After nearly a decade of growth as a public company and facing changes in how Medicare reimburses for cancer drugs, US Oncology last week announced it would go private in a $1.7 billion buyout deal with one of the largest private equity firms in the U.S.
The Houston-based cancer-care service provider, which handles approximately 15% of the country's new cancer cases each year through a network of 875 physicians, announced plans to be purchased by Oiler Acquisition Corp., an affiliate of Welsh, Carson, Anderson & Stowe. Welsh Carson owns roughly 14.5% of US Oncology's common stock.
The delivery of cancer care is a significant and growing market, with the National Institutes of Health estimating that overall costs for cancer in 2003 were $189.5 billion, including $64.2 billion in direct medical costs. But as new oncology pharmaceuticals and other cancer-care drugs enter the market, the costs of treating cancer patients continue to rise. US Oncology's physician partners provided care to approximately 200,000 new patients and 150,000 follow-up patients in 2003. While more patients are beating cancer, improved survival rates also mean that many patients receive treatment for longer periods of time, increasing costs and the challenges of managing ever-increasing patient loads.
The takeover is expected to be completed sometime this spring and was approved in a unanimous vote by US Oncology's board of directors, the company said. Stockholders last week filed at least two class-action lawsuits in Chancery Court in Delaware alleging US Oncology breached its fiduciary duties to shareholders by entering into the merger deal. US Oncology said the complaints, which also call the price offered by Welsh Carson inadequate, lack merit and that the company would "vigorously defend" them.
While the deal's terms permit US Oncology to solicit other possible bidders until April 6, the company would face a $12 million breakup fee if it accepts another bid. Further details about the transaction, which is also subject to shareholder approval, will be included in the company's proxy statement, expected to be filed with the Securities and Exchange Commission in coming weeks. Both US Oncology and Welsh Carson declined to comment.
US Oncology earned $70.7 million in 2003, compared with a loss of $46 million in 2002, which the company refers to as a transitional year during which it worked to change the economic model for its physician practice management relationships. Annual net revenue rose 18.8% to $1.9 billion in 2003. However, the company warned earlier this month that its 2005 earnings would fall because of provisions to reduce reimbursements for cancer care included in the Medicare reform act.
Medicare is the largest payer for the company's affiliated physician practices, representing approximately 41% of their net patient revenue. For 2004, the new law could lead to potential patient access problems because payment amounts for some cancer drugs are lower than the prices at which physicians can purchase them, according to the American Society of Clinical Oncology. The new law will create even greater challenges in 2005 and beyond because it will "drastically reduce" the payments for the drugs and drug administration services compared with 2004 amounts, the group said in a memorandum. "The (act's) payment amounts for 2005 and later years are unacceptable and have the potential to create substantial impairment of patient access to cancer treatment," the society said. The group is asking Congress to adjust payments for drug administration services to an amount that will maintain the net revenue to physicians in 2005 and 2006 at the same level as they received in 2004.
US Oncology's chairman and chief executive officer, R. Dale Ross, said in a news release that Welsh Carson has a successful track record of investing in healthcare companies and the experience and resources to lead US Oncology in its efforts to improve access to high-quality cancer care.
Ross, who will continue as chairman and CEO after the takeover, founded American Oncology Resources, one of US Oncology's predecessor companies, in 1992. US Oncology was formed in 1999 through the merger of American Oncology and Physician Reliance Network, with Welsh Carson as an original investor.
"Our special committee of independent directors and our board believe that this merger is in the best interests of our stockholders in returning value to them and that it also provides an exciting opportunity for US Oncology, its management and physician constituents going forward in dealing with new Medicare regulations that will affect US Oncology's business," Ross said in the release.
Under the terms of the deal, US Oncology stockholders would receive $15.05 in cash per share, an 18.5% premium above US Oncology's closing price of $12.70 on the Nasdaq exchange on March 19, the last trading day before the deal was announced.