Radiologix stock tumble reveals soft underbelly of outpatient imaging

October 23, 2002

Vacations, contract changes lead to dropThe vulnerability of the outpatient imaging market became apparent late last month, when all-star performer Radiologix lowered its financial forecast and the stock went thump. The company's

Vacations, contract changes lead to drop

The vulnerability of the outpatient imaging market became apparent late last month, when all-star performer Radiologix lowered its financial forecast and the stock went thump. The company's announcement Sept. 24 that third quarter earnings would not meet expectations cut the stock price from about $9 per share to $4. The stock has since rebounded, edging slightly above $5, but that is still a long way from the $14 it commanded in late August.

Radiologix's financial problems resulted in part from vacationing patients and physicians, who stayed away from the company's 117 imaging centers in greater than expected numbers in July and August. The corporate bottom line also reflected several payers' new preauthorization programs and a previously announced decision to end certain capitation contracts.

Patient volumes have bounced back, according to company executives. And internal efforts to cut costs and improve management should drive volume and profits even further. The company is not, however, as bullish about future prospects as it had been. CEO Mark L. Wagar now expects Radiologix to generate $290 million in imaging business, down from its previous estimate of $300 million. Pretax earnings have been revised down from $76 million to $73.5 million.

Factors affecting Radiologix are taking their toll industry-wide, according to Mark Martin, COO, who noted that other imaging services companies experienced similarly soft volumes this summer.

"We expected an increase in vacation time in July or August, but this is the first time we've seen it in two consecutive months," he said.

Competition may also be having an effect, driving down prices and forcing some tough decisions in the outpatient provider marketplace. The company's decision to drop two capitated contracts in its mid-Atlantic and Hudson Valley operations was part of an effort to maintain pricing margins, according to Martin.

"You have to make a decision about whether you want to maintain price discipline or be a low-price leader," he said. "We decided, because of the overall quality of our service and market position, to maintain our price structure."

Radiologix's problems will be short-lived, said Wagar, who expects a return to a healthy imaging volume growth in the fourth quarter, similar to the 8% same-store volume increase that the company recorded as its stock value rose steadily in the first half of 2002.

"We expect healthy core business growth for the rest of 2002 and still expect to achieve at least 20% earnings per share growth next year," he said.