Why sponsors may be gearing up to invest in radiology

  • Activist-pressured strategic buyers Mednax, Envision explore sales
  • NEA, Great Point, Excellere among few investors in the sector today
  • Risks: challenging reimbursement environment and physician comp structure

It may be the perfect window of opportunity for private equity to make a run at radiology groups.

To date, radiology has remained a vertical that PE — with a few exceptions — has stayed away from. But sources say that may be about to change as the sector’s strategic buyers face greater uncertainty and as physicians prep for potential risks as the reimbursement environment evolves.

At least a dozen or so PE groups are looking intently at potential opportunities in the space, one source said. Another hinted that some large funds are poised to unveil radiology deals in coming months.

Investors that have already taken part in consolidation include venture-capital firm NEA, which backs Radiology Partners, a 525-plus-radiologist network that has already been active on the buy side.

There’s also Excellere PartnersRiverside Radiology, and there’s speculation that Aris Radiology, a more than six-year portfolio company of Great Point Partners, could be poised to trade hands again in the not-too-distant future.

Besides these, sponsors have by and large chosen to do deals in other niche physician segments, for a few reasons. One is that it hasn’t always been easy to compete with the large public companies — primarily Mednax and Envision — that can typically win on price.

While Mednax and Envision are still “open for business,” as one source put it, the companies are not moving as quickly as they were 12 months ago in light of recent distractions.

Mednax, considered the vertical’s most predominant buyer, hired B of A after receiving inbound private equity interest, Reuters reported in November. An anticipated sales process, which a third source said is expected to launch in January, comes after Paul Singer’s activist hedge fund Elliott Management disclosed a stake in the company and agitated for change.

Envision also said in November said it would weigh strategic alternatives with “all options on the table.” The company effectively put itself up for sale following the recommendation of activist shareholder Starboard Management.

As the pair of physician-services supergroups consider potential transactions, it’s also a good time for outsiders to come in as radiology groups consider how shifts in the market may add to reimbursement pressures.

Changing model

Healthcare spend is moving toward a model increasingly controlled by patients, so some groups could see their volume sharply hurt as patients choose cheaper options, the source noted. That’s largely because radiology volume relies less on productivity or patient-doctor relationships and more on who is sent more cases based on his or her specialty.

Radiologists, unlike verticals such as dermatology, also aren’t paid based on the percentage of what they collect, the source said. Instead, radiologist groups typically operate under a model where partners in a group are paid the same regardless of productivity. That has proven challenging, as PE can’t compete on salary with the private practices.

But if PE can find ways to navigate through these challenges – restructuring compensation through growth or shifting to a productivity-based model, for instance – the target market is huge, sources said.

At least 40 to 50 independent groups have 50 or more radiologists, one source estimated. Mednax, for example, brought together north of 200 or 250 radiologists through four transactions, which simply wouldn’t be possible in many other specialties, the source noted.

Trade publication Radiology Business in October reported a list of the largest independent groups, led by Radiology Associates of North Texas out of Fort Worth, with 180 doctors, followed by Radia of Lynwood, Washington, with 157 radiologists.

While the public companies have struggled as of late — shares of Envision and Mednax respectively have lost more than 47 percent and 21 percent of their value year-to-date as of Thursday — the companies are still trading at reasonable EV-to-Ebitda multiples.

Envision is trading at about 9.7x and Mednax is trading just south of 11x, according to CapitalIQ. At those levels, and given the possibility the companies could be taken private, there’s some added value in selling while there are still publicly available metrics, one of the sources said.

Radiology groups may be even more willing to partner with PE if there’s a fear that their buyout potential or price potential could come down.

Action Item: Learn more about Great Point’s Aris here: www.gppfunds.com/case_studies/aristeleradiology.html

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