Our second biggest pathology and imaging provider doesn’t have an imaging engine anymore but it may now have a future of some sort.
Having seriously misread and misused its super profits from the covid pandemic and run its balance sheet quickly aground on misguided M&A and shareholder buybacks, Healius has given itself breathing space to at least reset its pathology business now, by selling off its imaging division Lumus for as much as $965 million to private equity group Affinity Partners.
Over the weekend, Australian Financial Review commentator Tony Boyd described the need for the sale in the paper’s Chanticleer column this way:
“Selling Lumus is akin to burning down Healius (nee Primary Health Care) founder Ed Bateman’s village, but it is a chance to reset the balance sheet and at times frosty shareholder relations, and get back to focusing purely on running the business”.
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That business is now largely only pathology, but even though Healius remains the second biggest pathology provider to Sonic in the country, losing imaging, which made up about a third of the company’s revenue and profit, is like losing one engine on a twin-engine jet, and maybe worse.
Imaging is predicted to grow at a CAGR of something like 6.4% between now and 2030, and pathology is forecast to keep growing slowly at best.
That means that Affinity has bought the number three of a reasonable crowd in a good growth market and despite government plans to significantly reduce over ordering, the sector is ripe for a possible AI-led productivity revolution amid a workforce crisis.
So it will likely be able to offload it in a few years for well over the billion-dollar mark (which they’ll need to because according to analysts they paid $965 million for something maybe worth $100 million less).
Affinity has a pretty good track record in Australian healthcare, having acquired GP patient management system Medical Director for $155 million in March of 2016, before offloading it in August 2021 to Telstra Health for $355 million.
Analysts aren’t as excited about growth in the pathology market, which for the past five years has barely grown at all. And moving towards 2030 the sector faces a federal government wanting to significantly rationalise the MBS and transform pathology productivity via vastly improved digital connectivity between providers and the main labs which it hopes will significantly reduce ordering volumes.
The Department of Health and Aged Care (DOHAC) recently released its vision for an e-requesting project which suggested that they’d like to reduce testing volumes by as much as 25%, most of which they see as inefficient or duplicate ordering.
Which all means that although Healius has dodged a bullet for now – it will be able to reduce its crippling debt from $1.9 billion to at least $1 billion leaving some for investment, which it is going to need to change its technology base – it probably has a lot to do yet in order to realise anywhere near the value it once enjoyed.
Ten years ago, the group was making about 15% profit before interest and tax, a year ago it was only making 1%, and today it’s making about 5%.
As far as providers are concerned, the most likely way to march that profit margin upwards in a slow market is going to be reducing the number of pathology sites from its current 2071 footprint significantly and getting more volume at less cost out of the sites that remain.
The major likely factor that might enable that trend and favour margin growth is technology transformation, particularly AI technology amid significant ongoing workforce issues.
In this respect the group seems to be investing a lot – about $25 million in the last year at least.
The other thing that might favour the group is that the significant possible downward impact of e-requesting as predicted by government itself might end up giving the group some leverage when lobbying to be paid more by Medicare.
Pathology is still a key service with an ageing population moving rapidly to chronic care management in the community, with lots of political ramifications if things go wrong with the sector, like things are going wrong with the private hospital sector today.
The pathology lobby definitely has less sway than it once did, but it still has sway.
One interesting swing factor for providers might be how the group views paying rent for on-site pathology at general practices.
Having pathology on-site is a huge channelling advantage for each of the major pathology providers, so typical rents being paid to GP practices can be very high – pathology rents is the second biggest income earner for a lot of GP practices after doctor commission.
In August last year Healius copped a Federal Court fine of $1.85 million for paying up to five times over “market value” to secure a few GP sites for its labs.
At the time the case looked bad for both Healius and GP practices, the court finding that Healius had paid in one case at least five times the market value to secure its site.
On spec this looked like it might mean that Healius now had a strong negotiating position going forward with at least some of its sites to reduce rent.
But independent health advisory principal David Dahm thinks it might not work out that way for the pathology providers at all.
He told Health Services Daily after the judgement that the independent valuations provided in the case were higher than the national average by quite a bit.
“If you actually read the judgement and the fine print, a lot of people are going to start to realise that their own pathology rents are probably undervalued,” he said, suggesting that rather than reducing costs for the pathology providers the case may provide the data needed for GP providers to increase their rent costs.
