RadNet, Inc. (RDNT) Earnings Call Transcript & Summary

Hello, everyone. Good afternoon. My name is Chris Tippett, and I'm an associate here on the JPMorgan health care coverage team. Today, it is my pleasure to introduce RadNet, Inc. And without further ado, I will turn things over to the Chief Executive Officer, Howard Berger.

Thank you, Christopher. There's 3 of us that are going to be speaking here: myself, Mark Stolper, the Chief Executive Officer; and Dr. Gregory Sorensen, Chief Science Officer and Board member. So we'll get through this as quickly as we can to entertain questions and also take the opportunity to kind of broaden the conversation about some initiatives that we're embarking on here in 2024. It's been a while since we've presented at JPMorgan, and I want to thank the JPMorgan team for inviting us back. The story surrounding RadNet has been one now that is about 40 years old. It's about 20 -- about 30 years as a public company. And on the surface of it and face of it, what most people know us for is being the largest outpatient diagnostic imaging company in the United States, and we've grown the company substantially since the last time we were here. Mark will talk a little bit about that. But we're also proud of the innovation that we're bringing not just to the imaging sector, but also for perhaps some opportunities to broaden us as a health care company. The company was founded in 1980, very fragmented industry at that time and still a very fragmented industry. It's one that has been traditionally run or performed by outpatient, what we call, mom and pop operators, perhaps over 6,000 of them in the United States. And RadNet, which is approaching 400 centers is still a very small part of that delivery system. However, the company is concentrated in 7 states and those 7 states represent about 25% of the population in the United States. So much like other industries and some health care companies, we're largely defined by the volume of business that we do. And company currently does about 10 million outpatient imaging procedures annually, which is by far the largest in the United States. Over the last several years, the company has grown not just in terms of the number of centers, but more importantly, the number of centers that we own, which are -- well over 1/3 of our centers now are jointly owned by large health systems that have essentially looked to us to be their outpatient imaging strategy. That's for 2 reasons: number one, as more and more of the payors and patients for that matter look to outpatient imaging as a better alternative to the hospitals, which are several times more expensive than we are and perhaps not as nice a patient experience, if you will, that's one aspect of it. The other is, is that hospitals generally just don't know how to operate and navigate in the outpatient arena and that goes for almost all ambulatory or outpatient procedures. So given the fact that this is an expanding business, which has begun to transition itself not only for the diagnostic work that we do, but screening tools that are used for population health, are going to become more and more part of what people seek for early detection of disease, not only cancer, but other diseases, cardiovascular diseases, diabetes and other things that imaging will be uniquely positioned to do. In the past few years, we've expanded the company and gone into artificial intelligence. You'll hear a lot about that, and Dr. Sorensen will hopefully expand on that. But hear a lot about artificial intelligence in every sector of business, particularly in health care, but in imaging, the early detection of breast cancer along with lung cancer, prostate cancer, colon cancer and others is an important part of what artificial intelligence is able to do to detect the disease, not only earlier, but more accurately than even the best of radiologists. So we began that initiative about 3 years ago, and we'll talk about how the transition from clinical artificial intelligence, which is what I just talked about, to generative artificial intelligence, primarily driven by ChatGPT will be a major focus of the company to combine all this on a single operating system platform, which we're very excited about. The company since 2006, which was really what put RadNet on the map, to -- with a large merger that was done at that time now is going to do close to $1.6 billion. Our actual revenue that comes through the company because in our joint ventures where we're not the consolidating partner, we don't report our revenue, but our actual build revenue in collections is closer to $2 billion. EBITDA this year, as we've forecasted in our guidance will be between $235 million and $240 million, and we have 9,000 employees operating in the 7 states that I mentioned. And you'll notice that on a map, which is East Coast and West Coast, we're where the people are. And my favorite line is when they caught Willie Sutton, you know he is a famous bank robber and they asked him, why do you rob banks? He says, "that's where the money is, if you will." Given that the population, in particularly, is so dense on the coast and our business, much like the airline business, much like the hotel business and others is really how well we can fill the capacity that we have at our imaging centers. But there's other facets of what we've done to really separate ourselves, one of which is for probably about 30 years now. We've been doing capitation, which I remember when I first started talking about this, it was a dirty word. But now it's really just an alternative form of payment that is used to try to manage control and cost by medical groups and payors that we have these agreements with. It's a significant part of our business, about 10% or so of our revenue and a growing one, which has been somewhat dormant, but now it's picking up again. But I think the theme there that people should think about as alternative forms of reimbursement. With that, I'm going to turn it over to Mark Stolper.

Thanks, Howard. I'll take you through a little bit of the industry dynamics, which represents a backdrop for what we believe to be a continuing environment for us to grow the business. If you believe the research out there, we're operating in about a $100 billion industry on an annual basis of services revenue. So it's an enormous industry. The research also says that the hospitals today perform about 50% of all the imaging in the United States. And in that $50 billion of imaging that the hospitals perform, it's believed that about half of that is outpatient diagnostic imaging that could ultimately be moved into the freestanding locations. So as RadNet looks at its marketplace today, we're operating in roughly a $50 billion industry. And as Howard said, our revenue, even if you gross it up for nonconsolidated operations is about $2 billion of that $50 billion. So there's a lot of room for us to continue to grow the business. Over 6,000 imaging centers in the United States, of which we own 400, so a lot of room to continue to grow the company. Growth in our industry occurs every year. It's grown steadily for a variety of different reasons. We've got a growing population and an aging population. As the population ages, we all utilize diagnostic imaging more frequently. Medicare lives, utilize diagnostic imaging 3x more frequently than commercial lives. So that will continue to be a nice trend demographically for our business. Technology advances and innovations of equipment, contrast materials, radioactive pharmaceuticals, post processing software and AI is also driving additional indications for ordering these types of diagnostic tests. And over the years, MRI and CT and PET/CT have become a household name. There's far more acceptance from the physician community, referring physician community as well as the consumers. As Dr. Berger said, it's very much a mom-and-pop cottage industry. It has not been professionalized or corporatized like a lot of other areas of health care services. We're doing that on a regional basis. And we think that in the coming years, this industry will look a lot more like some of the other industries that have been consolidated in a more meaningful way like dialysis or even hospitals, surgery centers, urgent care centers, and we think that we're well positioned relative to our competition to continue to grow the company very substantially. Acquisitions has been a major part or a portion of our growth over the years. We've been able to acquire smaller operators, mom-and-pop operators at anywhere between 3x and 5x, 3x and 6x EBITDA. And implement and integrate those businesses into our operations very effectively and very accretively, and that will continue to be a part of the strategy going forward. As we all know, labor has been a challenge, the availability of labor, the cost of labor, the cost of capital, the fact that we're in a capital-intensive industry, all puts pressure on the smaller players and will continue to drive consolidation into the future. I'll do a little bit of a deep dive into RadNet before turning it over to Dr. Sorensen to talk about some of our IT initiatives. As Dr. Berger mentioned, we're in 7 states. We're in East Coast, West Coast company where about 25% of the population lives. We continue to have a lot of growth in all of these markets. The most profitable growth we can have as a company is continuing to penetrate the markets in which we currently exist. There's unique aspects of being able to centralize cost or cost functions that we perform on behalf of our centers such as centralized call scheduling or appointment scheduling, pre-authorization, insurance verification, as well as revenue cycle functions. And that continues to be a strategy that allows us to utilize our scale relative to our competition. So when we acquire or build buy centers in our markets, we can do that very efficiently, very cost effectively. The other reason for geographic concentration, which has been a core tenet of our operating history is because it gives us a fair seat at the table to negotiate long-term equitable pricing with the commercial insurance. So we have the ability because we do so much volume relative to the other players in this industry to have a seat at the table, the payers know that if we were to go out of network and not be able to see their patients that a lot of the volume that we currently perform will find its way back into the hospitals at much higher pricing. And so this has been an effective strategy for long-term health and survival. So where does our revenue come from? About 77% of what we do, 76% of what we do by volume is actually routine imaging, x-ray, ultrasound, mammography and nuclear medicine studies. The more advanced imaging, which represents the other roughly 24% of what we do is really where the revenue driver is and where the growth in the industry is in terms of MRI, CT and PET/CT. And that portion of our business, the advanced imaging 24% of our procedure volume represents about 60% of our revenue. So clearly, there's a value to the more advanced imaging. We've always felt as a company, and it's been a core part of our strategy to be a one-stop shop for the referring physician community so that we -- from a marketing perspective, we could put 1 prescription pad on the table for our referring physicians and no matter what their imaging needs are, we can handle it and service it. And that's been a big benefit of ours relative to our competition, where we generally have these large advance, what we call centers of excellence that have the full breadth of the imaging capabilities. From a payor standpoint, we have a very diversified payer class. The biggest payer that we have is commercial insurance. These are the HMOs, the PPOs of the world, both the large national payers of the likes of Cigna and United, Aetna and others as well as some of the small regional payors. Medicare government payer represents about 22% of our revenue. Capitation, which I'll talk about in more in depth on the next slide, is about 10% of our business, about $160 million book of business. And then we've got some smaller books of business like personal injury and workers' compensation. Capitation, as Dr. Berger mentioned in his opening remarks, is a unique aspect of our business. There's a lot of talk these days about value-based care and risk taking and risk sharing. Well, we're actually one of the few companies that does it. We are responsible for almost 2 million lives. The vast majority of which are in California. These are HMO patients whose care is held in by these large medical groups or IPAs, and who are taking full risk for the medical care of these patients. And we contract or subcapitate with these large medical groups and take the imaging risk off of their plate for a piece of the per member per month fee that they're receiving from the various HMOs. It's been a book of business we've done for over 25 years. It grows steadily every year, both as enrollment in these plans go up as well as we're able to have some leverage on pricing as utilization in these contracts continue to rise as diagnostic imaging becomes a bigger part of the health care delivery system. We've had an average tenure of over 10 years of this -- of each contracts. We have an exceptional renewal rate, and we get price increases generally on all these contracts. So it's a great book of business. And most importantly, these doctors who are obligated to send us these HMO or managed care patients also see all the other payer classes, like Medicare, workers' comp, personal injury, private insurance, and they tend to send us their discretionary, their fee-for-service business as well. So it's a great way to build the business and to lock a lot of our competitors out of large patient volumes. Dr. Berger also mentioned joint ventures is a big part of what we do. Today, 36% of all of our imaging centers are held jointly with some of the larger health systems in our markets, representing about 25 joint ventures, which house 130 of our imaging centers. Some of them are accounted for on a consolidated basis, some are unconsolidated basis. We partner with some of the largest health systems in -- not only in our region, but in the country, the likes of Dignity Health, Adventist Health, RWJBarnabas, University of Maryland, Cedars-Sinai. And as hospitals are losing patient volumes to ambulatory outpatient freestanding centers because the payers are getting more and more aggressive in moving this business into the lower-cost sites of care, some of the more forward-thinking health systems and hospitals are looking for ways to recapture some of that revenue and have a long-term viable strategy around outpatient diagnostic imaging. And they look to us who has a 30-, 40-year track record in managing these outpatient facilities profitably as their long-term partner. And so this is a growing aspect of our business. We believe in the next 3 to 4 years, it would not be unlikely that over half of our centers will find their way into these health system joint ventures. And with that, I want to turn the presentation over to Dr. Sorensen, who is our Chief -- RadNet's Chief Science Officer and also the founder of the first AI business that we purchased.

Great. Thanks, Mark. I'll just, in a couple of slides, walk you through some of our digital health strategy and why RadNet is such a unique opportunity for growth and I think innovation. So I joined the company, as Mark said, 4 years ago, almost 4 years ago when DeepHealth became part of RadNet. And RadNet wants to control or be involved in AI for, I would say, 3 kind of very interesting reasons from my point of view. First, it just makes economic sense for us. We're so big that rather than contract out for certain AI tools, it just makes sense to own those and help control their direction. Second, though, importantly, at our scale, we can build AI better than most other groups for certain applications. For example, in X-ray mammography, RadNet does about as many mammograms every year on the order of magnitude as implant, the entire country. And we own all of that data. And so since data is the mother's milk of AI, we can build better AI than anybody else. We also have a more diverse population than most other groups with our extensive underserved and minority populations in the East and in the West Coast. So we have a very diverse population, which makes the AI very robust. So it made economic sense for us. We can build really top-notch AI. And then the third reason may not be intuitive, but in times of innovation, having vertically integrated both the service and the technology allows us to create and innovate in ways that are much more nimble and creative. So let me give you a specific example. Mammography AI, again, to choose that example. We've been trying to figure out how do we monetize that? How can we build it in a sustainable way? And because we have both the tech and services, we could figure out, well, what is the best way to bring value to patients. It turned out that if we used our AI a way no one else was using it to drive a novel workflow with what we call a safeguard review, we could actually improve care substantially. We were lowering the recall rates, so fewer false positives and finding many more cancers earlier, so more -- fewer false negatives. And that was really impressive. I mean we were seeing 20% changes in both directions. And we felt, okay, this is so compelling, why don't we offer this to patients as a way to build the sustainability? And because the AI company and the provider were all together, we didn't really have to fight over where was the money going to go. We could just try things out. And we could then modify things. And because of that, both combination of scale and vertical integration, AI in-house makes just a ton of sense. And I think we're going to continue to do that in other areas where we feel like we have a particularly high impact, hence, our investment in lung cancer screening, in prostate cancer, where we think that will be moving to MR as a partial screening methodology. There's quite a bit of buzz over the last year about that. So this all really is why over the past few years, we've been deeply investing and working to build our AI capacity. Now as we did that, we realized that one of RadNet's long-term strengths more than a decade is that we control our own nervous system. We have our own IT stack, if you will. And that lets us gain efficiencies that both Dr. Berger and Mark mentioned because when we acquire a new center, we can randomize them and quickly have them operate efficiently. But it also means that when we do, say, a novel workflow like this mammography one that we can introduce that relatively efficiently. Well, as part of that, we also realized that there's more than just Pixel AI that we need to do. We have to actually touch many different parts of the patient journey. From scheduling, do you want to pay that extra $40 for the safeguard review or not, all the way through billing and many pieces in between. And as a result of that, we realized, you know what, we need to kind of rethink and reimagine and rework how we are operating and essentially upgrade our entire nervous system. And so last quarter in November, we introduced at the big radiology meeting RSNA, a new operating system, again, based on DeepHealth. DeepHealth was now not just going to be our Pixel AI or our clinical AI, but our full portfolio of cloud-native AI-enabled operating system for the entire kind of medical operations we're doing, radiology and beyond. And this, we brought in a new team. We're investing seriously in it, and it will allow us to capture the benefits both of the clinical AI that we either build or in-source, but also the substantial improvements that are happening, especially in the cloud due to the Generative AI and large language models. And in fact, the way we've kind of described this to people is with this infinity sign, where on the right, you can see our clinical AI tools, we're calling those Saige, after Saige-Dx, our first mammography product. And on the left, our orchestration tools, both with maestro, again, both with AI embedded in them, hence, the QC spelling of those 2 words. But it really helps you understand that as the whole patient journey happens, all of that will be now digitally enhanced and markedly enabled with technology. And so we're going to leverage the innovations that other people are doing around language models and a scalable generative AI with the operations that we're carrying out and embed them with the clinical or the Pixel AI. And that whole continuity of operations is something we look for a vendor to do for years and couldn't -- literally a couple of years, couldn't find one, we've decided to do it for ourselves. You may know or may not know that some of our biggest competitors are already the customer of our own IT stack, and we will offer this as well to those 300 customers that we have. So this we expect will become both a major driver for innovation and cost reduction and revenue growth inside RadNet but also as a software business on its own will be something that will be a very high value and have great interest to other operators of radiology and other kinds of imaging centers. So that's kind of the AI story. We can talk more about the Q&A. Back over to you, Mark, for the rest. Thanks.

Sure, I'll just end the presentation with some financial information. Company has been performing extremely well. We're going to be announcing our fourth quarter results and year-end results towards the end of next month. So we're quarter behind here, but we've been growing the business nicely. In the third quarter, revenues were up almost 15%. EBITDA was up over 20%. We're -- that's being driven by robust volumes. We're seeing both on a same center in an aggregate basis. Same-center performance was up over 4% year over the third quarter of 2022 and then aggregate procedures approach about 9%. We had also a busy quarter as well. We announced a substantial expansion of an existing joint venture with Cedars-Sinai and now -- and the announcement of a new joint venture with Cedars-Sinai. So we have 3 new -- or 3 joint ventures with that hospital system. Our AI revenue is increasing very nicely. It was up over 220% over last year's third quarter. And we continue to build aggressively the capacity that we need to service the heavy volume in a number of our local markets. And today, we have a -- as we speak today, we have about 13 de novo facilities under various stages of construction and development, which we believe will come online this year and then early into next year. This was our guidance for 2023. And we'll be issuing new guidance next quarter. We expect to -- excuse me, next month. We expect to see substantial increases in 2024 in all of these metrics in terms of revenue, EBITDA, free cash flow as well as substantial growth in our AI division. Historically, we've grown the business very effectively. It shows over the last 14 years, we've grown the top line at about 8.5% compound annual growth rate. EBITDA slightly behind that at over 5% growth over the last 14 years and procedure volumes have also grown nicely. We expect the similar performance going forward, if not better, from our same-center performance as well as other organic and inorganic growth opportunities that the company has. We did an equity offering in June of last year. It was the first time the company raised equity in the history of the company. We raised about $250 million of proceeds. We're sitting with a pretty healthy balance sheet at this point. We ended last quarter with about $338 million of cash on the balance sheet, full availability of over $200 million revolving credit facility. Our net leverage ratio is about 2.2. So we've got a lot of capacity to accelerate the growth into the future, do acquisitions and continue to execute on the multipronged strategy that we have. From a valuation standpoint, we're trading about 12x EBITDA based upon historical EBITDA, we expect our EBITDA, obviously, to go up in 2024. And so we think we have a bright future ahead of us. And with that, we've got about almost 10 minutes, we're happy to entertain your questions. So thank you.

I was wondering if you could comment a little bit on the labor market for radiologists. And do you see tightness there? And what is its potential impact on your economics going forward?

Sure. I think like almost every industry out there, health care is no exception and maybe in some respects, even worse. The labor pool is both limited in terms of availability and the cost has gone up dramatically. We've already experienced an impact. I think if it weren't for those factors, we'd be driving more revenue and better margins. That, in fact, is really one of the major impetus for our whole generative AI. The opportunity to create improved efficiency and productivity cannot be overstated. The capabilities that ChatGPT brings to us. I'll give you one small example. In the scope of things, maybe it's not huge, but it's illustrative. Currently, given the markets that we're in with very diverse ethnic populations, we spend about $2 million a year on interpretation services. We believe we could eliminate or will eliminate all of that when we fully implement our generative AI, which will be able to answer the patient probably better and faster than interpretation can. So these are not unique or novel to the health care industry. Other companies and other industries are using those. It's about time that we start adapting aggressively this because it will address both the cost side of our business, which will improve our margins, but perhaps even more importantly, create huge efficiencies particularly for our radiologists. We believe in the next maybe 12 to 18 months, we will be able to have interpretive services for radiologists for their reporting where they simply put in the results and then ChatGPT actually creates the report. And the benefit of that will not only be enormous for the radiologists in terms of their productivity, but it will create uniformity from 1 radiologist, 1 exam to the next that doesn't exist right now. Just because somebody went to medical school and got a degree in medicine doesn't mean they necessarily articulates everything as well as they could or should. So these are the nuances that I think will be able to start demonstrating towards the latter half of this year and into 2025 that will improve our margin and address what I believe our chronic problems that health care, in particular, is going to face with labor shortages and cost of labor.

Yes. I was wondering if you could share more details about your capitation model? How well it's performing and where you see it going in the next 3 to 5 years?

Yes, the capitation model is one where we continue to evolve from the standpoint of pricing of it. We have built in pricing every year with our capitation groups ranging anywhere from 3% to sometimes 5%. However, that doesn't always keep up with the utilization that we see given how rapidly imaging itself is utilized and which it should be. We try to control that so that the utilization is appropriate. But every opportunity that we have when our contracts term out, we actually reprice that. Not that much different than what we attempt to do with our commercial payors and our fee-for-service business. But I think we're more effective in that negotiation as well as becoming even more essential to the delivery of the imaging in the markets that we're in. So this year, for example, I think we're going to have very substantial price increases, not just because utilization is high, but our costs have gone up quite a bit and everybody is going to have to realize that the cost of paying for this technology, the state-of-the-art medicine is not always free. So it's a great book of business for us, but one that has to be constantly monitored because the nature of imaging is constantly changing.

I noticed that in Florida, you have just a few centers. Do you see that?

We have 4 in Florida.

Yes, 4. Do you see that as a market where you'll continue to expand potentially? And then second question, do you see with Care Continuity, health systems wanted to have more connectedness and how you do that with EHR systems and most of them shifting towards EPIC, for example.