hosted a meeting on July 22 with seven tech companies to talk about potentially resuming sales to Huawei.

In the meantime, Huawei has hired two public relations firms, Racepoint Global and Burson Cohn and Wolfe, to lobby on its behalf, according to the Center for Responsive Politics. The company also slashed more than 600 jobs at its Silicon Valley research campus, Futurewei Technologies.

Trump has spoken recently about loosening the restrictions to allow companies to begin selling products to Huawei. But so far, there haven’t been any substantive changes. Huawei is still on the Bureau of Industry and Security’s “entity list,” meaning U.S. companies must apply for a license to export approved products to Huawei.

Stacy Rasgon, a managing director and senior analyst for Bernstein, said the ban is “not fun, but manageable,” for Qualcomm. The San Diego-based chipmaker sells 60 million chips per year to Huawei, he said, but they’re lower-end. Other companies may see a larger impact. Qualcomm did not respond to requests for comment on the ban’s effect on its business.

Rasgon said he’s more concerned about the potential escalation of trade conflict than the direct impact.

“My worry is, with Huawei, what’s next?” he added.

In the near-term, the Huawei ban may be a nuisance for Qualcomm, but it has more imminent concerns with appealing an antitrust case that could change its licensing business.

Legal Battles

Qualcomm’s stock soared in April, after it settled two years’ worth of legal battles with Apple Inc., bringing back one of its biggest customers. The companies also signed a six-year licensing and supply agreement. But Qualcomm’s licensing business was thrown back into question a month later, after District Judge Lucy Koh ruled the company stifled competition for baseband processors, the chips that allow phones to connect to a network.

It’s too early to predict how the appeals court will rule on the case. The panel of three judges that will hear the case won’t be selected until toward the end of the year, Rasgon said. Of the 28 active circuit judges that could be picked for the panel, 16 were appointed by Democrats and 12 were appointed by Republicans, including seven under the Trump administration.

“It’s about to be a waiting game for a while,” Rasgon said.

In the meantime, it will be important for Qualcomm to get a stay, delaying the sweeping implications of Koh’s ruling. Without one, the verdict could give its customers ammunition to renegotiate their contracts.

Some have already begun to challenge their licenses, according to statements filed in conjunction with Qualcomm’s motion for a stay. Huawei and one of Apple’s contract manufacturers have challenged their licenses, John Han, the general manager of Qualcomm’s licensing business, wrote in a July 8 court documents supporting the company’s request for a stay.

In addition, four of Qualcomm’s top 10 licensees by revenue will see their contracts expire by the end of the year, meaning Qualcomm will have to renegotiate those agreements anyway. Last year, Qualcomm’s licensing business brought in $5.16 billion, accounting for roughly 23 percent of the company’s total revenue.

Rasgon said he found the disclosures “somewhat disquieting,” adding the extent of the renegotiations would depend on Qualcomm’s customers.

Though the FTC maintains its case against Qualcomm, other regulatory agencies have gone to bat for the chipmaker. On July 17, the U.S. Department of Justice filed an amicus brief advising the appeals court to grant Qualcomm a stay, for national security reasons.

“Immediate implementation of the remedy could put our nation’s security at risk, potentially undermining U.S. leadership in 5G technology and standard-setting, which is vital to military readiness and other critical national interests,” the DOJ wrote in the filing.

Qualcomm also obtained a statement from the Committee on Foreign Investment in the United States (CFIUS), stating that a reduction in Qualcomm’s R&D spending or influence on the standards process could be detrimental to national security.

But at the end of the day, the final decision is up to the appeals court.

“It’ll be up to the judges,” Rasgon said. “They’re independent. They can do whatever they want.

Originally published in the San Diego Business Journal, July 31, 2019

Profiles in cancer research

Kansas City Business Journal, Writing

Originally published in the Kansas City Business Journal, June 23, 2017
Danny Welch | Farzad Alemi | Jaszianne Tolbert | Janakiraman Subramanian

Though this was a relatively simple exercise; writing profiles of local cancer researchers, this was one of my favorite projects for the Kansas City Business Journal.

Each researcher I spoke with had a different perspective on their work. One of them, a pediatric-hematologist with Children’s Mercy, had recently completed her residency and was looking to help find the optimal dose of a cancer-preventing drug for her young patients. Another, a well known researcher, discovered six metastatic cancer suppressors. He embarked on this work after his mother died of metastatic breast cancer.

Not only did this project show me the sheer breadth of work within cancer research, but it also was a chance to learn about the deeply personal motivations each individual brings.

The future of Sprint’s headquarters

Kansas City Business Journal, Writing

Shortly after Sprint announced it would attempt to merge with T-Mobile, the company took on an odd project: redesigning its headquarters. The telecommunications giant brought in WeWork to bring a more modern look to its $920 million campus in Kansas.

Soon after becoming CEO in May, Michel Combes announced that Sprint Corp. would embark on a redesign of its headquarters campus.

Sprint’s renovation project will amount to much more than window dressing. WeWork, the coworking innovator and budding designer of corporate spaces, will take a lead in transforming an imposing brick campus into space that’s attractive to top talent.

Fixing up the campus may seem an odd distraction for a company pursuing a $26.5 billion merger with T-Mobile US Inc. — a transaction that would relegate Overland Park to the new company’s “second headquarters.” But it’s actually an important move that positions the wireless carrier for the future, whether that involves finding its place as part of a larger company or fighting for market share as a standalone carrier, should regulators block the merger.

“The campus is 20 years old now; it needs to be updated,” said Tim Schaffer, president of AREA Real Estate Advisors. “Partnering with (WeWork) is not only going to give the organization a hand up in the way their people want to interact and work, but also make the space they don’t need marketable to a greater number of companies.”

The redesign went beyond pure aesthetics. It also poised Sprint to sell its 200-acre headquarters in Kansas, which it closed nearly a year later in March of 2019. While this article was written before the sale, I was able to foreshadow what such a massive deal would mean for Overland Park’s real estate market — and Sprint’s workforce.

WeWork’s influence

Combes’ charge as CEO is to keep Sprint pushing toward the future — whatever that holds. He broached the topic of a headquarters renovation during an event meant to rally the company’s employees to press on.

“We’ll make it well-suited to keep and attract new talent for the company,” Combes said of the campus. “It’s an absolute priority to invest in you and the campus, and it’s key to change the way we work.”

Although WeWork is known for its trendy shared office spaces, it has begun designing headquarters and satellite offices for larger corporations. The New York-based company struck a deal with Microsoft Corp. to give the tech company’s employees access to WeWork coworking spaces. Facebook Inc. is among another group of companies that have called upon WeWork to create office spaces solely for its employees.

Mass Appeal’s offices in New York were WeWork’s first custom build. The eclectic, colorful space includes nods to the media and entertainment company’s roots in hip hop and as a graffiti magazine. The office combines a mix of desks, tables and plush couches, as well as a recording studio for Mass Appeal’s artists. It also features custom artwork, including a large mural depicting the first year Mass Appeal magazine was published.

WeWork spokeswoman Alyssa Botts said in an email that enterprise members — companies with more than 1,000 employees — now make up a quarter of WeWork’s membership base. Enterprise members also are WeWork’s fastest-growing business segment, up 370 percent last year from 2016. Among its enterprise members are big names in the tech and financial sector, such as IBM, Standard Chartered, GE, Salesforce and Liberty Mutual.

In addition to the campus renovation, WeWork and Sprint have one other common connection: SoftBank Group Corp., which has a nearly 85 percent stake in Sprint, invested $4.4 billion in WeWork last year.

Sprint Executive Chairman Marcelo Claure tweeted that collaborating with WeWork on a headquarters renovation was a “testament of our commitment to the (Kansas City) region and the power of the SoftBank ecosystem.”

Changes on campus

Sprint’s $920 million Overland Park campus was a game-changer in the market when it opened. With 17 brick office buildings linked by sidewalks and green spaces and surrounded by parking garages, it spoke to a company preparing for strong growth.

But times have changed. The campus was built to accommodate 14,000 employees, yet Sprint employs about 6,000 locally today. Of the roughly 4 million square feet of space on the campus, about 1 million square feet are leased to outside companies, according to CBRE, with an additional 332,938 square feet available for rent.

Giving a more modern, open-office design to the campus will give Sprint an opportunity to suit its present needs, as well as provide options for the future.

“Certainly, Sprint will be able to consolidate within their campus because of the type of space they’re going to,” said Greg Swetnam, principal and director of office brokerage at Kessinger/Hunter & Co. LC. “They’re tearing the wall down and pushing it in a little tighter to make it more inviting and more appealing.”

It’s also possible that WeWork could open a dedicated coworking space on the Sprint campus. Although neither company has confirmed plans, Combes’ comments indicated that the idea was at least on the table.

“When you want to own 5G (the next generation of wireless technology), when you want to own digital, when you want to own artificial intelligence, we need to have small startups around us,” Combes said. “I want some of those startups to come to the campus and to help us to develop the company.”

More companies are seeking flexibility in how they use their offices, said Matt Druten, co-founder of Edison Spaces, an Overland Park-based provider of what it calls collaborative office space. In particular, the lack of a long-term lease appeals to small and midsize companies.

“You can increase the size of your team into a larger office or smaller office overnight,” Druten said. “You can go from a three-person office to a 12-person office to an eight-person office, which happens to most small companies.”

Kansas City has shown an appetite for coworking spaces. At WeWork, Plexpod, Edison Spaces and others, they’re being filled almost as quickly as they’re being developed.

“Take the WeWork concept, and plug it into the Sprint campus. You can see the potential success they would have at the Sprint campus if they choose to do that there,” AREA Real Estate Advisors’ Schaffer said.

Ripple effect

Whatever Sprint does with its office space, the broader real estate market will feel it.

“You can’t talk about the South Johnson County office market without talking about Sprint,” Swetnam said. “The Sprint campus is a huge facility. … In a secondary or tertiary market like Kansas City, it just pulls all of the air out of the room.”

Since Sprint began offering swaths of space for lease, speculative office development has slowed to a crawl. Swetnam said the Kansas City office market also hasn’t seen any significant rent growth for the past seven or eight years. 

Sprint’s campus is ideal for large tenants, with ample parking and amenities such as gyms and cafeterias. However, the lack of visibility might not suit some tenants, such as law or accounting firms.

“It’s a wonderful facility. It makes a ton of sense for a corporate headquarters,” Swetnam said. “But like a lot of other corporate headquarters, it gets built a certain way.”

If Sprint puts large chunks of new space on the market, it could continue to mute demand for new single-tenant office buildings in Johnson County. If it offers more smaller spaces, the campus could become a bigger competitor to multitenant spaces in the market, Schaffer said. That market has single-digit vacancy rates.

“It is a game-changer for South Johnson County,” Schaffer said. “What WeWork provides is the opportunity for different-sized tenants. … It could potentially be really disruptive.”

Originally published in the Kansas City Business Journal, July 20, 2018.

Shopping for health care is a real pain

Kansas City Business Journal, Writing

Molly Moffett was shocked when her bill arrived in the mail. After months of screenings and physical therapy required by insurance for a herniated disc, she finally got in to a specialist for a steroid injection.

Moffett’s doctor was in her insurance network. But unknown to her, the facility where the procedure was scheduled wasn’t. That cost her an extra $3,000.

“It took several months of me being in a lot of pain until I could get what I needed,” Moffett said. “I think everyone struggles with these things. I always tell people, just ask as many questions as possible.”

Moffett is no ordinary health care consumer. As a project coordinator at the Community Health Council of Wyandotte County, she spends most of her time helping people get access to insurance and understand how to use it.

“I think the fact that our health care system is so complicated creates unnecessary barriers for a lot of people, whether you’re low income or high income,” Moffett said. “It’s frustrating because it feels like people are giving you different answers and you have to go through all of these different steps.”

With more companies offering consumer-directed health plans and provider networks referring to patients as consumers, the onus increasingly falls on patients to advocate for themselves. But it’s difficult to be a savvy consumer in the face of arcane health care systems and little to no information necessary to compare outcomes and costs.

Dizzying information

Trying to compare costs of procedures at various hospitals demonstrates that even what are billed as transparency efforts fail to present a clear picture.

The Missouri Hospital Association’s Focus on Hospitals database includes 2016-2017 prices for procedures from hospitals’ “chargemaster,” a list of billable services. The database shows that the median charge for heart catheterization for a condition other than a heart attack, without complications, is $25,831 at Mosaic Life Care in St. Joseph and $51,547 at Shawnee Mission Medical Center. But the MHA site notes that “most health care consumers will never pay these rates.”

Now, try to compare that with information from the Centers for Medicare & Medicaid Services. The 2015 list price for a catheter-based coronary bypass ranges from $89,000 at Mosaic to more than $216,000 at Shawnee Mission Medical Center.

The amount Medicare pays for the procedure is more consistent, ranging from $21,000 to $32,000.

A comparison of inpatient hospital costs for pneumonia without complications shows a wide range of listed charges between hospitals in the same metro area. Of course, most insured patients would never pay the listed price.

Some differences result from how hospitals bundle services. Charges for a procedure may roll up the cost of the surgeon, anesthesiologist, lab work and facility fees.

Insurance companies negotiate rates with providers, perhaps to 30 percent or less of list price. But negotiated rates are carefully guarded trade secrets.

Mash it together, and patients are left with price information that “few mortals can decipher,” said John Leifer, a Leawood-based health care consultant.

“We have been talking about price and quality transparency for 25 years, at least,” Leifer said. “The prices that are quoted in health care are so far from reality. There are so many impediments to getting that true pricing. It’s a Herculean task for any company to try and overcome this barrier.”

Even with more information, it would be tough for consumers to make important decisions. For example, Leifer said, if your father is going in for heart surgery and you have a choice between a hospital that charges $75,000 with a 1 percent mortality rate and another that charges $40,000 with a 3 percent mortality rate, what do you do?

“We need really good data, and we probably need to have it interpreted,” he said. “Consumers are neither discerning nor demanding when it comes to making smart health care purchases.”

Attacking the problem

Companies are working to help get more actionable data to companies and consumers.

Matt Condon’s Bardavon Health Innovations is working to gather information for all facets of workers’ compensation care. Spending on musculoskeletal injuries in the U.S. is higher than for cancer, he said, totaling about $35 billion in medical costs and an additional $35 billion in indemnity.

“Employers actually want a better provider who’s getting a better outcome. They’re financially incented to do so,” Condon said. “Knowing which doctors are most likely to heal patients is the holy grail we’re trying to get to.”

Although workers’ compensation care is a unique area, Condon said he hopes the idea of actionable data driving decisions can be expanded to the larger health care space.

Kansas City-based Health Outcomes Sciences Inc. uses predictive analytics to provide risk models for individual patients before certain procedures. This information could allow low-risk heart patients to avoid wasting time and money on unnecessary treatments, while seeing that high-risk patients are treated appropriately.

Kansas City startup iShare Medical LLC helps patients view and share their health records securely.

Condon said startups are best positioned to disrupt the status quo, where doctors and patients alike have spent decades battling the same problems of misaligned incentives, lack of transparency and inadequate information.

“Our system has historically tried to do the same things,” he said. “We’ve got to be irreverent about almost every single aspect of the status quo.”

Learning to navigate

Navigators and advisers can help patients figure out their needs and even do some of the legwork of getting care.

Moffett helps patients navigate insurance plans offered through Affordable Care Act exchanges. That includes helping people — many of whom are getting insurance for the first time — understand jargon, network limitations and deductibles.

“I think insurance companies are trying to do a better job, but it really comes down to whether patients are asking the right questions,” she said. “I have seen people afraid to use their insurance even though they know they need it. The process to get there can be disheartening.”

HCA Midwest, the area’s largest hospital system, began putting nurse navigators in its hospitals three years ago to help cancer patients get information on procedures and schedule doctor appointments. It has expanded the program to cardiovascular, gastrointestinal and perinatal patients.

“It’s taking some of the pressure off the physicians and their office staff,” said Brent Pike, regional access director. “I think that’s helped patients a lot because they know they have someone they can call.”

Dr. Darryl Nelson, HCA Midwest’s chief medical officer, is working with the system’s physicians to focus on patients’ needs instead of what works best for the care provider.

He became attuned to the problem some years ago at his family medicine practice in Lee’s Summit.

“It was prompted by a walk by the front desk, where I saw my poor dear staff person just red in the face and distraught,” Nelson said. “She was trying to explain to a patient it was going to be weeks before they could be seen.”

Originally published in the Kansas City Business Journal, March 9, 2018

An image of a cover story for the San Diego Business Journal titled "Settling for More"

Breaking coverage: Qualcomm and Apple settle

San Diego Business Journal, Writing

The announcement that shook the tech world last week immediately brightened Qualcomm Inc.’s future.

Wounded in a fight with Apple Inc. over patent licensing fees across the globe, unable to complete the deal to acquire NXP Semiconductors N.V. after China shot down its bid last year, and getting nowhere near the promised $100 stock price, the San Diego chipmaker needed the good news.

It was just two days into Apple’s multibillion-dollar antitrust trial against Qualcomm before U.S. District Judge Gonzalo Curiel. The two tech giants had been embroiled in a scorched-earth legal battle spanning more than two years and 80 cases.

The consequences of a loss for Qualcomm in the trial that began in Curiel’s San Diego courtroom April 15 could have been staggering: Apple and its contract manufacturers were expected to seek up to $27 billion in damages based on past royalties they had paid. Qualcomm would have sought at least $7 billion — the rough equivalent of unpaid royalties since Apple stopped paying for licensing in April of 2017.

Attorneys for Qualcomm, Apple, and its contract manufacturers had laid out a litany of points in opening statements before the nine-person jury. They spoke about the damage done to their companies, told sentimental stories about when Apple and Qualcomm were just startups in a garage, and compared patent licensing to Kentucky Fried Chicken.

And then, within minutes, it was all over.

Separately from the unfolding trial, Apple and Qualcomm jointly announced that they would settle all of their cases against each other. Curiel sent the jury home. Though financial details were sparse, Apple would pay Qualcomm an undisclosed amount, and the two companies signed a six-year licensing agreement, with the option for a two-year extension.

Apple will also license Qualcomm’s technology directly, rather than through contract manufacturers Foxconn, Pegatron, Wistron and Compal.

Qualcomm did share one number: It expects to see a $2 boost to its earnings-per-share as it begins ramping up shipments. This appears to indicate Qualcomm will continue charging Apple the same licensing fee as before, estimated around $7.50 per phone, said Kevin Cassidy, a semiconductors equity analyst for Stifel Financial Corp. A separate report by UBS Analyst Timothy Arcuri pegged the royalties at $8 to $9 per iPhone.

“It seems to me, they didn’t give any concessions through a lower licensing fee,” Cassidy said. “I think they held their negotiation.”

As for Apple’s payment to Qualcomm for the lost licensing fees, Cassidy estimates it will be about $5 billion. He upped his target price for Qualcomm’s stock from $57 per share to $100, indicating the company could reach the milestone it pledged shareholders last year.

Spokespeople for Apple and Qualcomm declined to comment on the settlement terms.

Why Now?

Up until the trial, a deal seemed like a distant possibility for Apple and Qualcomm. In January, Apple CEO Tim Cook said the company had not been in any settlement talks, while two months before, Qualcomm CEO Steve Mollenkopf had said the two companies were “on the doorstep” of a resolution.

Mollenkopf offered few details when he talked about the deal with CNBC’s Jim Cramer April 17.

“We talk all of the time,” he said, cracking a smile. “The companies, to get to an agreement as complex as this, you’ve got to talk.”

According to anonymous sources cited in the Wall Street Journal, serious talks began on April 15, with the final details begin hammered out the next morning.

“It seemed like the right thing to do, when you look at it from a purely business perspective,” said Robert Stoll, a partner with Drinker Biddle & Reath LLP. “Usually, when you get to that stage (a trial), there are other reasons, or personalities involved. if you take a cold, hard business look at things, you should be able to find a way out.”

Another important piece of news that surfaced hours later that might have explained the deal. Intel Corp., which was expected to supply 5G smartphone modems for Apple by 2020, announced it would no longer be making them. In fact, Intel would cut its entire 5G smartphone modem business.

It’s hard to say which came first — the settlement, or Intel’s decision.

“If Apple sensed there was little risk that they could get to 5G in the back half of 2020, I think Apple would have stayed the course,” said Patrick Moorhead, founder of Moor Insights and Strategy.

At the same time, Intel may have determined making smartphone modems was no longer the best strategy for the company, which has more leadership in PCs and IoT devices. Apple was Intel’s only customer for 5G smartphone modems.

“I think we all knew Qualcomm had the lead in 5G smartphone tech,” he said. “The question became … how much time did they have before it started to cause an issue for Apple?”

Another, less discussed possibility: Outside competitors may have played a role in bringing the quarrelling partners back together. Chinese phone-maker Huawei has its own silicon division, HiSilicon. It’s growing—even as the broader demand for new smartphones is slowing.

“The forecast is for Huawei to grow 35 percent this year in a market that will be down 5 percent,” said Cassidy of Stifel Financial Corp. “Both Qualcomm and Apple are losing market share. They’re teaming up to say, we’ve got a serious competitor here, and it’s not just Samsung.”

Qualcomm still faces one outstanding challenge to its licensing practices. U.S. District Judge Lucy Koh had yet to rule as of April 17 in the U.S. Federal Trade Commission’s antitrust lawsuit against Qualcomm, which concluded on Jan. 29.

It’s possible that the FTC and Qualcomm may settle before Koh’s ruling. The two had pursued a settlement before the trial began in January, and the FTC has faced pressure to settle based on “national security concerns.”

Koh hasn’t given an indication of when she will rule, other than to note that her decision would take longer than usual.

“It just seemed like she was highly suggesting that the two settle out of court,” Cassidy said.

Though Apple had an information sharing agreement with the FTC, with the settlement, Apple will likely not look to spend any more time on that case. The leadership at the Department of Justice has also pushed back on the FTC’s case.

“The current administration probably doesn’t want to go forward with this,” Drinker Biddle’s Stoll said. Makan Delrahim, the head antitrust official with the Department of Justice, has pulled out of agreements with the (Patent and Trademark Office) and gone more in the direction of pro-patent owner.”

The FTC declined to comment on settlement talks with Qualcomm.

Future Plans

With the extra cash in hand from the settlement, Qualcomm will be able to make some interesting moves. The company may once again be able to shift to hiring mode, and it might also become more acquisitive.

Qualcomm has said it is not interested in revisiting a deal with NXP after its failed bid to acquire the Dutch semiconductor manufacturer last year. NXP would have been an important acquisition for Qualcomm’s automotive business, but the San Diego chipmaker might be on the hunt for other options, Cassidy said.

“The goal is for Qualcomm to start selling 5G outside of just smartphones,” Cassidy said. “That’s the opportunity to acquire another company that may be selling in the automotive market.”

For Apple, it’s difficult to say if the settlement will affect plans for its new San Diego office. The Cupertino-based company announced it would hire 1,200 people for its planned tech campus, and some job postings have pointed very clearly to modem engineers.

“When they’re hiring for design engineers for a digital modem, you have to take them for their word,” said Moorhead of Moor Insights and Strategy. “At the beginning, I pretty much thought Apple was trying to poach Qualcomm engineers. … Now that there’s an armistice here, are they going to aggressively go after Qualcomm employees like they were before? I just don’t know.”

If Apple is interested in making its own modems, it also could pull talent from Intel’s and MediaTek’s offices in San Diego. And with Intel looking to offload its 5G modem business, Apple could be first in line to buy it.

In the long term, Cassidy said, Apple likely wants to build its own chips. That takes time, money and technology assets. With their six-year agreement with Qualcomm, Cassidy said, “They’ve bought themselves some time.”

Originally published in the San Diego Business Journal, April 21, 2019

Hospitals think small

Kansas City Business Journal, Writing

Originally published in the Kansas City Business Journal, March 9, 2017

A rash of proposals for scaled-down emergency rooms went before cities for approval in the suburbs of Kansas City. At first, the operator remained a mystery, but I later confirmed that it was Saint Luke’s Health System, one of the main hospital systems in town.

Though the hospitals provided more extensive services than a freestanding emergency room, they were still limited in the types of cases they could handle. They were announced as a quick, convenient way for people in the community to receive emergency services. But despite their small size, they’re still billed the same as any emergency room.

Why were so many hospital systems turning to this method? For one, microhospitals are cheaper to build, at around $7 million to $30 million each. They also serve as a quick way for health systems to build a presence in growing neighborhoods, giving them a strategic advantage over their competitors.

Venture Capital in San Diego

San Diego Business Journal, Writing

After several back-and-forth flights to San Francisco, Seismic CEO Doug Winter finally landed his company’s first investment. The San Diego software startup raised $4.5 million from early-stage venture capital firm Jackson Square Ventures.

Since then, things have changed. Seismic’s valuation has ballooned past $1 billion, and the company has raised more than $160 million in funding to date. If Seismic’s future looks bright, expect an even sunnier outlook for San Diego, as more investors turn their eyes — and dollars — down the coast.

Peter Arrowsmith, a general partner with JMI Equity and a board member of Seismic, said he was bullish on San Diego. Though his firm primarily makes growth-stage investments in business-focused software companies, it has also made 10 investments in its backyard, including Classy and Seismic.

“In the 20 years that I’ve been here doing this, the number of good ideas and fundable companies continues to increase in the (San Diego) software market,” Arrowsmith said. “Early-stage investors outside of San Diego are active here, looking. They view San Diego as a fertile ground to make investments.”

Last year, Seismic raised its largest-ever round, $100 million from Lightspeed Venture Partners. And that wasn’t even San Diego’s largest investment of 2018. That title went to Samumed, which raised $438 million from Singapore-based Vickers Venture Partners and private investors, followed by Gossamer Bio, which raised $230 million from Beijing-based Hillhouse Capital Group, Chicago-based Arch Venture Partners, and several other life sciences firms.

A snippet of the data we compiled for the article. Notable is ARCH Venture Partners’ continued investment in San Diego startups, after serving as a founding investor for gene sequencing giant Illumina.

Outside Investors

While local VCs still play an important role in growing and nurturing San Diego startups, growing interest from outside investors has led to more eye-popping numbers.

In 2018, the total amount of venture capital investment increased to $2.51 billion — nearly double the previous year’s investment, and the highest it had been since the dot-com bubble in 2000. Favorable investing conditions coupled with a bumper crop of maturing startups are bringing money to San Diego.

Mike Krenn, president of the San Diego Venture Group, said companies here are attracting suitors of all sizes. Early-stage funds in Los Angeles have taken to looking in the San Diego area, such as Crosscut Ventures and Rincon Venture Partners, which invested $3 million in enterprise messaging company Zingle before it raised, $11 million round in January.

Larger firms, that won’t invest less than $50 million, have been snooping around, too.  

“There’s been so much interest in San Diego that I think funds that don’t have an investment here are looking aggressively,” Krenn said.

San Diego has fewer VC firms than its other California counterparts, and that isn’t likely to change soon. Former startup CEOs and finance executives have created their own funds to help fill in the early-stage gaps, but the fact remains that Silicon Valley simply has a massive concentration of venture capital.

According to PricewaterhouseCoopers, San Diego has just 46 venture capital firms, compared with 182 in the Los Angeles metro and 812 in the San Francisco Bay Area.

Those numbers might sound discouraging, but for investors who are willing to travel, it can make San Diego companies an attractive prospect.

Why? It comes down to two things: money and persistence.

Capital Efficient

Allison Long Pettine, founder of seed capital venture fund Crescent Ridge Partners, said companies that don’t have access to large amounts of cash early on tend to be more capital efficient, which is attractive to investors. And with less investment, those companies also tend to have a lower valuation, so they’re perceived as a better deal.

“The entrepreneurs also have a lot of grit and don’t give up easily. We’re seeing some wins as well; all of that combined is making people interested in what we’re doing,” she said. “You’re seeing a lot more Silicon Valley VCs, VCs from Salt Lake City, Arizona, Seattle… there is money coming in from all different places.”

One firm that appears to have taken a liking to San Diego companies is PeakSpan Capital. The software-focused firm, co-founded by Phil Dur, Brian Mulvey and Matt Melymuka, has invested in six San Diego startups to date — and it’s only started to invest out of its second fund.

“When I think back in my career 10 years ago, not very often did we think about San Diego,” said Mulvey, who is based in New York. “It’s definitely been a big increase in the volume of exciting companies that are getting to scale.”

Interestingly, few of Mulvey’s investments were made through past introductions. Rather, the company uses a software system it developed to vet thousands of companies, before reaching out to about 50 for due diligence. PeakSpan identified some of its most recent investments, including Cloudbeds, PetDesk and Zingle, in this manner.

Mulvey didn’t know of any quirk in PeakSpan’s algorithms that kept pointing the firm to San Diego companies, but noticed one commonality among startups here. Management scored big points for being transparent, collaborative and constructive, which PeakSpan considers important in its investments.

“I don’t know if it’s because of the sunshine down there or what, but almost every entrepreneur we meet is amazing in this respect — and that is a rare attribute,” Mulvey said.

Executive Talent

JMI Equity’s Arrowsmith also pointed to San Diego’s growing pool of executive talent as one of its keys for success. In addition to pitch contests and VC dinners, local groups also host events to bring startup CEOs together, to swap tips, strategies and investor contacts.

For Dawn Barry, CEO of health data startup LunaDNA, it was the company’s connections to Illumina that helped it bring in its first backers. The two-year-old company had garnered $4 million in funding, including support from Illumina’s corporate venture capital arm, Illumina Ventures; Arch Venture Partners, one of Illumina’s early investors; Illumina co-founder David Walt; and Dr. Aristides Patrinos, the scientist who helped lead the Human Genome Project.

Connections to Illumina aside, Barry said her company also caught the interest of these groups by taking their work to the next level in helping put DNA data to use.

“Now there’s so much emphasis on making an impact through the data,” Barry said. “In San Diego, we see interesting innovations at the intersections. We see collaboration between industry and academic institutions. Operating a business like this in San Diego, I think, is the perfect fit.”

Seeding an Ecosystem

When Crescent Ridge Partners’ Pettine moved back to San Diego in 2012, she said the startup community was “pretty fragmented,” and most of the companies were still in the earlier stages. Since then, startup investors and advisors have been working in tandem to push for a higher profile for San Diego companies — and the effects are beginning to show.

“If you’re going to look for a life sciences deal, you’re going to basically look in San Diego, San Francisco or Boston,” added Krenn of the San Diego Venture Group. “If you’re a tech (investment) firm, you can basically look anywhere. We help by being feet on the ground.”

For the past five years, Krenn has done just that by bringing startups to the Bay Area to introduce them to investors, and by helping outside investors navigate the network of San Diego startups.

Terry Moore, managing partner of boutique investment firm Moore Venture Partners, has also taken a similar tack with his investing strategy. He founded his firm a decade ago with hopes of rebuilding venture capital in San Diego. At the time, VC investments had slowed to a trickle, dipping below $1 billion.

Moore struck gold early with one of his firm’s first investments in EcoATM, which was acquired less than two months later by Coinstar. One of Moore’s more recent investments, Edico Genome, sold to Illumina for $100 million last year. Now, the firm is working on raising its fourth fund.

Though Moore Venture Partners isn’t a lead investor in any of its deals, the company partners with outside firms to help raise Series A, B and C rounds.

“I feel like Johnny Appleseed in a way,” Moore said. “I’ll take our top companies to Silicon Valley… sprinkle the seeds of these great opportunities and gauge the interest of a top-tier fund.”

A Lot of Momentum

In general, VC investments have been up across the U.S. for the past few years, as firms that have built up large cash reserves benefit from low interest rates.

Trevor Callan, managing partner of Callan Capital, described it as the “perfect confluence of events.”

“The financial markets in general have been recovering for 10 years,” he said. “You’ve got a lot of momentum across a lot of classes.”

San Diego is also subject to two other major national trends: fewer companies are receiving funding, but those that do are seeing much larger amounts. Those trends are expected to continue through 2019, with big rounds already raised by autonomous truck startup TuSimple, oncology biotech Erasca and DNA sequencing company Omniome.

In the long-run, Moore said he hopes to see the amount of local venture capital increase so companies can stay in America’s Finest City.

“That’s the challenge — how do we continue to grow?” Moore said. “That’s been my life’s pursuit, to increase the amount of local capital so we don’t lose our companies to Silicon Valley or San Francisco. To turn down a top VC term sheet, it’s hard to do.”

Originally published in the San Diego Business Journal, March 24, 2019

Manifest Destiny

Kansas City Business Journal, Writing

The University of Kansas Health System purchased several health systems in a two-year period. It started with Hays Med, a 207-bed hospital that serves as an important hub for the surrounding communities in Western Kansas.

Later in 2017, KU Health System purchased St. Francis Health, a 378-bed hospital in Topeka. Unlike Hays Med, St. Francis Health had been struggling financially, and faced closure. KU Health System acquired the hospital jointly with for-profit operator Ardent Health Services.

While it was undergoing this westward expansion, KU Health System was still fighting for market share in Kansas City. In addition to breaking down this strategy, I also scooped the competition on news of an internal reorganization of its top leadership.

For CEO Bob Page, proof of The University of Kansas Health System’s growth is as close as his office window. Outside, its new 124-bed inpatient tower, emblazoned with the system’s logo, rises above the surrounding neighborhood.

Of course, there’s further proof throughout the metro area: the Indian Creek Campus that expanded this summer in Overland Park, a mental health inpatient facility in Wyandotte County and billboards promoting it as the official health care provider for the Kansas City Chiefs and Kansas City Royals.

But KU Health System has been reseeding its approach to growth. As it battles other large health systems for market share in the metro area, it also is plowing new ground across Central and Western Kansas. It’s in the rural parts of the state that cash-strapped community hospitals struggle and some patients drive long distances for care.

In the past two years, KU Health System has snapped up hospitals in Hays, Great Bend, Topeka and Larned. The strategy has its risks, but Page expects it will let the system bring academic medicine to other communities in Kansas, plus attract patients from those areas when they need more complex care.

This westward expansion has caught the eye of many, from inquisitive physicians to hospitals seeking help.

“People are really curious about what we’re doing,” Page said. “We’re not trying to take over the entire state of Kansas.”

Strategy or philanthropy?

Health care is a growing industry nationally, but the picture is very different in rural areas. Rural hospitals face aging and shrinking populations, declining reimbursement rates and patients leaving their home areas for care.

In Kansas, 69 percent of rural hospitals had negative margins, said Cindy Samuelson, vice president of public relations for the Kansas Hospital Association. Statewide, 76 counties lost population last year. In some of those communities, nearly a third of patients are older than 65. And in 64 counties, at least half of patients travel to another location for care.

“Many times, they’re going to another, bigger facility for a procedure,” Samuelson said. “Follow-up care can be done in the community, but oftentimes they’ll come back. They end up getting that care in the urban area or another area.”

In its 2018 outlook, Moody’s Investors Service predicted that “mergers, acquisitions and strategic alliances will continue at a rapid pace,” especially for rural or community hospitals.

Large hospital systems and high-acuity academic medical centers continue to perform well, in part due to their scale and brand recognition, Moody’s wrote. But small hospitals still face a number of difficulties, including lower reimbursement rates and a shift to outpatient care.

“Rural hospitals are struggling and are likely to be increasingly acquired by major systems in nearby urban hubs,” the note concluded.

That’s where KU Health System comes in. It can benefit by opening a pipeline to attract the sickest patients, instead of them traveling to other counties, or states, for care. It also can offer resources and leverage for reimbursement to rural hospitals, while allowing more patients to get follow-up care in their hometowns.

“It’s a way of planting a flag in those rural communities with the idea that you will ultimately pull a lot of the larger or more complex procedures back to the main campus,” said Blane Markley, a health care attorney at Spencer Fane LLP. “Transplants, complex surgeries and strokes, those types of procedures come back to Rainbow Boulevard.”

He noted that not every hospital KU Health System has acquired has been in financial distress. So operating those hospitals doesn’t necessarily come with a hit to the system’s income statement.

There’s another potential benefit for hospitals to align with KU Health System. Tammy Peterman, COO and chief nursing officer for KU Health System, said ties to their alma mater can be a useful recruiting tool for rural partners. Her father, a physician in Western Kansas and a graduate of the University of Kansas Medical Center, kept the phone number for the hospital in Kansas City, Kan., taped to his desk.

“That was who he called,” she said. “Physicians and providers are loyal to this organization.” 

A new structure

The University of Kansas Hospital rebranded to KU Health System in 2017, soon after it closed on the acquisition of Hays Medical Center. The name change hinted at a broader shift to come; since then, Page’s role has pivoted to overseeing the broader health system, with Peterman leading local operations as president of its Kansas City division.

As the system continues to expand across the state, Page said it can’t lose sight of its operations in Kansas City.

“At the end of the day, all of the work we do across the state of Kansas is absolutely dependent on the success of this enterprise right here. This allows us to make these moves across the state,” Page said.

The plan to look statewide dates to 1998, when KU Hospital won approval from the Legislature to be placed under an independent hospital authority. The move allowed the hospital to shed state personnel and purchasing policies that kept it from competing with other health systems. But embedded in the law that gave it this freedom was a mandate to improve the health of Kansans.

“While there is a strategy to this, the reality is we have a mandate that we’re now positioned finally to achieve,” Page said. “It took us five to 10 years to get our own ship fixed. We were in no shape to go try to improve the health of Kansans because we were trying to improve our own health.”

Now, with KU Health System financially stable, Page said hospital leaders saw an opportunity to look more broadly across the state. In 2016, the health system brought in $1.73 billion in revenue and had operating income of $135.8 million.

“At the center of that is not this hubris about ‘We need to be this big, and we’re not going to rest until we get this big,’” he said. “If you put the patient in the center of the decisions you make, those decisions are easier to make.”

That effort began about five years ago, with a $12.5 million grant from the Centers for Medicare and Medicaid Services to improve heart attack and stroke outcomes at 10 community hospitals.

Bob Moser, who practiced family medicine for 22 years near the Kansas-Colorado border, led that effort with Jodi Schmidt, executive director of regional outreach for KU Health. They worked with rural hospitals to develop protocols for identifying heart attacks and strokes early and administering treatment.

Often, they would work with primary care providers at smaller facilities that might see only three to five stroke cases a year.

“The more you do, the more efficient you can become,” said Moser, now executive director of the Kansas Heart and Stroke Collaborative. “Where it’s rare, you have to have a protocol you can pull out that walks you through it so you can do that intervention in a timely matter.”

When Moser initially went out to communities to explain the program, they’d ask: “What in the world does The University of Kansas Hospital need out here? Don’t you have enough patients?”

Once they were able to convince doctors that KU Hospital wasn’t there to poach patients, Moser said that made it possible to strike a partnership that resulted in Kansas City doctors helping rural providers, and those providers, in turn, teaching specialists what challenges they face in rural communities.

“Those relationships are what have led to partnership of University of Kansas Hospital and HaysMed, Great Bend and Larned,” he said. “I don’t think those alliances would have likely occurred, not at this pace, without having done a lot of this work.”

Health care highway

KU Health System’s deal for HaysMed was rooted in discussions among a group of hospital leaders, including Page and former HaysMed CEO John Jeter. They hoped to form a system connecting hospitals along Interstate 70.

Initial conversations didn’t go anywhere. But Jeter approached KU Health System again, and the two struck a deal.

“John, in his final year as CEO out there, had the vision and the courage to make that happen,” Page said. “I will forever respect John for doing that at that stage of his career because many CEOs want to walk out with their name on the building, with the pride they had in building something without joining another organization.”

The deal called for KU Health System to issue $40.2 million in bonds to pay off HaysMed’s debt. Fitch Ratings gave the bonds an AA- rating, stating that it viewed the acquisition favorably for the hospitals’ distinct service areas, HaysMed’s historic profitability and its dominance in the local market.

HaysMed plays a pivotal role in the health of Ellis County and the surrounding communities. The 207-bed hospital is one of the largest in Western Kansas and the only provider of heart surgery, cancer care, orthopedics and neonatal intensive care services in its five-county service area. In all, HaysMed sees referrals from 24 critical-access hospitals — facilities with 25 beds or fewer.

“We want (critical-access hospitals) to maintain their healthiness and take care of their patients at their level of competency,” HaysMed Chairman Alan Moore said.

For example, a patient with pneumonia might receive treatment at the nearest hospital in Quinter, Kan. If the patient’s condition becomes more serious, she would be transferred to HaysMed. And in the most severe of conditions, that patient would be transferred to a larger hospital.

Before, that referral depended on the physician’s preference. HaysMed would send patients to Wichita, Denver or Kansas City.

“Now, there’s a collaborative effort to make sure we know where we’re sending our patients,” Moore said. “We know they’re going to get the best care possible, keeping them within the system.”

With the purchase of HaysMed, KU Health System also acquired 25-bed Pawnee Valley Community Hospital in Larned. A year later, it acquired another hospital that had been in conversations with HaysMed — 33-bed Great Bend Regional Hospital.

KU Health System’s biggest purchase did not involve a small, rural hospital. Buying 378-bed St. Francis Medical Center in Topeka wasn’t part of the health system’s original plan. In fact, Page said KU Health had been cultivating a relationship with its competitor, Stormont Vail Health, before the deal.

“When the Sisters of Charity (of Leavenworth) decided they were going to close St. Francis, and the governor’s office called us and said we’d like to have a conversation, you answer that call, attend those meetings and figure out what’s the right thing to do for Kansans,” Page said.

KU Health System formed a joint venture with Nashville-based Ardent Health Services, collectively issuing $90 million in bonds for the Topeka hospital, which was nearing bankruptcy. The arrangement resulted in St. Francis becoming a for-profit hospital.

Peterman compared the installation of the KU Health System logo at St. Francis to a pep rally, with cheering and music.

“That’s different than it was in Great Bend, and it’s different than it was in Hays,” she said. “That one (St. Francis), they were just happy that their organization was going to remain open.”

Page said KU Health System will plan more deals, but he couldn’t identify future targets.

“We don’t know the next five. And we’re not here to take every phone call and say yes,” he said. “The big message is we’re not done. This is not going to be the end of the development of The University of Kansas Health System.”

Originally published in the Kansas City Business Journal, Sept. 21, 2018

Pictured above: The University of Kansas Health System’s main hospital campus in Kansas City. Photo by Adam Vogler.

A woman crosses the border from San Diego to Tijuana.

Tech in Tijuana

San Diego Business Journal, Writing

After living in San Diego for six months, I crossed the border for the first time to attend a startup meeting in Tijuana. The process was surprisingly simple; I parked my car on one side, grabbed my papers and passport, and walked across the pedestrian bridge for the San Ysidro Port of Entry– which I later learned is one of the busiest land crossings in the world. The experience also made it easier to visualize just how many people cross the border daily for work, school, or commerce.

The focus of this article was to more closely examine some of the software firms in Tijuana, and their relationships with companies located in San Diego. Several nearshore developers are located in Tijuana, with the ability to easily cross the border and meet with clients in San Diego. But another group of startups is also working to offer developers more interesting work, and better pay, than most outsourcing firms.

Read the full story here.

Founders and tech employees meet over drinks at Republica Malta, in Tijuana’s Zona Rio district.

Sensors and Silos

San Diego Business Journal, Writing

“They were amused with the concept of a hobby drone flying around the fields. But when we showed them the data, they got interested quickly.”

When most people think about sensors, they think about self-driving cars or smart homes. But some of the most interesting use cases that I’ve encountered involve putting technology to use underground, in measuring crop yields and monitoring the health of plants.

For the San Diego Business Journal, I featured three startups putting sensor technology to use in the agricultural sector: GroGuru, a company that builds underground sensors to measure soil moisture and salinity, Slantrange, a company making drones that track chlorophyll concentration in plants from above, and Go Green Agriculture, a company building automated greenhouses for romaine lettuce.

Read the full story here.

Pictured above: A drone equipped with sensors flies over a strawberry field in California. Slantrange, a startup based in San Diego, builds drones that measure the chlorophyll concentration in plants.