Shared MRI fate unclear after Diagnostek sale

September 16, 1992

Diagnostek of Albuquerque, NM, signed a definitive agreement lastmonth to be acquired by Medco Containment of Montvale, NJ. Medco'splans for Diagnostek's shared service MRI business are not clear,but the rationale for this merger was the complementarity

Diagnostek of Albuquerque, NM, signed a definitive agreement lastmonth to be acquired by Medco Containment of Montvale, NJ. Medco'splans for Diagnostek's shared service MRI business are not clear,but the rationale for this merger was the complementarity of thetwo firms' pharmacy lines. Diagnostek's imaging business doesnot appear to fit in as well to a merger of the two companies.

MRI services had become an increasingly small part of Diagnostek'srevenues over the past several years as it built up a large andprofitable mail-order pharmacy business (SCAN 2/28/90). The firmran a half dozen scanners, mostly high-field GE Signas and mostlyfor hospitals on a fee-per-scan basis.

Diagnostek had explored either selling its MRI systems or expandingfurther into the MRI center business and decided against bothoptions, according to Arthur C. Solomon, executive vice president.Solomon will continue with Medco as a senior executive followingthe merger.

High center prices, as well as the possibility of legislationrestricting referring-physician ownership more severely than currentfederal safe harbor guidelines, were factors mitigating againsta center buyout strategy.

"A year or so ago--because we have good financial resourcesand good (clinical) relationships--we looked at helping theselimited partnerships by coming in and doing buyouts," Solomontold SCAN. "We took a wait-and-see approach because of allthese states reacting with their own safe harbor provisions."

The 60/40 ownership guideline of the safe harbor regulationsallows for the maintenance of some physician participation. Withoutthis participation, the riskiness of most center deals is notworth the high multiples of earnings many physician owners areasking, he said.

Although Diagnostek has been approached by several potentialbuyers of its MRI business, no one offered a price high enoughto justify a sale, Solomon said. Potential buyers included sometrying to arrange rollups of multiple imaging facilities, he said.

"For the last two years we have had people calling uswanting to know what we want to do with (the MRI systems). Forus, the business has pretty much taken care of itself. They areprofitable. We have looked at the possibility of selling them,but no one came through with a deal we felt was more favorablethan holding on to them," Solomon said.