UNH - Amedisys Inc.: Why Stock Is A Hold Pending Agency Review

2023-11-03 10:08:09 ET

Summary

• Amedisys, Inc. is set to be acquired by UnitedHealth Group in a $3.29 billion merger agreement.
• Some US legislators have called for further scrutiny of the merger, citing concerns of increased market dominance and higher medical costs.
• UnitedHealth's subsidiary, Optum Group, has been expanding its service provision through acquisitions, including a recent deal with UK health-tech company EMIS Group.

It has been a tumultuous year for Amedisys, Inc. ( AMED ) with the share price dropping 6.25% (YoY) and about 13.7% below its 52-week high of $106.02. Paul Kusserow, the Chairman of Amedisys’ board of directors returned to the helm of the company after the departure of Chris Gerard in November 2022. Among the key activities to be overseen by Kusserow will be the $3.29 billion merger agreement with UnitedHealth Group ( UNH ).

Thesis

I believe Amedisys’ acquisition by UnitedHealth Group is a done deal now, despite the recent calls by some US legislators for further scrutiny by the Department of Justice (DOJ) and the Federal Trade Commission ((FTC)). Other than being a healthcare consolidation plan, this deal also seeks to draw a vertical integration of the supply of home health, hospice, and palliative care across the US. AMED’s financials are impressive and the company already has a stable growth runway giving it a positive intrinsic value.

Beyond Senator Warren’s Petition

In a joint letter to the US FTC and DOJ, Senators Warren and Jaypal prevailed on the agencies to investigate further the UNH-AMED merger terming it as “anti-competitive.” According to the lawmakers, this acquisition would increase UnitedHealth's market dominance allowing it to raise medical costs and adversely affect patients' healthcare provision. UnitedHealth is set to complete this merger using its subsidiary, Optum Group which in my view excels in pharmacy and technological healthcare service delivery.

Reports indicate that Optum closed its $1.51 billion acquisition of UK health-tech company EMIS Group. This deal came after it was cleared by the UK’s Competition and Market Authority ((CMA)) in late September 2023, after the agency established there were no competition concerns on data-management service provision to the National Health Service ((NHS)).

UnitedHealth also reported that Optum and ProHealth Care, which specializes in "revenue cycle management, information technology, informatics, analytics, and inpatient care" had struck an agreement to support the company's community health system provision in Waukesha, Wisconsin, and to cover at least 800 ProHealth employees. While speaking about this partnership, ProHealth CEO, Susan Edwards stated,

“Our work with Optum will strengthen our administrative functions as we continue our growth as a premier independent, community-based health system.”

With these recent acquisitions in place, we have to consider that UnitedHealth through Optum is looking to expand its service provision and offer a wholesome product to the market with its acquisition of Amedisys. I’m considering AMED’s organic growth through its home health and high-acuity care business which will be uplifted by this merger. Another critical aspect is the clinical initiatives such as hospice/ care centers, capacity, and overall productivity.

Quarterly Review

In Q3 2023, AMED’s net revenue declined by less than 1% (YoY) to $556 million from nearly $558 million realized in Q3 2022. Home health was the highest earner at $351.6 million, with 3.7% (YoY) growth while the hospice service revenue followed at $188.9 million in the quarter. Additionally, the high-acuity segment posted a 34.9% (YoY) growth in the quarterly admissions to 580 from 430 in 11 joint venture markets. There was a slight reduction in the operating loss in this segment to $7.4 million from $9.4 million recorded in the 3 months leading to September 2022.

Of importance is that non-Medicare service revenue grew 17.7% (YoY) to $133.7 million from $113.6 million while Medicare dropped 3.4% (YoY) to $217.9 million. As we know, AMED’s home health service care is covered by both Medicare and Medicaid. Eligible patients also qualify for some private insurance depending on approved plans. Therefore, the decrease in Medicare revenue for AMEDs brings to focus the reality of reduced home health service provision in the US (as far as Amedisys is concerned). On close inspection, AMED’s Medicare completed episodes declined 4.74% (YoY) to 72,714 while the (Medicare) visits per episode fell by 0.6 points. Here is where UnitedHealth comes in, to jumpstart AMED’s home health business and increase its reach across the US.

In essence, Medicare has been the greatest payer for home health services in the US for several years now. Therefore, it will require AMED to have a strong incentive to standardize the difference between the intended payment and the visit costs. In essence, it is about lowering the cost of every visit by a caregiver and the prospective number of visits, a move that I believe requires substantial backing from a financial powerhouse such as UnitedHealth.

As seen above, Amedisys is growing its non-Medicare business and high-acuity service revenue even as the Optum merger awaits the DOJ’s approval. The total volume of admissions/ recertifications for both Medicare and non-Medicare rose 2.52% (YoY) to 144,220.

Risk and Valuation

The petition to stop the potential merger between AMED and UnitedHealth poses a risk to AMED’s share price considering the stock is just 9.1% shy of UNH’s target price of $101. In my view, I believe the notion that UnitedHealth poses a risk to market competition with this acquisition is unfounded. UNH’s Optum Group has been investigated in the UK and its acquisition of EMIS Group was above board. Further, the US home health industry as of 2022 was valued at $143.19 billion. It is expected to grow to $278.83 billion by 2032 growing at a CAGR of 6.89% over the 10 years. UnitedHealth's acquisition of AMED at a valuation of $3.3 billion is significant but far below the sector's overall market share that is needed to control pricing.

AMED’s total operating expenses in Q3 2023 rose 114% (QoQ) to $197.4 million up from $92.2 million in Q2 2023. The company reported a 3.7% (YoY) increase in the visiting clinician cost per visit (in Q2 2023) while the overall number of visits also fell 1.21% (YoY) to 1,723,289 from a high of 1,744,385 in Q2 2022.

Against rising expenses, AMED also faced an 18.13% (QoQ) decline in its cash reserves to $78.1 from $95.4 million in the prior quarter. However, the company managed to lower its debt balance by 12.8% (YoY) to $490.2 million (which includes debt and lease obligations) despite the decline in cash levels.

In regards to valuation, AMED’s forward price-to-book ratio stands at 2.55 against the industry average of 2.28 (indicating a difference of 11.45%). The price-to-cash flow ('TTM') metric is 25.34 against the industry average of 16.41 (giving a difference of 54.43%). These ratios show that AMED is slightly overvalued and we may see some downside in the near-term especially if the merger agreement falls through. However, the share price will rise significantly to the set price of $101 once the merger agreement with UNH has been approved by the DOJ and FTC.

Bottom Line

At the moment, I believe AMED is a hold pending the approval of its merger with UNH. The company has robust fundamentals with a significant growth runway. I also think UNH's valuation of AMED is accurate considering the company intends to streamline its vertical healthcare service delivery, especially home healthcare provision. Generally, this acquisition is intended to not only raise more revenue for UNH but also grow its Medicare and non-Medicare coverage across the US.

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