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

Good morning, everybody. Hopefully, you can hear me. It's bright and early on the East Coast. I appreciate you starting your day with me. My name is Mark Stolper, I'm the Chief Financial Officer of RadNet. In today's presentation, I'm going to go -- give you a brief introduction on who the company is, what we do. I'll talk a little bit more about the industry, the overall size and the growth of the industry that's creating a backdrop of continued growth and success of our business. I'll talk more -- I'll do a deep dive into our business where our revenue comes from, some of the opportunities that we see in the near future. And I'll complete the presentation talking a little bit about our financial performance. So with that, for some of you who are less familiar with the company, RadNet is the largest owner-operator of diagnostic imaging centers in the United States. We own 375 locations concentrated in 8 markets. We're a company that's been around for a while. We're over 3 decades old. We were founded by our President and Chief Executive Officer; Dr. Howard Berger in the mid-'90s. We've been a fast grower. We've quadrupled the size of the business since 2006. This year, we expect to have about $1.7 billion of revenue, EBITDA in the range of about $275 million, and we have about 9,700 employees, our company is based in Los Angeles. We have a couple of core operating tenets that I'll do a bit of a deeper dive later on in the presentation, but one of which has been our success largely has been driven by geographic concentration. All 375 locations are held within concentrated clusters of centers in 8 states now, now that we've entered to Texas earlier on this year. I'll talk about the importance later on in the presentation of geographic concentration, allowing us to be both an efficient operator and to contract successfully with the commercial insurance companies. We also are, what we call, a multi-modality company, meaning the vast majority of our centers are what we call centers of excellence that have the full breadth of imaging equipment in them from the routine studies all the way to the more advanced studies. I'll talk a little bit more about why that's important as we go forward. We also are unique in our industry with respect to a book of business where we are -- that we call capitation, where we are an exclusive provider of imaging to about 2 million patient lives, predominantly in California, where we get paid a per member per month fee for providing all of the diagnostic imaging to these managed care lives. And I'll talk more about that later as well. And then more recently, we have been growing our digital health business. So outside of our core business of owning and operating diagnostic imaging centers, we have a digital health platform that's a separate operating segment that is both a software designer and licensor as well as an AI company. So we have a software platform that we use and got into in 2009 at all of our 375 locations. We have a couple of hundred customers outside of RadNet that also license the software platform. And then in more recent years, over the last 3 or 4 years, we've been leading our industry into AI solutions, both on the clinical side for the interpretation of the exams that happen within radiology, but also on the generative AI side, which we're building into our software platform. So what do we do? As I mentioned, we're a multimodality company. The vast majority of our centers have the full breadth of imaging equipment at them. Routine, if you look at a normal patient population within radiology, about 75% to 80% of what a normal patient population needs is the very routine studies of x-rays, ultrasound and mammography. However, that other 25% to 30% of the business is the more advanced studies, the MRI, the CTs, PET CTs, which drive a lot of the revenue and a lot of the margin in our business. And we've always felt that it was important to be a one-stop shop, where we can put one prescription pad on the referring physicians desk and no matter what patient needs, they can be sent to the RadNet facility down the street. And often, patients are sent to us for a routine study and based upon the findings of that study are sent back to us for the more advanced or higher-ticket exam. I'll talk a little bit about the industry. If you believe the research out there, the industry is believed to be about $100 billion or north of $100 billion of annual imaging services revenue in the United States. Today, it's believed that the hospitals still do about 50% of the imaging that occurs each year in the U.S. and that has been shifting and changing as there's a huge differential in the pricing that the hospitals charge relative to the pricing that we charge. And in the RadNet markets, generally speaking, hospitals charge anywhere between 2x and 5x the cost of doing imaging at our centers. And over the last several years, the commercial insurance companies have been more and more aggressive in trying to move this business out of the hospitals into the freestanding centers. And that's not specific to radiology or diagnostic imaging. You're seeing this trend happen in all disciplines of healthcare, whether it's outpatient surgeries, the growth of urgent care centers, the growth of home health, dialysis and others. So we're benefiting from that market share shift. Additionally, the industry is highly fragmented. It's believed that there's over 6,000 imaging centers in the United States. So we're just scratching the surface in terms of how big a company that RadNet can be. If you took the 5 largest players, us being the largest and the 4 others, that are either physician-owned or private equity owned, we make up about 10% of the entire industry. So this is very much a cottage industry. And one of the last frontiers of healthcare services that hasn't been consolidated in a meaningful way. One of the great things about the industry is that it grows every year. It's growing for a number of the demographic reasons that you're seeing the growth of healthcare services in general. You've got a growing population, you've got an aging population. And within radiology, Medicare lives or those over age 65, utilize imaging 3x more frequently than commercial lives. So as we all age, we rely more heavily on these types of diagnostic tests and that trend is obviously going to continue here in the U.S. But the other reason that the industry is growing steadily is due to technology advances. Every year, there are advances on the hardware side, meaning the equipment; they're advances in the development of contrast materials. More recently, radioactive pharmaceuticals are creating new indications for ordering exams in the world of prostate, in the world of Alzheimer's. And this trend will continue. Postprocessing software and AI is another thing that's driving new applications and new medical indications for ordering these tests. So we think that we've got a runway at least for the next decade or 2 for more and more of these advanced imaging tests to be ordered. As I mentioned, the industry is highly fragmented. We've as part of our growth been an acquirer. We generally in our markets can acquire small operators in the 4x to 7x EBITDA range. To do larger acquisitions or to go into new markets, typically, multiples are higher than that, but we've done about $250 million worth of acquisitions over the last 4 years, and it will continue to be part of our growth. So just to give you a little geographic representation of where we are. We're very much an East Coast, West Coast company, although we're only in 8 markets. Those 8 markets comprise about 30% of the United States population. So we operate in densely populated markets that are typically growing with good payer mix and demographics. There are 2 primary reasons why we believe geographic concentration is important for the long-term success of our business: First, from a cost structure standpoint, we're able to operate much more efficiently with densely clustered centers. This is because we can centralize many of the functions that we perform on behalf of our centers, such as revenue cycle functions, marketing, preauthorization, insurance verification and so on and so forth. This gives us a huge advantage with respect to our scale when we compete against mostly mom-and-pop operators in that marketplace. The second main advantage of being geographically clustered has to do with contracting. So most of our payers -- a largest portion of our payer mix is commercial insurance. And so the -- our pricing is subject to negotiations that we have with the large health plans. And the more indispensable that you can make yourself with respect to their provider network, the better pricing and the long-term stability that you can have with respect to pricing. And in our markets, we believe that the threat of us leaving a provider network creates all sorts of access issues, quality issues for the commercial insurance companies, and they recognize that there's not enough other sites of care in that -- on the outpatient side in many of the markets in which we operate to absorb the volume if we were to leave their provider networks, and therefore, they know that a lot of the business that we currently do would end up going back into the hospitals at prices that are 2x to 5x the pricing that we charge them. So it gives us a fair and equitable seat at the table with respect to pricing. So on this page, you'll see where our revenue comes from. On the left side of the page, roughly about 25.5% of our procedure volume comes from the advanced studies, the MRI, CT and PET/CT. However, on the right side of the page, you'll see that those -- that 25% of our volume translates into over 60% of our revenue. So clearly, the money in this industry is being made on the more advanced modalities. And this is a good thing because the industry is moving towards these advanced studies, a lot of the technology advances that we're seeing in the industry are focused on MRI, CT and PET/CT scanning. And in fact, when we announced our first quarter results this year, we did call out that there is a shift in modality mix that we're seeing in our business. We had about 120 basis points move from the first quarter of last year into the first quarter of this year from routine imaging into advanced imaging. So this trend should continue for some time. With respect to our payer mix, we have a fairly diversified payer mix. Our largest book of business is commercial insurance, which is a little over 58% of our book of business. Medicare represents about 21%, 22% of our business. Commercial book, as I mentioned before, we have a seat at the table, and we've been able to get the effect of getting price increases over the last several years, particularly as it's becoming more and more expensive to operate partly because of the tight labor situation. On the Medicare book of business, although we participate in industry groups and have lobbyists that represent us. Unfortunately, we're a price taker like everybody else in the Medicare industry and then capitation, which represents about 8% of our book of business. We have a lot of leverage with those contracts who become highly dependent upon us and our centers to see their patients on an exclusive basis. And we've got some other small books of business like personal injury, workers' comp and some state-run Medicaid program. I'll talk a couple of minutes on capitation because it is a unique part of what we do, and there's a lot of discussion within healthcare towards moving to more efficiently aligned payer and provider models, value-based care, risk taking, risk sharing and that's what capitation is. We've been doing this business for upwards of 30 years very successfully and very profitably. We are responsible for providing diagnostic imaging to about 2 million patient lives on an exclusive basis. As I mentioned, we get paid per member per month. These are all HMO patients, both on the commercial side as well as the Medicare Advantage side, which represents the senior lives that we see within these contracts. And we're really ingrained in the medical groups with whom we contract where we become almost an extension of their business. There's constant interaction in terms of us educating them on the appropriateness of ordering these diagnostic tests. We're able to manage the utilization with them very effectively to be able to be very profitable in this end of our business. We also get pricing increases, typically, in most, if not all, of these contracts on an annual basis based upon the fact that diagnostic imaging is becoming a bigger part of the healthcare spend. And probably most importantly, we see a lot of pull-through business from our capitation customers. So the physicians that are part of these medical groups with whom we contract, not only see these HMO-capitated patients, but they also see all the other payer classes. And there's just an understanding that if we're servicing their capitated patients effectively that they'll send us their fee-for-service business as well. So this is really a way that we can establish better long-term relationships with the referring physician community. Hospital joint ventures. This is a bigger part of what we did [Technical Difficulty] the same hospitals that are experiencing the loss of radiology business from their center -- from their hospitals into freestanding centers. A number of them are looking at strategies about recapturing some of that revenue that they've lost and will continue to lose and just trying to create a long-term viable strategy around outpatient diagnostic imaging. And one of the ways they can do that, and we allow them to do that is with a joint venture structure. So today, 137 of our 375 locations or about 36.5% of our locations are held within these hospital joint ventures where we allow them to own an equity piece in our centers. And in return or kind of a quid pro quo for doing that is that we ask them to use their relationships with community-based physicians and instead of asking them to send those referrals into the hospital outpatient departments, they now direct those referrals into our jointly-owned outpatient centers. So we usually see an uplift of procedural volumes and performance of a lot of these joint venture centers. The other thing that they're there for, although we haven't yet to exercise this is that they add additional leverage and relationships with the commercial payers to be able to establish long-term fair pricing. We do not bill under hospital tax ID numbers. We're billing outpatient rates under our physician partners provider numbers, tax ID numbers, but they do help get at times better outpatient rates on our behalf. And we partner with some of the largest health systems in the United States and the largest in our communities such as Dignity Health, Cedar-Sinai, Adventist, the Memorial Care System, the RWJ Barnabus system and many others. I'll talk a little bit about our digital health strategy. As I mentioned in my opening remarks, there's 2 businesses with inside of digital health. One is a radiology software business, the other is an AI platform. The radiology software business we entered in 2009 as we saw the need to own our own IT platform and to control our own destiny. At the time, we were contracting for some of these software platforms from third parties who were not able to keep up with our requirements for scalability and customization. And so we bought a small company at the time called eRAD and over the years, developed a platform that now controls all of the IT at all of our 375 locations. Through the years, others have approached us about licensing our platform. And today, we have over 200 customers outside of RadNet that license the software platform. And it's both a what we call a radiology information system, which is a front-end operating system for our centers as well as a back-end image management system, which takes the images from the machine, sends it to a radiologist workstation, there's digital storage, digital retrieval and so forth. We are in the process of moving this platform, which we call eRAD onto a cloud-based platform that we're now calling DeepHealth OS. We're going to be -- we are developing a number of generative AI solutions that are now going to be embedded in this platform around automating a number of functions that today we rely heavily on human capital and labor to perform. This includes automating scheduling, preauthorization, insurance verification and certain revenue cycle functions. We're hoping to have a fully commercialized product announced at the big radiology show called the RSNA in Chicago around Thanksgiving time frame and expect to have a fully commercialized product to sell to others outside of RadNet sometime in early 2025. From an AI perspective, we continue to believe that AI is going to have a transformational impact on our business and our industry, both on the generative AI side, which we're building into the DeepHealth OS, but also on the clinical side meaning the interpretation of the scans that occur at our centers. We recognized early on that we couldn't be all things to all folks in this AI world. And so we decided to focus our investments on large population health screening opportunities around cancer and other chronic diseases. And so we have entered the AI marketplace with the development of 3 algorithms focused on breast cancer, prostate cancer and lung cancer. We successfully launched in November of '22, a self -- a program around breast cancer where we're now offering to our mammography patients who come in each year for their annual screening tests the ability to have AI read the exam initially. And it's been a very successful program. We're charging $40 out of pocket. And in a number of studies that have been published in medical journals, including Nature magazine most recently, our AI has shown to detect breast cancer up to 2 years sooner than a licensed fellowship-trained radiologist. So it's been an incredible program. We're now seeing about 40% adoption rates on the East Coast with our annual screening population. And as we roll it out on the West Coast, we're seeing about a 30% adoption rate already on the West Coast. We should be completing our rollout of the program to our remaining centers in Northern California and Central California by the end of this month. So very exciting there. We also are rolling out a program in the U.K. in conjunction with the National Health Service on our lung cancer screening product where the NHS is implementing a program called the targeted lung health check program. And they've mandated the use of AI in these lung cancer screening tests where they've asked all smokers, current smokers and past smokers, to come in annually for a lung cancer screening test and so that product has been growing. We're hoping to get FDA approval from the lung cancer screening products sometime in the first half of 2025. And then lastly, our prostate screening program. We have a prostate AI called Quantib that we're utilizing internally at the RadNet centers. We're licensing it in Europe, and we're hoping to create a similar, self-pay prostate screening program for men that we think is a much more effective -- better test than the PSA test, which currently is the standard of care for prostate screening. I'll spend a couple of minutes going through financials and then open up the floor for questions that you may have. Our performance has been strong. We're seeing double-digit growth in our company. In the first quarter, we grew about 10.5% relative to last year's first quarter. Our EBITDA was up significantly higher than that over 21%, which is a function of very strong same-center performance, which tends to -- which is now averaging around in the mid-single digits. We are seeing both great aggregate growth on the procedure side as well as the same center side. Additionally, as I mentioned earlier, we entered the Houston marketplace with 2 acquisitions, one of which we completed, the other which we'll look to complete early in July. That will be -- we're excited about that. It's the fourth largest metropolitan market in the United States, representing over 7 million patient population, and it's the second fastest-growing market in the United States. So we're excited about that, making that a new core market for the company in the coming years. We also recently announced a joint venture with the Providence Health System in the northern and eastern part of the San Fernando Valley in Los Angeles, which represents our first joint venture with that health system. Excited to grow that as we go forward. Many of our centers are experiencing heavy demand. We've got backlog in most of our local marketplaces. Because of that, we see the need and the opportunity to build capacity. We currently have 12 facilities under various stages of construction, which we hope to open by the end of this year. And then we have an additional 8 projects in development, which we're going to be constructing and opening in 2025. With that -- this is just a geographic representation of how we've grown the business over the last 14 years, very consistent growth, almost 9% compound annual growth on the top line, close to 6% on annual growth on the EBITDA line. Obviously, procedure volumes [ mirror that ]. From a valuation perspective and a capitalization perspective, we're about a $4.5 billion market cap on the equity side. We have very little leverage today, about less than $300 million of net leverage. So we've got roughly $1 billion of debt on the balance sheet, but also $700 million of cash. So we've got a capital structure that is prefunded to continue to grow this business, both organically as well as through hospital joint ventures and acquisitions, further consolidation. So last thing I'll mention is that we do have a net operating loss carryforward. So we keep most of our pretax net income. We're not a taxpayer and shouldn't be a taxpayer for the coming few years. So with that, I left about 6 minutes. I'm happy to answer any questions that people have. Thank you.

Yes. Yes. So the question was around our JVs and the benefits of it. And is there any downside towards the structure? The answer is we really love the JV opportunity. It does a few things for us. One is, it provides incremental volumes because these hospitals over the last decade, many of them have bought primary care docs or specialty practices. Part of the reason was to get some of the referrals into the health system, not just on imaging but all the ancillary businesses. And once we joint venture with the health system, then they're motivated to direct those referrals into our jointly owned centers. And so it's been -- when you look at the totality of those imaging centers that are in our hospital joint ventures and compare them with our wholly-owned centers, they actually perform slightly better and at slightly better margins because of the incremental procedure volumes. It also creates stability in our markets, branding in our markets and then gives us a better seat at the table with the commercial payers. So if we have an aggressive payer come to us to try to lower our pricing, now we have the hospital standing shoulder to shoulder to push back. And we haven't had to use that much. I can think of one situation where it was very effective and very helpful. So in 100% of the situations with our joint ventures, we are the management partner. In other words, the hospitals other than helping on the referral side really is a silent or an equity -- simply an equity partner. RadNet provides the day-to-day operations. We provide all the IT, the finance and accounting and do everything on behalf of the centers. And for that, we get a management fee for providing those services, and that's very profitable and effective for us. So we think that this would not be unlikely that this -- that the joint venture business could be over 50% of our centers in the coming 3 or 4 years, not because we're out there trying to pitch this and trying to make it happen. It's just that that's what's happening in the healthcare delivery system where these hospitals are looking for a viable long-term strategy around diagnostic imaging, and this structure allows them to do that effectively. And so we have very happy partners. Yes?

Are you expanding seats? Are you taking price? Is there still a lot of opportunity to reach other centers that haven't yet used your software? Or are you competing with the EMR vendors?

Sure. So the question was what's the potential growth prospects for the software business within the digital health platform. And so when we originally got into this business in 2009, the focus was to use these solutions internally. We never had a customer outside of RadNet, we were okay with that because we felt like it was important to own our IT destiny. And then organically, we started getting outside customers. So today, we have over 200 customers. Last year, that business did about $37 million of revenue and about $20 million of EBITDA. So it's a very profitable business and that includes RadNet as a customer in those numbers that I just gave you. We compete with some of the larger OEMs who have products such as Philips and GE and there's business out of Australia, Pro Medicus and others. So it is a fragmented marketplace out there but a big industry. Hospitals use these solutions, outpatient imaging centers use these solutions. And the idea is that, over time, we're going to migrate our 200 customers onto the new DeepHealth OS platform. And we think that this cloud-based solution, given some of the generative AI modules that we're building into it, is going to be attractive to a larger population, particularly on the outpatient side as opposed to the hospital side that we think that this product is tailored to. So we never really looked at third-party customers as a core part of our business. However -- and it's never been our core competency in terms of developing and licensing software for external use. However, a little over a year ago, we hired a group of individuals out of Philips who were in radiologic software within Philips who has -- who have the expertise in developing these solutions, commercializing these solutions, licensing these solutions and marketing these solutions. So that we now have a management team within our digital health that we think can be -- can make this a very successful and potentially stand-alone business. Any other questions?

Any Color regarding penetration of the use of EBCD being like roughly 30% on the West Coast and 40%. Should we look at that as like -- that's like the natural saturation point or like a little bit higher at 50%. There's just going to be half of consumers are just like not going to buy it or like -- and so help us understand like how quickly that you guys think that has reached maturity in terms of consumer adoption.

Sure. So we don't really know is the answer to that question. We're blazing a new path. No one's ever done a self-pay AI program like the EBCD program is. What I can tell you is we do about 2 million annual mammography exams. And of that 2 million, about 80% or about 1.6 million are screening mammography exams where this EBCD product or the service applies. And when we started on the East Coast, we didn't really know how to sell it, how to market it, how -- we didn't know how to train our schedules to communicate the opportunity to our patient population. We had to figure out how to train our front office personnel on how to communicate the benefits of this program. We started doing some marketing in local news. So there's been a lot of learnings that have come from it. And when we started on the East Coast, we were getting a penetration rate in the low teen. So it's over time as we've gotten better and more effective in communicating the benefits of this program, and people have also, in general, understood the benefits of AI that we've gotten this penetration rate up to 40% on the East Coast where we started and now we're close to 30% on the West Coast. What I can say is, the fact that we're at 30% on the West Coast really having started that rollout a quarter to 2 quarters ago is showing that we've migrated a lot of those learnings, and we took the best practices from the East Coast and applied it to the West Coast rollout. Could we get over 50%? I don't see why not. Could it be higher? It should be higher because, frankly, if you have a wife or a mother, I wouldn't want any of my family members not to get AI in conjunction with their annual mammo exam because the fact is the computers, if trained on enough data and the right type of data, is more effective in terms of pattern recognition than the human eye and we saw that in a number of the tests that we did with the algorithm, and it gets better and better as it gets trained on more information. So I think that this is where the industry is moving towards using these types of tools. And the Holy Grail would be ultimately to get to our -- towards autonomous reading where you don't even need a radiologist in the equation. Today, $0.20 on every dollar that we bill and collect for goes to paying the radiologists to interpret the scan. From a financial standpoint and a patient quality standpoint, the industry would be much better off if we can get these tools in the hands of radiologists, make them much more productive, make them more accurate and ultimately, who knows we might go towards autonomous reading where you won't even need a radiologist. I think we're far away from that at this point, but that's where the industry is headed. So I think we're out of time. I appreciate everybody's interest. Thank you.