High Tech, High Growth

High Tech, High Growth

By Jean Gruss

Editor/Lee-Collier

To glimpse the future of cancer treatment, take a walk through a 21st Century Oncology center. Behind 8-foot-thick hurricane-proof cement walls sits a gleaming machine that promises to zap tumors more precisely and effectively than any other equipment on the market today. Doctors can focus their radiation beams on tumors as small as the diameter of a sewing needle.

The new equipment, called a stereotactic radiosurgery system with image-guided radiation therapy, also lets doctors expand the types of cancers they treat. For example, it's difficult to treat lung cancer with radiation because the tumor moves as the patient breathes. With the image guidance, doctors can aim a beam of radiation at the tumor without affecting the surrounding healthy tissue.

Daniel Dosoretz, 52, president and chief executive officer of Fort Myers-based Radiation Therapy Services, which owns and operates the 21st Century Oncology treatment centers, is counting on the new technology to deliver higher revenues and profits. Although company officials won't quantify what those may be, they're confident enough to spend $16 million to install seven of these next-generation machines in a pilot program on the Gulf Coast of Florida and in Las Vegas.

"We don't even know what the full potential of this equipment can be," says Dosoretz, a radiation oncologist who continues to see patients two days a week despite his schedule as the company's top executive.

If the pilot is successful, Radiation Therapy Services will buy the machines for the rest of its facilities.

The company is the country's largest operator of radiation-treatment facilities, with 69 centers located in 14 states. Of those, 12 are based in hospitals and 57 are free standing. It has 900 employees, including about 100 at its headquarters in a converted Sears furniture store on Colonial Boulevard in Fort Myers.

To fund technology upgrades and continue to grow, the company lined up $100 million in financing over seven years from banks and other institutional investors in December. It submitted to a review by credit-rating agencies Moody's and Standard & Poor's, an intensive process that many institutional investors require before they buy any corporate debt.

"Long-term, we're looking at 12% to 14% annual revenue growth," says David Koeninger, 52, executive vice president and chief financial officer. Already, 2005 looks like it's going to exceed that. For the nine months ended Sept. 30, revenues grew 30% to $163 million.

Investors have bid up the company's stock since it went public on June 23, 2004. Radiation Therapy's stock (symbol RTSX) began trading at $13 after its initial public offering and recently closed at $33. Its stock rose 154% in 2005, giving the company the biggest stock-price gain of any Gulf Coast-based publicly traded company. Net income for the nine months ended Sept. 30 was $18.3 million. That was up 334% from the $4.2 million it earned in the same period in 2004, though the lower figure for 2004 reflected a $17.6 million non-cash income tax expense related to the initial public offering.

Ready for consolidation

Koeninger expects two-thirds of the company's growth will come from additional revenues generated by improving operations at existing centers. Meanwhile, the other third of the growth will come from acquisition of existing radiation centers and opening new facilities in markets where it sees potential.

To grow its existing centers, Radiation Therapy Services wants to increase the number of treatments it provides and treat patients with the most advanced technology to obtain higher reimbursements from Medicare and insurance companies. It has been successful so far, raising the number of treatments per day at its free-standing centers by nearly 20% in the first nine months of 2005 versus the same period in 2004. It does that by providing fast and efficient service, earning the referral of physicians upon whom it depends for patients. For example, the company schedules patients within 24 hours of cancer diagnosis.

Radiation Therapy Services also has upgraded many of its centers with newer and more complex radiation machines that generate higher revenues. Typically, insurance pays $100 for each conventional radiation treatment, but it pays $650 for treatments with newer and more effective technology. At centers open at least one year, the company has seen revenues jump nearly 15% for the nine months ending Sept. 30 over the same period in 2004.

Because cancer is predominantly a disease of the elderly, Radiation Therapy Services' performance is dependent on how much Medicare will pay. About 51% of the Radiation Therapy Services' revenues come from Medicare, with 47% from commercial insurers and another 2% from people who pay directly for service. Although the company is confident that Medicare reimbursements won't decline significantly, the company retains two lobbyists in Washington, D.C., and is active in industry associations that lobby Congress for funding.

Radiation Therapy Services also has been acquiring radiation centers and starting new ones. During the latter part of 2004 and in 2005, the company acquired 13 treatment centers and opened two new ones. It takes less capital to build a new center, but it takes more than one year to achieve positive cash flow. By contrast, it takes more capital to acquire an existing facility, but it takes less than a year to reach positive cash flow because the acquired business is usually well established.

Whether it builds new or acquires an existing business depends on the market, company officials say. Radiation Therapy Services wants to enter one to two new markets each year to fuel the 12% to 14% revenue growth target.

Because of its primarily elderly customers, the company has targeted areas where there is a large concentration of older people. For example, in May it acquired four facilities in Scottsdale, Ariz.

When it evaluates where to expand, it considers three criteria. First, executives ask whether they can add value. Among the keys is the ability to have the staff and equipment on hand to schedule patients within a day of cancer diagnosis.

Then, Radiation Therapy Services evaluates an area's growth prospects and the incidence of cancers. For example, it expanded into rural Maryland because the area is home to a growing number of retirees from nearby urban areas such as Washington D.C. Similarly, the company started operations in Delaware when it discovered that the state's population is growing at two-and-a-half times the national rate.

Third, the company looks for areas where commercial insurers reimburse more for radiation services. For example, insurers reimburse less than Medicare in Fort Lauderdale but more in Naples.

A key advantage for the company is that the industry is highly fragmented. Most of the country's 2,000 radiation therapy centers are usually operated by small groups of local doctors or hospitals that don't have the resources to invest millions of dollars in the newest equipment or the clout to negotiate lower prices for that equipment.

"There are great consolidation opportunities," Koeninger says.

Radiation Therapy Services' size also gives it an edge in recruiting radiation oncologists because of the opportunity for career advancement and choice of geographical locations. Only 110 young doctors each year graduate from residency programs in radiation oncology, so the company sends it top executives to industry conventions to recruit doctors for its growing practices.

"We provide a career and geographic diversity," says Koeninger.

A cure for cancer appears far in the future. With baby boomers moving into the elderly population that has high rates of cancer, Dosoretz and Koeninger have a clear focus: seize the market.

BY THE NUMBERS

Statement of Operations (dollars in thousands)

Nine months Nine months

REVENUES ended 09/30/04 ended 09/30/05 % Change

Total revenues 125,756 162,877 30%

EXPENSES

Salaries and benefits 63,546 81,815 29%

Medical supplies 2,560 4,296 68%

Facility rent 4,061 5,572 37%

Other expenses 5,601 7,021 25%

General & admin. 14,513 16,730 15%

Depreciation, amortization 4,897 7,664 57%

Provision for doubtful accounts 4,180 5,784 38%

Interest expense, net 2,641 3,563 35%

Impairment loss 0 1,226

Total expenses 101,999 133,671 31%

Income after minority interests 23,762 29,831 26%

Income tax expense 19,545 11,515 ?41%

NET INCOME 4,217 18,316 334%

BALANCE SHEET Dec. 31, 2004 Sept. 30, 2005 % Change

ASSETS

Cash 5,019 5,174 3%

Marketable securities 2,400 5,900 146%

Accounts receivable, net 25,834 33,460 30%

Income taxes receivable 426 2,411 466%

Prepaid expenses 2,882 2,313 ?20%

Current portion of lease receivable 653 699 7%

Inventories 1,065 1,205 13%

Other 680 1,155 70%

Lease receivable, less current portion 1,230 700 ?43%

Equity investments in joint ventures 1,422 748 ?47%

Property and equipment, net 83,000 108,775 31%

Goodwill, net 35,442 65,379 84%

Intangible assets, net 1,328 7,137 437%

Other assets 6,797 8,056 19%

TOTAL ASSETS 168,178 243,112 45%

LIABILITIES

Accounts payable 2,955 14,301 384%

Accrued expenses 9,482 11,518 21%

Deferred income taxes 1,729 1,461 ?16%

Current portion of long-term debt 9,620 10,726 11%

Long-term debt, less current portion 56,483 95,219 69%

Other long-term liabilities 2,005 2,122 6%

Deferred income taxes 15,479 15,614 1%

Minority interest in consolidated entities 4,104 3,641 ?11%

TOTAL LIABILITIES 101,857 154,602 52%

Total stockholders' equity 66,321 88,510 33%

TOTAL LIABILITIES AND

STOCKHOLDERS' EQUITY 168,178 243,112 45%

Sources: Securities and Exchange Commission filings, Yahoo Finance.

How Going Public Fueled RTS's Growth

Radiation Therapy Services was ready to go public in 1998, or so executives thought at the time.

The company's president and chief executive officer, Daniel Dosoretz, a practicing radiation oncologist in Fort Myers, had hired David Koeninger as chief financial officer to help the company make the transition from a privately held firm.

Koeninger jumped at the opportunity. After all, it's not every day that a finance expert gets the chance to take a company public. Prior to joining the company, Koeninger was vice president and corporate controller for Anthem Blue Cross Blue Shield in Cincinnati.

The 20 investors in the privately held company wanted to tap into the public markets to grow the business, invest in new technology to stay competitive, repay debt and take some cash out after 16 years building the business.

But Radiation Therapy Services' name didn't end with "dot-com" and investment bankers warned that an initial public offering would be a dud with tech-enamored investors. So the company shelved its IPO and decided to wait.

It ended up waiting six years because of the bear market that followed the tech boom. Finally, on June 23, 2004, the company successfully sold shares to the public at $13 per share. By the end of December 2004, the shares were trading at $17, a 21% increase.

Despite selling some of their shares since the IPO, insiders remain the company's largest shareholders by controlling nearly half of all outstanding shares. For example, the Dosoretz family controls about 16% of the company's shares, a stake valued at about $124 million. "I'm here for the long term," says Dosoretz, whose salary and bonus totaled $1.7 million in 2004 according to securities filings.

Looking back, Dosoretz says the IPO delay was a good thing. "I don't think we were ready [in 1998]," he says. For example, the company's accounting systems needed to be improved to generate reliable financial statements and top executives had to develop a solid plan to execute its growth strategy. After six years of preparation for an IPO, executives were ready when the day came to sell shares to the public.

Despite the stock's success - it recently traded about $33 per share - the company doesn't plan to tap the stock market any time soon to keep growing says Koeninger. That's in part because the company doesn't want to dilute the value of the shares for current stockholders by issuing more shares. Instead, the company is taking on more debt.

To keep from relying solely on bank financing and broaden access to capital, Radiation Therapy Services submitted to a review in 2005 by bond-rating agencies Moody's and Standard and Poor's so it could more easily sell debt to institutional investors. Institutional investors such as hedge funds rely on the agencies' analysis to determine risk. Many investors prefer to buy rated bonds because the market for them is more liquid and they can trade them more easily.

The risk of submitting to an agency analysis is that the outcome may be less favorable than expected. For example, Moody's expressed concern about Radiation Therapy Services' reliance on debt and capital expenditures in excess of operating cash flow to fuel its growth, leaving little cushion for creditors should the business falter.

That analysis cost the company 0.25% in extra interest to compensate investors, Koeninger says. The term of the debt is 1.75% over the benchmark LIBOR rate, but a better rating from Moody's could have lowered that to 1.5%, he estimates. Both Moody's and Standard & Poor's rated Radiation Therapy Services' debt as speculative.

With the ratings in hand, Radiation Therapy Services in December sold $67.5 million worth of debt to18 undisclosed institutional investors with individual positions ranging from $2 million to $5.5 million. Meanwhile, nine commercial banks hold $32.5 million worth of the company's debt, including Bank of America, Wachovia, Fifth Third, SunTrust, Regions, Carolina First, National City, LaSalle and International Bank of Miami.

Spreading debt among different investors means the company's debt is not all "in one basket." Plus, with its debt rated, the company is building a track record with institutional investors that should help it borrow more in the future.

What's more, Koeninger says institutional investors are not as intrusive as banks are in the company's operations. "They require a little less care and feeding," he says.