USDL leads consolidation trendin U.S. imaging center business

August 28, 1996

Positive industry factors may help open financing tapBuddy, can you spare $118 million? Any imaging center chain lookingto expand two or three years ago wouldn't have gotten far withthat line on Wall Street. But it might be time to try again.

Positive industry factors may help open financing tap

Buddy, can you spare $118 million? Any imaging center chain lookingto expand two or three years ago wouldn't have gotten far withthat line on Wall Street. But it might be time to try again. Thatsum is how much U.S. Diagnostic Labs (USDL) of West Palm Beach,FL, has raised over the past five months through a convertibledebt issue and the calling of stock purchase warrants.

USDL has used its cash to aggressively expand its center network.The company hopes to gain the approval of Medical Imaging Centersof America (MICA) shareholders in two to three months to finalizeits acquisition of that San Diego firm (SCAN 7/31/96). That wouldadd 17 imaging centers to USDL's current 53, said president JosephPaul (see chart, page 7).

Five other single-center deals are also pending, Paul toldSCAN last week. Even before these new centers were in the bag,USDL initiated talks with mobile imaging provider Alliance Imagingof Orange, CA. USDL is still in due diligence scouting out Alliance,but was forced to reveal the talks when the latter's stock jumpedon rumors.

Enthusiasm over mobile imaging is not the main reason USDLis interested in Alliance. While some Alliance mobile routes maymake business sense, the firm has a dozen fixed mobile units parkedat single sites that could be good candidates for conversion tocenters.

All this acquisition activity would be interesting but notearthshaking if it only pointed to a single imaging services providerrun amok. There seems to be something more fundamental, though,about the USDL story.

The growth of USDL, which had only 15 imaging centers lessthan a year ago, highlights the movement of the imaging servicesindustry into a pivotal period in its history. Funds for centeracquisitions may be more available now because the perceived valueof the industry has risen.

One reason is revenue. Reimbursement for MRI and other imagingmodalities shows signs of leveling off and even rising slightlyin certain markets, after plummeting for years.

"Over the last few quarters, I have noticed that (reimbursement)is flattening," said Swapan Sen, vice president and generalmanager of Raytel Medical of San Mateo, CA. "It (paymentlevels) may be reaching equilibrium, at least on the East Coast.As a matter of fact, in the East, I see (global reimbursement)slightly up."

Increased pressure for quality managed healthcare -- abettedby the efforts of watchdog groups like the National Committeefor Quality Assurance (NCQA) -- may also be helping stabilizeimaging prices, said Cherrill Farnsworth, chairman, president,and CEO of TME of Houston.

"Payors are not going to be able to just buy the cheapestanymore," she said. "They have to go for quality products."

Other factors add to the industry's luster.

While prices seem to have bottomed out, imaging proceduralvolumes appear to be stable or growing slightly. The shock overself-referral restrictions has passed through the system. Manyweak players have been winnowed out through competition. The progressof imaging technology development has stabilized, with less chanceof obsolescence.

Industry consolidation may also be building its own momentum,creating stronger companies that can, in turn, attract more fundingto grow further.

"There is new capital coming into the game, and that isimportant since it is a capital-intensive business by definition,"said Larry Atkins, president and CEO of InSight Health Servicesof Newport Beach, CA.

InSight, which was created out of the merger in June of AmericanHealth Services of Newport Beach and Maxum Health of Dallas, isa stronger company now, backed with a 48% equity position by scannergiant GE Medical Systems (SCAN 3/13/96). In another example, thecombination of Medical Resources of Hackensack, NJ, and NMR ofAmerica of Murray Hill, NJ, will create a regional powerhousein the Northeast, Florida, and Illinois. Shareholders are scheduledto vote on that merger at an Aug. 30 meeting.

"(The Medical Resources merger) puts us in position tomake more acquisitions," said Joseph Dasti, chairman, president,and CEO of NMR of America. "We are generating $100 millionto $110 million in net revenue. This raises eyebrows on Wall Street.They (investors) see a critical mass and we get better treatment.If our stock goes up, it makes it easier to raise capital anddo more acquisitions."

An aggressive example. All of these positive factors may be contributingto an increased valuation of imaging services firms and individualcenters. The example of USDL has shown the industry that aggressivegrowth is a reality. Others are sure to follow, but many firmswill remain cautious.

Health Images of Atlanta is still the largest imaging centercompany, with 54 centers (including those in the U.K.), but itmay be surpassed quickly by USDL. Health Images added to its networkwith the acquisition last year of MedAlliance, but the firm ismore interested now in growing through new center development,said Robert Carl, chairman, president, and CEO.

"You have one company out there that is buying everythingthey can possibly acquire," Carl told SCAN. "We certainlycould have made some of the same acquisitions, if we were willingto pay some of the prices they paid."

Health Images picked up MedAlliance back when Wall Street wasstill turned off by the industry and company valuations were low(SCAN 1/18/95).

"It was at a price that made sense, at a time when theindustry was quite depressed," Carl said. "We are bottomfishers."

Now, it makes more sense for Health Images to open new centersusing its own HI Star 0.6-tesla MRI system.

"USDL doesn't have the ability to put in its own low-costequipment. I do," Carl said.

Renewed interest on Wall Street is increasing the growth optionsfor many imaging services providers, however. TME remains private,butthat could change, Farnsworth said.

"It (public financing) is a possibility," she said."We kept our company private through what we believed wasgoing to be a tough time to grow a business publicly -- with allthe depreciation and (imaging equipment) obsolescence -- to thetime we thought was right. That could be now."

Consolidation of the medical imaging center business is likelyto continue and will accelerate over the next two or three years,according to most executives contacted by SCAN. The consolidationwill be regional in nature, however, following the trend of regionalmanaged care.

Some imaging services providers are talking now about reachinga level of 200 centers, according to Farnsworth, a number fourtimes as large as Health Images or USDL. A center network thatsize would still have at most a 10% share of the total U.S. centermarket.

Still, that leaves plenty of room for regional dominance. Forinstance, if the MICA acquisition is approved, USDL says it willcontrol -- either through ownership or management -- 20% of theCalifornia imaging center market. That coverage could prove attractiveto managed-care customers in a competitive imaging market.

Independents will continue to have a role in the U.S. imagingcenter business, particularly when they have a niche to exploit,said Paul Stanley, a longtime imaging service industry veteranand president and CEO of Questar Imaging of Tampa, FL.

"The path is to (center industry) consolidation,"he said. "You will have a few players that control most ofthe business in the next few years. That is why (the smaller players)need to offer niche services that the (large firms) can't offer."