Executive summary
Initiating coverage on IDTF sector
We are initiating coverage on the independent diagnostic testing facility (IDTF) sector,
including two pure-play companies -- Alliance Imaging, Inc. (AIQ-Hold) and RadNet, Inc.
(RDNT-Buy). Diagnostic imaging services (i.e., radiology) play an integral role in the
identification, treatment and monitoring of disease. We estimate that the outpatient imaging
sector is a $40 billion+ market, comprised of over 5,500 Medicare-certified IDTFs and
thousands of office-based locations. Yet, proliferation of technology and physician selfreferral
under the Stark in-office exception for ancillary services led to unchecked spending
growth during the early 2000s. Ultimately, rapid Medicare spending growth culminated in
disruptive reimbursement changes implemented by the Deficit Reduction Act of 2005 (DRA).
In the fall-out of the so-called “DRA” and other impending regulatory issues, we expect rapid
change in the imaging sector landscape over the next 12 months to 24 months and see
selective investment opportunities.
The DRA is taking its toll on the sector -- and weeding out irrational capacity. The DRA
reduced Medicare reimbursement for imaging services performed in freestanding settings
(office-based and IDTF) to the lesser of the Medicare physician fee schedule or the hospital
outpatient prospective payment system. In addition, the DRA reduced the Medicare rates for
multiple scans performed on contiguous body parts. Imaging cuts under the DRA will total
$8.1 billion from 2007-2015, according to the Congressional Budget Office scoring. The DRA
hit advanced imaging modalities particularly hard, with key MRI/CT codes receiving 30-40%
cuts and key PET codes receiving 50-60% cuts effective January 1, 2007. Furthermore,
impending regulatory requirements such as tighter self-referral restrictions and facility
accreditation/quality standards will create even greater challenges for the industry in 2008.
Private sector pressure is coming from the advent of radiology benefit managers who seek to
control growth of unnecessary utilization amongst managed care enrollees. RBMs and MCOs
alike are also weeding out self-referral through stricter accreditation standards – well ahead of
regulatory intervention. However, we expect much of the carnage to be centered on singlemodality
IDTFs and practice-based imaging (especially office-based MRIs) locations, which
arguably proliferated too quickly and are ill-equipped to adapt to this changing environment.
In the wake of DRA, we believe hundreds (perhaps more) of outpatient imaging locations will
fold, leaving only the stronger players – such as AIQ and RNDT – standing.
Who will be the winners post DRA? We believe the winners in the post-DRA era need to
possess the following key attributes: (1) a multi-modality strategy by offering a wide variety
of imaging services at each location, (2) an IDTF portfolio with strong geographic market
concentration, thus being relevant to managed care payers, and (3) an emphasis on PET or
PET/CT, the fastest growing category in imaging. Furthermore, given the industry dislocation
post-DRA, we believe strong balance sheets and integration expertise should allow the
winners to opportunistically consolidate within the fragmented space.
Initiating coverage on RadNet, Inc. (RDNT) with a Buy rating and $11.50 price
target. Out of the two publicly traded companies, we believe RDNT’s current
positioning relative to aforementioned attributes makes it the best way to play the
sector. RDNT’s 142-facility base is comprised primarily of multi-modality IDTFs, and
its footprint is geographically concentrated throughout California, Maryland and
upstate New York. RDNT is in the early stages of an aggressive, yet very selective,
acquisition strategy that should translate to attractive earnings growth. Upsides to
our forecasts include the potential for an accretive refinancing, completion of
unannounced acquisitions, and an acceleration of its deployment of PET/CT

technology throughout its fixed site portfolio. Downside risks include additional
reimbursement pressures stemming from private insurance carriers adopting lower
payment rates and/or tighter utilization standards, and integration challenges
associated with recent M&A.
Initiating coverage on Alliance Imaging, Inc. (AIQ) with a Hold rating and
$10.50 price target. We see modest upside to AIQ shares from current levels and
even reasonably good odds of upside to management’s conservative 2007
guidance. Further, we believe AIQ’s good balance sheet and strong management
team is adapting its business model well to the current environment. Yet, we
believe declines in its core mobile business (86% of total revenue) will be a drag for
the foreseeable future, and thus we take a slightly less bullish long-term stance on
AIQ shares.
In particular, we believe the mobile business’s core customer base – hospitals --
have increasingly better access to affordable advanced imaging technologies (such
as MRI and PET) as equipment costs come down. AIQ’s multi-pronged approach to
stem the decline in the mobile business include the build-out of fixed site locations,
expansion into a new product line, radiation oncology, through its Alliance Oncology
subsidiary, and potential acquisitions. Upside risks to our forecasts (and outlook on
AIQ shares) include the potential for higher growth outside of the core mobile MRI
business, continued (as opposed to deteriorating) steady declines in the mobile MRI
business, and the completion of unannounced acquisitions. Downside risks include
steeper deterioration of trends in the mobile business, additional reimbursement
pressures stemming from private insurance carriers adopting lower payment rates
and/or tighter utilization standards, and inability to hit its targets for new fixed site
additions (12-17 per year).
Valuation and risks. Since the IDTF sector is still undergoing change and many of the
disruptive factors in post-DRA era are still not entirely known, we believe it is prudent to
assign conservative valuation multiples to AIQ and RDNT. As such, we assign a 20-30%
discount to the average forward EV/EBITDA multiple observed amongst a broad crosssection
of small cap health care service providers (such as ASCs, dialysis, home health and
hospice). This approach yields an EV/EBITDA multiple of 6x-7x 2008E. We assign AIQ a
multiple toward the lower-end of this range due to the risks associated with revenue losses
in its mobile MRI business, whereas we assign RDNT a multiple at the upper-end of this
range due to our belief that its stand-alone multi-modal fixed-site strategy is a superior
business model. We also assign value to each company’s substantial NOL position, which
we estimate is worth roughly $0.50 per share for AIQ and roughly $2.50 for RDNT. Note,
AIQ’s three-year average forward EV/EBITDA is in the 5.5x-6.0x range, while RDNT does not
have enough trading history to obtain a long-term average valuation multiple.

Table of Contents
Executive summary ........................................................................... 3
Initiating coverage on IDTF sector ............................................................................................3
Industry overview.............................................................................. 5
Market size ...............................................................................................................................5
Market growth ..........................................................................................................................5
Imaging business models and competitive landscape..............................................................8
Imaging modalities..................................................................................................................10
Magnetic resonance imaging (MRI) ........................................................................................11
Computed tomography (CT)....................................................................................................13
Positron emission tomography (PET)......................................................................................15
Nuclear medicine ....................................................................................................................18
X-rays .....................................................................................................................................19
Ultrasound..............................................................................................................................20
Mammography .......................................................................................................................21
Fluoroscopy ............................................................................................................................22
Reimbursement overview.......................................................................................................23
Reimbursement mix................................................................................................................28
Deficit Reduction Act of 2005.................................................................................................31
Radiology benefit managers ...................................................................................................31
Alliance Imaging, Inc. (NYSE: AIQ) – Executive Summary........... 34
Outlook: We see modest upside to shares and guidance, but long-term outlook is slightly less
bullish due to drag from mobile ..............................................................................................34
Valuation: Mobile revenue drag leads us to more conservative target multiple......................35
Key investment risks ...............................................................................................................35
AIQ company overview................................................................... 36
Company background and description....................................................................................36
Strategic profile and business mix ..........................................................................................37
Senior management................................................................................................................42
Financial projections ...............................................................................................................43
RadNet, Inc. (NASDAQ: RDNT) – Executive Summary................. 48
Outlook: Plenty of upside opportunity ....................................................................................48
Valuation: Difficult reimbursement environment leads us to conservative valuation approach,
yet earnings visibility and NOL value underpin price target ....................................................48
Key investment risks ...............................................................................................................49
RDNT company overview ............................................................... 50
Company background and description....................................................................................50
Strategic profile and business mix ..........................................................................................51
M&A strategy and recent acquisitions....................................................................................53
Other growth initiatives...........................................................................................................55
Senior management................................................................................................................55
Financial projections ...............................................................................................................57
NSIGHT Imaging .....................................................................................................................63
Medquest...............................................................................................................................64
Medical Resources, Inc...........................................................................................................65
Centers for Diagnostic Imaging ..............................................................................................66
Diagnostic Health Corporation ................................................................................................67
Doshi Diagnostic Imaging Services.........................................................................................68
PresGar Companies ................................................................................................................69
e+ healthcare ..........................................................................................................................70