Syncor to take revenue shortfall after Premier talks breakdown

February 19, 1997

Mallinckrodt wins big contract with GPORadiopharmaceutical supply contracts held by Syncor Internationalthat are worth an estimated $60 million to $65 million in annualrevenues are in jeopardy after negotiations between the companyand group

Mallinckrodt wins big contract with GPO

Radiopharmaceutical supply contracts held by Syncor Internationalthat are worth an estimated $60 million to $65 million in annualrevenues are in jeopardy after negotiations between the companyand group purchasing organization (GPO) Premier broke down. Syncorannounced this month that it had withdrawn from negotiations withPremier, which represents about 1800 hospitals and health systems,because Syncor was not willing to compete solely on the basisof price in order to win the contract. Premier announced lastweek that it had selected Mallinckrodt of St. Louis as its exclusivesupplier.

The loss of the Premier contract is a major blow to Syncor, andillustrates the growing power of GPOs in negotiating preferred-providercontracts with medical imaging firms. Syncor estimated that 1997revenues will be down $5 million to $10 million, with pretax profitdown $1 million to $2 million. Syncor stock tumbled $1.63, or13%, to finish at $11.25 a share on Feb. 5, the day the news wasannounced. It was trading at around $12.13 last week.

Syncor had been providing radiopharmaceutical services to membersof American Healthcare Systems, SunHealth, and Quorum, the allianceof healthcare providers that merged with Premier in 1996. Chatsworth,CA-based Syncor continues to provide services to the former SunHealthand Quorum groups under old agreements, but those services arescheduled to end March 31, despite efforts by Syncor to the contrary.

"At this point, we think that we can still maintain a goodchunk of that business," said Michael Mikity, Syncor CFOand senior vice president of development.

Mikity explained that many customers will be hard pressed to findanother radiopharmacy that can provide them adequate service.He estimates that these customers represent between $28 millionand $30 million in annual revenues. Additionally, customers havegrown to depend on Syncor's Nuclear Medicine Manager, a computersystem that keeps track of nuclear medicine records, includingdata relevant to regulatory issues.

"The way the contracts are written is (such) that if ourservices are terminated, we can remove the software and hardwarefrom the sites," Mikity said.

Syncor had been negotiating with Premier for the past eight months,but withdrew when the discussions stalled over Premier's demandfor a single pricing structure.

"They were looking for one price nationwide and that wasvirtually impossible," Mikity said. "There are a numberof ways to provide value to your customers. However, being thelow-cost provider is not consistent with our value-added philosophy."

Syncor holds major supplier agreements with other healthcare groups,including VHA, which signed a five-year, $270 million sole-sourcecontract with Syncor in January (SCAN 2/5/97).

In choosing Mallinckrodt as its new supplier, Premier cited thecompany's broad product portfolio and integrated manufacturingand distribution system as attractive features. Premier is alreadybuying nonionic x-ray contrast from Mallinckrodt.

New ventures. In the wake of the Premier breakdown, Syncor hasbegun pursuing other ventures that will take the provider of 121nuclear pharmacy service centers and nine international centersinto new areas of medical imaging. The first step in that directionwill be to establish and operate a chain of open MRI centers inthe U.S.

The company has entered into an equal partnership with NationalDiagnostic Services (NDS) of Thousand Oaks, CA, to form a newcompany called Syncor Diagnostics. Steven Krieger, senior vicepresident of development at NDS for the past 10 years, will leavethat company to become president and COO of Syncor Diagnostics.Krieger will also hold a percentage of the collective NDS interestin Syncor Diagnostics. Mikity will be CEO, while continuing toperform current duties at Syncor.

Mikity expects to have as many as 10 centers operating by theend of 1997.

"We would like to go to 20 centers, but that will dependon the performance of the initial 10," he said. "Afterthat, we hope to continue expanding."

Sites are being chosen primarily based on working relationshipswith radiology groups that have proven effective for NDS in thepast, as well as through leads supplied by the venture's primaryequipment manufacturer, Hitachi Medical Systems America, basedon criteria developed by NDS. Over the past 15 years, NDS hasdeveloped more than 100 imaging projects for hospitals, medicalgroups, and other providers. Sites being evaluated are locatedin California, Texas, the state of Washington, and possibly Missouriand Oregon.

The transition to MRI is a natural extension for Syncor, Mikitysaid. As a provider of radiopharmacies around the nation, Syncoris deeply involved in the radiology community.

"We saw this as an opportunity to provide additional servicesto an existing customer base," he said. "We view theradiologist as a consumer of our types of services. And althoughour experience is only in nuclear medicine, this is still in theradiology arena."

Syncor's entry into provider services is an attempt at diversification,which top management at the company views as being critical toensuring profit growth and the continued success of the company,Mikity said.

The MRI centers to be developed by Syncor Diagnostics will exclusivelyfeature open MRI systems, a choice based on socioeconomic considerations.Mikity noted that open systems are less expensive to acquire andmaintain and are easier, and therefore less costly, to installdue to their compact design. Additionally, they provide improvedpatient access and are less intimidating to patients than closed-gantrysystems.

Two other imaging services providers, Questar Imaging of Tampa,FL, and InSight Health Services of Newport Beach, CA, have alsoannounced plans to develop networks of open MRI centers (SCAN9/25/96 and 9/11/96).

NDS is contributing the expertise for Syncor's diversificationinto MR imaging, while Syncor is providing the capital, some $5million. Of those funds, $3 million will be used to run the business,including costs for establishing the sites; the other $2 millionwill be used as down payments on equipment leases—$200,000for each of the 10 initial systems.

"Ultimately, we would like to buy out the interest held byNDS in the joint venture, but in order to do that we will haveto achieve certain financial goals," Mikity said.

In other Syncor news, the company earlier this month announcedthat it has signed an agreement to purchase all of the iodine-123assets of Golden Pharmaceuticals of Golden, CO. Iodine-123 isused to diagnose thyroid disorders, and Syncor distributes almostall of Golden's production of iodine-123 capsules.