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

Thank you all for joining us. I'm going to read the disclosure before we begin. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Dr. Berger, Mark, Greg, thanks for joining me today. I'm joined by the team from RadNet. Maybe before we begin, I just want to pass it over to you, any opening remarks, and we'll jump into some questions.

No, I just want to thank Morgan Stanley for inviting us to the conference and very much appreciate all the efforts that have transpired to make this successful. It's been a long, but a very rewarding day for us.

Thank you for being here. So I want to start with the competitive landscape. But given your scale, can you provide a little perspective on the opportunity for industry consolidation across the sector?

Well, I think industry consolidation will continue simply because although some people think of a dirty word, but the corporatization of medicine really does play a meaningful role, particularly in an area like radiology and imaging, which are both capital intensive very much dependent upon the availability of labor and a workforce that is challenged right now. And with the new developments that are occurring that are transformative. So the average provider out there is probably not equipped to be as not just competitive but very capable of delivering the level of service that I believe the industry as a whole is transitioning to and what patients and referring physicians are going to expect. So I think that in the right hands and with the right management capabilities as opposed to perhaps some of the other consolidations in physician services, this is 1 that makes a lot more sense, and we'll continue to be that way as it becomes more and more sophisticated with technological improvements. It's really an evolution of a tech-enabled division of medicine that has a lot of promise for the future.

Thank you. Let's hope. So when you think about the white space in the market, can you talk a little bit about that? And then also just the reimbursement environment, what's that like? And how can you -- how do you see this helping to drive incremental growth kind of across that spectrum?

Well, I think that the demand for imaging is going to continue. Perhaps in a way now, though is really reflective of what's started to unfold in the last 2 or 3 years, and that is artificial intelligence. And I think the opportunity for meaningful population health will finally gather some steam and some direction that will create meaningfulness for it. If health care is going to transition itself, we've got to think about it more as an opportunity for earlier disease detection. And I'm not just talking about cancer, but other things like coronary arteries and chronic diseases, diabetes, all of things -- all of which are being impacted in imaging, in particular, primarily through the development of new technologies and artificial intelligence. And so I think that both as a reimbursement opportunity but more as a driver of how to manage the enormous volumes that we have already and that will continue to grow is critical to helping your health care system, develop these new tools for managing health care in a more cost-effective way and 1 that ultimately provides better outcomes for all the stakeholders. So I think reimbursement, at least for RadNet particularly now with CMS increasing for the physician fee schedule next year, the first increase across the board, and I can't remember how many years has -- was the last piece of what we see as reimbursement challenges. And now the direction really is more to take some of the elective work that we do, which is predominantly what we do and move it out of the more costly hospital systems into the more convenient and perhaps even better equipped outpatient imaging centers, which the payers themselves are now being very aggressive about. So I think all of the indications are there, whether it's reimbursement or whether it's demand will continue to be beneficial for maintaining and growing the quality of what radiology and imaging can't contribute to overall health care.

Thank you. It's very helpful. Can you discuss a little bit about the key initiatives that are driving this organic growth and same-store volume trends for the business?

Well, I think some of them are what has traditionally driven organic growth over the many years we've been doing this. An aging population, a growing population and an increasing awareness of the value proposition for diagnostic imaging. Those have been traditional drivers of our values for as long as I've been in this business, which is a while. But what I think is accelerating that now is technology and that is producing more opportunity to utilize imaging for deeply deeper diagnostic capabilities that improve the radiologists and their capability and make the overall patient journey that much more convenient, whether it's shorter scan times or improve processing of patients through our centers or even more accurate detection and interpretation of what we do. So I think that will now be a driver as those of you that may have listened to our last earnings call, our advanced imaging has grown disproportionately to the rest of our business. So things like MRI scanning and CT scanning and PET/CT scanning, in particular, have seen several times the growth that we've seen in our routine image in the X-ray mammography and ultrasound. So I think that's going to continue. And I think the burden on the radiology community and developers are to continue the tools that help make this kind of imaging, a little bit more available and a little bit more beneficial to the health care system, both patients, referring physicians and ultimately, the payors. So I think we're going to continue to see those kind of efforts that will drive things that none of us sitting here today can probably even imagine.

Thank you. I want to circle back to the AI technology comments you made before and then kind of how that helps drive the same-store volume. So when we think about how important is AI and technology for the business in the whole and how does it help to drive that incremental same-store volume when you think about that across the entire platform?

Yes. I think the answer to that is how do you create capacity with the existing equipment that you have because radiology has always been a capital-intensive business, and it's getting even more so as some of the newer technologies are evolving. So as we saw in our second quarter, we created capacity through the use of some artificial intelligence that which we have developed internally and at which we have bought as software upgrades, for example, in our MR equipment. I think you'll continue to see that and that the developments will be how do you create better throughput, both for the benefit of the patients as well as the benefit of the investment side of this without having to put as much capital to work because building an imaging center, putting in some of this technology is quite expensive. And there are efficiencies, particularly in certain areas like MR, like x-ray like ultrasound that have not really evolved enough to shorten scan times which then create capacity. So our challenge is creating that capacity through the use of artificial intelligence and by being able to process our patients faster than I see that accelerating with work that we're doing in other software companies that are doing right now and having a big impact over the next couple of years.

Thank you. So I want to talk a little bit about the current labor and inflationary environment that we're in. Can you discuss a little bit about that environment? And then also, how have you been able to automate processes and positions to help alleviate some of these pressures that we're seeing kind of across the entire ecosystem?

Maybe Greg and Mark can.

Sure. Got it. I'm happy to take that one. So like other areas of health care, we've been experiencing a shortage of labor particularly in the area of technologists, X-ray tax, ultrasound tax, mammo tax and the like. It's a challenge for us. It's a change for our competitors. It's a challenge for the health systems. We've been absorbing this labor inflation for some number of years now, especially after COVID where it was amplified. And despite that, we've been able to continue to grow revenue and even increase margins, which shows you how well the business is performing. But some of the things that we're doing in particular to address this -- the labor shortage include the following: we talked a little bit more recently on our last earnings call about our TechLive product, which we just got FDA approved, and it is a box that sits in between a piece of diagnostic imaging equipment and technologist workstation and allows for remote technologists. So you don't have to have the tech on-site to perform the scan, where we're seeing a great impact right now is in our -- on the revenue side, where 1 of the things that's plagued us in the last few years is that we've had to close exam rooms because of labor shortage, whether we're just lacking the staff in that particular market or we have a tech that calls in sick in the morning, and we can't replace that tech with someone else. Now we're able to remotely control that machine, not lose that revenue. And that resulted in part of the margin expansion that we saw in the second quarter where we had a 57 basis point increase in our margins from 15.7% to 16.3%. Ultimately, where we're going with this TechLive product is by sometime in the first quarter of next year, we'll have all of our advanced in equipment connected with TechLive. This will, one, decrease exam closure hours, like what we demonstrated in the second quarter. Number 2 is it allows us to hire from a much greater pool of candidates because we're not limited in the regions in which we currently operate. We don't have to have the tech on site. And number 3, where we'd really like to take this is we're starting to train some of our more capable technologists to sit in command centers and to actually control multiple machines simultaneously where we get a tremendous amount of operating leverage on our labor force. So that's 1 example of technology that we're bringing to the table to address the labor shortage. And then we're also doing a lot of things on the grassroots level to be more effective in hiring and retaining technologists, for instance, we started opening up our own tech schools in Southern California in conjunction with a non-for-profit vocational organization. We are offering internships, tuition reimbursement programs, bounties to our existing employees who bring in labor from the outside. And I think it's having an impact. We are seeing some labor stabilization. We're still going to be in, I think, in an inflationary environment in 2026, but I think we're doing all the right things to address the problems.

Thank you, it's impressive.

I think we should also mention the generative AI tools that we're now beginning to implement at the center level to try to facilitate virtually every aspect of patient engagement, whether it's scheduling, contact centers, coding, revenue cycle management, reporting tools, those things that have been traditionally manually intensive that we now can consign to artificial intelligence, tools that we think will dramatically reduce the amount of manual labor. So while we're not looking to eliminate positions, we are looking to continue to create capacity to manage more patients with the existing staff. And I think we'll start rolling out these tools and see some benefit from decreasing costs here over the next 12 to 24 months as we implement this internally inside RadNet and then be able to showcase it to commercial -- external commercial opportunities, which are rather robust out there. But we've got to make it work for ourselves before we can start marketing it to other people. And we're very excited about that as another way for margin expansion.

And if I could just echo that. I think 1 of the structural things that's happening is we are starting to have more and more of our work leverage these generative and other AI tools so that the tech becomes more powerful. And the thing that's compelling about that is, is we see the hyperscalers invest in better and better gen AI, we naturally just benefit from that. So we're essentially riding their tech investments because as our business becomes more tech-enabled, if you will, our technologists, our front office staff, as just a simple example is their handwriting recognition keeps getting better and better, the decoding of a physician's prescription gets easier for us to do. And that is sort of a -- that's our way we intend to keep writing as long as all the powerful AI tools that are out there continue to improve, our business will improve as well.

Thank you. That's very helpful. Can you spend a minute on how your diversified multimodality strategy and exclusive managed care capitation arrangements have driven growth for you as well?

Sure. So it's always been in our DNA to be a multi-modality operator. And what I mean by that is if the vast majority of RadNet centers, we do the full breadth of imaging from the routine studies, x-ray, ultrasound, mammography all the way up to the more advanced studies, MRI CT and PET/CT. Part of it is that we started as a business long many, many years ago at the California-only operator. And at the time, over 30% of our revenue came full risk managed care capitation arrangements. Today, that book of business represents about 7% of what we do. We love that business. But in order to be in order to capitate for what today is about 1.7 million lives where we're the exclusive imaging provider, we have to have the capabilities of providing the full breadth of imaging to them. And roughly speaking, about 73% of all the exams that we do by volume is from routine imaging, not advanced imaging. So we've always felt that we've had a marketing benefit by being able to put 1 prescription pad on the table of a referring physician and say, no matter what your patient needs are, you can send it to the RadNet facility down the street. And often someone has sent into 1 of our facilities for a routine study and based upon the results of that study, they're sent back for more advanced tech -- for advanced procedure. So we're getting a lot of the advanced imaging because we do the full breadth of capabilities. With respect to capitation, which I think was the second part of your question, it's something that we've done for the better part of 30 years. We take full risk for providing patient care to roughly about 1.7 million lives. The vast majority of them are in California where most of the HMO lives, the responsibility for patient care is borne by these large medical groups. And what we do is the medical group's approach rather or we approach them and in the basket of medical services that they're responsible for providing, they shift the risk for the diagnostic imaging portion to us and we get a per member per month fee for managing the imaging for these patient populations. It's been a great book of business, predictable revenue, predictable cash flow. Because we have done this for so long, we manage the utilization. So we we're able to do it very profitably. We have no cost of billing and collecting. No cost of carrying receivables because we get paid in the month that we render the services. So we have no DSOs associated with this book of business. And we have little to no bad debt because there's almost no patient portion responsibility for it. So we like it. It creates a lot of pull-through business because the same physicians who are obligated to send us these HMO patients tend to also send us the discretionary fee-for-service business as well. So it's a way for us to lock up a lot of fee-for-service business and relationships with the referring physicians. And so long as we feel like we're getting paid adequately and appropriately for the services we're providing, we'll continue to do that business. If you do look at our income statement over the last few years, we have converted several of these contracts into fee-for-service relationships in situations where we weren't able to get the kind of pricing increases that we thought that we were -- that made sense for us. And so we flipped into higher paying fee-for-service businesses.

Interesting.

I might add that the recent announcement that we made with this 1 large -- or the largest medical group that we have a capitated arrangement was that they added our early breast cancer detection, EBCD, to their benefits for their membership. They had no cost. So they are paying us. They're the first real payor, if you will, to embrace this as a routine benefit and they only got there because of our capitated relationship and the confidence that they have and the quality of the imaging and the benefits from applying this artificial intelligence for their patients. So for those people that have the long horizon, if you will, about using early detection as a way to reduce costs and improve outcomes, it's just a matter of time because this is adopted. But in this particular case, the capitation relationship led to a substantial book of business that we might not have otherwise seen.

Interesting. And congrats on that. Thank you for that. I want to shift to the joint venture de novo development piece of it all. But can you talk a little bit about the de novo development strategy in JVs with hospitals and health systems that help to accelerate the growth of the business?

Mark, do you want to take that?

Sure, Howard. So yes, today, 155 of our 405 locations or 38% of our locations are held within joint ventures with some of the larger health systems in our markets. They've been great relationships for the hospitals. They benefit because they're looking for a long-term viable outpatient strategy where they recognize today that the commercial payers are getting more and more aggressive in manage site of care and trying to move the ambulatory outpatient business outside of the hospitals into the lower-cost freestanding centers in most of the markets in which we operate, the hospitals are charging anywhere between 200% and 500% of our pricing for providing the same services. So the hospitals know that they're on the losing side of a trend and that this business is going to continue to move into the ambulatory sites of care. So we allow them to buy an equity stake in our imaging centers in that market or in that catchment area around our hospitals. And in return, the quid pro quo is that we expect the hospitals to then utilize their relationships with the community-based referring physicians and drive those referrals into now our jointly owned outpatient centers. So they've really helped with the incremental volumes that we otherwise wouldn't see without the joint venture relationship. They also are helpful in terms of contracting with the major commercial insurance companies where they help us with the leverage to be able to get and establish long-term fair and equitable pricing. It's been a great growth area for us. We expect that in the next several years, it would not be too much of a leap to believe that we could have over half of our centers in these relationships. And we have existing partners who are looking to take us into other areas, other geographic areas as partners to be able to have an outpatient imaging strategy.

And on the de novo side, last year, we built 9 imaging centers, this year we've built or will have opened 11 new imaging centers. And next year, we have 11 additional centers planned. And virtually all of those, it's a reflection of demand and the need for us to add additional capacity. I expect that, that may slow down from this point because of the tremendous investment we've made in this. But now with the advent of some artificial intelligence and other capabilities that we have for creating capacity, we might be able to do that without building as many new centers. But we don't really build greenfield centers where build it and they will come. These are all a reflection of managing the capacity and the access within the markets that we're in. So that's been our strategy rather than maybe buying centers, but building them because we know we can fill them. So our ramp-up time for a new center is maybe 90 days as opposed to -- I'm talking about to get to breakeven or even better because we know we have the demand for that right out of the gate.

That's impressive. The they are just waiting there for you. So I want to talk a little bit about market expansion opportunities. Can you discuss a little bit about market expansion opportunity in areas of focus that you look to increase that entire TAM opportunity? So you mentioned a little bit about enhanced breast cancer detection, lung cancer screenings, prostate, Alzheimer's. Can you go into a little detail on that?

Well, I think those are a little bit different. One is the market expansion. Heretofore, we've kind of limited where we were looking to grow the company and stay within our markets every time we have assessed going into new markets, we've always come to the conclusion it's better to use our capital in existing markets to perhaps create a greater presence and greater operating efficiencies. And that single made sense. I think that still makes sense. However, the difference today is that given the right opportunity, I think we would look if we can find a platform company to grow in, we don't want to just operated imaging -- 1 or 2 imaging centers in a market list. There is a plan and an opportunity for us to grow within that market. So we now have opportunities perhaps with other hospital partners to do that rather than come in and just be make it or we're being asked to look at other opportunities in markets with platform companies that are looking to have RadNet help manage their growth and opportunity. As far as our AI and the early disease detection, that will be pervasive throughout our entire operation, no matter where we market and will go into commercialization with other non-RadNet facilities that are looking to use these tools. The things that we're talking about today will be or already are the standard of care. And so it's just a question of when those get adopted either by the provider or when they get adopted by the payor from a reimbursement standpoint. So I don't think we're doing anything that somebody in our position, with our scale, with the capital that we have, we look at it differently. This is a company responding to market opportunities and for that matter, the needs of the health care community to transition itself from the typical fee-for-service business into population health and screening tools for early disease detection.

I would echo though, you're right that there are new medical domains that are opening to your point. I think 3 or 4 years ago, when aducanumab was first approved, everyone thought there was going to be a big boom in our business, which didn't pan out because aducanumab didn't pan out. But now with lecanemab, and donanemab for treating Alzheimer's disease, we are seeing more MRI and PET growth. And as new medical domains open, I think another great example is the heart flow and coronary CT. That's a technology which didn't have 5 years ago. And so our coronary CTA businesses growing substantially year-over-year. And those new technologies are allowing us to do population health for things that we didn't have the opportunity to do even 5 years ago. So -- and I think that's going to continue. We see a lot of innovation. We actually think that the blood tests that people are doing like the grail, the multi-cancer early detection tests those actually will likely be a driver for our business. You get 1 of those tests, and it says you have a positive signal. Even if it thought you have pancreatic cancer, you need to come get a PET/CT to figure out, well, how big is the pancreatic cancer? Is it spread all those things. So as medicine starts to move earlier and earlier to manage populations more effectively, imaging just plays a natural role and I think it's a good call out.

I hear the tip of the spear is early detection.

I think it's not unreasonable in a term that I've used that people think of imaging as the gateway to population health. And there's tools that they're not talking about and there have been several papers about using routine abdominal imaging, particularly MRI scanning to look at body composition and help predict the development of diabetes far earlier than any blood tests. So these are the kind of things that are capable of being done both with the technology of the equipment and particularly artificial intelligence that can help take these leads of data and sift through them and come up with some very meaningful determination of what the implications of these tests are.

One testing facility we're watching closely, the U.K. just started a trial of using MRI to detect prostate cancer early. Because about 16%, 20% of prostate cancers aren't picked up through a blood test through PSA. Either just -- they're PSA negative and yet you get prostate cancer. NRAI is actually selected by that trial to help handle the large amounts of data and analyze the prostate images appropriately. So will that come to the U.S.? At some point, I think it's likely that the medical advances will say, yes, rather than PSA, which has had all these problems with overdiagnosis, over treatment, let's use something that's more capable and more accurate, which in many cases is these advanced engine tools.

Thank you. So I'm going to ask you 1 more question, and then I want to open it up to any questions from the audience as well. On the M&A front, can you just walk me through what a typical tuck-in acquisition is like from LOI to the integration phase. What are some of the key areas that you look at to drive that incremental volume cost reductions, margin expansion, kind of the playbook?

Well, our typical profile in the past, there's been acquisitions in the range of 4 to 6x EBITDA. There are some that we do this or asset purchases because they're not making enough profit to create positive cash flow. So we may look at those as asset purchases, particularly in areas where we need capacity, and we know we can help fill that. So the driver of M&A is not only how does that center perform. But what can we do if we're going to pay a multiple for this to deleverage the cost of that. What's exciting about, I think, our latest efforts in artificial intelligence, particularly the generative side is that we now can take any imaging center and reduce its cost and deliver a transaction that we might have otherwise not done because we thought it might have been a little too expensive. So now we have additional ways of deleveraging a transaction that might that we might deem to be very strategic, but which heretofore might have not fit the profile of us being able to find a more cost-effective way to incorporate it into RadNet. So we're going to continue to use the same discipline that has gotten us to the point that we are right now, but we have more tools in the toolkit to perhaps take some bigger leaps where we think these are of strategic importance. And more importantly, we have a lot of capital that we can deploy in order to do that.

Thank you. Any questions from people? We have another 1 from me. Hitting again, I guess, on the M&A opportunity, both in core radiology and in digital health AI. Can you talk a little bit about how your scale helps to expand your reach and improve the integration of some of these new acquired platforms?

Yes. I think it's all about scale. And most AI developers have to go out and buy their data. We don't have to go out and buy it. And we have better quality of data because we control the entire process. So all the clinical information is available to us to the extent that we've needed. And perhaps more importantly, we've got a huge enterprise to try to further develop these and pilot them on because we have specialists almost in every facet of what we do operationally, both on the clinical side and on the technology side to test these out, refine them and get them ready for prime time. So I think the position that we're in is clearly a reflection of scale and volume. And the bigger we get, I think, the better we get, too.

Really impressive. Well, thank you for joining us today. Thank you for coming to our conference, and I really appreciate any closing remarks?

No. I just think it's an exciting time for us, for health care. And as I think I mentioned, we probably will be having an Investor Day to maybe take a deeper dive into what the future of RadNet looks like here within the second week of November, and I hope to see many of you at that also. Thank you.