Surgery Partners Finds Its Sector Is There For The Taking

W hen an industry isn't new, small enhancements can pay off big. And with no single player in that sector taking control, those little things can be magnified even more. Just askSurgery Partners ( SGRY ), an operator of ambulatory surgery centers, or ASCs.

"The top chains account for ownership of less than 20% of the facilities, with the largest chain only owning 5% to 6%," Stifel analyst Chad Vanacore said in an interview with IBD. "So it's a big field to play in and we should see greater consolidation in that industry."

Vanacore figures that Surgery Partners, with 13% to 14% revenue growth in 2016 and 10% to 12% same-facility growth, has potential to take advantage of that.

"I think they can grow faster than the industry and be a consolidator in the industry," he said.

ASCs have been around since the 1980s. Instead of getting a surgical procedure done at a hospital, patients can get faster and better service, while physicians can work in an attractive and more efficient environment, and the cost is lower for insurers. The ASC industry has a strong payer profile, with 55% of revenue coming from private insurance and just 38% from government payers.

It's also a growing market, with roughly 5,400 ASCs in the U.S, up 64% from the 3,300 that existed in 2000, notes Vanacore in a research report. The market is expected to grow by 19% to 6,400 by 2023.

A $23 Billion Industry

Annual industry revenue is estimated at $23 billion, with 23 million surgeries done each year.

"It really has some attractive attributes on a lot of different levels and from almost anybody's perspective," said Frank Morgan, analyst at RBC Capital Markets.

Across 28 states, Surgery Partners operates 99 facilities, of which 94 are ambulatory surgical centers and five are surgical hospitals.

It also runs a network of 43 physician practices and provides services annually to over 500,000 patients affiliated with over 4,000 physicians. It has a strong presence in Florida and Texas.

The company's current structure was formed largely through two large acquisitions made in the past four years. Last year it bought Symbion, a privately owned operator of surgical facilities, for $772 million.

This added 49 ASCs and six surgical hospitals to its facility mix and greatly expanded its geographic footprint. Most of Symbion's top executives were retained as part of its management team.

In 2011, Surgery Partners acquired NovaMed, a publicly held operator of primarily ophthalmology and optical services.

This added 37 ASCs to the mix.

Merger Record

Morgan notes that the company has a proven track record of executing and delivering synergies from acquisitions, and now has high visibility from the Symbion purchase.

"The highly fragmented ASC market presents a strong pipeline of bolt-on acquisition opportunities for Surgery Partners, which plans four facility acquisitions for 2016 and five for 2017," Morgan said.

Part of Surgery Partners' growth trajectory is acquiring smaller facilities that it can convert from single specialty to multispecialty.

Only 37% of the ASCs in the industry are multispecialty.

Roughly 70% of its surgical facilities function as multispecialty centers, offering services in the areas of ophthalmology, gastrointestinal, pain management, orthopedic, ear, nose and throat, and general care. The company typically maintains a majority ownership, with an average equity stake of 57% in each facility.

Going Outside The Box

In addition to mergers, Surgery Partners is trying to provide a variety of ancillary services not available elsewhere. While many operators typically specialize in one health care area and provide no ancillary services to patients, Surgery Partners tries to separate itself on that front.

While 90% of its revenue comes from surgeries, the remaining 10% comes from ancillary services such as diagnostic laboratory, physician practice management, anesthesia, urgent care, optical and specialty pharma services. Those ancillary services offer higher margins and are one of its growth catalysts.

Another growth driver for the ASC industry is innovation in the health care sector, population growth and the government's medical overhaul.

"There are more procedures that can be performed on an outpatient basis than ever before. Surgical advances, advances in anesthesiology, all those things are helping the size of the industry to grow," said Morgan.

Cutting Costs

Reimbursement is another driver, with consumers sharing more in health care costs. With overhead higher at hospitals, the overall procedure cost can become a smaller burden on patients as well as insurers by using ASCs.

Surgery Partners takes that a step further. It typically uses two-way agreements between the company and the physician, thus bypassing hospitals completely and cutting extra fees. Physicians also get an equity stake in the business, another motivating factor to partner up with an ASC.

"The company's centralized corporate infrastructure relieves physicians of the administrative and regulatory burdens that draw physicians' attention away from care delivery," Morgan said in a note.

Finally, recent government medical changes have increased the number of those covered by insurance, explains Stifel's Vanacore.

"Over the past two years, we've seen a lot of new volumes flowing through the system. If you were uninsured before, you probably weren't seeking any health care services," Vanacore said. "Now you have some sort of insurance, so you're a higher utilizer of the system. So what we saw was increased volumes and better payer mix shift."

Surgery Partners was founded in 2004, but went public only a few months ago at $19 a share. Private equity firm HIG Capital owns about 54% of the company's stock.

Health care industry veteran Michael Doyle is its CEO. He declined to comment for this story.

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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