Streamlining Hospitals: Omnicell CEO Randy Lipps (Part 4)

SM: What timeframe was it when you developed your first prototype?

RL: It was 1992–1993. Sequoia Hospital quickly bought a contingent of products afterwards. It was about $300,000. We were able to find great experienced people in Silicon Valley very quickly, which helped us engineer great products.

SM: What was the first major milestone after that?

RL: It was to re-engineering the product. The biggest issue with our business was that we had to raise a lot of money. In healthcare they like to know who your service guy is, who your installation guy is, who your sales guy is, and those all cost a lot of money. We went out and got a guy to build the sales team, someone to do the engineering, and got all the disciplines covered.

Another key for us was finding early technology adopters. We followed Pyxis into hospitals. I was proud to have our system next to theirs. Eventually we did get a competitor into our marketplace, so we had to figure out if we were going to get into the drug side of the business.

SM: How did you handle that?

RL: We bought a division from Baxter that was the number 2 player in the same space as the pharmacy supply chain automation.

SM: Where were you at in terms of revenue by that point?

RL: We were at $50 million. In 1998 we were the fastest growing company in Silicon Valley. That award was based on five-year growth, and we barely made the cut to be evaluated. Your first year in business you had to do $50,000 and we had done $50,500. By 1998 I think we were at $75 million.

SM: What kind of money did you have to raise to get to that ramp?

RL: $80 million. We had one down round when we had 175 employees, and we almost ran out of cash. I was trying to bridge to the next round of $1 million. I was raising money, which is pretty much all I did for 10 years with that company.

We got to round “I” before we went public. In the early days I did not want to take a lot of money. I took as little as I could to get to the next milestone. By the time it got to the second round, it was four times what we got for the first round. At some point, we had almost every venture company in the Valley invested in us.

SM: With $75 million in revenue you were getting ready for an IPO?

RL: We had three prospectuses written for an IPO. We had to persevere through going public. The first time we decided that instead of going public we had to get a drug supply company and take a year to clean things up. The second time we thought about changing the name to Omnicell.com, and we paid $5 million to Commerce One for a site license to the backend for a supplier component which we were going to redesign and sell to hospitals. That would allow us to integrate our equipment into it and make seamless functionality. We had $100 million in sales and our valuation, probably due to the Omnicell.com name, was $1 billion.

We waited another two years, put our name back to Omnicell, and waited until the world thought real businesses were worth something again. There were investment banks that were begging to do our deal on the first round but that would not touch us on the second round because we had brick and mortar associated with us.

I kept telling bankers it was going to take a while to shake out and that the deals going on were not reality. One of them told me they would rather go with those market cap rates than reality. Perception does not last forever; eventually reality hits.

We finally went public in 2002 with $100 million in revenue. I didn’t know much about being public. I didn’t have a CFO or COO who was public-oriented. They did not want to work with the Street, and we did not manage the Street well. Nobody knew who we were. When we missed a quarter stock went down to $1 from $13.

I got a new team, a CFO from the street, and together and we repositioned the company. We re-evaluated our strategy as well. We had only done one acquisition before then, but afterwards we did a few more deals. Eventually the stock got up to $21 or $24. Then the company blew up again. Capital equipment companies in hospitals blow up every two years when Congress changes some things in Medicare. Hospitals stop their spending for six months while they wait for Congress.

When we missed again, I got another CFO who helped me change the business model. That was very important. We moved to a backlog model wherein we recognized revenue as we installed. The backlog can go up and down based on business cycles which allows for better predictions. That worked well and the stock got up to $30.

This segment is part 4 in the series : Streamlining Hospitals: Omnicell CEO Randy Lipps
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