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In the health care business, bigger may be better.
That's the strategy Fort Myers-based 21st Century Oncology Holdings is pursuing as it tries to outrun the cutbacks in government and private insurance reimbursements for the services it provides at its radiation treatment centers.
21st Century Oncology says it is now the largest physician-led operator of radiation treatment centers in the world. With 179 centers in 16 U.S. states and six Latin American countries, the company is more than three times larger than its closest competitor.
Efficiency and scale are keys in health care today. Since 2011, the company has spent $10 million to beef up its internal operations team to integrate its acquisitions.
Consider this example: In May 2010, 21st Century Oncology acquired a single radiation-treatment center in Myrtle Beach, S.C., for $33 million. The Fort Myers-based company upgraded the center's equipment, recruited new physicians and consolidated its back-office operation. Within seven months, 21st Century Oncology boosted the Myrtle Beach facility's earnings by 95%.
These kinds of savings are critical as the government and private insurance companies continue to slash payments to doctors and hospitals. For example, Medicare, the government's health insurance program for older people, reduced its reimbursements for radiation oncology by 7% in 2013. For 2014, Medicare plans to lower that again by 5%. Medicare payments represented about 45% of 21st Century's net patient revenues last year.
“The concept of value is key here,” Daniel Dosoretz told investors on a conference call recently. Dosoretz, CEO of 21st Century Oncology in Fort Myers, is one of the founders of the company. “Value is defined as medical care of the highest quality, with the best technology, provided promptly in a coordinated system and delivered in convenient locations at the lowest cost.”
But 21st Century Oncology's expansion has come at a steep cost: $974 million of long-term debt on its balance sheet. Its quarterly interest expense of $24 million in the most recent quarter ended Dec. 31 swamped its earnings to a loss of $9.6 million. Without the debt expense, the company would have been profitable.
The company's debt load came as a result of a leveraged buyout by private equity firm Vestar Capital Partners in early 2008, a deal that was nearly derailed by the financial collapse later that year. Since then, the company's debt continued to grow as 21st Century Oncology ramped up its acquisition spree in recent years. Most recently, the company acquired Oncure Holdings, a bankrupt rival, for $125 million, including $82.5 million of assumed debt.
Now, five years after it bought the company, formerly known as Radiation Therapy Services Holdings, Vestar seeks to recoup some of its investment with an initial public offering of stock. Although it hasn't specified exactly the number of shares or what price it might seek, documents filed with the Securities and Exchange Commission show it seeks to raise as much as $300 million in equity. Because of the IPO, company executives were not available for interviews.
But a review of securities filings, transcripts from conference calls with investors and interviews with former board members show how the company has deftly managed the dramatic changes in health care. At the company's helm in Fort Myers is Dosoretz, a cancer physician by training who has steered the business to become a leader in the industry.
“Danny [Dosoretz] is one of the most brilliant guys I've ever met,” says Ron Inge, a Fort Myers entrepreneur who served on the board of Radiation Therapy Services. Dosoretz has built the company from $56 million in revenues in 1999 to more than $737 million last year.
“But what impresses me the most is how he still sees patients actively,” Inge says. “He's not all about building.”
Back to the future
21st Century Oncology has been down this road before.
The company went public in 2004 for $13 a share. On Feb. 21, 2008, Vestar Capital Partners paid $32.50 a share in cash for the company, taking it private in a leveraged buyout. The $1.1 billion deal netted the three shareholder founders — Dosoretz, and fellow physicians Howard Sheridan and Michael Katin — $234 million.
Dosoretz, 60, who personally netted $127 million in the Vestar deal, said at the time that he reinvested $45 million into the business. Recent filings show Dosoretz owns 7% of the voting classes of shares of the company. His total compensation was $7.6 million in 2013, including $5.5 million in stock awards.
When the company went public the first time in 2004, Dosoretz and fellow investors said the firm needed to access the public markets to raise capital for its growth plans.
But Dosoretz later said the administrative burdens of government requirements on publicly traded companies in the form of Sarbanes-Oxley legislation made going private a compelling choice. “The compliance with Sarbanes-Oxley cost $500,000 a year,” Inge recalls “It detracted from the ability to practice medicine. They could not focus on growing the business as much.”
Because Vestar owns 80% of the voting shares of 21st Century, it likely recently decided to take the company public to recoup some of its investment. It's common for private equity firms to use an IPO as an exit strategy. Vestar officials declined to discuss the IPO and also declined to take questions from investors and analysts in its most recent earnings conference call.
Big growth plans
If the acquisition of Oncure is successful, investors in the company's stock may be attracted by 21st Century Oncology's growth prospects.
Over the past three years through November, 21st Century Oncology has acquired 12 companies representing 71 treatment centers. “Our pipeline of potential targets is robust and acquisitions will remain a significant part of our growth strategy,” the company says in a stock-registration filing.
That strategy picked up momentum last year as the company completed three acquisitions that now represent 24% of the company's revenues. The biggest of these was Oncure, which added another 33 centers in Florida, California and Indiana.
After it closed Oncure's headquarters and consolidated its back-office operations, 21st Century says it slashed $15 million in Oncure operating expenses. The company says Oncure will contribute $30 million in earnings annually.
There's a lot riding on the Oncure acquisition. “During the quarter, we made meaningful headway integrating Oncure, the largest and most transformational acquisition in our history,” Bryan Carey, president and chief financial officer of 21st Century and senior adviser with Vestar, told investors recently.
If Oncure is as successful as advertised, other significant acquisitions could be on the horizon. 21st Century says it has access to another $250 million in debt to finance acquisitions.
The landscape is rich with targets. In 2013, there were about 1,100 freestanding, non-hospital based treatment centers and 21st Century only owns about 13% of those.
The strategy isn't limited to the United States. 21st Century plans to expand its international presence by building new treatment centers and acquiring existing ones. Dosoretz, a native of Argentina, already has boosted the company's presence in Latin America to 34 centers.
The Latin American centers contributed $89 million in revenues for the year ending Sept. 30. “We believe that our international operations provide a faster growth opportunity than in the United States,” the company says in its filing.
That's because the industry there is even more fragmented than in the U.S. and entrepreneurial doctors there don't have easy access to capital to pay for the newest treatment machines. “Organic and acquisition growth opportunities for radiation therapy services outside of the United States are driven largely by higher volume growth from strong underlying demographic and health care industry trends, an underserved and fragmented market and increased access to and payment for technology in the treatment of cancer,” the company says in its filing.
If the public markets remain in a bullish mood, a successful IPO could boost 21st Century Oncology's prospects. As Vestar's Carey told investors: “We are at a key inflection point in our history.”
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