Medical Resources claims momentum with frenzied month of acquisitions

Company signs deals to add 23 centers to network

Is the momentum shifting in the race to consolidate the U.S. imaging center market? Medical Resources believes it is. The Hackensack, NJ, imaging services provider served notice that it is a force to be reckoned with after acquiring 12 imaging centers last month and signing an agreement to buy a chain that would add another 11 to the company's network.

Medical Resources has been nearly as active in growing its imaging franchise as competitor U.S. Diagnostic, but labored in USDL's shadow through much of last year as that company carried out one high-profile acquisition after another. The roles may have become reversed now, as USDL management tries to resolve an internal crisis related to revelations about one of its former mergers and acquisitions consultants, Keith Greenberg (SCAN 2/19/97).

For Medical Resources, meanwhile, it is full steam ahead. In March, the company:

• acquired an imaging center in Jacksonville, FL, for $2.3 million in stock;
• bought a center in USDL's hometown of West Palm Beach, FL, for $2 million in cash and $600,000 in stock;
• bought Advanced Diagnostic Imaging (ADI), a nine-center imaging chain in the northeastern U.S., for $10.6 million in cash;
• purchased a center in Rancho Cucamonga, CA, for $2.5 million in cash and $500,000 in stock; and
• signed a deal worth $14.4 million to buy ATI Centers, an imaging chain centered in eastern Pennsylvania and southern New Jersey.

Not counting the pending ATI Centers deal, Medical Resources now operates 64 imaging centers, with 40 in the northeastern U.S., 15 in Florida, six in the Chicago area, and three in California. Once the ATI deal closes, Medical Resources will have 75 centers, two more than HealthSouth but still shy of USDL's total of 120 centers.

Medical Resources plans to continue its aggressive strategy throughout 1997 as it strives for regional dominance, particularly in the Northeast, according to William Farrell, president and COO. The company was attracted to the ADI and ATI Centers' prospects due to the good fit those chains make with the existing centers Medical Resources has in the region.

Six of the nine ADI centers are in New Jersey, close to the Medical Resources centers in that state, while the other three are in Massachusetts, a state that is tough to enter because of state determination-of-need (DON) rules that hamper new scanner purchasing. ADI had annual revenues of $15 million.

In ATI's case, Medical Resources will be able to build its presence in the Philadelphia metropolitan area, Farrell said. ATI is a limited partnership that holds stakes in 11 centers, with its interest ranging from 15% to 100% ownership of the facilities. Medical Resources will acquire the general partner interest and the management agreement for the centers.

Farrell sees regional dominance as important because it gives imaging center chains leverage in negotiating deals with managed-care organizations, which would rather deal with one imaging provider than with a series of mom-and-pop centers.

"The (large number of) imaging centers we own and operate within a region puts us in a position to cater to the needs of the large referral sources, the managed-care organizations," Farrell said. "They are looking for attractive pricing and one-stop shopping without sacrificing service."

Acquisition fuel. Medical Resources is fueling its purchases through two sources: a secondary stock offering last October that raised $28 million, and a debt placement in February that raised another $52 million. Subtracting cash spent on the most recent acquisitions, including the pending ATI deal, Medical Resources still has $30 million in the bank, according to Farrell.

The company's financial results are also strong. Medical Resources last month released year-end figures for 1996 (end-December) that showed revenues from continuing operations for the year increasing to $93.8 million, up 80% compared with $52 million the year before. Net income from continuing operations was $7.3 million, compared with $4.1 million in 1995.

While the company's growing revenue figures are clearly the result of its acquisition spree, there is a hidden story behind the numbers that is the key to the company's improving performance, according to Farrell: same-center revenue growth. Medical Resources centers averaged 16% growth in same-center sales in the fourth quarter of 1996, and an 18% increase in the third quarter.

The improvement is due to the economies of scale Medical Resources enjoys in its network, Farrell said. The company can employ its sales and marketing team to drum up business, and can secure equipment pricing discounts.

Farrell believes there is plenty of room for continued consolidation, as the centers belonging to the major chains still make up only a small percentage of the 2250 imaging facilities operating in the U.S. The consolidation wave will only build as equipment grows obsolete at independent centers, he said.

"You have plenty of imaging centers out there that can afford to stay in business doing seven or eight scans a day on an MRI scanner," Farrell said. "Where they will run into trouble down the road is, as their equipment becomes obsolete, they are required to make an upgrade, and they have a tough decision. 'Do I spend $300,000 to do the upgrade or $1 million to $1.5 million to replace my equipment at a time that I am losing business and expenses are going up? Or do I sell to a larger operator?' That is what is motivating many of these centers to knock on our door and enter into a transaction."