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DIAGNOSTEK's ACQUISITION OF HEALTH CARE SERVICES INC

Executive Summary

DIAGNOSTEK's ACQUISITION OF HEALTH CARE SERVICES INC. moves the magnetic resonance imaging firm into the mail order pharmacy business and boosts annual sales to the $100 mil. level. Announced Feb. 29, the purchase involves a $250,000 cash payment, 1.1 mil. shares of Diagnostek stock, and an earn-out on future Health Care Services cash flow. Exclusive of the earn-out, the deal has an initial value of about $1.8 mil., based on Diagnostek stock's Feb. 26 close of 1-7/16. "We are excited to have been able to gain entry into one of the fastest growing areas of health care today through this acquisition," Diagnostek Chairman Nunzio DeSantis remarked. "With the changes implemented by Diagnostek's management over the past 30 days, we feel confident that Health Care Services' margins will be comparable to those of our competitors in the industry." A privately held firm based in Bala Cynwyd, Pennsylvania, Health Care Services generated revenues of $53 mil. for the 12 months ended March 31, 1987. The company fills approximately 10,000 prescriptions per day out of a 96,000 sq. ft. facility, employing 40 pharmacists and 100 technicians. Diagnostek said it plans to build a second prescription filling facility in Albuquerque, N.M., where the company is headquartered. Founded by DeSantis in 1983, Diagnostek establishes magnetic resonance imaging (MRI) centers nationwide through joint ventures with hospitals. Ten have been established so far, with five to six planned for each of the next few years, DeSantis said. Under a typical arrangement, Diagnostek builds and equips an MRI center at a hospital and then provides marketing support. The hospital supplies operating personnel and pays Diagnostek a fee for each patient undergoing an MRI procedure. "Because the hospital rents the MRI center from Diagnostek, paying a predetermined fee for each patient procedure performed with the equipment, the hospital avoids the major capital expenditure or lease commitment of anywhere from $1.8 mil. to $2.2 mil. for the sophisticated equipment," the company explained in a press backgrounder. Although Diagnostek assumes the risk that procedure rental fees are below Diagnostek's equipment costs, Diagnostek is able to significantly minimize its downside from such an arrangement by both pre-qualifying the hospital and obtaining contractural commitments from the hospital to pay a minimum monthly rent after the second year." Diagnostek's fiscal 1987 (year ended March 31) revenues were $3.5 mil. However, combined with the Health Care Services operation, the company's revenues are currently annualizing at $100 mil., according to DeSantis. The U.S. market for mail service pharmaceuticals, DeSantis said, "has grown by 30-50% annually, reaching at least $800 mil. in 1986 and is expected to exceed $2.8 bil. by 1991." Before establishing Diagnostek, DeSantis, a pharmacist, worked for Nuclear Pharmacies, which was recently merged into Syncor. Through similar joint venture arrangements, Syncor establishes centralized nuclear pharmacies in hospitals nationwide.

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