Diagnostic Health builds center chain privately

May 5, 1993

Diagnostic Health has switched tracks in its imaging-center acquisitiondrive but is still rolling towards the goal of building a 30-centerchain over the next two to three years. With stock markets spookedby the uncertainty of impending health-care

Diagnostic Health has switched tracks in its imaging-center acquisitiondrive but is still rolling towards the goal of building a 30-centerchain over the next two to three years. With stock markets spookedby the uncertainty of impending health-care reform, the Birmingham,AL, start-up firm has withdrawn its Securities and Exchange Commissionregistration for a stock exchange offering, according to RussellH. Maddox, chairman and CEO.

The original plan was to acquire a group of about 10 physician-ownedcenters through a rollup of physician equity in exchange for commonstock created in an initial public offering. Diagnostic Healthhas already reached half that target this year through acquisitionof five centers using private equity funds and bank debt. Lettersof intent have been signed for seven additional centers. The firmhopes to build its center chain to at least 10 sites over thenext three to six months, Maddox told SCAN.

"We haven't changed our plan. We just changed the methodof how we are going to pay for it," he said.

But center acquisitions could proceed slower than originallyplanned without the substantial resources available from the publicmarkets, Maddox said. Still, Diagnostic Health has considerableventure capital support and has not felt a tightening of accessto sources of debt.

Another run to the public trough is likely in the future, althoughnot in the form of an exchange offering.

"We anticipate that, when there is a return to sanitywithin the health care financial markets, we would return to thestrategy of, not a rollup, but a regular filing for an IPO,"he said.

With a successful operating history under its belt, DiagnosticHealth would return to the stock market better positioned to raiseequity in support of continued expansion.

"We would be able to set an effective proforma (acquisitionplan) for the market, based on centers we know are available.The financial community will buy into an acquisition strategywhen there is a candidate available at a good multiple with agood history of earnings," Maddox said.

DIAGNOSTIC HEALTH PAYS CASH for its centers and retains no outsidepartners. The company's strategy is to pick centers with goodtechnology and location, he said. Investments are then made inthe latest equipment upgrades and expanded marketing efforts.Although reimbursement per procedure has declined this year, revenuehas been up at the first five centers.

The future is bright for centers that compete professionallywith state-of-the-art imaging equipment, Maddox said. While reimbursementwill decline, the number of competitors will shake out as well.There will be opportunity to increase volume and compete on bothquality and low-cost scanning (see story, page one).

"We started the company based on (projections of) lowerreimbursement prices and more volume. It is a volume-driven business,"he said.

All of the Diagnostic Health centers presently run high-fieldMRI systems, although some of the centers under negotiation havemid-field equipment, Maddox said. While optimal field strengthdepends on the community and physician base, the firm does notplan to buy centers with low-field MRI. An investment of $300,000to $500,000 per center is anticipated to fully upgrade equipment.

Advantages of scale will be exploited through shared purchasing,use of central company expertise, and linking centers with managementinformation systems and teleradiology. Radiology Management Systems'Radman radiology information system will be used for data andimage transmission.

The company is targeting managed care accounts and will buildregional center networks to approach these buyers. There willbe cases, however, when individual centers can compete effectivelyfor managed care accounts. Choosing appropriate locations is asvital as technology and marketing in determining center success,he said.

Diagnostic Health will concentrate its centers in the southeastand mid-west regions. The company has decided to stay out of thefar west because of greater procedure price pressure there.