How under the radar I-MED is fighting fit after 20-year PE job

The Australian Financial Review04-28

What’s there is a business on track to record $1.35 billion revenue, which makes it 60 per cent bigger than No.2 player Sonic, and $230 million EBITDA this financial year, with about 4700 staff and ...

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The chief executive says there is room for more M&A in Australia, where I-MED already has nearly 25 per cent market share.It is also sitting on a newish New Zealand network of clinics, a fast-growing tele-radiology business (the biggest in Australia, No.2 in the United States and plans to enter the UK) and a hefty and valuable dataset that underpins a world-leading AI business dubbed Annalise.ai.We shouldn’t be surprised that I-MED is so big, but it is easy to forget while tucked away in private equity land for nearly two decades.By the stats, I-MED seems to have a clean bill of health and is going better than those ASX-listed rivals. COVID-19 was hard – diagnostics volumes plummeted across the country – but I-MED has bounced out the other side, and is targeting growth.It has a lot going on; as you would expect of a PE-owned business. It has grown revenue at close to 11 per cent since 2018 on a compound annual growth rate basis under current owner Permira, a British buyout firm that targets healthcare sector deals.AdvertisementIn a rare interview, Shrey Viranna, a South African doctor and former McKinsey consultant who moved to Australia to run I-MED in early 2020 and now plans to stay, talks a lot about purpose.Good for the systemSo too does his chairman, former Medibank Private boss and SBS chairman George Savvides. They’re both big believers that their X-rays, MRI scans, PET scans changes patients’ lives, and their early detection services save the health system plenty of money.“This is one of those institutions that can really shift health outcomes on a population level,” Viranna says from I-MED’s head office on George Street, in Sydney’s CBD.“It fundamentally shifts clinical outcomes for a human being – if you find cancer early, that’s changing someone’s life, it’s completely shifting the cost of the ecosystem, the treatment protocols change dramatically. It’s one of those areas within healthcare that really shifts the person and shifts the system.”A big part of I-MED’s strength is its 450 doctors. It employs one-in-six radiologists in Australia; most of the doctors earn $700,000-plus annual salaries, and most have shares in the company. They underpin the business.AdvertisementSavvides says he met the doctors on his second day as chairman, in 2022.“There was not a shy one anywhere,” he jokes. “It’s a lovely fraternity; a great army of capability.” He says he saw the benefit of early detection and what it means for the healthcare system and the cost of treating patients while running Medibank Private last decade.While it’s unusual for I-MED to stick its head above the parapet – it is only Viranna’s second interview with The Australian Financial Review since moving to Australia in March 2020 – we should expect to hear more of I-MED’s name in the coming 12 months.The smoke signals suggest current owner Permira, with 15 offices and €78 billion ($128 billion) in capital committed globally, is thinking about its options.Next chapterIt would be great to see I-MED return to the ASX boards via an initial public offering.AdvertisementI-MED was last listed in 2006 when it was inside DCA Group; an imaging and aged care company bought by CVC Asia Pacific for $2.7 billion. I-MED was DCA’s Australian imaging business, bundled with a sister company in the UK (Lodestone) and aged care assets in Australia and New Zealand.DCA’s buyout was the sort of heady debt-fuelled deal that necessitated a few restructures and ownership changes as financial markets turned. I-MED has come out the other side and is eyeing global growth again after stints with CVC, a group of hedge funds and distressed debt types led by Australia’s Anchorage Capital, Swedish PE shop EQT and now Permira. It is approaching close to 20 years in private equity hands, one of the longest stints across corporate Australia.I-MED’s size, scale and relatively stable earnings profile arguably means it is more likely to attract a private capital buyer, be it another traditional PE group or an infrastructure-minded investor. It may be a different story if the IPO market was hot.Interestingly, Permira has considered merging it with an offshore diagnostics group in the past to create a trans-continental imaging provider – that’s how chief executive Viranna met his now bosses. He was chairman of the potential merger buddy, pan-European imaging group Alliance Medical. He got to know Permira, and moved to Australia to run I-MED for the firm.I-MED uses AI to “blind read” scans, which are seconded by a doctor. AI also helps with the reporting, speeding up the process and reducing misses, its CEO says.  Jessica ShapiroYears later, that horse has bolted for Permira, which bought I-MED in 2018. PE firms typically own assets for three to five years before considering sale options. But it doesn’t mean another PE owner may not try.AdvertisementAll those things going on – New Zealand, tele-radiology, Annelise.ai, potential Australian M&A – will no doubt be factored into sale plans. The fatter the calf, the more it is likely to be worth at market. Buyers will want to see proof that these growth plans are working.‘Significant whitespace’I-MED’s core remains the Australian clinics, fuelled by a growing and ageing population, and the increase in higher-margin scans. Is Viranna serious about buying more clinics? His company is already the biggest player, by some margin, and any material move would attract regulatory scrutiny.“When we look at our [Australian] footprint, we still have significant whitespace,” he says. “There are very few spaces where our market penetration is so significant that we feel we’d be saturated from a growth point of view, or an ACCC point of view.”Those comments are interesting. The sector’s dream deal is merging it with ASX-listed Integral Diagnostics; it was even pitched to Permira and other potential buyers as a logical bolt-on acquisition when last up for sale in 2018. It hasn’t happened – Permira’s stint was interrupted by COVID-19, and it has been busy growing in New Zealand and tele-radiology (in Australia and offshore) since.No.4 player Lumus Imaging, owned by ASX-listed Healius, could also be coming up for sale. It has about $462 million in annual revenue and operated at an 18 per cent EBITDA margin in the past six months.AdvertisementM&A has always been a big part of I-MED’s story. It typically buys a big business and bolts on smaller ones, creating scale and a network effect. Even when it went to NZ recently, it started by buying the biggest player outside Auckland, Hamilton Radiology, and soon added another chunky business. So, too, with its tele-radiology business in the US.Network effectBut the acquisitions have not always been welded together, so the network effect wasn’t as powerful as it should’ve been, Savvides says.“Properly putting together all those acquisitions wasn’t finished,” Savvides says.“If you look at the business now, it is one company and the yield that has come out of that is really important.” He says I-MED is now better able to manage demand and service customers across its clinics network, and that’s a key feature of Permira’s ownership.While the clinics are the bones of the organisation, it will be interesting to see how its tele-radiology and AI business go in coming years, and whether they become big enough to stand on their own two feet.AdvertisementI-MED seems to have carefully established these units as separate entities. The tele-radiology business, for example, has its own management team, technology stack and third-party customers. It is still small, relative to the clinics, but growing much faster.Spin-off?If the tele-radiology business is as exciting as the current I-MED duo believes, you would have to think there comes a day when its owner thinks about spinning off the capital-light, high growth tech business. It could be worth significantly more (on an earnings multiple basis) than the core clinics, which require ongoing capital investment to update equipment.“There is no shyness that I have observed in this company when it comes to investing in equipment,” Savvides says. “The benefit is that the average value of a scan goes up as the tech goes up.” Those higher-value scans are one of the reasons why Australia’s diagnostic imaging market is forecast to grow at 7.8 per cent a year for the rest of the decade, up from 5.2 per cent in the past eight years.You could make the same argument about I-MED’s AI business Annalise.ai, which it founded alongside Harrison.ai in 2019. Annalise.ai is underpinned by 10 million-plus images, accumulated over 20 years.That database is used to help read new scans, which are typically taken in a clinic or hospital and sent to a “bunker” with radiologists for reading and reporting. A first blind reading can now be done by AI, and seconded by a doctor. AI can help write the report, and it accelerates the process and reduces misses, Viranna says.AdvertisementHe says the really valuable bit is that the database is cross-cultural, reflecting Australia’s population, which makes it clinically and commercially relevant globally.Like we said, the tele-radiology and the AI is the sizzle in I-MED’s story. The core, in terms of both earnings and assets, is still its clinics and radiologists.It will be interesting to see what happens in the coming year or so. Owner Permira and the I-MED’s board and management team clearly have big plans and there is a lot going on in the sector. It feels like the next time they stick their heads above the parapet, there may be some big news.Have your sayWe are always interested to hear your views on current topics. Guidelines for how to write an opinion article are here. Guidelines for how to write a letter to the editor are here. 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