Amsurg Has An Acquiring Mind For Market Share Growth

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W hen you're one of only a few national players in an industry dominated by small, local operations, you can gain market share pretty quickly by gobbling up the little guys.

That's been a big part of the growth strategy atAmsurg ( AMSG ), which owns and operates ambulatory surgery centers and physician practice groups.

The company has been an aggressive acquirer through the years, which is one reason why its annual revenue has more than doubled since 2011. It's made six buyouts this year alone -- and they don't even include its $5 billion bid forTeam Health Holdings ( TMH ), which Team Health rejected last month.

Most of Amsurg's deals are small, tuck-in acquisitions that allow it to grab share in existing markets or extend its reach into new ones. A typical deal was its November acquisition of Valley Anesthesiology & Pain Consultants, a Phoenix-based practice with about $160 million in annual revenue.

Valley provides anesthesiology and pain-management services through more than 240 physicians and 38 allied health providers. It also operates 25 ambulatory surgery centers and numerous physicians' offices in the Phoenix area.

The Valley buyout provides a "significant expansion" of Amsurg's physician services outside of its core operation in the South and East, Chief Executive Christopher Holden said on a third-quarter call with analysts.

"We significantly diversified our East Coast concentration and established a strong presence and a new growth market out West," he said.

The deal itself was made possible in part because of Amsurg's earlier acquisition of Sheridan Health Care, a provider of anesthesia and other services. After that $2.35 billion buyout closed in July 2014, AmSurg split its business into two divisions: Physician Services, which includes Sheridan; and Ambulatory Services.

'Partner Of Choice'

The Sheridan buyout was significant not only for its size but also because it gave Amsurg leadership positions in areas outside of ambulatory services. Those areas include anesthesia, children's services, emergency medicine services and radiology.

The addition of Sheridan also gave Amsurg more financial might to make buyouts. And it enhanced the firm's reputation in physician services -- an important consideration when small, independent practices are looking for a larger partner.

"We believe the Valley deal is a clear sign that Sheridan is viewed as a partner of choice among physicians," Holden said on the conference call.

This is a particularly ripe time for buyouts in ambulatory and physician services, says Jason Gurda, analyst at Keybanc Capital Markets.

"From a macro perspective, there are a number of forces driving consolidation," he told IBD. "For one thing, (medical) reimbursements are getting more complex, which makes it more difficult for small businesses to be stand-alone operations. Also, it's easier for larger companies to negotiate with managed-care firms for favorable contracts, which leads to cost savings over the long term."

As of Sept. 30, Amsurg owned and operated 253 surgery centers and one surgical hospital in 34 states, and provided physician services to more than 360 health care facilities in 27 states.

The company's ambulatory surgery centers perform colonoscopy and other endoscopy procedures in gastroenterology; cataracts and retinal laser surgeries in ophthalmology; and knee and shoulder arthroscopy and carpal tunnel repair in orthopedics. It also provides multispecialty physician outsourcing services to hospitals, surgery centers and health care facilities.

Only three other publicly traded players have business models similar to Amsurg's, Gurda says: Team Health,Envision Healthcare ( EVHC ) andMednax ( MD ). Although all four are involved in managing medical services across most of the U.S., they focus on different treatment areas.

Team Health specializes in staffing and services for hospitals and for radiology and pediatric practices. Envision provides staff for hospital emergency departments through its EmCare division and medical transportation through its American Medical Response unit. And Mednax's primary focus is neonatal care, though it has also branched out into anesthesiology and radiology.

"Each has a slightly different mix of physician services they specialize in," Gurda said. "They are not competing against each other in terms of services. Most of the competition is local, from smaller independent groups. The publicly traded guys will compete more on the M&A side."

Strong Gains

Financially, all four have produced consistent double-digit earnings and revenue growth over the past couple of years, notwithstanding the occasional hiccup.

Since the Sheridan deal closed, Amsurg has delivered three quarters of triple-digit revenue growth and two quarters of double-digit gains. Earnings growth has been slower but still solid, with five straight quarters of 17% or better gains.

During the third quarter, Amsurg logged a 49% EPS gain to $1.03, topping consensus views. Revenue climbed 29% to $650.2 million. The Physician Services unit accounted for $341.2 million in revenue, while the Ambulatory Services unit contributed $309 million.

Ambulatory Services posted a 6.6% increase in same-center revenue. Physician Services logged a 10.1% gain in comps.

"Amsurg continues to execute, and its operational performance has been strong the last couple of quarters," Piper Jaffray analyst Kevin Ellich said in a report. "We were encouraged by the strong Q3 results and accelerating same-surgery-center growth as well as Amsurg's continued M&A activity."

Analysts polled by Thomson Reuters expect Amsurg's full-year earnings to rise 33% in 2015 and another 15% in 2016. The company's stock trades near 83 and is up more than 50% for the year.

Follow Vance Cariaga on Twitter: @IBD_VCariaga .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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