FONR- Fonar

[cameronfen]

I haven't done much serious work in this.  I know there was a discussion about this stock in the AIQ thread, along with Radnet which is a bigger company (with worse valuation, but with more trustworthy management) with a similar story.  Anyway these guys seem to be able to purchase Mom and Pop radiology clinics (and bigger) at a cheap price and then wait for the market to rerate the increased earnings.  For example in this (http://www.radiologybusiness.com/topics/business/imaging-center-valuation-what-your-facility-worth) article offering advice for radiology clinics looking to sell, it says that Radnet is trading at 12 times EV/EBITDA but advises sellers: "What is your facility worth? It is worth the present value of future cash flows, which may or may not be in the range of three to five times the EBITDA."  Senvest which has a great record as a fund and which is itself a value stock used to own a lot of Radnet.  They have started selling with valuation issues, I think, (and perhaps management is getting more promotional) but still have a decent position.  FONR has done the same thing.  Here is a press release: https://www.massdevice.com/fonar-acquires-mri-providers-new-york-florida/.  They said they bought three clinics which are projected to bring in 1 million in net income for about 7 million dollars (see 9/28/2016 10-K).  I think this is a pretty interesting roll up and according to Radnet's presentations, there is a long runway for growth as the industry is fragmented and radnet still holds only a small market share (and FONR even smaller).  See investor presentation where they say Radnet states comprise 25% of the US population.  I think they were trying to brag but considering they only have 3 clinics in Florida, this suggests long runway for growth for anyone pursuing this strategy (and Radnet is the biggest clinic chain by far 3x the next biggest). 

[bergman104]

I did a lot of work on this one and was really really excited about it for all the reasons you mention. However, I ultimately passed. What I couldn't get over is the family ties to everything. To my knowledge, they bought all of the MRI centers from people involved in the company or family friends. The MRI center managing company they bought was from the then CEO's son for instance. I think it is the same for all their centers too. It isn't a coincidence that all of their centers, including those that they bought, also operate FONR MRI machines. Secondly, they are managing MRI centers. Meaning they are attempting to be hired by MRI centers to run the day to day operations, whereas I was way more excited about them purchasing the entire clinics outright.

 

This is still a company I follow and maybe I'll change my mind, but I initially thought it was great upon digging through their 10k decided to pass. There are other red flags too, but the major one for me was the family ties. If you find something different please let me know. I'd love to be proven wrong on this one

[Cigarbutt]

Only have superficial knowledge about Fonar but understand that they get most of their revenues and especially profits from managing Diagnostic Imaging Centers in the US. Some time ago, looked at the MRI business in some depth.

 

Comments submitted here provide more questions than answers. :-\

 

In the US, the number of MRI scanners available per capita and the number of MRIs performed per capita are way above what is found elsewhere. Controversial area and perhaps not worth discussing now.

 

Running a diagnostic imaging center is a relatively standard activity (acquiring hard assets, hire the right personnel, appointments, performing the tests, reading films etc). The variability of the price charged to perform an MRI shows a tremendous geographic variation in the US and the price per MRI performed in the US is off the chart in terms of international comparison.

 

After analyzing the MRI industry in the US, I came away with the feeling that I could not explain the price charged by the operators. At least not in a way that would convince me that there is a lasting edge. I wonder if more transparent price discovery may hurt the business?

 

[compoundvalue]

I own Fonar.

Having said that and to play devils advocate I think the following two items from the latest 10K and regulation in general are the biggest threats to Fonar:

 

 

8. Proposed Reduction of New York Workers’ Compensation Benefits. A proposal was published by

the New York State Workers’ Compensation Board (“NYSWCB”) in 2014 to change the fee schedule for

Workers’ Compensation payments. Initially, the fees proposed would be set at approximately 130% of the

Medicare fees. This would reduce fees for the most commonly billed radiology procedures by

approximately 60%. Further, since the Workers’ Compensation fees are coupled with the New York State

No Fault Program, radiology providers would suffer similar reductions for No-Fault fees. Although we and

the HMCA clients wrote to the NYSWCB to argue against this proposal, and other affected parties

commented as well, there can be no assurance that the NYSWCB will withdraw or modify this proposal,

or if they elect to do so, the extent to which the NYSWCB would modify their proposal. No further action,

however, has been taken by the NYSWCB to advance this proposal for approximately two years. A

significant reduction in Workers’ Compensation and No-Fault fees could have a material adverse impact

on our business.

9. Possible changes in Florida Insurance Law. A bill has been introduced into the Florida legislature,

whose goal is to eliminate the no-fault system and the requirement that motorists carry personal injury

protection, commonly referred to as “PIP”. Currently, drivers and passengers get car damages and PIP,

paid for up to $10,000, no matter who is at fault in an accident. Drivers have to pay an additional cost to

insurance companies to pay for bodily injuries, which covers them if they are at fault. While PIP is

required, coverage for bodily injury is not. The insurance industry is pushing to scrap PIP and instead

mandate all motorists to carry coverage that includes a minimum of $25,000 bodily injury if they are at

fault. Eliminating PIP would mean that the $10,000 drivers now get paid toward medical costs through

their insurers might not be there for them to pay for injured drivers. Importantly, payments would be

reduced by approximately 60% due to claims being paid at commercial rates instead of at the presently

prevailing PIP fee schedule. This would negatively impact our seven diagnostic imaging facilities (both

those we own and those we manage) with more unpaid bills, lower reimbursement rates and elongated

waiting times.

[cameronfen]

I did a lot of work on this one and was really really excited about it for all the reasons you mention. However, I ultimately passed. What I couldn't get over is the family ties to everything. To my knowledge, they bought all of the MRI centers from people involved in the company or family friends. The MRI center managing company they bought was from the then CEO's son for instance. I think it is the same for all their centers too. It isn't a coincidence that all of their centers, including those that they bought, also operate FONR MRI machines. Secondly, they are managing MRI centers. Meaning they are attempting to be hired by MRI centers to run the day to day operations, whereas I was way more excited about them purchasing the entire clinics outright.

 

This is still a company I follow and maybe I'll change my mind, but I initially thought it was great upon digging through their 10k decided to pass. There are other red flags too, but the major one for me was the family ties. If you find something different please let me know. I'd love to be proven wrong on this one

 

I will respond to three comments in order.  I will say, it may be that Radnet is the better play.  The management is more trustworthy and is a bit more expensive but not something like 15 to 20 times earnings which is not bad.  I own both, but like due to the problems you all mentioned I like Radnet better.  Also these are starter positions for me, so my research is not super extensive (but I think pretty good). 

 

First Bergman.  Basically I agree.  If the related party dealings are a deal breaker, look at Radnet.  Same business model, a somewhat higher valuation, but none of this shady stuff.  Honestly, I may sell this stock and buy more Radnet after thinking about the insider funny business, even after the Radnet run up.  The management company business is terrible and I completely agree.  At least for the FONR upright machine, I have to think Raymond believes they are better as he seems to be emotionally invested in it (just look at the Fonar website lol).  They have expertise in it, so why not use that competitive advantage (at least in his mind).  I will say it though, I would not put it past management to have gotten into the clinic business so they could milk upright MRI sales.  But once they got into that business, I think they realized that was where the real money was (actually when Tim was hired was when they seemed to realize but whatever). 

 

I wasn't aware management was trying to focus on managing MRI clinics.  Honestly, I have to believe management is not dumb (but they are corrupt).  They know they can make money buying clinics at 6x and letting the market rerate the value at 10x or 15x.  Ray states in the April 2017 letter to shareholders that "The business plan for growing HMCA remains the same: increase scan volume at existing facilities, establish de novo centers, and make acquisitions." So I have to assume if they want to manage they know what the return profiles are like.  In short, if you know you have a golden goose, why would you shoot yourself in the foot unless you were confident this would be beneficial. 

 

One thing to address the related party transactions, they company is obviously trading at a discount for that fact.  Additionally, the company has grown earning and revenues in HMCA at a consistent level.  I don't get the impression that they are leaving a empty shell of a company.  Their company is growing with high ROE and a long runway to grow.  Management is behaving unethically.  But it doesn't look like they are doing anything illegal.  Put another way, in five or ten years, I will bet that FONAR will be at least twice as big and earn twice as much rather than the other way.  That being said, I may sell as did have problems with the management and am unsure. 

[cameronfen]

Only have superficial knowledge about Fonar but understand that they get most of their revenues and especially profits from managing Diagnostic Imaging Centers in the US. Some time ago, looked at the MRI business in some depth.

 

Comments submitted here provide more questions than answers. :-\

 

In the US, the number of MRI scanners available per capita and the number of MRIs performed per capita are way above what is found elsewhere. Controversial area and perhaps not worth discussing now.

 

Running a diagnostic imaging center is a relatively standard activity (acquiring hard assets, hire the right personnel, appointments, performing the tests, reading films etc). The variability of the price charged to perform an MRI shows a tremendous geographic variation in the US and the price per MRI performed in the US is off the chart in terms of international comparison.

 

After analyzing the MRI industry in the US, I came away with the feeling that I could not explain the price charged by the operators. At least not in a way that would convince me that there is a lasting edge. I wonder if more transparent price discovery may hurt the business?

 

Sure I basically agree that our prices are above what other country charges.  I haven't thought about the implications for Fonar and Radnet.  That being said, the high prices I think are an artifact of our terrible health care system (by terrible I mean value proposition and not necessarily quality of care).  Our health care costs are like double of like most other developing countries and so the high prices are not just representative of MRI scans but all health care costs in the US.  So I think MRI costs will only go down if we fix health care (i.e. massively change how we treat patients).  I don't see that happening because of how many players it will effect (hospitals, insurance companies, doctors...).  For example, most countries have nationalized health care.  Thus reimbursements are easy.  You just bill the government.  Rates are set before hand.  In the United States there is a huge amount of administrative overhead to determine coverage and bill the right insurer and figure out who pays what and how much etc.  So like admin cost will not mean revert to global levels because of how our system is set up (note not attaching a value judgement of how we do things just relaying facts).  I will also point out that they are the low cost option compared to hospitals so they might have less to lose if things mean revert. 

[cameronfen]

I own Fonar.

Having said that and to play devils advocate I think the following two items from the latest 10K and regulation in general are the biggest threats to Fonar:

 

 

8. Proposed Reduction of New York Workers’ Compensation Benefits. A proposal was published by

the New York State Workers’ Compensation Board (“NYSWCB”) in 2014 to change the fee schedule for

Workers’ Compensation payments. Initially, the fees proposed would be set at approximately 130% of the

Medicare fees. This would reduce fees for the most commonly billed radiology procedures by

approximately 60%. Further, since the Workers’ Compensation fees are coupled with the New York State

No Fault Program, radiology providers would suffer similar reductions for No-Fault fees. Although we and

the HMCA clients wrote to the NYSWCB to argue against this proposal, and other affected parties

commented as well, there can be no assurance that the NYSWCB will withdraw or modify this proposal,

or if they elect to do so, the extent to which the NYSWCB would modify their proposal. No further action,

however, has been taken by the NYSWCB to advance this proposal for approximately two years. A

significant reduction in Workers’ Compensation and No-Fault fees could have a material adverse impact

on our business.

9. Possible changes in Florida Insurance Law. A bill has been introduced into the Florida legislature,

whose goal is to eliminate the no-fault system and the requirement that motorists carry personal injury

protection, commonly referred to as “PIP”. Currently, drivers and passengers get car damages and PIP,

paid for up to $10,000, no matter who is at fault in an accident. Drivers have to pay an additional cost to

insurance companies to pay for bodily injuries, which covers them if they are at fault. While PIP is

required, coverage for bodily injury is not. The insurance industry is pushing to scrap PIP and instead

mandate all motorists to carry coverage that includes a minimum of $25,000 bodily injury if they are at

fault. Eliminating PIP would mean that the $10,000 drivers now get paid toward medical costs through

their insurers might not be there for them to pay for injured drivers. Importantly, payments would be

reduced by approximately 60% due to claims being paid at commercial rates instead of at the presently

prevailing PIP fee schedule. This would negatively impact our seven diagnostic imaging facilities (both

those we own and those we manage) with more unpaid bills, lower reimbursement rates and elongated

waiting times.

 

See page 17 of this: https://www.radnet.com/sites/corporate/files/radnet/imce/investor-relations/RadNet%20Equity%20Presentation%20-%20Updated%2011-22-17.pdf  Radnet is basically a bigger FONAR and gets only 3.5% of its business revenue from workers comp.  I don't know what the numbers are for FONAR. 

[Cigarbutt]

cameronfen,

 

Fair enough.

Necessity is the mother of all inventions and "reform" in US healthcare is hard to predict (what and when).

 

Just want to add the following:

 

-what compoundvalue shows may become more and more mainstream thinking for payers (whoever they are) ie in the absence of transparent price signals, the provider will continue to ask for as much as possible and the payer will offer as little as possible (often based on a Medicare-based formula), with possibly an absence of intersection between the bid/ask spread.

 

-Apologies because I did not look closely at Fonar statements but, if the trend is more containment (likely), providing MRIs will be an easy target as the service is quite standard (quite easy to compare and to simplify the administrative process). In terms of being a low cost provider and establishing some kind of margin of safety, you may want to see the link found below (page 13) and see where 1-Fonar fits in the large range of percentiles in the US and 2-how they compare to another system (I think Switzerland is a reasonable comparative, system wise).

 

http://static1.squarespace.com/static/518a3cfee4b0a77d03a62c98/t/57d3ca9529687f1a257e9e26/1473497751062/2015+Comparative+Price+Report+09.09.16.pdf

 

 

[cameronfen]

cameronfen,

 

Fair enough.

Necessity is the mother of all inventions and "reform" in US healthcare is hard to predict (what and when).

 

Just want to add the following:

 

-what compoundvalue shows may become more and more mainstream thinking for payers (whoever they are) ie in the absence of transparent price signals, the provider will continue to ask for as much as possible and the payer will offer as little as possible (often based on a Medicare-based formula), with possibly an absence of intersection between the bid/ask spread.

 

-Apologies because I did not look closely at Fonar statements but, if the trend is more containment (likely), providing MRIs will be an easy target as the service is quite standard (quite easy to compare and to simplify the administrative process). In terms of being a low cost provider and establishing some kind of margin of safety, you may want to see the link found below (page 13) and see where 1-Fonar fits in the large range of percentiles in the US and 2-how they compare to another system (I think Switzerland is a reasonable comparative, system wise).

 

http://static1.squarespace.com/static/518a3cfee4b0a77d03a62c98/t/57d3ca9529687f1a257e9e26/1473497751062/2015+Comparative+Price+Report+09.09.16.pdf

 

Sure I'll take a look.  Thanks!

[bergman104]

cameronfen,

 

Fair enough.

Necessity is the mother of all inventions and "reform" in US healthcare is hard to predict (what and when).

 

Just want to add the following:

 

-what compoundvalue shows may become more and more mainstream thinking for payers (whoever they are) ie in the absence of transparent price signals, the provider will continue to ask for as much as possible and the payer will offer as little as possible (often based on a Medicare-based formula), with possibly an absence of intersection between the bid/ask spread.

 

-Apologies because I did not look closely at Fonar statements but, if the trend is more containment (likely), providing MRIs will be an easy target as the service is quite standard (quite easy to compare and to simplify the administrative process). In terms of being a low cost provider and establishing some kind of margin of safety, you may want to see the link found below (page 13) and see where 1-Fonar fits in the large range of percentiles in the US and 2-how they compare to another system (I think Switzerland is a reasonable comparative, system wise).

 

http://static1.squarespace.com/static/518a3cfee4b0a77d03a62c98/t/57d3ca9529687f1a257e9e26/1473497751062/2015+Comparative+Price+Report+09.09.16.pdf

 

Sure I'll take a look.  Thanks!

 

I think Cigarbutt's point is why I ultimately decided to pass. I thought that outpatient clinic's had a competitive advantage in that once a local outpatient diagnostic center had been established local physicians would unconsciously send their patients there for a host of reasons. But once I realized that they sought to mostly manage clinics rather that own them I decided that long-term health trends probably wouldn't favor them. Again, I could be totally wrong but those were my reasons.

[Cigarbutt]

More data points.

 

Last night, I participated in a webcast whose central issue was not the use of MRI but the topic was touched upon.

There were presentations by "experts"' and discussions. The experts had boots-on-the-ground experience and reported on recent interactions with payers (insurers and government). Reviewed some stuff.

 

Bottom line: medical imaging and MRIs represent now a low-hanging fruit in terms of cost containment.

 

Why?

 

-There are enough studies now showing MRIs are often done when not indicated or necessary.

https://www.usherbrooke.ca/dep-radiologie/fileadmin/sites/dep-radiologie/Public/Club_de_lecture/2012_01_12_Analysis_of_appropriateness_of.pdf

 

-There are enough studies now showing that an application of clinical guidelines results in better utilization of imaging studies.

https://pdfs.semanticscholar.org/e32d/902eeb9c7870a576da87ea91021d029a58c0.pdf

 

-Medicare (which will likely play an increasing role), through CMS, is aggressively pushing for "bundled payments".

 

There appears to be a growing momentum that looks different from previous cost containment efforts. What this will eventually mean for MRIs is that primary care physicians and patients will have skin in the game. Over time, the radiologist lost the gate-keeper role as there was a free lunch environment and as the prescriber was typically getting paid directly or indirectly when ordering the test. There can be obviously unintended consequences and maybe even major backlash but with the newer bundled payments, it is likely that physicians will order less imaging studies and, if tests are ordered outside of the guidelines, patients will likely end up with higher co-payments. So, many factors could combine to significantly impact demand.

 

IMO, this time around, the value-based imaging thing over volume-based is for real.

If you can't beat them, join them.

http://n2value.com/blog/value-and-risk-the-radiologists-perspective-value-as-risk-series-4/

 

 

 

 

[Cigarbutt]

The stock is down 25 to 30% since the initial discussion. On a P/B , P/E and P/FCF basis, the stock looks appealing and the trend in operating results is still good although moderating. With no material debt, significant tax-deferred assets and 3.43$ cash per share and with the recent swoon affecting healthcare-related stocks, is this an opportunity, especially with the projected growth within a fragmented landscape?

 

-The MRI medical equipment side is declining with stronger competitors, the "upright" MRI technology offers little advantage and is unlikely to gain significant traction outside their network.

 

-They are achieving very high margins both from the collection of imaging fees and clinic management fees but both sources of revenue are derived from referenced reimbursement rates. The moat is in correlation to the fact that they were at the right place at the right time but the environment is changing. So far, they have been able to compensate for lower reimbursement rates by increasing volume but this may be coming to an end with continued pressure on rates. Bundled payments with refined indications to prescribe MRIs and tighter rules around MD-owned imaging centers are to be expected so there may be an overcapacity issue.

 

-Also, related party transactions are impossible to validate.

 

I expect margins to come down and the path to profitable growth appears to be muted.

So the idea has been put in the value trap category.

 

 

 

[cameronfen]

The stock is down 25 to 30% since the initial discussion. On a P/B , P/E and P/FCF basis, the stock looks appealing and the trend in operating results is still good although moderating. With no material debt, significant tax-deferred assets and 3.43$ cash per share and with the recent swoon affecting healthcare-related stocks, is this an opportunity, especially with the projected growth within a fragmented landscape?

 

-The MRI medical equipment side is declining with stronger competitors, the "upright" MRI technology offers little advantage and is unlikely to gain significant traction outside their network.

 

-They are achieving very high margins both from the collection of imaging fees and clinic management fees but both sources of revenue are derived from referenced reimbursement rates. The moat is in correlation to the fact that they were at the right place at the right time but the environment is changing. So far, they have been able to compensate for lower reimbursement rates by increasing volume but this may be coming to an end with continued pressure on rates. Bundled payments with refined indications to prescribe MRIs and tighter rules around MD-owned imaging centers are to be expected so there may be an overcapacity issue.

 

-Also, related party transactions are impossible to validate.

 

I expect margins to come down and the path to profitable growth appears to be muted.

So the idea has been put in the value trap category.

 

I started this thread and you aren't going to hear any complaints from me.  Sold a while ago. 

[constructive]

This is one of my larger positions now - it trades at a cheap multiple and is really piling up cash.

 

The claims in this thread that management are corrupt and that it’s impossible to verify related party transactions are bizarre to me. The big related party transaction was 6 years ago, and it has obviously contributed to growing profits and share price.

 

It seems like everyone is missing the fact that margins are high and growth has been good because the upright MRI technology positively differentiates their clinics from their competitors.

[cameronfen]

I'm foggy on this one, but doesnt Fonar pay the ceo and his son a management fee to manage the radiology clinics?  I'm pretty sure they pay licensing fees for the upright technology although they could (?) expire at some point I vaguely remember.  Anyway the same people were at the helm 6 years ago as now.  They obviously are a lot richer now and less likely to screw the minority shareholders but I assume they havent done anything super positive governence-wise?

[constructive]

The son (Tim) is actually CEO now, and rightly so since he developed and executed the successful business plan of running diagnostic centers. The father, although a great scientist, is a bit of a crank and wasn’t suited to running a public company.

 

Compensation is reasonable. Tim actually takes 0 base salary and a modest performance bonus. The Damadians still have a minority interest in HMCA - it would be cleaner if Fonar bought them out completely. But minority interest is not conflict of interest.

[Cigarbutt]

Constructive criticism here:

1-The "upright" technology has been around for quite a while and seemingly has not gained much traction outside of related party entities. In some selected cases, the upright advantage can potentially add value but I would be glad to be educated. The equipment segment which is behind the upright scans is on the decline.

2-Revenue and increased margins since 2013 have come mostly from more volume per facility (23 to 26 facilities) and further growth and margins will have to come with geographic expansion and acquisitions.

3-The potential moat is from the practice management segment (services) which basically is dealing with running an imaging clinic, equipment acquisition and maintenance, recruiting referring doctors and keeping overhead down through efficiency and scale. Their model rests on the idea of finding a radiologist (or a group of) who wants to (and needs to, because of the law) maintain control but at the same time wants to outsource basic management operations in states that promote the corporate practice of medicine. Opinion: there is a moat but it's relatively weak and will be difficult to scale.

4-Expectations of further profitable growth imply no change in this very imperfect and non-transparent market.

5-Rates of MRIs per capita are too high in the US. I'm not saying the rates of MRIs will decline but should decline.

[Cigarbutt]

Update:

Top-line continues to grow but bottom line is flat-lining.

https://www.globenewswire.com/news-release/2019/11/12/1945935/0/en/FONAR-Announces-First-Quarter-Sales-Up-5-To-21-7-Million.html

I take this to mean that they are able to increase the number of MRIs per center but pricing pressures are mounting.

 

The MRI industry is at risk of commoditization:

There is growing recognition that standardization procedures to order the test and to read images will lead to better outcomes at lower costs.

Ventures such as Haven will likely push in that direction and, out of nowhere, large employers like Walmart want to take the matter into their own hands in a your margin is my opportunity mindset:

https://khn.org/news/walmart-charts-new-course-by-steering-workers-to-high-quality-imaging-centers/

https://undark.org/2019/08/26/problem-mris-lower-back-pain/

 

Florida and New York states (where Fonar operates) do not report the highest freestanding costs in the US but there is a growing push for international comparisons (starting to show up in discussions for drug pricing) and yesterday a reliable institution came out with a recent assessment that continue to show an impossible to justify cost for an outpatient MRI in the US versus the rest of the world.

https://www.businessinsider.com/how-much-an-mri-costs-by-state-2017-3

https://www.healthcostinstitute.org/blog/entry/international-comparisons-of-health-care-prices-2017-ifhp-survey

 

I don't have enough conviction to short this, in the absence of a clear short-term catalyst and with the possibility for delayed recognition of threats but I think this is unlikely to do well over the mid to long term.