What You Need to Know About Mednax’s Acquisition of vRad

May 25, 2015

vRad is acquired by Mednax, NYSE:MD. But, what is a Mednax?

First, let's look at the overall deal. Mednax acquired vRad for $500 million in a cash transaction. This is approximately equal to 10x the EBITDA number provided by unnamed internal vRad sources for the article Newstone, Blackstone’s Credit Arm Hire Credit Suisse to Find Buyer for vRad in March, and discussed subsequently in the Diagnostic Imaging article, vRad Is For Sale. This figure surprised many and is approximately 2.5 to 3 times the amount that many insiders believed that vRad would eventually be sold for.

According to the press release by Mednax and the Dow Jones article, vRad currently generates annual revenue of $185 to $190 million. vRad is reported to have approximately 350 radiologists with customers in all 50 states.

Mednax hopes to use vRad as an entrée to the expected $3.8 billion teleradiology market as well as the broader radiology and imaging market. Mednax CEO, Roger J. Medel, MD, was quoted in the Mednax press release as saying, “We believe vRad is an excellent platform for growth in teleradiology and the broader telemedicine market.” He went on to say, “Radiology is a large, fragmented industry with total revenue of roughly $18 billion, and it is evolving rapidly to include teleradiology as an economic and clinical necessity for customers. We believe the opportunities for organic growth at vRad and for cross-selling between the company’s and MEDNAX’s customer bases are compelling. This acquisition also further broadens the scope of services we can provide to our hospital partners.”

But, what is a Mednax? In a corporate description from the Mednax website this is how they describe themselves: “MEDNAX, Inc. is a national medical group that comprises the nation’s leading providers of neonatal, anesthesia, maternal-fetal and pediatric physician subspecialty services. Physicians and advanced practitioners practicing as part of MEDNAX are reshaping the delivery of care within their specialties and subspecialties, using evidence-based tools, continuous quality initiatives and clinical research to enhance patient outcomes and provide high-quality, cost-effective care.”[[{"type":"media","view_mode":"media_crop","fid":"37991","attributes":{"alt":"","class":"media-image media-image-right","id":"media_crop_9044167130553","media_crop_h":"0","media_crop_image_style":"-1","media_crop_instance":"3771","media_crop_rotate":"0","media_crop_scale_h":"0","media_crop_scale_w":"0","media_crop_w":"0","media_crop_x":"0","media_crop_y":"0","style":"float: right;","title":" ","typeof":"foaf:Image"}}]]

According to Reuters, Mednax originated as a neonatology group, Pediatrix Medical Group in 1979. Their initial public offering (IPO) was in 1995. MEDNAX, Inc. (MEDNAX), incorporated on October 10, 2007. From a low of approximately $12.40 in late 2008, Mednax has steadily climbed in share price to approximately $70 today. Mednax is reported to have approximately 2,625 affiliated physicians providing care in approximately 34 states and over 400 hospitals. Through its affiliated physicians, Mednax provides neonatal care, anesthesiology services including pain management, maternal-fetal care, pediatric cardiology, and other subspecialty care.

Now, the real question, "What does this mean for radiology?" If we look at Dr. Medel's statement, perhaps there are some clues. He states that, “Radiology is a large, fragmented industry with total revenue of roughly $18 billion…” If by fragmented he means that radiology is still primarily practiced by individual radiologists in radiology groups, this is true. He goes on and says, “We believe the opportunities for organic growth at vRad and for cross-selling between the company’s and MEDNAX’s customer bases are compelling.” Organic growth in the teleradiology market typically means converting current customers of other teleradiology providers to vRad. Cross-selling between the company’s customer bases suggests potential new market opportunities that may not be open to vRad competitors giving vRad a distinct advantage in marketing and sales.

Whether the new vRad plans on or will be successful working through the Mednax network to cross-sell directly to hospitals and hospital systems rather than working through the radiology groups that have the hospital contracts, remains to be seen. vRad has always been adept at walking the tightrope between providing services to the sometimes competing interests of hospitals and hospital systems, and radiology groups. But, in an industry where predatory behavior towards radiologists and radiology groups has long been a significant concern, efforts to remove the ability to provide in-house teleradiology, to use a teleradiology provider other than vRad, or dis-intermediate radiology groups entirely, would signal a much more aggressive move.

It's too early in the game to gauge the reaction of the radiology market and radiology in general to this news; and just as difficult to predict how Mednax/vRad will move into the future. Is the largest provider of teleradiology services in the US moving further away from its radiology roots, or will this acquisition move vRad away from corporate radiology and closer to physician-to-physician radiology and teleradiology services? Time will tell. Stay tuned…