By Steven Ralston, CFA
Northstar Healthcare (NHC.TO) holds interests in and operates four ambulatory surgical centers (ASCs) in Houston, Dallas and Scottsdale. The company has experienced a dramatic increase in revenues over the last several quarters as a result of the implementation of management’s growth strategy composed of enhanced Direct-to-Consumer marketing programs, re-syndication of partnerships and acquisitions. A new ASC was opened recently in Scottsdale, and two MRI and one Urgent Care Centers were acquired in the metropolitan Houston area.
Management’s growth strategy entails generating organic growth through physician referrals and targeted direct-to-consumer marketing campaigns, augmented by acquisitions. Northstar Healthcare’s business model revolves around establishing strategic partnerships with the physicians associated with Ambulatory Surgical Centers in order to drive organic growth (cases and procedures) through increasing patient flow.
To generate incremental case flow through the company’s facilities, Northstar embarked upon a program of marketing campaigns to drive case volume. By educating and motivating potential patients to contact the physicians at the ASCs, the marketing campaigns augment the traditional source of net patient revenue (physician referrals). Initially, the company developed the integrated marketing campaign to educate and motivate prospective patients to contact the company’s ASCs. Building upon that platform, the company developed the enhanced Direct-to-Consumer marketing program, augmenting the campaigns with dedicated websites, listings on local online directories, social media pages, YouTube videos and paid search-engine keywords. Northstar Healthcare launched its first direct-to-consumer marketing programs during 2013, which helped contribute to the 49% increase in net patient revenues.
Northstar Healthcare’s acquisition strategy entails building a network of ASCs and other complementary healthcare facilities in metropolitan areas of the United States. Management is focused on replicating the ASC network-building process thus far employed in the Houston market, where the healthcare facilities act as a platform for scalable growth through in-network physician referrals and lead generation from Direct-to-Consumer marketing campaigns. Potential acquisition candidates may be in-network local hospitals, ASCs, Urgent Care Centers, MRI facilities or other complementary healthcare service offices in order to leverage the effect of current marketing programs or out-of-network operations that establish platforms in new geographic locations.
Around year-end 2013, Northstar Healthcare announced two acquisitions. In December 2013, Northstar announced that the company was the winning bidder to acquire the former Brown Hand Center outpatient surgery facility in an upscale neighborhood of Phoenix, Arizona. The surgery center has four operating rooms and 27,000 square feet of floor space. In January 2014, the company announced the closing of an acquisition of ownership interests in two imaging centers and one urgent care clinic in the Houston area. The total purchase price for Spring Northwest Management, LLC (Katy, TX), Spring Northwest Operating, LLC (Katy, TX) and Willowbrook Imaging, LLC (Houston, TX) was $ 1.4 million in cash and stock. Through the purchase, Northstar Healthcare’s revenue generation platform will be augmented with additional revenue streams derived from the 19 physician partners in these facilities.
Last month, on March 6th, Northstar Healthcare reported financial results for the fourth quarter and year ending December 31, 2013. For the fourth quarter, net patient service revenue increased 108.7% to $ 13.5 million compared to $ 6.5 million in the fourth quarter of 2012, primarily due to an increase in case volume. Total cases increased 37.7% to 1,811 and increased in all specialties except pain management and gastro-intestinal. Procedure volume increased 18.7% to 5,977. Net income attributable to common shareholders improved to $ 0.08 per diluted share compared with $ 0.01 per diluted share in the comparable quarter last year. However, without the one-time gain of $ 2.39 million from a bargain purchase, net income attributable to common shareholders would have been $ 0.02 per diluted share.
During 2013, net patient service revenue increased 49.0% from to $ 20.9 million to $ 31.1 million primarily due higher case volume in all specialties, along with the addition of the gynecology specialty. Total cases for the year increased 23.0% from 4,468 to 5,496 cases. Procedure volume increased 26.6% from 15,579 to 19,718. Operating salaries and benefits increased 39.1% to $ 5.33 million, primarily due to increased staffing needs. Higher case volume increased medical supply expense higher by 85.0% to $ 4.42 million. Operating general and administrative expense increased 137% to $ 10.6 million, primarily due to the company’s growing marketing effort, along with higher physician contracting and revenue cycle expenses. The operating margin for the year was 32.4%. Total corporate costs increased 38.3% as a result of hiring new corporate employees and stock-based compensation expense. Management determined that no provision for bad debts was necessary in 2013. The company’s payer mix improved as the percentage of net patient revenue from Private insurance and other private pay increased year-over-year from 91.0% to 95.8% while the proportion of revenue from Medicare reimbursements declined from 3.7% to 1.8%. Net income attributable to common shareholders increased 18.1% from $ 1.199 million to $ 1.416 million driving diluted EPS up 12.2% from $ 0.03 to $ 0.04 per share. Diluted weighted average shares outstanding increased 5.2% to 37,637,662 from 35,764,295.
During 2013, Northstar Healthcare raised net proceeds of approximately $ 4.09 million through a private placement and about $ 168,000 from the exercise of stock options. Working capital improved from $ 7.11 million at the end of 2012 to $ 8.69 million on December 31, 2013.
For 2014, management’s primary focus is to increase net patient revenues and EBITDA through scaling direct-to-consumer marketing programs in the Houston, Dallas and Scottsdale markets, along with completing selective acquisitions. During the first quarter, the NueStep podiatry direct-to-consumer marketing campaign was launched in Dallas, and management is planning an advertising program for bariatric weight-loss surgery in Dallas. In addition, Northstar will present at several national surgical center meetings in order to identify potential new partnerships for surgical centers elsewhere in the U.S. Longer-term, management anticipates entering two new markets in 2015 (possibly San Antonio) and four additional markets in 2016.
Our price target of $ 2.10 is based on price-to-sales (P/S) and enterprise value-to-EBITDA (EV/EBITDA) valuation methodologies. Northstar Healthcare is a small-capitalization company with a revenue profile that should experience rapid growth both through internal growth as the company’s Direct-to-Consumer marketing program is rolled out and through the execution of management’s acquisition strategy. The growing revenue stream has already manifested itself into the positive earnings reported for the last two calendar years. Based on current valuation of similar specialty providers of healthcare services companies, we expect NHC to trade in an EV/EBITDA valuation range between 17.0 and 6.5, and specifically, our target is based on NHC attaining the first quartile valuation benchmark of an 16.8 EV-to-EBITDA ratio due to the revenue and net income progress attained thus far from the implementation of management’s growth strategies. Also, valuation based on the price-to-sales metric confirms and reinforces the price target. We expect NHC to trade in a P/S valuation range between 3.3 and 1.4, which is also based on current valuations of similar companies. The first quartile valuation benchmark is 2.8 price-to-sales or $ 2.00 per share utilizing annualized revenues from operations from the most recent quarter’s results. Price-to-sales valuation also incorporates a company’s ability to increase revenues. Given management’s stated business plan of becoming a creator, owner and operator of health care networks in multiple metropolitan areas, Northstar Healthcare is expected to expand its revenue base significantly.
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