Good afternoon. Day one of the 45th, I have to keep looking at this, Annual Raymond James Conference winding down. And this morning, I had a company that's been to every single Raymond James Conference since 1983, that's Service Corp. Today, we have a different, we have a company who's never been, RadNet, RDNT, 'cause he finally got around to filing his financials before the first week of March. So-
True, true that.
So now we have Mark Stolper, CFO of RadNet. So we don't have slides; we have a fireside. So just to tee this up for a second, company's been around since before the song the Macarena was the hit in 1996. Been around for a long time. It's really caught a gear. Stock's more than doubled in the last year. You know, it's a combination of, I think, a cyclical recovery and utilization, but also some excitement about the company's AI division, which was incubated years ago. It wasn't just a jump on the fad, which has some real use case benefits, and it's being separated out, for the first time.
Also, we think the company has just been an excellent steward of capital and is reaping the benefits of being, by far, the best company in this industry, and is only in, what now? Eight states. You're only in eight states, correct?
8 states as of last week.
Right. So only in eight states, and 400 imaging centers. The fundamental case is that these prices are one-third to one-fifth the price of getting it done in a hospital. So PSA to you, if you're getting an MRI, don't get it done at the hospital. Go get it done at a freestanding imaging center. And if you're in New York, you can go get it done in about 20 blocks north of the financial district at RadNet.
As long as you have good insurance.
As long as you have good insurance or pay cash. So the first question, and this is 100% fireside, we'll leave some time at the end for questions. So the first question for me is, you know, if we looked at the Q4 of 2022, that's really when the revenue growth shifted from kind of a 6% to a 16%, and it's, this was your first tough comp, but the revenues have stayed elevated. You know, on the debate of how much of this is a cyclical recovery and how much of this is just structurally higher demand, does the company have any particular point of view on, on that acceleration?
Yeah, I think we do. You know, a lot of people ask me how much of our growth in the recent years has been based upon a pent-up demand from COVID, when not a lot of people were availing themselves of medical services. What we tell them is that we think we've worked through that level of pent-up demand. You know, I do read from time to time that patients not going in during that time period have created kind of a backlog of long-term chronic diseases. But the demand that we're seeing, I think, is coming from a number of other factors, not having anything to do with COVID. First, our industry grows every year.
You know, there's been tremendous advances in technology that are driving more of the advanced or more acute imaging in our industry, including MRI and CT, and PET/CT scanning, for example. MRI equipment is shorter scanning times these days, which allows for better throughput and better utilization of our imaging centers, which allows us to work through backlogs and deal with the heavy demand that we have.
In PET/CT, there's been advances in radioactive pharmaceuticals, particularly around prostate imaging with the PSMA test and the growth thereof, as well as some of the newer tracers around Alzheimer's imaging, which is just starting to take hold. We've seen a few patients thus far around Alzheimer's imaging.
And, you know, there's been a number of advances in post-processing software and AI that are driving technology changes, which create more and more medical indications for ordering these types of tests. So the industry continues to grow, and then within this growing industry, which is believed to be about $100 billion annually on a revenue services basis each year in the United States, within this growing industry, you have a market share shift that's taking place between hospitals and outpatient diagnostic imaging centers.
And this is not unique to radiology or imaging. It's you're seeing the same shift from hospital volumes to in favor of the ambulatory, lower-cost sites of care. You're seeing that with outpatient surgery centers, physical therapy, the growth of urgent care centers, home health, virtually every specialty, and we're benefiting our, our-- You know, the outpatient industry is benefiting from that shift of site of care.
You've got the insurance companies more and more instituting pre-authorization processes and trying to direct this business to the lower, lower-cost centers. You've got radiology benefit managers that are doing the same, and it's just, you know, the future of healthcare, and I think we're still in the early innings. So we've always told our investors, to go back to your question, we've always told our investors that on an organic basis, over the long term, we could grow kind of in the 2%-4% organic growth basis.
Last year and the year before, you can see that we've demonstrated, you know, kind of in the mid-single digits, which I think is sustainable for some time to come.
So in case you haven't picked up on this, this company gives very thorough answers to questions. So,
I think that was a 57-part answer. It was very, very-
That's very good. It'll take you a couple of hours to get through the transcript because that's a typical RadNet, very thorough answer. I think an area of the company that certainly, if I had to take a test on, I wouldn't make an A, but, can you describe? So one of the interesting things about AI to us, regardless of what you think it's worth, is just the throughput improves.
You know, the doctors can read more scans, you know, with this, with this tool. Could you talk about your Friendly PA model and how this has a business case for RadNet, how it can lower your costs? You know, 'cause you bill globally for both the doctor read and the scan.
So just talk about that Friendly PA model, what % of your scans are fixed costs, and then what it means for you from a business case standpoint if you get, say, a 20%-25% improvement. And then how many doctors-- What's the resistance? How many doctors are using this today? Is it fully rolled out? And just kind of explore that topic a little bit, please.
Sure. I'll try to be briefer this time.
Succinct.
Succinct, there we go. You know, so we continue to believe that AI is gonna have a transformational impact on our business, which is why we wanted to lead the industry and make these investments, and we started investing in AI over four years ago. So we were kinda early in the trend before it became a buzzword. And we tried to focus our investments and areas-
Just remind us how much you put into the AI segment?
Well, we bought three companies in total for about $150 million.
Okay.
And then, since we've had those companies, we've invested in the development, the further development of their, of their products.
Okay.
So, it's a sizable investment for our size, for a $1.6 billion revenue company. And we tried to focus on the areas that we thought had the biggest impact on our core business of providing imaging services, both in the areas that your question intimated about creating productivity benefits for our physicians, and accuracy, of course, and better care, but also in the areas that we felt could drive significant revenue opportunities around large-scale population health screening.
So when we looked at the four major cancers, and there are four cancers that comprise upwards of 75% of all the incidents of cancers worldwide. You've got breast cancer, prostate cancer, lung cancer, and colorectal cancer. Today, as we sit here, only one of those cancers, meaning breast cancer, utilizes diagnostic imaging as a widespread population health screening tool.
So today in America, about 40 million women come into imaging centers or hospitals to get their annual screening mammogram, and we felt that with prostate, lung, and colorectal cancer, that you could utilize diagnostic imaging for other effective healthcare screening programs.
So, we bought a company called DeepHealth in the breast cancer area, and that's and we're monetizing that today. I can talk about that later. We bought a company, and two companies in the Netherlands, one that focuses on lung cancer screening and the other, prostate cancer screening. We launched a self-pay program where we're offering the AI to women.
We started this program in November of 2022. We grew it throughout the East Coast in 2023. We've launched it on the West Coast here in early 2024, and we've tripled, you know, AI revenue between 2022 and 2023. We think we're gonna grow our AI business by north of 65% here in 2024.
Do you think, given the high out-of-pocket, the uptake will continue to be in that 25%-30% range?
Yeah. So today, about between 30% and 35% of our women are electing to be in that program. We hope, you know, for better participation, we're we started opening up a pilot within inside of Walmart with our Mammogram Now, mammography offering, where we're also offering the breast cancer AI. So on the clinical side, we think that ultimately, diagnostic imaging is going to have widespread implications for these screening programs for all of these cancers, and we wanted to get in with the AI to lower the cost. Going back to your original question, which is, what does it do for the productivity?
Well, if you were to ask our mammographers nationwide, you know, how they like using the AI, I think you would have them tell you that if we pulled it away from them, they would say it was akin to malpractice.
Yeah.
They've gotten that used to the AI. We're finding more cancers, about 20% more cancers than we otherwise would find without the AI, and we're lowering callback rates for women when the radiologist finds something suspicious. We're lowering callback rates because the radiologist is more definitive upfront. So-
Do you have a stat on the callback reduction?
Yeah, we're about 17% lower on the callback reduction.
Seven percent.
Seventeen.
Seventeen.
Yeah.
Okay.
But the payers love this because, you know, we're, we're eliminating potentially unnecessary follow-on tests, such as ultrasounds and MRIs.
But so if you get 20% more throughput, just theoretically through your chassis, what does that mean for your economics? 'Cause of your fixed costs model, so I think it's two-thirds of your reads are done through your Friendly PA model.
Yeah, so,
So how does that help RadNet to get more product throughput?
Yeah, so two-thirds of our revenue runs through physicians that are in these friendly professional corporations with whom we contract, where they're run essentially like an economic equivalent of a subsidiary. So if we make those doctors and those businesses more efficient, all of that benefit inures to the benefit of RadNet and our shareholders. So theoretically, if you could use AI on every single body part, every single modality, which we're years away from being there, it would have a significant financial impact on our business.
Okay. You know, just a little bit of a side detour. Alzheimer's, you said on the call that we were a little unclear about how many scans this is a year. It's four? I think you said it's four scans per year. So just talk about what's baked into your assumptions for Alzheimer's in 2024, if anything, and, you know, if you've done any work to size that opportunity.
Sure. So, to answer your first question first, nothing is baked into our 2004 budget or guidance around-
2024. Two thousand and twenty-four.
Twenty-four.
Yeah.
That, too. Around Alzheimer's imaging. We've just started seeing the first patients last quarter, and we've done about 110 of those initial PET/CT screens for the amyloid, the presence of these amyloid plaques. Even though the drugs by Lilly and Biogen were approved over a year ago, it's been slow coming to market.
The CMS has essentially shifted the authorization requirements for these patients to the individual regional Medicare administrators, the MACs, and so now we're just starting to see some of these patients being authorized. So, you know, look, the statistics that I'm reading are that there's over 6 million Americans that suffer from some level of Alzheimer's or early-onset dementia.
And some portion of those, you know, will certainly go on these therapies, but it's too early kind of to tell. Now, when a patient is qualified to get the initial scan to look for these amyloid plaques, it's... They would have an initial PET/CT, and then an initial baseline MRI, because in the clinical trials of these drugs, there were enough adverse side effects related to hemorrhaging, that part of the clinical protocol is when a patient goes on these therapies, they have an initial baseline MRI, and then every 3-4 months, while they're on the roughly 15-18 months therapy, that they would have an additional MRI.
So it could be a huge, you know, driver for our MRI and CT business, but right now, we're not putting that in our projections.
So it's upside. If we think about the longer-term growth model, what is a good number to think about in terms of your just de novo plus M&A? So should we think about that as... I mean, I think we've thought about it as kind of a 3%-4% good guy every year to the top line, but as you get bigger, that gets a little tougher to do. So what are your—if you look out over the next five years, what do you think is a reasonable assumption around square foot expansion, if you will?
Yeah. Well, what I would point you to is, you know, history. If you look at the last 15 years of our operating history, you know, we've grown the business at 8.5% compound annual growth rate on the top line, and that's been a mixture of same-store sales performance, which is average, kind of 3%-4%. And then on top of that, our de novo centers, acquisitions, hospital joint ventures, software sales in our eRAD, now digital health division, and more recently, AI revenue growth. And I think that, you know, despite the fact that we've grown from a very small company to where we are today, I think that that growth rate is still achievable in 2023.
Last year, you know, we grew 13% on the top line, a combination of all those things. It's a little difficult to point to, you know, investors to what that number will be because it's highly dependent upon the M&A environment and how many deals we might do in any given year. There are some years that we're highly acquisitive and other years where we've done very little M&A. But I think, you know, if you were to go out for the next 10 years, would it be reasonable to think that we can continue the 8.5% average growth? I think that's reasonable.
So your new digital health segment, three years from now, do you think that's inside of RadNet, or do you think that could be an independent company? What kind of odds do you put on those two outcomes?
That's a good question.
Thank you.
You know, we put the software business, which was embedded in our imaging center segment last year, into the AI business for 2024 and beyond, because those two businesses have very different growth characteristics-
Mm-hmm
... as to our core business. They also have different capital requirements, and different margin profiles. And the way we're managing those businesses, and how it's unfolded organically, is that it takes a different type of, you know, people with different experience to manage those types of businesses. So we brought in a management team over the last 12 months, and we're still building that management team, who's now responsible for managing both of those businesses.
We've kind of stood it up on its own, partly to give investors more transparency about how those businesses are performing, and then partly because, you know, there might be an opportunity in the future to spin off this division, do a subsidiary IPO, bring in a joint venture partner, an investor. We don't really know how it's gonna unfold, but it's profitable.
You know, we're projecting it to do $60-$70 million of revenue this year, somewhere between $12-$14 million of EBITDA, and we think also that, you know, it'll allow investors to help better value the company too, because those businesses have different valuation metrics than our core business. I'm not really sure how it's gonna unfold in two or three years, but it's very possible that, you know, we do do something different with that business.
There's a fair amount of R&D spend still. Is that pace that we see this year expected to continue, or is that kind of a one-timer? Are there some one-timers in there?
Sure. So, are you talking about on the base business or in the digital health business?
Digital health.
Digital health. Okay, yeah. So last November, we made an announcement at the big radiology show in Chicago, the RSNA, that we were taking our radiologic software business, so what we used to call eRAD RIS and eRAD PACS. RIS being the radiology information system, the front-end system, and PACS meaning the image- the back-end image management system.
We were gonna take that software to the cloud, and then we were investing, going to invest in a number of generative AI modules that we would build into that now cloud-based operating system, that would improve workflow and automate functions such as patient scheduling, pre-authorization, insurance verification, and certain revenue cycle functions that would bring tremendous efficiencies to our own workflow because we're the biggest customer of eRAD, as well as to our 200+ customers and anybody else who wants to buy that. So that development project is well underway.
We're starting to beta test some of those modules within our imaging centers, and the plan and the goal is by the RSNA, the radiology show this year in November after Thanksgiving, that we would be able to announce a fully commercialized product and start selling it to other customers in 2024.
So just going back to the original question, is the investment phase, is-
Oh, yeah.
Is this a-
Thank you.
Yeah.
So, in order to bring that product to the cloud, you know, we are projecting to invest up to $10-$12 million this year in 2023. There will be some additional investment and development going on. Excuse me, 2024. There will be some additional development going on next year in 2025, but ultimately, that investment should go away.
So the accounting is weird because you're expensing it, but I know you're adding it back to your adjusted EBITDA. Why, why wouldn't that be capitalized? What, what's the-
It, it-
Not to get into an accounting seminar, but I was kinda surprised that was an expense.
Yeah, it has to do with the accounting and the difference between accounting for internal use software versus a software that you plan to sell to others. So we've gone over it with our auditors, and we're gonna expense it.
Yeah. Parker, you were right. Parker told me that, but I didn't believe him, so Parker was right. Okay, couple other things, and we'll leave five minutes at the end for questions. You're sitting on a ton of cash. You could have paid off more debt than you did. You passed the point where the prepayment penalty kicked in, so why are you sitting on all this cash? What are you gonna do?
Well, we think that this is the right time to accelerate the growth of the company, and that could take a number of different forms. One form is, you're already seeing it, we're in the process of building and developing a number of sites. We have 12 de novo centers that we're hoping to open by the end of 2024.
We've got another 8 or so that are on the docket in terms of developing new centers that would open in 2025 and 2026. And so we're spending you know, an extraordinary amount for us on CapEx to develop these centers. Second is we believe that the M&A environment you know, is going to heat up. There are... We're seeing opportunities in all of our markets for small tuck-in deals.
As you saw last week, we announced that we're entering a new market in Houston, which is the, you know, fourth-largest metropolitan area, 7.3 million people, highly fragmented outpatient imaging market, fragmented hospital market as well. So we think that there's more to do in Houston after this initial investment, so we wanna have capital earmarked for that. We also think that there, in the next 12-24 months, there might likely be some larger scale acquisition opportunities that you know we'll come to at least to the point where we'll be evaluating them. Whether we do them or not, you know, it is highly dependent upon the opportunity.
But, so we wanna be prudent there, and we also wanna be prudent about our capital structure. We're now under 2 times net leveraged. It's not a secret to us or anyone else that, you know, interest rates have gone up by 500 basis points in the last 18 months, and-
It was a secret to Silicon Valley Bank.
Yeah, perhaps. So, you know, we wanna be very conservative with our capital structure as well.
So when companies talk about platform deals, that usually implies they paid a bit higher multiple. I assume you paid a bit higher multiple than normal to get into that market?
To Houston?
Subsequent deals might be cheaper.
Yeah, generally speaking, when you enter a new market with scale, you know, you're buying a more sophisticated player who's, you know, either been shopped or invested or advised by an investment bank, and so you generally have to pay a little higher for the platform acquisition.
Yeah
... as you do for subsequent tuck-ins. But I think, you know, given this particular operator, I think we got it at a reasonable cost. And I think there's a lot to do in Houston.
7-8 times EBITDA wouldn't be a crazy assumption?
I don't wanna say it publicly.
Okay, that's good.
Yeah.
So for those not on the webcast, I'll talk to you about it later, what Mark did. Okay. Lastly, a little bit of the capitation business has been, you know, kinda stable, mostly California. Is that just the outlook for that business? Other markets just aren't gonna, you know, get a jump on that train?
Yeah, so, capitation is now about 9.5% of our business, represents about $153 million-$155 million of annual revenue. The vast majority of that business is in California. So I think of our 2 million or so lives that we're 100% responsible for on a full risk capitated basis, 1.9 million of them are in California, and that's mostly a function of the way HMO lives are contracted for in California, where in California, most of the risk of patient care for HMOs are passed from the various HMO managed care players to large medical groups, you know, either staff medical groups or these IPAs, independent practice associations.
And then, what we do is we subcontract with those IPAs and those medical groups, and take the risk of those patients from them for a piece of their per member per month fee that they're getting from the various HMOs. That structure that exists in California doesn't exist in many other markets around the United States. You see it a lot here in Florida.
California.
You see it in a few other markets, but, you know, there's a lot of talk about, you know, value-based care and risk-based contracting, and, and we love that, and we do it, and we'd love to do more of it, but it's really a function of where the healthcare delivery system goes in the future. Enrollment has been fairly stable in these contracts, which is why our revenue has been stable, but not it, and it really did not grow 2024... 2023 over 2022.
So just to be clear, they don't take medical risk. They take risk of people getting too many scans, you know, so it's not like you're taking hospitalization risk and-
Right.
Yeah, you're just taking risk on your... using your chassis.
Yeah. What we like to say is, you know, our equipment does most of the work, so, you know, our equipment doesn't complain to us when it sees an extra patient or two, you know, on a daily basis. But what it can do is if we're wildly off in terms of projecting utilization, it can push out the available slots for our fee-for-service business, which is not good.
So there's news today that maybe Congress might intervene on the cut to the specialists, for the specialists. What could you size that impact? Have you had a chance to look at that, and if so, could you size that?
Sure. So, the appropriations bill that looks like it's going to get passed by March 8th would mitigate the cut that is proposed or that has already gone into effect as of January 1st, in the Physician Fee Schedule, where the conversion factor-
Right
... rate was going down by 3.4%. It looks like this bill has a mitigant where roughly half of that, or 1.72 of the 3.4% cut will be mitigated.
Yeah.
My feeling is that all that's gonna do is push that into next year. I think CMS is gonna get its money one way or another, but it does make you know, 2024 a little bit more attractive for us.
So it-
For us, it was an $8 million cut.
It could be a $4 million good guy if it's-
About a $4 million good guy.
If it's that... See, that's how you get to it. It's the same answer, right?
$4 million-
Not everybody is-
I know.
You know?
That's a gift, Mark. I struggle. So, any questions? We got a couple of minutes for questions. Yes, sir.
Yeah, fairly sizable sort of healthcare service company in eight states, not a lot. Can you explain the dynamics or could it be line home state... Repeat the question. Eastern part of the U.S., not the same benefits as-
Sure. For those of you who didn't hear the question, the question was, you know, we're only in 8 states today, how many states do we think, you know, we could be in, you know, in the future? And the answer to that question is, we like to be geographically concentrated and have our centers, you know, clustered, because a number of reasons.
One, from the standpoint of operating at a low cost, there's significant efficiencies that we can drive by centralizing, you know, scheduling, pre-authorization, insurance verification, marketing, and leveraging those costs over densely clustered centers can create, you know, tremendous efficiencies.
Secondly, it helps with contracting. It helps, you know, to have a fair seat at the table with the commercial payers, you know, by having, you know, some scale in a market, to get long-term favorable pricing. So the answer to your question is, we could get as large as... There really is no limit to how large we can get. It's just that we've been very deliberate in how we've been growing the business up to this point, where we've wanted to go into. If we're gonna go into a new market, we'd like to go into it with scale.
And so I think there will be opportunities for us to, like, like we did in Houston, go in with a big acquisition, or in the case of Arizona, we went in with a hospital partner, with Dignity Health, and there probably will be other opportunities like that in the future.
Great job. Thank you.
Thank you.
Yeah, so now you get a round of applause.