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Making money off increasing demand for private healthcare:
A healthy recovery makes this an ideal IPO play!
by Siu-Yee Ng
According to SMG Marketing Group Inc.’s “Freestanding Outpatient Surgery Center Directory,” the number of outpatient surgery cases performed in freestanding surgery centers in the United States has increased 191%, from 2.3 million in 1990 to 6.7 million in 2000. Back in 1980, outpatient surgical procedures represented approximately 15% of all surgery performed in the United States — compared to approximately 70% in 2000!
New surgical techniques and technology, as well as advances in anesthesia, have increased the types of surgical procedures that are being performed in surgery centers. Lasers, arthroscopy, enhanced endoscopic techniques, and fiber optics have reduced the trauma and recovery time associated with many surgical procedures.
Improved anesthesia has shortened recovery time by minimizing postoperative side effects such as nausea and drowsiness. So there’s no need for overnight hospitalization in many cases.
Some states now even permit surgery centers to keep a patient for up to 23 hours. This allows more complex surgeries — procedures that were previously only performed in an inpatient setting — to be done on an outpatient basis.
Fact of life
The Health Care Financing Administration reports that in 1999, total U.S. healthcare expenditures grew by 6.0%, to US$1.2 trillion. It projects that total U.S. healthcare spending will grow by 6.5% annually from 2001 through 2008. That’s approximately US$2.2 trillion by 2008, or 16.2% of the U.S. gross domestic product!
Many physicians prefer surgery centers and private surgical hospitals to general acute care hospitals. Let’s face it: there’s just less paperwork in surgical centers and private surgical hospitals, which increases the number of actual surgeries doctors can perform.
IPO opportunity
Now with all this said, I want you to take a look at United Surgical Partners International, Inc. United Surgical owns and operates surgery centers and private surgical hospitals in the United States, Spain and the United Kingdom. It acquires and develops its facilities through strategic relationships with physicians and healthcare providers.
In the U.S., United Surgical has ownership interests in 28 surgery centers and one private surgical hospital, and manages five additional surgery centers. It also owns interests in and will operate five surgery centers and one private surgical hospital that are currently under construction in the U.S., and has identified five additional markets for possible acquisition or development projects.
In Spain, it owns and operates six private surgical hospitals, two surgery centers and one diagnostic facility. In the United Kingdom, it owns and operates two private surgical hospitals and is developing a cancer center.
Going global
Most countries in Western Europe provide their populations with some level of government-funded healthcare. Despite the success of these public programs, practical limitations have resulted in delays or rationing of elective surgeries and certain other procedures. In many of these countries, funding and capacity constraints on public healthcare systems have created an opportunity for private healthcare systems to develop. So you can see why there’s a need for United Surgical.
While Spain’s national health service covers substantially all of the country’s population, a private healthcare industry has emerged that currently serves the 17.2% of Spain’s population that maintains private insurance, and another growing portion of the population that pays for elective procedures out of personal funds.
Total healthcare expenditures in Spain grew from 5.9% of gross domestic product in 1997 to 7.6% in 1998.
Demand for private networks such as United Surgical will continue to grow.
The rain in Spain
The growth in Spain’s private healthcare industry has been driven in large part by an increase in the number of employers offering private insurance as a benefit to their employees. Like their U.S. counterparts, private insurance companies in Spain typically offer comprehensive health coverage. Since only 57 of the 347 private surgical hospitals in Spain are owned by multi-facility systems, an opportunity exists to build a private hospital network that will enable United Surgical to negotiate more effectively with the country’s large health insurance companies.
As of September 30, 2000, United Surgical derived approximately 65% of its revenues in Spain from private insurance, and around 22% from private pay.
The United Kingdom also provides government-funded healthcare to all of its residents through a national health service. But it, too, is subject to funding and capacity limitations. Since the demand for healthcare services exceeds the public system’s capacity, U.K. residents may encounter waiting lists for elective surgery of up to 18 months, as well as delays in obtaining cancer biopsies and other diagnostic procedures.
Experts estimate that 25,000 people die unnecessarily of cancer in Britain each year, due to underfinanced
and poorly managed cancer programs! In response
to these shortfalls, private healthcare networks and insurance companies have developed in the United Kingdom.
Approximately 11% of the U.K. population has private insurance to cover elective surgical procedures, and another rapidly growing segment pays for elective procedures from personal funds. As of September 30, 2000, United Surgical derived approximately 58% of its revenues in the U.K. from private insurance and roughly 31% from private pay patients.
Recipe for success
United Surgical only began operations on February 27, 1998, and its first acquisition, in April 1998, was a hospital and a group of clinics located in Barcelona, Spain. United has grown through the acquisition of additional facilities in Spain, the United States and the United Kingdom, as well as the development of new facilities in the United States.
On February 12, 2001, United Surgical merged with OrthoLink Physicians Corporation. At that time OrthoLink held a direct or indirect ownership interest in eight surgery centers. This merger gives United Surgical 14 more service agreements with physician groups in six states.
United Surgical has also entered into strategic relationships with established healthcare systems and hospitals in the United States. Its largest joint venture is with the Baylor Health Care System in Dallas, Texas. This venture owns an outpatient surgery network that serves approximately four million people located in the Dallas/Fort Worth area.
Recently, United Surgical has signed an agreement for a strategic relationship with Mt. Sinai Health System in New York City, through which United will develop a surgery center in Manhattan. But it’s still awaiting approval from New York’s regulatory authorities.
Money talks
These acquisitions and alliances are adding to United Surgical’s bottom line. For the year ended December 31, 1999, its first full year in operation, United Surgical generated US$70.4 million in revenues. For the nine months ended September 30, 2000, its revenues had grown to US$98.8 million.
According to the latest figures, approximately 43% of its revenues were generated from operations in Spain, 39% from the United States and 18% from the United Kingdom. For 1999 and 1998, respectively, these percentages were 67% and 91% for Spain and 33% and 9% for the United States. It did not operate in the United Kingdom before April 1, 2000.
I hate to see a company rely on one customer, or in this case one country, for such a large portion of its revenue. But United Surgical’s business expansion means it is now less dependent on a single country.
A major concern with international expansion is the fluctuating exchange rate. The exchange rate of the euro to the U.S. dollar declined during the first nine months of 2000. This meant a US$4.4 million reduction in revenues for the facilities in Spain, relative to the 1999 numbers.
Nevertheless, the facilities in Spain contributed US$39.6 million to consolidated revenues in the first nine months of 2000, an increase of US$4.4 million over the same period in 1999.
Cash on hand
Of course, United Surgical had to pay for these acquisitions. So like many companies, United Surgical borrowed and issued stock options to fund the acquisitions.
Now United Surgical plans to use the IPO proceeds to redeem in full all outstanding shares of its Series A redeemable preferred stock, plus accrued and unpaid dividends. And of course to pay off its debt. I usually don’t like to see debt repayment from the offering, but it may not be a bad idea in this case. United Surgical has established credit lines for borrowing if needed. Nevertheless, this is a young company and we’ll need to keep an eye on its cash flow.
United Surgical Partners International is in a booming industry. Just look at its competitors, HEALTHSOUTH (HRC:NYSE) and Triad Hospitals (TRIH:NASDAQ) which have market caps of US$6.02 billion and US$1.17 billion respectively.
United Surgical plans to raise US$138 million in its offer, so the market cap is much smaller than that of its competitors. This alone makes United Surgical a great play — we can look forward to watching the stock price appreciate relative to the price of its competitors.
The underwriters involved are Credit Suisse First Boston, UBS Warburg LLC, Lehman Brothers and SG Cowen.
For more information after the quiet period, contact United Surgical Partners, 17103 Preston Road, Suite 200 North, Dallas, TX 75248, tel. 972-713-3500, fax 972-713-3550, website www.unitedsurgical.com.
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