NightHawk considers further acquisitions

NightHawk Radiology Holdings is nowhere near a dominant position in the burgeoning teleradiology marketplace, according to Tim Mayleben, NightHawk executive vice president and chief operating officer. He described his company as holding just a small piece of the market, despite today's announced purchase of the third largest teleradiology service in the U.S.

"Radiology is a $15 billion-plus business for interpretations," Mayleben said in a teleconference April 9 to discuss the company's purchase of Radlinx. "We have aspirations to continue to grow profitably."

The company described its latest acquisition, Texas-based Radlinx Group, as expanding its core off-hours business while strengthening its partnerships with radiology groups. NightHawk, whose per-share price rose marginally on today's news, paid $53 million for Radlinx. Company executives predicted that Radlinx will contribute between $17 million and $19 million in revenue during the remainder of 2007.

Radlinx doctors are located solely in the U.S., which "should help alleviate concerns the industry may have about Medicare interpretations being performed outside the U.S.," Mayleben said. The group's 303 hospitals also increase NightHawk's customer base to more than 1300 hospitals nationwide, representing 24% of all U.S. hospitals.

This is NightHawk's second major acquisition in as many months. On Feb. 9, the company paid $23 million in cash to acquire Teleradiology Diagnostic Service of California, which serves hospitals throughout the Golden State. California is the largest market for teleradiology services in the U.S., according to NightHawk. Texas, where Radlinx is based, is the second largest.

Future profitability will come at least partly from wringing cost efficiencies and increased productivity from the companies it acquires, including in the near term the Radlinx Group and TDS. Efficiencies will be achieved by migrating radiologists in these groups to a common software platform developed by NightHawk and adopted by its network of reading physicians.

Productivity will come from incentives provided the radiologists, according to Dr. Paul Berger, NightHawk chairman and chief executive officer.

"My goal is to allow those who want to increase their compensation to do so by being more productive," he said.

Other gains may come from cross-selling opportunities, whereby NightHawk provides specialty services, including cardiac imaging and 3D reconstructions, to the customer base of TDS and Radlinx. Customers already served by NightHawk have been asking for these services, Mayleben said.

"We expect their (Radlinx) customers are probably asking for similar things," he said. "As a combined entity, we will be in a position to provide a broader suite of solutions and expect there will be a revenue upside to that."

In the last two months, NightHawk has spent some $75 million in cash on acquisitions. The purchase of Radlinx, however, was done entirely with a newly established credit facility, which has preserved $60 million the company has in cash on hand to manage daily operating costs and plan future M&A activity, according to Mayleben.

"We looked at this (credit facility) as an opportunity to balance our capital structure, while preserving cash balances," he said. "We have other corporate purchases or purposes to use cash for, if opportunities present themselves."

As Nighthawk expands, company CFO Christopher Huber will depart, effective May 1. Huber was a cofounder of NightHawk and served as a director and vice president of operations since 2004. During the previous three years, he served as vice president, treasurer, and secretary of Nighthawk Radiology Services, LLC, which preceded the publicly traded company. Huber's successor, Glenn R. Cole, has served as an executive of the healthcare segment of The Thomson Corporation since 1996, most recently as the chief financial officer.

Editor's note: This is an updated version of a story posted earlier today.