Dr Bateman's delivery: A 49% profit jump

15 August 2012 Kath Walters

Nothing fazes Dr Edmund Bateman, the founder and managing director of medical centre, pathology and imaging business, Primary Health Care (ASX: PRY).

Others might flinch in the face of refinancing $1.02 billion debt; recovering from a merger with a rival provider, Symbion, that was 12 times Primary’s size at the time; backflipping on a decision to require co-payments from patients for pathology services that had flattened growth in parts of that business; or even a failed attempt to sell off a software division that has drained resources rather than delivering cash.

Bateman is a tough, unflappable leader. Today, he delivered results: a 49% jump in net profits, from $78.3m to $116.6 million on revenue for the FY 2011-12 of $1.4 billion, up only 5% from the previous year.

Earnings per share rose 7% to 23.3 cents per share and a dividend of six cents will be good news for shareholders – and Bateman owns 7.9% of the company himself. His personal wealth is estimated by BRW to be $420 million, making him the richest doctor in Australia.

It’s a bright result for the company and there is more good news. For example, $1.02 billion in debt was refinanced in October 2011 on “improved terms” the company's chief financial officer, Andrew Duff, told investors and analysts today. And earnings per share are expected to grow again between 20% and 25% in the current financial year.

The past 12 months has seen Primary’s share price sink as investors worried about whether Bateman could pull off a turnaround in the profit numbers. In 2009-10, net profit was higher than this year’s – $132 million – and earnings per share were 27.8 cents.

The big profit fall in 2010-11 ($78 million) led to job cuts (290 positions), 23 sites closing and cost savings of $27 million.

Bateman’s decision to respond to a $500 million federal government cut in pathology subsidies by charging co-payments turned out to be a disaster. The move stalled growth in pathology revenue in some of its centres, and led to Primary reversing its decision. Four centres reversed co-payments in the second half of FY 2012. “I am philosophically opposed to co-payments,” Bateman says. “Our model is about accessibility and affordability. But we are commercial realists as well. We are left with centres in the higher socioeconomic areas that are highly profitable with co-payments, and maybe we should increase them there.”

Pathology is the biggest revenue earner for Primary, delivering $785 million 56% of this year’s revenue – up 5.7% from last year’s result.

The company continued to cut costs and capital expenditure in 2011-12. It only opened one new medical centre, however it continued its program of buying small general practices. Its goal is to buy 130 a year; it spent $50 million buying 105 general practices over the period.

Primary’s model is to buy small practices with a big upfront payment (typically around $500,000) and then for the GPs to work in the business for the next five years, receiving a percentage of their billings.

The company’s largest medical centres grew fastest – across its 57 large centres the growth rate was 12%. Its 19 small-scales centres – the results of its $2.2 billion purchase of rival Symbion in March 2008 – has been much slower, at 5%.

When Primary merged with Symbion Health in 2008, Symbion had revenue of $3.8 billion, 14 times the size of Primary’s.

The merger put Primary into the big league, adding 80 pathology labs, 54 medical centres and 130 radiology sites. Although Bateman immediately turned around and sold off two divisions, which generated an estimated $2.8 billion revenue for $1.065 billion, and had had to close some sites and rationalise other. The move put Primary into serious contention as a rival to listed hospital manager, Healthscope, which was overthrown in its bid to buy Symbion in a bitter, year-long struggle against Bateman.

Bateman’s model has always drawn criticism from doctors, who say it is too focused on billing and not enough on patient care. Bateman has always disputed this, saying Primary releases doctors from the business demands of practice so they can focus on patients. In support of his case, Bateman quotes a retention rate of 93% of GPs in the large practices. He also points out that small practices are increasingly unprofitable, driving doctors who are nearing retirement to sell.

Bateman has proved his ability to manage his now-enormous health care business, stare down doubters and solve problems as they arise. Now all he has to do is do it again this year.

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