NovaMed (NOVA)

TOP CONTRIBUTORS

Chris Kallos

www.zacks.com

Headquartered in Chicago, Illinois, NovaMed, Inc. (NOVA), formerly NovaMed Eyecare, Inc., is an emerging healthcare services company engaged in the operation of ambulatory surgery centers (ASCs) and the provision of optical products and services to eye-care professionals. Founded in 1995 and floated in 1999, the company was originally a provider of physician practice management services to eye-care professionals, and later entered the Laser Vision Correction (LVC) market. Since 2001, the company's primary focus has been on the acquisition, development, and operation of ASCs in partnership with healthcare professionals. The company currently has ownership interests in 34 ASCs located in 18 states, with the majority located adjacent to or near the physicians' practices. Most of these ASCs are single-specialty ophthalmic surgical facilities, where eye-care professionals perform surgical procedures, primarily cataract and refractive surgery (laser vision correction). The company also has a nonexclusive supply agreement with Alcon Laboratories, Inc., which allows NOVA to procure and utilize excimer lasers and other equipment manufactured by Alcon. As a result, the company also provides excimer lasers and other services to eye-care professionals for their use in performing laser vision correction surgery under fixed-site laser agreements. In addition, NovaMed also owns and operates optical laboratories (manufacture and sale of corrective lenses and eyeglasses), an optical-products purchasing organization (eyeglass frames and contact lenses purchased from other manufacturers), and a marketing products and services business. In 2004, the two broad divisions of ASC and Product Sales represented 72% and 28% of total revenues, respectively.

Cost containment, driven by ongoing pressure from the third-party payors, has fueled significant growth of surgical procedures performed in outpatient settings. A key driver of the growth has been the strong physician and patient preference for non-hospital locations, which provide easy access to the frail and the elderly, as well as more control over scheduling for the healthcare professional. Ophthalmology is the largest single type of outpatient surgery, representing approximately 27% of all outpatient surgeries performed in 2000. We believe ASC industry fundamentals remain attractive given the increasing focus on conditions afflicting the elderly such as cataracts. We note that cataract surgery accounted for an estimated 2.7 million of surgical procedures performed in 2002. At the company level, NOVA's practice management expertise and excess ASC capacity provides an opportunity to expand into allied high-growth surgical specialty areas. For instance, these may include other specialty areas, such as orthopedics and podiatry. Typically, NOVA owns approximately 65% of the ASC with the healthcare professional owning the balance. Given that an ASC's principal revenue source is the "facility fee" charged for surgical procedures performed in the center, we believe NOVA's partnering with ophthalmologists aligns common goals to increase volume and productivity while reducing capital outlay for both parties.

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