Syncor breaks into imaging services with flurry of proposed acquisitions

February 4, 1998

Purchases will result in 35-center network in South and WestThe character of the imaging services business changed almost overnight last month after radiopharmacy company Syncor International announced its intent to acquire three imaging center

Purchases will result in 35-center network in South and West

The character of the imaging services business changed almost overnight last month after radiopharmacy company Syncor International announced its intent to acquire three imaging center chains, including TME of Houston. Once the purchases are completed, the moves will turn the Woodland Hills, CA, company into an imaging powerhouse in the western and southern U.S., with at least 35 imaging centers in operation.

The moves are part of Syncor's plan to diversify outside its core radiopharmacy business, which faces a future of limited growth due to competitive pressures on nuclear medicine from other imaging modalities. Syncor believes that it can use the same expertise it has employed in setting up a national radiopharmacy business to develop a large imaging center network.

Syncor first announced its diversification plan last year when it entered into a partnership with National Diagnostic Services, a Thousand Oaks, CA, firm that operates four centers and provides imaging center development and management services (SCAN 2/19/97). The companies said they planned to build a network of open MRI centers to capitalize on this increasingly popular niche.

The acquisitions announced last month represent an evolution of the company's business plan, according to Robert Funari, Syncor president and CEO. In working with NDS, Syncor began to recognize the broader opportunities available in running multimodality imaging centers, as opposed to focusing solely on open MRI.

Syncor's revamped business plan calls for acquiring multimodality imaging centers, preferably as part of chains, and folding them into Comprehensive Medical Imaging (CMI), a new business that will be run as a wholly owned subsidiary of Syncor. The open MRI centers will be integrated with CMI's operations, Funari said.

The first acquisition announced was that of NDS, which brings four centers to the table. Three of the centers are located in California and one is in Wichita, KS. Syncor will pay $12 million plus the assumption of $4.8 million in debt for the business, which is expected to contribute about $9 million in revenue this year.

NDS was a good start, but Syncor had bigger fish to fry. On Jan. 28, the company announced that it has entered agreements to buy International Magnetic Imaging, which runs 10 imaging centers, and TME, which operates 21 facilities, with five more in development.

TME at one time considered entering the race to consolidate the imaging center market, but found center prices too high and instead decided to focus on internal growth (SCAN 4/21/93). Perhaps as a result, the privately held firm watched from the sidelines as companies like U.S. Diagnostic and Medical Resources aggressively snapped up imaging centers. TME's total of 21 centers is just one facility higher than the 20 the company was operating in 1993. TME's facilities are located in 10 states: Florida, Texas, Louisiana, North Carolina, Pennsylvania, California, New Jersey, Arizona, Virginia, and Illinois. Syncor has agreed to pay $14.5 million in cash to TME's stockholders for the centers.

The perils of leverage. International Magnetic Imaging could be considered a textbook case in the pitfalls of using too much debt to finance acquisitions. IMI has its origins in a center network built by Dr. Stephen Schulman in the 1980s. Many of the centers were based on physician self-referral arrangements, a nationwide practice that was drawing the attention of state and federal regulators. The passage of Stark II legislation in 1993 outlawed such arrangements, and Schulman subsequently sold IMI to Consolidated Technology Group of New York City (SCAN 10/26/94).

To come up with the $27 million to buy out IMI's physician investors, however, Consolidated relied heavily on debt, which weighed on the company in subsequent years. In September, Consolidated decided to discontinue its medical imaging operations, which include IMI, and sell off the assets. That same month, a number of IMI centers went into default on $6.3 million in debt, and in October creditors filed involuntary Chapter 7 bankruptcy petitions against the IMI centers, according to Securities and Exchange Commission filings. In addition, Consolidated's stock was delisted from the NASDAQ exchange in August for failing to meet minimum bid and tangible net worth requirements. Consolidated hopes to get back into compliance with NASDAQ listing rules by selling off several business, including IMI.

Syncor has agreed to pay $20.5 million for IMI, and to assume $21 million in debt owed by the centers. IMI has seven centers in Florida, one in Kansas City, one in Arlington, VA, and one in San Juan, Puerto Rico. Syncor will also acquire IMI's imaging referral network and businesses that provide imaging services in the Caribbean and to customers on a capitated basis.

The NDS, TME, and IMI acquisitions will be used to further Syncor's goal of assembling a critical mass of centers that can be used in the construction of an imaging chain in the western and southern U.S, according to Funari. Now that a critical mass of centers has been assembled, Syncor plans to take a breather to integrate its holdings. In particular, the company hopes to implement many of the operating processes that have proved successful in its radiopharmacy business, including information technology, responsive service to referring physicians and patients, and financial network integration. The company's business model could then be replicated in other areas of the country.

Syncor's measured approach is in part a reaction to recent experiences in the imaging services field, where some firms appear to have grown too fast. The company is mindful of the growing pains that other imaging services companies have suffered in trying to build a large network too quickly, according to Funari.

"We'll get to a point where I think we will have achieved critical mass, and it will be my intent at that point to really pause, to go through an initial stage of integration of these entities, so that we've got a real strong platform on which to build," he said. "The organizations that have gotten in trouble have been those organizations that have not been able to operationally or financially integrate. We don't want to repeat that process."

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