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In today’s market, you can be disrupted or be the disruptor. Or, if you are UPMC Enterprises, you combine the two.

“We want to disrupt ourselves,” President Tal Heppenstall says. “We don’t want to be subject to the disruptions of Amazon and Apple and the other tech companies that are in the space.”

UPMC Enterprises was officially created five years ago to develop health care innovations that improve the lives of patients in meaningful ways. It encompasses the $130 million a year that UPMC lays out for corporate venture investments and R&D, with a focus on two key areas: translational sciences — using basic scientific research to create new therapies, procedures or diagnostics — and the more familiar technology solutions

“We track Enterprises’ history back to 1996,” Heppenstall says. “Since then, we’ve made about 80 investments for about $750 million. We’ve already returned about $800 million in cash to the balance sheet. We probably have another $500 million in value that we haven’t harvested yet.”

Of the 80 investments, all the money that’s been returned has come from approximately eight deals, he adds.

“Our board understands how venture works, so there have been some big failures in the history of UPMC and the history of UPMC Enterprises, but it’s OK,” Heppenstall says. “At other nonprofit health systems, that wouldn’t be OK.”

Filling the investment pipeline

Formalizing specific entrepreneurial divisions under Enterprises didn’t just give UPMC more focus, Heppenstall says. It also helped attract outside investors, including other health systems like Providence Health & Services, which is one of its leading partners.

Enterprises follows a strict vetting process, through which its 200 employees help get things in and out of the pipeline. But first, UPMC has to be a customer.

“If UPMC does want to deploy the solution, that’s when we begin our due diligence to become an investor and an owner, and whether that solution is one that we bring in or it’s one that we develop here,” he says. “I’d guess we’re 50/50 between those two buckets.”

Companies move through a five-stage pipeline, which goes from zero to four:

0 - A lead comes in the door.

1 - Something UPMC is considering investing in.

2 - UPMC commits resources to the opportunity.

3 - UPMC pilots a product, opportunity or company.

4 - The innovation becomes a commercial entity.

UPMC has about 22 entities in stage four today, Heppenstall says. The most successful of those — 15 — are listed on Enterprises’ website as portfolio projects.

While Enterprises has focused on health care IT, its newest effort is translational sciences — investments around immunotherapy work from the University of Pittsburgh.

“That is primarily about 30 researchers at Pitt who are doing things in the immune space that we believe are better, faster and cheaper than the stuff that you’re seeing on the West Coast,” Heppenstall says. “So, we will have started five companies in that space in the last year.”

An active investor

As Enterprises’ investments mature and grow, they typically become more autonomous. About half of the projects are based in Pittsburgh. Others are like Salt Lake City-based Health Catalyst, which has an office in town because UPMC commercialized a product with them.

Enterprises is the majority investor in many, which it’s comfortable doing.

“Unlike our corporate brethren or our for-profit brethren, we don’t have a stock price to worry about, so the accounting for these things is not as big a concern for us as it is, for example, for pharmaceutical companies,” says Heppenstall, who also oversees UPMC’s day-to-day cash needs, its $7.3 billion of cash and investments, its pension portfolio, and its outstanding municipal bonds.

UPMC uses its own money so it can make long-term investments. Also, some of Enterprises’ $130 million annual budget is R&D — a way to research what’s happening in the market — not venture capital investing, so it doesn’t expect a 20 percent return on the full $130 million, he says.

However, it can be a challenge to run an innovation center within an 85,000-person organization that’s one of the largest employers in the state.

“It’s a daily challenge to make sure that you have the room to innovate,” he says.

Hits and misses

The most successful startup UPMC invested in is its health plan. It had zero revenue in 1996; today, it has $10 billion.

Another big success story is Evolent Health, which UPMC helped start in 2011 with The Advisory Board and several people who were trying to determine how to teach hospitals to deliver value-based care.

“We wound up investing $38 million in the company and when it went public, we probably made $250 million on that investment,” he says. “We owned 30 percent of the company when it went public and that kind of risk is one that our peers would never have taken.”

One big miss was a partnership with GE Healthcare in digital pathology company Omnyx LLC. The eight-year effort didn’t work out because it was a 50/50 joint venture that that didn’t have somebody to take responsibility, while also experiencing leadership turnover and losing its connection to the market.

“We’ve found it very difficult to partner/co-invest with large companies because the incentives really don’t end up meshing,” Heppenstall says.

In addition, health care startups are inherently risky — even though there are plenty of problems in the industry to solve, which creates opportunities.

“Most health care startups that in Silicon Valley think they have the greatest thing since sliced bread, but they don’t understand the convoluted infrastructure that exists in this country around how we’ve set up providing health care and paying for health care,” Heppenstall says. “You can have the greatest solution since sliced bread, but if you don’t understand where in the system to plug it in, it won’t work.”

UPMC’s perspective as payer and provider lets it see innovation opportunities on both sides of the equation, he adds.