The HealthCare M&A Monthly: Is There Any Future for PPMs?

 The answer to the question posed in the headline would seem obvious to many observers of the physician practice management (PPM) industry, so obvious that it can be summed up in a single word: No. After all, the number of companies has dropped so precipitously that there are now less than one-half the number of PPMs there were three years ago. Their stock performance has been anything but stellar, with investors having long abandoned the sector. One-half of the publicly traded companies that do remain trade at under $2.00 (see the chart on page 3). And many of the companies still in the business do all they can to avoid using the dreaded PPM label in their news releases or public filings. Dead and buried. Or so we thought.
This month saw two transactions in the Physician Medical Group sector which suggest that some of these companies still have a pulse. First, in our deal of the month (see page 2), Pediatrix Medical Group (NYSE: PDX) is acquiring Magella Health Services, another neonatology PPM with 109 physicians, in a deal worth $190 million.
Second, United Surgical Partners International, a manager of surgery centers and surgical hospitals, recently revealed in its S-1 filing that it had acquired OrthoLink Physicians Corp., an orthopedics PPM with 207 physicians. This transaction is valued at about $49.5 million. Clearly, neither deal sets any record; however, each is interesting because it goes against the trend of the recent past for PPMs to sell practices back to their original owners and exit into another line of business.
Not coincidentally, we believe, all of the players in these two deals have strong ties to the hospital industry, which itself has witnessed strong growth during the past year. Pediatrix manages neonatal (NICUs) and pediatric intensive care units in hospitals while United Surgical Partners operates surgical hospitals and outpatient surgery centers. Magella also manages NICUs while OrthoLink provide management services to outpatient surgery centers and hospitals. Both deals thus appear to be capitalizing on the newly found vigor of the Hospital sector.
Now don’t get us wrong. We don’t expect anything like a return of the PPM business to those heady days when MedPartners (now Caremark RX, NYSE: CMX), PhyCor (OTCBB: PHYC), PhyMatrix and their many imitators were buying up any practice that came across their radar screens and planning to crisscross the country with their clinics. Not by a long shot.
Nor do we expect a resurgence in the near term. The industry is still shaking out, and not even all of the PPMs listed in the chart of page 3 will survive as viable companies. Integrated Orthopedics (AMEX: IOI) has all but exited the industry, selling back its owned practices to their former owners and planning to merge with PowerBrief. In any event, it will not now challenge Amex’s call to delist its stock.
What we do see is, though, is a more modest, but sharply focused industry emerging from the devastation of the past few years. As we have observed in our coverage of the PPM industry, the companies that survive will be those that concentrate on a single specialty. It is thus no accident that the four companies topping the list on page 3 all deal in a single specialty. Those that prosper will have access to revenue streams beyond the mere provision of physician services. Pathology and radiology services, to name two, derive additional revenue from their laboratory testing services. Companies with a high proportion of fee-for-service revenue, such as laser vision correction or cosmetic surgery, will also be favored. And those that shine will be the ones that clearly provide added value.