Medical Resources seeks merger or acquisition partner

Company posts big loss for 1998

Bigger isn't necessarily better in the beleaguered imaging services market. Although the market is now much less fragmented than it was three years ago, imaging center firms are still having a tough time making money. This became apparent earlier this month, when one of the largest U.S. imaging center chains, Medical Resources, announced that it will seek a merger or acquisition partner.

The announcement represents a surprising turnabout for Medical Resources, which just two years ago was growing rapidly through acquisition. The Hackensack, NJ, company's fortunes shifted in late 1997, however, when it became involved in an imbroglio over consulting fees that led to the departure of several key executives. The controversy subsequently derailed the company's acquisition drive (SCAN 12/17/97).

Medical Resources this month reported financial results for 1998 (end-December) that illustrate that it has yet to pull out of the financial doldrums. The company reported a net loss of $12.1 million for the fourth quarter and a $19.9 million net loss for the year. This compares with a $43.8 million net loss in the fourth quarter of 1997 and a net loss of $33.2 million for the year. Medical Resources had revenues for 1998 of $179.1 million, compared with $144.4 million in 1997. The company's higher sales last year were due to the inclusion of revenues from acquisitions completed in 1997.

Medical Resources attributed its 1998 loss to charges related to doubtful accounts receivable, as well as charges associated with a December 1998 agreement to settle class-action suits against the firm. The company also incurred charges because of the closing of some of its underperforming imaging centers.

Medical Resources executives say the company has decided to seek an acquisition partner because of their belief that the health of the outpatient imaging services segment depends on additional consolidation. The company said it hopes to attract additional capital to make acquisitions, or, alternatively, will consider "growing stronger by joining with another industry participant." The company has retained investment banking firm BT Alex. Brown of New York City to explore its options.

Medical Resources' move indicates that the consolidation trend of 1997 didn't do much to alleviate the economic problems in the imaging services industry. Unable to smoothly incorporate new centers into their existing networks and cut costs, imaging services companies have continued to turn in poor fiscal results, according to John Cumming, CEO of Healthcare Markets Group in Hilton Head, SC.

"The whole market isn't healthy," Cummings said. "It's a tough market, where margins are pretty thin. I don't think (imaging services firms) have achieved the savings from consolidation they thought they could. No one has really broken the code on how to make a lot of money in this business."