American Oncology Resources is buying another oncology company, Physician Reliance Network, in what analysts say could be the first of many mergers among single-specialty physician practice management companies.
"The acquisition (of doctors) has slowed down, making it difficult (for companies) to maintain their historical growth rates," says Ken Miller, M.D., a senior analyst at Hambrecht & Quist in San Francisco. "They're looking to spur growth. One way to do that is (through) mergers."
Miller says while he doesn't know of any imminent deals, other companies are considering them.
American Oncology of Houston on Dec. 14 offered 0.94 of a share of its stock for each share of Physician Reliance, Dallas. The transaction is worth $715 million, including $60 million in assumed debt. The deal, which is scheduled to close this spring, makes American Oncology the nation's most valuable PPM, with a market value of $1.1 billion.
The company will not rework the management agreements of its 714 doctors, says Dale Ross, American Oncology's chairman and chief executive officer. The company, which will retain the name American Oncology Resources, is studying how to integrate the PPMs' technology.
In theory, being in the same business should make it easier for American Oncology and Physician Reliance to merge.
Multispecialty PPMs MedPartners and PhyCor would have faced a more difficult challenge if they had completed their proposed merger last year, analysts say. Their deal's failure sent PPM stocks on a steep downward spiral from which most are only beginning to recover.
On news of their proposed merger Dec. 14, American Oncology's stock finished at $12.19, down 81 cents, and Physician Reliance's dropped 50 cents to $11. But Ross says he expected a skeptical reaction because of general PPM woes.
American Oncology says it will control 13% of the nation's cancer treatment market, giving it by far the largest market share among oncology PPMs. It will have 44 cancer treatment centers in 24 states, and in most locations it will have a 30% to 40% share of the oncology market. American Oncology and Physician Reliance overlap in only two geographic areas: Austin and San Antonio, Texas, and Albany, N.Y.
Ross hopes the combined company can achieve negotiating clout with payers and suppliers, although he says he's aware the deal might cause a backlash. Before the companies agreed to merge, Physician Reliance in March had to promise to limit its expansion in Dallas as part of a lawsuit settlement with Methodist Hospital of Dallas. Methodist had accused the company of monopolistic practices.
Ross especially has his eye on making money through clinical trials. Physician Reliance is strong in early stages, while American Oncology is strong in late-stage testing. He says the deal will create "critical mass and leverage."
American Oncology and Physician Reliance had discussed merging for about three years. Talks got more serious in the fall, once Physician Reliance's management felt confident the company had gotten back on its feet, says John Casey, its chairman and CEO. He will step aside in favor of Ross but will be a board member at the merged company.
Physician Reliance for the first nine months of 1998 reported earnings of $21.9 million, or 41 cents per share, on $291 million in revenues, compared with a loss of $12.4 million, or 24 cents per share, on $230 million in revenues in the same period in 1997.
American Oncology reported earnings of $22.2 million, or 44 cents per share, on $330.8 million in revenues for the first nine months of 1998, compared with earnings of $16.7 million, or 35 cents per share, on $232.2 million in revenues in the same period in 1997.