It’s been nearly a year since Mednax Inc. (NYSE: MD) announced its MedData subsidiary was headed for the auction block. The company acquired the privately held revenue cycle management company in August 2014 for an undisclosed amount. Now that Mednax has hired teams of consultants to help it rethink its business model, MedData is a non-core asset.
Frazier Healthcare Partners agreed to pay $250 million for MedData in mid-October, although Mednax has classified MedData as discontinued operations since the first quarter of 2019. The target provides management services to hospitals, health systems and healthcare providers.
Back in 2014, when Mednax bought it, MedData served 3,000 physicians at 700 facilities in 43 states. It currently serves more than 10,000 physicians at a network of more than 3,000 facilities nationwide.
Mednax is in the midst of a transformation, prompted by lackluster earnings in recent years. It’s brought in Accenture, Alvarez & Marsal and FTI Consulting to help it focus on its core physician groups in neonatology/maternal-fetal medicine, anesthesiology and radiology. In the past year, the company has flattened its top management structure while adding a Chief of Growth & Strategy, a National VP of Sales & Marketing, and a National VP of Managed Care Contracts, as well as a new Chief Financial Officer and Chief Operating Officer.
The rebalancing act has put a big dent in its mergers and acquisitions, however. Since 2009, Mednax announced 117 acquisitions, with 116 of those targeting physician practices. (MedData is the sole exception.) Between 2009 and 2018, it averaged almost 12 deals per year, but in 2019, the pipeline has largely run dry. Only six deals have been announced in 2019, all in the areas of neonatology, maternal-fetal medicine and pediatrics (also called women’s & children’s).
Coming into this year, Mednax management assumed $100 million would go towards acquisitions, the new CFO Stephen Farber said on the company’s second-quarter earnings call in early August. Now the company expects to spend just $40 million to $50 million in 2019.
For one thing, labor costs are high as physicians in specialty fields are in high demand. Mednax has deployed a revenue sharing model across its radiology practices. Its neonatology practices are already on this model. Now the company plans to slowly roll it out to its anesthesiology group.
Valuations are having an effect, too. Mednax is still looking for good opportunities in the women’s & children’s areas, where multiples are “very favorable in the 4x range,” according to CEO Roger Medel in August. However, thanks to the entry of private equity firms in the radiology segment, valuations have sky-rocketed to double-digit multiples—too rich for Mednax right now.
It wasn’t always that way. Back in 2015, Mednax took Virtual Radiologic Corp. (vRad) private in a $500 million deal. vRad was a leading radiology physician services and telemedicine company with a network of more than 350 radiologists, more than 75% of whom were sub-specialty trained. The multiples worked out to 2.7x revenue, but 20x EBITDA.
As CEO Medel said on the August earnings call, “Expect to see increased [M&A] activity in the women’s & children’s field at those lower multiples.” Duly noted.
