Description

 IntegraMed America is a provider of specialty healthcare services with desirable cash flow characteristics that is trading at approximately 5.6X next year's pre-tax cash flow (EBITDA - Maintenance Cap - Pre-Opening costs) to enterprise value.  Despite trading as such a depressed level INMD has the potential to grow its EBITDA by over 25% a year through the development of its Vein Care division.  This growth potential is masked by the preopening costs associated with the vein care clinics. The opportunity exists because of the confluence of a number of one-time costs that occurred in the 2nd half of 2010 and the concentration of preopening costs associated with the ramp up of INMD's vein care business (INMD increased the number of clinics from 33 to 41 in late 2010).  These circumstances collectively increased INMD's 2010 costs by about $3MM for 2010.  As INMD's new vein care clinics mature over the next twelve to eighteen months, the unit economics of that business will become more apparent and there will likely be a convergence between market price and intrinsic value.

Company Overview

The company currently operates in two healthcare sectors, fertility care and vein treatment.   We view INMD as having three business segments (though INMD only reports two). 

INMD's largest segment is its Attain Fertility Centers Division is comprised of 14 contracted fertility centers, located in major markets across the United States.  Each contracted center is composed of a multi-physician practice with multiple clinical locations covering their service area.  This business provides management support its 14 different partner fertility clinics, including financing permanent property, equipment and receivables, providing all non-physician employees to the operation, revenue cycle management, patient marketing and sales, electronic patient information systems, accounting and financial management, legal and risk management services. The Attain Fertility Center contract business represents approximately 65% of the business by revenues and 50% by contribution.   

In addition to providing back office services to the 14 contracted fertility centers, INMD offers an insurance like service bundled with a national marketing platform called the Attain^TM IVF Program to its contracted partners and a network of 28 independent fertility clinics under an affiliate program.  The Attain^TM IVF Program is very much like an insurance product that provides a set of product offerings allowing a patient to pay one discounted fee for multiple fertility treatment cycles and under certain programs, patients are eligible for a refund if they do not take home a baby. Just like insurance, INMD receives the benefit of the float for the period between when a new patient enrolls in the IVF program and when INDM ultimately has to pay the medical care providers for treatment.  The Attain IVF Program represents approximately 10% of INMD's business by revenues and 30% by contribution.

INMD's third segment, the Vein Clinics Division, provides business and management services to a network of 44 clinics located in 13 states which specialize in the treatment of vein disease and disorders.  These clinics provide specialized treatment for patients suffering from vein diseases and other vein disorders, such as varicose veins, spider veins and venous ulcers.  This business is growing rapidly as INMD has added thirteen de novo clinics over the last 15 months.  The vein care business represents approximately 25% of INMD's business by revenues and 20% by contribution.

Based on a sum of the parts (see segment valuation below) and a 2011 pre-tax cash flow basis, I believe that the appropriate price for the stock is around $15-$16.  

Sum of the Parts

• + $ 163 MM for IVF Clinic Management Business
• + $ 62 MM for Attain IVF Business
• + $ 116 MM for Vein Care Business
• + $ 15 MM of net cash*
• - $ 160 MM for G&A

Total Sum of the Parts Valuation: $196

Shares Outstanding: 11.8MM

Share price: (5/11/2011) $10.18

Target: $16.61 (+63%)

2011 Pre Tax Valuation

• 2011 EBITDA ≈ $20MM
• Maintenance Cap Ex ≈ $4 MM
• Pre-Opening Costs for Vein Clinics ≈ $3 MM
• Cash $15 MM*
• Adjusted EV ($121MM (Market Cap) -15MM (Net Cash adjustment*)) = $106MM
• Pre-Tax CF = 20 (EBITDA) - 4 (M-CAPEX) + 3 (Pre-Open Exp.) = 19
• EV to Pre-tax CF = 90/19 = 5.6X
• Appropriate Valuation 9X Pre-Tax or $171MM + 15MM for Cash = 186 MM market cap and $15.76 per share.

*See below for detailed explanation of why we use this measure for the cash adjustment.

Segment Analysis

Fertility Center Management (FCM) -

FCM Base Business Value:

Revenues:                                         161.7MM

Contribution:                                    14.3MM

Depreciation:                                     6 MM

Maintenance cap-ex:                         3 MM

Pre-Tax CF Contribution:                 17.3 (14.3+6-3)

SSS Growth Rate:                             3%

Pre-Tax Multiple:                              8X

Segment Value:                               $138 MM                           

FCM Unit Growth Value:

Unit Growth: 3% of Base

ROIC on Unit Growth: 60%

After tax multiple: 10

Value of Unit Growth: $25 ($138 Base Vale x 3% Growth x 60% ROIC x 10 After Tax Multiple)

Attain IVF (the Insurance like product)

2011 Attain IVF Projections

Revenues:                                         30.5 MM

Contribution:                                    6.5 MM

Pre-Tax CF Contribution:               6.5 MM

SSS Revenue Growth Rate:            6%

Pre-Tax Multiple:                             9.5X

Segment Value:                                $ 62 MM             

Vein Care (VCA).

INMD's Vein Clinics Division was formed with the purchase of Vein Clinics of America, Inc. ("VCA") in 2007.  When VCA was purchased by INDM, VCA had 27 clinics.  Today, INMD's Vein Clinics Division has grown to 44 clinics with most of that growth occurring in 2010.

• Last year INMD began to ramp up the growth rate of VCA by increasing the number of de novo clinics from 33 to 44 today.
• By the end of 2011 they anticipate having 50 clinics in operation.
• Each clinic can be opened with about $475K of capital expenditures and $350K of pre-opening expenses.
• Clinics typically break even in the first nine months of operation.
• Clinics typically reach maturity in one to two years.
• At maturity, clinics generate 20% four wall operating margins and about $1.8MM in sales.
• Management believes they can reach 250 clinics nationwide.
• Because of pre-opening expenses, the incremental improvement in this business has been masked.

2011 VCA Projections

Base VCA Business Value

Revenues:                                         75 MM

Contribution:                                    5.9 MM

Depreciation:                                   1 MM

Maintenance cap-ex:                      1 MM

Pre Opening Expenses:                   3 MM

Pre-Tax CF Contribution:               8.9 MM (excluding pre-opening expense)

Revenue Growth Rate:                   3%

Pre-Tax Multiple:                             8X

Base Value:                                      $71 MM                             

VCA Unit Growth Value

Unit Growth Rate: 20%

ROIC: 32%

After Tax Multiple: 10

Value of Growth $45 MM ($71 Base Vale x 20% Growth x 32% ROIC x 10 After Tax Multiple)

VCA Total Value: $116 MM

Corporate G&A

• Corporate G&A and other costs will likely be around $14 MM next year and will grow around 9% a year.
• This would likely result in a -$160MM (≈19 X 14 x .6) value to the sum of the parts.

Balance Sheet

INMD has $50MM of cash and about $15MM of long term debt which would typically warrant an enterprise value adjustment of $35MM. However, pursuant to the constraints of INMD's credit agreement they must maintain a minimum of $10MM of "Unencumbered Liquid Assets" which are basically cash and cash equivalents. After making this adjustment INMD has net cash of $25MM. INMD will likely be able to put about $10MM of this cash to work in 2011 leaving them with a net cash adjustment of $15MM.

Catalyst

Catalyst for Appreciation

I see three catalysts for INMD's market value to converge with its intrinsic value:

               (1)          Given the small base of clinics, the vein care business has a relatively high level of segment level fixed administrative costs that provide significant leverage for incremental clinic contribution. The vein care business will start to look much more attractive as the new clinics that were added in late 2010 and in the first quarter of 2011 start to mature over the next twelve months. 

               (2)          The market for the fertility side of the business will likely see improvement as high end consumer confidence improves and previously delayed family formation is initiated.  At the margin, mass delay of family formation is beneficial for INMD because of the need for more fertility treatment among older child bearing women.  For the purpose of our valuation above, we assumed that that the fertility market would grow at the same rate that it did in 2009 (approximately 1% vs. the seven year average of 4%).

               (3)          INMD has been in the market to purchase additional interests in Fertility Centers and they have the capital to make a substantial number of acquisitions with $40MM in available cash and $15MM available under their credit facility. Earlier this year, INMD purchased the North West Center for Reproductive Medicine (NWCRM) for roughly $2.3MM. This acquisition will add $5MM in revenues and about $500K of profits for 2011. If INMD can deploy more of its capital for deals that are as favorable as the NWCRM deal, then that will serve as a significant catalyst.