ADAC reports higher revenues despite shortfall in MCD sales

Information systems unit also reports difficulties

Nuclear medicine vendor ADAC Laboratories last month reported strong growth in third-quarter revenues and operating income, but the positive numbers were overshadowed by a disturbing shortfall in sales of its Molecular Coincidence Detection high-energy imaging upgrade. ADAC also experienced difficulties in its information systems unit, which has had trouble getting a new product to market.

For the quarter (end-June), the Milpitas, CA, company reported revenues of $71.5 million, up 15% compared with sales of $62.4 million in the same period the year before. ADAC would have reported net income of $5.8 million for the period, but a one-time charge of $5.9 million for its acquisition of information systems company Cortet reduced the company's net income to $106,000, compared with a profit of $4.4 million in the third quarter of 1996. ADAC completed the Cortet acquisition July 11.

Among the highlights in the quarter were a 16% jump in product revenue, a 12% increase in service revenue, and an improvement in the company's gross profit margin to 41.5% from 38.7% in the third quarter of 1996. ADAC also reported bookings of $75 million, an increase of $6 million over the prior year's third quarter. Based on preliminary data, the company estimates that its share of the U.S. nuclear medicine market remains at about 50%, ADAC chairman and CEO David Lowe said in a conference call with analysts.

On the downside, the company said sales of MCD failed to meet forecasted expectations. MCD enables standard ADAC gamma cameras with Epic detectors to image the PET radioisotope fluorodeoxyglucose, and ADAC hopes MCD will enable nuclear medicine to perform oncology imaging procedures previously conducted with modalities like MRI and CT. ADAC began commercial shipments of MCD late last year, and has touted the technology as a key component in its growth strategy in nuclear medicine.

MCD shipments in the third quarter were flat, however, according to Andy Eckert, president and COO. The company had forecast that it would ship around 25 MCD upgrades in the quarter, but instead shipped 15.

ADAC believes the shortfall could be due to several factors:

the lack of formal clinical validation of the technology, as multicenter clinical trials ADAC is sponsoring have not been completed;

the lack of widespread reimbursement for FDG studies;

the fact that as a new technology MCD has not yet been included in hospital capital equipment budgets; and

a pause in orders caused by the introduction in June of ADAC's latest enhancement for MCD, attenuation correction (MCD/AC).

With respect to the fourth point, ADAC believes that many potential customers may have postponed MCD purchases after ADAC introduced MCD/AC at the Society of Nuclear Medicine meeting (SCAN 6/25/97). Because Food and Drug Administration clearance is pending for the technology, ADAC can neither sell it nor quote prices on it, Eckert said.

On the reimbursement side, ADAC believes that the Health Care Financing Administration's technical assessment committee is close to recommending FDG Medicare reimbursement for lung indications. Clinicians have experienced success in securing FDG reimbursement on a local level, with 19 sites submitting claims to private payors and local Medicare offices and securing an average global reimbursement of $1800 per procedure. Despite this progress, however, the company believes that national Medicare reimbursement for MCD is crucial.

"We believe that (Medicare reimbursement), if implemented, will be a breakthrough for MCD procedures and MCD unit volumes," Eckert said. "We believe that the momentum for FDG imaging is in fact building."

On the information systems side, the company's ADAC HealthCare Information Systems division also struggled in the quarter. The unit is still trying to bring to market LabStat, a laboratory information system that ADAC acquired with its purchase of Community Health Computing in 1995, and the company also suffered from a shortfall in radiology information systems sales. As a result, the division, which ADAC hoped would break even in the quarter, instead suffered a $1 million loss.

ADAC believes that the division's woes are primarily execution-related, and the company is in the process of changing the senior management at the business to improve its prospects. ADAC has also boosted its R&D investment in the information systems unit to make its products more competitive, although in the short term those investments increased the division's loss in the third quarter.

Despite the tactical setbacks, ADAC is still bullish on the company's long-term prospects, according to Lowe.

"Although we participate in a tough market, we believe that the opportunities that we have to continue to gain share in nuclear medicine, particularly outside the U.S., remain strong," he said. "In addition, our recent introduction of Molecular Coincidence Detection with attenuation correction may stimulate the replacement cycle once we are able to quote it, and therefore increase the market size of the nuclear medicine industry, as well as improve our competitive position."