S&P outlook highlights ‘heavy consolidation activity,’ fragmentation in radiology sector

Standard & Poor’s issued a “positive” outlook for one growing imaging industry player, but also sees risk given “heavy consolidation activity” in the radiology sector.

S&P shared its updated outlook on Wednesday after US Radiology Specialists recently completed its largest acquisition to date. The agency’s optimism is driven by USRS’ newly enhanced scale, better business diversity with more focus on outpatient settings, and improved bottom line aided by the recent acquisition of “high margin” practices.

Analysts also highlighted US Radiology Specialists’ financial stability, given solid free operating cash flow. They expect the imaging group can maintain this stability “if acquisition activity is moderate.” But there is added risk of credit default because of the industry’s high volume of M&A activity.

“We believe that given the fragmented nature of the business and consolidation in the radiology sector, the company will likely aggressively pursue acquisitions, possibly pressuring its ability to sustain improved credit metrics,” S&P said Feb. 16.

USRS’ earnings—before interest, taxes, depreciation and amortization—margin improved to 23% for the year ending Sept. 30. That’s up from 17% in 2019, driven by both improved scale and revenue cycle management over the last four years. These gains were partially offset, however, by integration costs and wage inflation amid nationwide staffing shortages, S&P noted.

Since its founding in 2018, USRS has grown rapidly through expansion, with revenue increasing more than fivefold, up to $860 million for 2022. Analysts expect the imaging firm to continue on this path. Scale will likely benefit its providers in negotiations with payers but introduce further integration risk. About 69% of USRS’ revenue comes from commercial payers, and it is in-network for 99% of its contracts. About 80% of the company’s business is conducted in outpatient settings, “which we view favorably as payers are billed globally,” the analysis noted.

“The company also benefits from catering to both outpatient imaging and radiology physician services in an integrated manner in many of its markets, which we view positively compared to other competitors,” wrote analysts Richa Deval and David Peknay.

USRS’ credit rating is constrained by the company’s narrow focus on radiology services, limited history under current ownership, and risk of adverse reimbursement changes. About 20% of its revenue comes via Medicare, which has been subject to reimbursement cuts in recent years. But USRS’ margins were insulated from these changes, due to its presence in outpatient settings.

“At the same time, we note that USRS' cost structure, in which the large part of physicians' compensation is tied to company earnings, should enable it to offset a meaningful part of the reimbursement reduction,” analysts noted. “In addition, we believe USRS' ability to drive organic revenue growth, driven by slight rate increases and new contracts, and volume increases due to shift of patient volumes to outpatient centers that should partially offset rate cuts.”