Pan-European medical imaging group Alliance Medical has cut back on ambitious expansion plans announced when it was acquired by Dubai International Corporation in 2008 and may now look for an IPO in a few years time. We talk to Group CEO Alan Pilgrim.

With sales of £231.6m in the year to March 2009, Alliance Medical is together with Euromedic as one of the two largest imaging groups in Europe. There are other similarities. Like Euromedic, both groups are international. And, like Euromedic, both groups were sold by one group of private equity investors to another at precisely the right or wrong moment, with Alliance Medical sold in early 2008 for £600m to Dubai International Corporation (DIC) and Euromedic in May 2008 for €800m to Merrill Lynch and Ares Life Sciences. Alliance was sold for 10.7 times run rate EBITDA, Euromedic for over 12 times. So both have high debt levels today.

There are however, notable differences. Whilst Euromedic also has lab and dialysis interests, Alliance is focused 100% on imaging which continues to grow organically at 7-8% a year. Pilgrim points to figures showing that imaging expenditure in Europe should double over the next decade. Secondly, Euromedic. which started in Eastern Europe, still make nearly half its sales there, whilst Alliance doesn’t have that exposure to what are now difficult and slow-paying markets.

However, the recession has had an impact. Alliance has decided to focus on its core markets. That seems to mean mainly the UK and Italy, rather than Spain and Germany. Certainly, plans announced at the time DIC bought Alliance to expand into the Middle East and Asia have been scrapped for the time being.

Yet, despite the slump, Alliance expects sales to grow over 20% to £275-£280m in the year to March 2010. Of that Pilgrim says organic growth, including new machines will account for around 15 percentage points, with the rest from acquisitions. The accounts to March 2009 show EBITDA at £57m after an exceptional loss of £5.8m with an operating profit of £5m and a loss of £96.8m after tax. Allowing for the write off of intangibles, treating shareholder loans as equity and adjusting depreciation to reflect actual replacement capital equipment costs show EBITDA at £62.8m, an operating profit of £50m and a post-tax profit of £12.1m.

In most countries, the nearest national rivals are a factor of 2 or 3 times smaller than either Euromedic or Alliance Medical. But this doesn’t mean that, in imaging at least, they have got substantial marketshare. Healthcare Europa doubts that Alliance’s share of the MRI and CT imaging market in the UK and Italy is higher than 10%. The market in every country remains fragmented, often with scores of small imaging clinics.

Indeed, assessing how large any national market is remains very difficult as it is hard to know what technologies to include. Pilgrim says: “When people talk about imaging being 8% of healthcare GDP they include a lot of X-rays and ultrasound equipment where the private sector can not really make money, so the actual market is considerably smaller than that.”

Nor does it mean that Alliance Medical and Euromedic are head to head competitors. Pilgrim says he only comes across Euromedic as a direct competitor in one country.

Alliance Medical’s breadth of coverage is impressive. Today Italy, with 45% of sales, around €125m, is its largest market, followed by the UK at 40%. The remaining 15% is spread across Spain, Germany, the Netherlands, the Nordic region, Poland and the Baltic States. Here, much of the business is from mobile units with Alliance meeting short-term needs although the group has a small chain of clinics in Germany and Spain.

The company started in 1989 when its founder, Robert Waley-Cohen, loaded a couple of imaging machines on trucks and hired them out. Its mobile fleet of some 90 trucks still make up 10% of sales. Pilgrim sees them as ambassadors. “We first went into Italy with a mobile fleet. Hospitals would first want 1 or 2 days of imaging and then it built from there. After a while, we would be consulted as to how they should structure an outsource tender and then we would be invited to pitch.” Pilgrim says that sales in mobiles are in slow decline but adds: “they will always be part of the mix – just as in recruitment there will always be a temp market.”

Today, around 50% of sales come from various outsourcing deals where Alliance Medical runs imaging centres on behalf of hospitals. Pilgrim says that Alliance can typically improve efficiency by 30-40% by working longer hours, by having different terms and conditions for staff and by adopting different work practices. He adds: “If you look at the UK you will find that the number of scans per machine has gone from the low 3,000s a few years ago to 4,900. A lot of that is down to our involvement in the government’s MRI Fast Track project.”

A further 40% of sales is from standalone clinics serving mainly outpatients across a region, town or city.

Pilgrim says he is not sure that being international brings many advantages. “There really aren’t that many synergies. Each market is different and we recognise that, with strong local management teams. It is hard getting the split between local and group right. In general, I always say, ‘if we aren’t sure, it should be local.’ For us the trick is always to understand the payor and that varies from country to country and region to region.”
These differences come across in an analysis of the two big national markets – the UK and Italy.

The UK lags far behind mainland Europe in the use of MRI and PET CT scanners and AM has won the PET CT contract for the North of England on top of its earlier MRI Fast Track contract to carry out 635,000 MRI scans in the five years to June 2009, a 16% increase in NHS capacity.
The private sector is also important for AM in the UK, where running imaging for private hospital chains accounts for around 40% of all sales.
Pilgrim has great hopes for the UK primary care trusts. New reforms means that family doctors can now order MRI scans themselves, rather than having to first refer the patient to a specialist in a hospital. This enables the Primary Care Trusts to extend their control on follow up expenditure and means that Alliance can compete with NHS hospitals for outpatient work.

Italy is very different with a much more developed MRI and CT market. Here the business is based more on standalone clinics and outsourcing contracts. The clinics serve the outpatient needs of a town or locality as small as 20,000 or 30,000 people. The challenge, says Pilgrim, is to become the supplier of choice for the local medical community.

The country is divided into 20 regions, each of which has autonomy over its spend and strategy. Some, such as Veneto, are very pro-public sector. Many in the south are over budget and fairly inefficient. But some like Tuscany, Lombardy, Lazio and Piedmont are happy to welcome and work with the private sector. However, Pilgrim categorises the market as “political and unpredictable”. “A centrist or right wing government can be replaced overnight with leftists who won’t work with the private sector.”

The outsourcing of imaging by hospitals is becoming big business, with possibly as many as 50 deals already signed nationally. Here, says Pilgrim, Alliance has done well, winning most of the contracts it enters for. Contracts are typically of 7-10 years.

The need to drive down debt means it looks as though Alliance Medical will be concentrating most on the UK and Italy over the next year or two. Pilgrim says: “We’d like to become more Pan-European, particularly in Germany and Spain, but every time opportunities come up there we find even more opportunities in Italy and then UK.”

Spain he sees as a regional market, rather like Italy, where Alliance could win 2-3 very large outsourcing contracts. Unlike Italy, the company faces strong regional players.

Germany today is a saturated market with overcapacity. Pilgrim says proposed legal changes in Germany and France will make it possible for corporates to own and run networks of clinics. He adds: “I think we will see a step change in the next few years as the older generation sells out and a generation of machines are upgraded.”

The focus on its two core markets – Italy and the UK - is partly explained by the need to concentrate on profitability. Pilgrim is keen to reduce debt as fast as possible from around six times equity to four times equity and to then float on a stock market, although he adds that won’t happen for at least 2-3 years.

To float, Alliance will need to demonstrate good growth rates. Pilgrim says organic growth, including the purchase of new equipment enabling Alliance to tackle new markets, is running at around 7-8%. He hopes to add an extra 7-8% through bolt on acquisitions of clinics. But they have to be priced right. Multiples which had been running at 6-7 times EBITDA have now dropped to 4-5 times. “It will take radiologists a while to come to terms with that fact,” he adds.

And what of the future? Pilgrim says the plan is to reduce the current debt to EBITDA ratio from “6-ish” to day to “4-ish” in the next three years. He then indicates the group could go for an IPO but he says this won’t happen for “at least” 2-3 years.