CORPORATE FOCUS—Syncor International Corp.’s 3-year-old diversification strategy has impressed analysts

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Syncor International Corp. is turning heads on Wall Street. A three-year-old diversification strategy at the once-sleepy little pharmaceuticals company has boosted profits and revenues, impressing analysts and running up the stock price by about 170 percent. “It’s not often you find companies where everything is going great, and Syncor just happens to be one of those companies right now,” said Mitra Ramgopal, senior equity analyst with Sidoti & Co. LLC in New York. “They’re firing on all cylinders and they’re being rewarded.”

Shares in the company, which were trading at about $13 apiece in early January, have soared closing on Sept. 20 at $35.38. (Those figures are adjusted for a two-for-one stock split effective Aug. 9.)

The Woodland Hills-based company has long enjoyed a solid, albeit low profile as a maker of radiopharmaceuticals, high-tech compounds used to diagnose cancers and coronary disease. But sales and earnings languished until 1997, when Syncor began acquiring medical imaging centers and expanding its distribution in overseas markets. As a result, Syncor grew to a $520 million company in 1999, from sales of $381 million in 1997.

For the second quarter ended June 30, Syncor reported net income of $9.1 million (69 cents per diluted share), up from $6.4 million (50 cents) for the like year-earlier period. Revenues jumped 18.5 percent to $154 million for the quarter.

“I think we saw some very strong growth out of medical imaging, both in revenue and improvement in profitability,” said Bob Funari, Syncor’s president and chief executive, who assumed his current posts in 1996. “We saw good strength in pharmacy services, and the overseas (division), which was unprofitable in the second quarter of last year, became profitable this year.”

At the time Funari stepped into the CEO spot, Syncor enjoyed a whopping 52 percent share of the radiopharmaceuticals market, but its single-business strategy was limiting its growth potential. An earlier attempt to diversify by moving into “positron emission technology” (a technique for the early detection of cancer) had been unsuccessful, and employee morale suffered as a result.

Funari believed that the company’s skill set could be applied to a broader range of technologies, and began looking for those opportunities.

Since then, the company has acquired 50 medical imaging centers (locations used to administer MRI tests), and on Aug. 4 it announced an agreement to acquire an additional 14 centers for $39.5 million. It has also increased the number of countries where it distributes its products from six to 13.

In the second quarter, operating income from its medical imaging division increased to $3.1 million, a $2 million jump over the same quarter of 1999.

“Obviously, they have a pretty good franchise in radiopharmaceuticals,” said Robert Gold, director of Standard & Poor’s Equity Services. “What I’m looking at is their growth in the imaging-center business. That’s an area that’s very fragmented that’s probably more of a growth opportunity.”

Many medical imaging centers are struggling because the business requires large capital investments an MRI machine typically costs upwards of $1 million that are difficult to recoup. Further, most chains only have a single center in a given market, and because patients tend to go to the center that’s closest to their homes, they lose out on a lot of business.

Syncor’s strategy is to cluster numerous centers in a given area so that it can dominate the local market, meaning patients have little choice but to go to a Syncor imaging facility.

“In our centers, we see as many as 25 patients a day in an MRI room,” Funari said. “Many competitors see half that many.”

Syncor’s international subsidiary, Syncor Overseas Ltd., has focused on developing nations where nuclear medicine is still a very new technique. But the investments in those countries nevertheless contributed $200,000 in operating income and $9.2 million in sales to the company in the second quarter. And Funari believes that by entering those markets early, the company will enjoy a strong position when foreigners do embrace the technology.

“As health care becomes a bigger priority in those countries, we think those markets are going to grow very rapidly,” Funari said.

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