Apollo Health Street - High on Growth!

Wednesday, 05 September 2007

Firstsource recently acquired MedAssist, one of the leading companies offering revenue cycle management services to the US healthcare industry, for $330 million.
SPi acquired Springfield Service Corporation, a physician billing and revenue cycle management solutions provider for $44 million.
AHS acquired Zavata for $170 million. With this acquisition, AHS has become the largest healthcare BPO. AHS will fund the acquisition by way of debt ($120 million) and equity ($50 million). This is one of the largest deals in the healthcare revenue cycle management space.

In the report " US Healthcare Revenue Cycle Management: Offshoring of Medical Coding and Billing Services" published on Feb 2007, ValueNotes had profiled Zavata and indicated that the company would be a good option for any large outsourcing company seeking inorganic growth and India capacity.

Background: AHS and Zavata

With a growth rate of more than 70% over the last 3 years, AHS, the BPO unit of Apollo Hospitals Group recently cemented its position in the healthcare revenue cycle management segment with the acquisition of Zavata.

AHS commenced its operations in 1999 and is promoted by Apollo Hospitals Group (AHG). AHG (NS-APOLLOHOSP) is the pioneer in corporate (private sector) hospitals in India. AHG runs over 32 hospitals, with over 6,000 beds under management. AHG has a market cap of INR 10.82 billion ($ 248 million). AHG Group, Apollo Health Enterprise, JP Morgan Chase and Co and Temasek Holdings are major investors in AHS.

Established in 1995, Zavata was funded by CEO and Chairman of Zavata, Satish Sanan, Mellon Ventures, BV-Cornerstone Ventures, LP and Westbridge Capital. The company was earlier known as STI Knowledge, and later changed the name to Integreo and in 2005 was renamed Zavata.

Short profile of AHS and Zavata

Parameters	Apollo Health Street	Zavata
Manpower (June 2007)	India: 1,200 US: 300	India: 450 US: 500
Service Emphasis	A range of healthcare provider and payer services	End-to-end services in healthcare revenue cycle management.
Client base	Over 40 hospitals in the US, top three academic health systems	over 100 active customers (recently the company won a $80 million contract from the US hospitals)
Locations	India (Hyderabad), USA (New York). Building a new 2,000 seat facility in Chennai	India (Hyderabad), USA (Atlanta, Georgia)
Revenues	Estimated to be in range of $30 million to $35 million for FY2006-07.	NA

Source: ValueNotes Research

With this acquisition, AHS is projecting revenues of Rs 4 billion (approx. $100 mn) for the fiscal year ending March 31, 2008. Prior to this, AHS acquired US-based Armanti Financial Services, one of the largest hospital billing and receivable management companies for $31 million in 2006. The company is also planning an IPO, which is the most likely exit route for the VC investors in AHS.

Going Strong in Healthcare

Estimates by ValueNotes suggest that US outsourcing market in the medical transcription industry alone is estimated to be $5 billion in 2005. The market for medical coding and billing outsourcing is estimated to be in the range of $8 to 10 billion in 2006.

Healthcare costs in the US are among the highest in the world. The US healthcare expenditures were estimated at over $2 trillion in 2005 and are expected to grow faster than the US economy. According to the Center for Medicare and Medicaid services (CMS), the figure will double by 2015 to exceed $4 trillion.

The US healthcare establishments are facing several challenges:

Rapidly aging population is leading to rising (>GDP growth) demand for healthcare
Increasing regulatory compliance such as HIPAA is adding to the workload of the healthcare institutions

The rising cost pressures coupled with the increasing workload have forced healthcare institutions to explore the outsourcing / offshoring option.

India, which has emerged as the preferred destination is a significant beneficiary of the trend towards greater outsourcing. One of the most exciting opportunities lies in offering end-to-end services in the healthcare domain. In this context, competition to players like AHS is scarce, considering that stringent regulation and trained manpower requirements impose significant challenges on scaling up both in terms of size and services.

With larger buyers looking for vendors to provide end-to-end services, vendors are gearing up to add or extend their service offerings. There are several large vendors such as Apollo Health Street, Perot Systems and Ajuba positioning themselves as providers offering end-to-end services in revenue cycle management. This will also signify services with a blended shore model and hence the race to acquire capabilities and clients is triggering several inorganic growth actions by ambitious vendors.

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