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" \t\t   \n\nImaging services investment confirms mobile's revival\n\n\n\nDon't cry for mobile MRI. Despite sagging reimbursement levels, the U.S. shared imaging services business has steadily improved for those players that were able to tough it out past the industry's nadir in 1994 and continue investing in fleet upgrades. Remember when the operative words for providers of mobile magnetic resonance imaging services were \"overleveraged and obsolete?\" How times change. \n\nThat outside investors are showing interest in the mobile MRI business is a clear sign industry conditions have changed for the better. New York investment firm Apollo Management will purchase control of Alliance Imaging of Anaheim, CA, and SMT Health Services of Pittsburgh in transactions valued at $258 million and $100 million, respectively. The two shared imaging services firms will then be merged together.\n\nAlthough Apollo extended its tender offer for SMT until Aug. 5, due to a refiling requirement related to its Alliance deal, the investor already has the required number of shares to complete the SMT purchase, according to Joshua Harris, an Apollo partner. The Alliance recapitalization transaction is expected to close in October, at which time Apollo will own 82% of the company through its affiliate, Newport Investment. Following the merger with SMT, existing shareholders of Alliance will own about 10% of the combined company.\n\n\"The name is staying the same,\" said Alliance CEO Richard Zehner. \"We are not moving. We will be in the same business, doing the same job we have always done.\"\n\nManagement from both companies will be maintained, Harris confirmed. Apollo will help provide strategic direction.\n\n\"Typically, we partner with strong operating professionals, providing strategic guidance and access to capital but allowing them to run their businesses,\" he said.\n\nWhile Apollo has invested in healthcare since its inception in 1990, this is the firm's first foray into imaging services. The business may provide a platform for Apollo to expand both within imaging and outside, providing other types of services to hospitals, Harris told SCAN.\n\n\"Allowing hospitals to outsource services that are not fundamentally core to them can be a growing and good business, as long as you do it on a cost-efficient basis,\" he said. \"We see (annual growth in) demand of between 5% and 10%, which is greater than in other areas. There are also opportunities within the industry to consolidate and take cost out of the business.\"\n\nThe Apollo investment is significantly less leveraged than Alliance's management-led buyout in 1988, Zehner said (SCAN 11/9/88). The new owners will sink $80 million of equity into Alliance.\n\nAlliance expects that Apollo's assistance and funding will fortify its effort to build market share in MRI shared services, he said.\n\n\"We will be able to grow more,\" Zehner said. \"These people (Apollo) have about $9 billion under management. If we need to do other acquisitions or grow the core business or even enter new lines of business, they will be able to either raise the funds or provide the funds for us to grow at a more rapid rate.\"\n\n\n\nBrighter prospects. Rising procedural volume in MRI has helped compensate for radically lower reimbursement rates per procedure, Zehner said. Both Alliance and SMT displayed a sharp rise in revenue and net income in their 1997 second quarters (both end-June).\n\nAlliance's second-quarter revenues this year rose 25% to $20.8 million, and net earnings jumped 39% to $2.4 million. SMT's quarterly revenue jumped 50% to $7 million, and net income increased 56% to $879,000. Reflecting greater scan volume in the industry, SMT experienced a 21% increase in quarterly revenues from hospitals the company serviced in both 1996 and 1997.\n\nAlliance operates about 100 MRI systems in 36 states, with one-third situated at fixed sites on hospital campuses, Zehner said. SMT has 20 MRI machines, all mobile, operating in seven Eastern states.\n\nWhile the overall number of MRI units at Alliance has remained fairly steady over the past several years, much of the equipment has been turned over for newer technology, he said. This reflects an industry that is mature in terms of total MRI systems but growing in procedures and revenue.\n\nReimbursement for MRI scans has declined significantly over the past decade, from a height of around $1500 per procedure to $600 now, he said. Consequently, MRI profit margins for the mobile companies and their healthcare provider customers have been squeezed.\n\nOn the bright side, however, lower procedure prices have spurred demand and volume, while financially adept hospital administrators have taken the emotional factor out of MRI purchases, Zehner said. Hospitals can often see the advantage in saving their capital for other purposes than acquiring a shiny new MRI machine. This, in turn, aids the shared service providers.\n\n\"The hospital's goal today is to provide services, attract key physicians, maximize dollars because dollars are under tremendous squeeze, and spend as little as possible on capital expenditures,\" Zehner said.\n\n"
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