Shareholders of Sawtelle-based medical imaging company RadNet Inc. have had a great run over the past 12 months.

Between July 23 of last year and July 23 of this year, RadNet’s share price soared nearly 86%, ending at $65.05. A related metric, market capitalization, jumped 97% in that period to roughly $4.8 billion.

That jump is especially notable because RadNet is a mid-sized company by market cap; while doubling of market cap in a year’s time is common among small and micro-cap public companies, it’s a more daunting achievement for mid-sized companies, especially for a company that’s been publicly traded for nearly 40 years.

But more importantly, from the shareholders’ perspective, RadNet substantially outperformed its peer companies. According to a Yahoo Finance index of the cumulative market cap of 63 companies in the medical imaging and diagnostic space, the index posted a slight decline of nearly 2% over the same 12-month period that RadNet’s market cap nearly doubled.

So how did RadNet achieve such spectacular growth in market cap and share price?

Mark Stolper, RadNet’s chief financial officer, offered four factors:

• RadNet is riding a wave of hospitals and insurers seeking to slash costs by moving medical imaging into just the type of ambulatory imaging centers that RadNet operates;

• The company has achieved solid quarterly performance metrics, consistently beating analyst estimates;

• RadNet has taken steps to substantially reduce its debt, making it more attractive to investors; and

• The company is moving swiftly into the digital health arena, using artificial intelligence algorithms to increase productivity of its radiologists and also licensing this technology to third parties.

“Call it a combination of company-specific reasons and RadNet positioning itself to be at the forefront of trends in the industry,” Stolper said.

Outsourcing gains momentum

Outsourcing of medical imaging – which includes everything from mammogram screenings to magnetic resonance imaging (MRI) exams to computed tomography (CT) scans – is nothing new. After all, RadNet, which was founded in 1981, has been in the business of operating ambulatory imaging centers for more than four decades. But over the last five to 10 years, outsourcing has gained more traction, pushed by insurers and hospitals seeking to cut costs.

“The industry is moving procedure volumes out of hospitals into free-standing centers such as we operate,” Stolper said.

Not only is this translating to more business for individual RadNet imaging centers – now up to 375 nationwide – but it also is driving an increasing number of partnerships between RadNet and hospitals. Locally, RadNet has in the last year or so expanded its partnership with Beverly Grove-based Cedars-Sinai Health System to a total of three joint ventures that together operate 12 imaging centers on L.A.’s Westside and four centers in the San Fernando Valley, according to Stolper. A fifth center Tarzana is slated to open later this summer.

RadNet has a similar arrangement with Renton, Washington-based Providence Health and Services and the hospitals that chain operates in the San Fernando Valley.

Overall, Stolper said, 137 of RadNet’s 375 locations are in hospital and health system partnerships.

Beating earnings estimates

On the performance front, RadNet’s quarterly earnings and revenues have frequently beat analyst estimates, as was the case in the first quarter. Chief Executive Howard Berger noted in his remarks to analysts in the first quarter earnings teleconference call that the company saw its best-ever first quarter performance with record revenue, adjusted EBIDTA (earnings before interest, taxes, depreciation and amortization) and adjusted earnings. (The actual earnings were negative due to a number of one-time expenditures.)

Analysts were also impressed.

“We are maintaining our Outperform rating and raising our price target to $60 (+$10) on shares of RDNT following 1Q24 results that were better than expected, with revenues that were +$10 million (or +2.3%) ahead of our model and adjusted EBITDA that was +$2 million (or +3.7%) ahead of our model,” John Ransom, a health care industry analyst with St. Petersburg, Florida-based Raymond James & Associates Inc., said in his research note on RadNet in May, immediately after the latest earnings release.

At that time, RadNet shares were up more than 50% year-over-year. “The (earnings) beat and raise managed to clear lofty expectations,” Ransom said.

Deleveraging through share offerings

On the debt front, RadNet has taken substantial steps over the last 15 months to reduce debt, including a pair of public offerings that combined raised nearly $490 million.

It’s common for companies in the imaging industry to run high levels of debt due to the high costs of imaging equipment, such as MRI machines.

“We started paying down debt even before interest rates rose and became more aggressive as interest rates started rising,” Stolper said.

“As a result, we now have a positive cash balance of $750 million. And our net debt to EBIDTA ratio now stands at 1.1, which is extremely low for our industry.”

Stolper said the company’s comparatively low debt level has made it more attractive to investors.

AI investment and market segment

But Stolper said probably the biggest inducement for investors has been the company’s substantial investment and efforts on the digital health front.

Those efforts took a huge step forward in March 2020 when RadNet purchased Cambridge, Mass.-based DeepHealth, a radiology artificial intelligence and machine-learning company. In the years since, RadNet has been incorporating that technology into its freestanding imaging centers.

But RadNet has gone much further with this and related artificial intelligence technology. The company soon began selling and licensing the software to other providers; these deals now number about 200.

More recently, the company launched an initiative to offer women having mammograms at RadNet facilities the option of having its artificial intelligence program analyze their scans for an additional fee. According to Stolper, more than one-third of women having mammograms have chosen to pay the additional fee for the AI analysis.

And beginning in January, the company split its financial reporting into two divisions: the traditional outpatient clinics and a new digital health segment.

“We did this to increase the transparency of our initiatives on the digital health front, so that investors and others could more easily see our progress,” Stolper said. “Investors are excited about this: these new revenue streams have the promise to be higher margin and higher profitability businesses than core outpatient imaging center business.”

He added that these AI initiatives are less capital intensive than opening new imaging centers.

Analyst Ransom agreed. He said the company’s increased commentary on its shift over time at imaging centers to AI-assisted imaging and the company’s new digital health segment has boosted investor sentiment.

Managing a shortage of radiologists

Of course, RadNet does face challenges. The biggest, according to Stolper, is finding qualified labor and keeping in check labor costs.

“This is something the entire industry is grappling with,” Stolper said.  “We have backlogs at many of our sites because we often do not have enough radiologists on hand to quickly and accurately read the scans that are coming in.”

The company is trying to address this in the short run with increasingly attractive job-offer packages to radiologists, he said.

Over the longer run, the prevalence of AI in the imaging scan analysis process should boost the productivity of radiologists, allowing them to move more quickly through image scans.

“The industry is moving toward this, but we’re definitely not there yet,” Stolper said. “In the meantime, we are finding this labor and labor cost challenge manageable.”