Executives with Surgery Partners (Nasdaq: SGRY) conveyed a bullish message on the potential for growth and remained quiet on the rumors of a potential company sale during Tuesday’s Q3 2024 earnings call.
High-acuity procedures and strategic acquisitions are, and will continue to be, core drivers of growth, the leaders said.
“Transition into the ASC setting – that shift in site of care – is in the early innings, and we are well-positioned, with our recruiting team and our portfolio of facilities, to continue to grow in the high-acuity space,” CEO Eric Evans said.
Tennessee-based Surgery Partners operates more than 200 ambulatory surgery centers across 33 states in the United States.
The trend of moving high-acuity procedures into ASCs has been favorable for Surgery Partners, whose facilities reported a 53% growth in total joint replacements over Q3 2023, Evans said. And as demand for outpatient joint replacements rises among patients, physicians and payers, the volume of these procedures will continue to grow, Evans said.
“Total joint cases in our ASCs continue to grow at a disproportionate rate, with just over a 50% increase in case volume in the quarter,” he said. “We do not see this growth slowing in the mid to long term as hip, knee and shoulder surgeries continue to transition into the ASC setting.”
Indeed, revenues for the third quarter of 2024 increased 14.3% to $770.4 million from $674.1 million for the third quarter of 2023, the company reported. Same-facility revenues for the third quarter of 2024 increased 4.2% from the same period last year. And adjusted EBITDA margin expanded 100 basis points year-over-year, to 16.7%.
However, the company posted a net loss of $31.7 million and missed some analysts’ consensus estimates on earnings per share. Shares were down 7.48% in late afternoon trading on Tuesday.
The company also has been active on the M&A front and has exceeded its $200 million annual target on investments, which has led to a “tempered” outlook on free cash flow, Macquarie Capital Analyst Tao Qiu wrote in a note on the earnings results. However, he also flagged that Surgery Partners still has $815 million in total liquidity, while management has also “simplified” the balance sheet and put it on a path toward sub-3.0x leverage.
“We see few macro headwinds in the ASC sector given physician/patient preference, favorable payor mix and support, stable reimbursements, and cost environment,” Qiu wrote.
In late August 2024, rumors surfaced of a potential sale of Surgery Partners, with insurance giant UnitedHealth Group (NYSE: UHG) and global alternative asset manager TPG (Nasdaq: TPG) floated as potential suitors. On Tuesday’s earnings call, Surgery Partners’ leadership team did not address these reports.
Cardiology potential
The potential for cardiac procedures in ASCs, particularly for EP cardiac treatments that can be safely performed without a catheterization lab, are another area of “excitement” for Surgery Partners.
Over 70% of their facilities are already equipped with fluoroscopy to handle these procedures, Evans said, and the company aims to add this capability to five to ten more facilities each year, seeing cardiology as one of its fastest-growing service lines, although it’s currently small.
Still, there’s a learning curve as cardiologists transition to ASCs.
“Many of these docs haven’t historically practiced in ASCs, so there’s a bit of a learning curve, but we’re working through that,” Evans said. “We do have a lot of interest in the area, but again, it’s small with rapid growth. We expect it to really hit a rapid curve over the next several years, though somewhat muted by the fact that it’s the most heavily employed specialty, and certain states haven’t caught up with CMS yet. But we’re excited about it.”
M&A strategy remains strong
The company was active in the M&A space during Q3, focusing on high-growth, high-acuity markets.
The company put forth a $24 million investment across five in-market transactions, in New York, Texas and Illinois, which Surgery Partners considers to be high-growth states. The investment included two new multi-specialty orthopedic ASCs in Chicago, in partnership with Duly Health and Care, joining two existing Surgery Partners facilities there.
“These ASCs have a demonstrated history of strong operating and financial performance and have a very favorable outlook for high acuity growth,” Executive Chairman Wayne DeVeydt said. “We’re excited about the growth potential of this market, fueled by a strong network.”
The deal totaled $87 million, Crain’s Chicago Business reported. One of the ASCs involved, the Surgical Center of Duly Health and Care in Lombard, is one of the “largest and busiest multi-specialty ASCs” in Illinois, serving more than 20,000 patients each year, according to a Nov. 12 press release on the transaction.
Duly anticipates “building on this strategic partnership with Surgery Partners to further expand across our broader geographies,” the press release stated.
Surgery Partners is poised to deploy additional capital as opportunities arise, DeVeydt said on the earnings call. In Q2, Surgery Partners added five new facilities to its portfolio.
Recruiting talent for high-acuity specialties
Over 230 new physicians joined in the third quarter, with a focus on high-acuity specialties like orthopedics, spine and cardiology, Evans said. Recruitment activities, along with new facility developments and acquisitions, are driving growth, particularly in musculoskeletal procedures.
The company has seen strong volume and rate growth from new recruits, who have contributed 126% more revenue year-over-year, Evans added.
“We continue to have strong interest, as you can see in our recruitment numbers, mostly because we provide an opportunity for [surgeons] to be more efficient with their time,” he said. “We’re like a time machine that allows them to have consistent scheduling, get more procedures done, and have more say in their practice. I do think there are a lot of surgeons who are frustrated with the current system and with how much time they end up having to spend on things they don’t see as efficient.”
