Elscint divestiture may be harbinger of more medical imaging consolidation

Imaging firms seem to have awakened to healthcare’s new reality

The long-awaited consolidation of the larger players in medical imaging appears to be picking up steam. The decision of Israeli medical technology firm Elbit Medical Imaging to sell off its Elscint subsidiary in pieces is only the latest sign that medical imaging’s corporate landscape is in the midst of dramatic changes. The move reveals that vendors are trying to gain the scale needed to compete more effectively in an era of group purchasing and managed care.

Elbit announced on Sept. 11 that it had reached separate deals to sell pieces of Elscint to GE Medical Systems of Milwaukee and Picker International of Cleveland (SCAN 9/16/98). GE has agreed to buy Elscint’s nuclear medicine and MRI divisions for $100 million, while Picker will purchase the Haifa vendor’s CT business for $275 million. The deals are expected to close in November.

Elscint was founded in 1969 by researchers from the Technion, an Israeli technical university in Haifa. Much of the company’s early efforts focused on nuclear medicine and CT, although it also developed MRI and mammography systems. As the company grew, it developed a strong international distribution organization and a reputation for products that were often technologically superior to those of its multinational competition.

At the same time, Elscint had weaknesses in several areas that doomed the company to also-ran status. Its efforts in the U.S. were plagued by changes in strategy and poor execution in marketing and service, crucial areas for penetrating the North American market. The company also had a penchant for introducing products long before they were ready to begin shipping, which alienated customers, according to one observer of the company. Elscint’s profitability followed a declining trend through the 1990s, prompting the company to implement several restructurings.

Led by CEO Jonathan Adereth, Elscint several years ago determined that the solution to its dilemma was to partner with its competitors, most of which were far larger and had massive home markets. The company signed a CT technology sharing deal with Siemens in 1996 and a joint-venture partnership in nuclear medicine with GE in 1997. The agreements were showing signs of paying off, with Elscint posting improving financial results in its most recent quarters.

That may not have been fast enough for Elbit. Elscint’s parent firm earlier this year became acquainted with the joys of divestiture after selling its Diasonics Vingmed Ultrasound subsidiary to GE for $228 million, a healthy premium over the $70 million Elbit paid for Diasonics in 1994. In public statements prior to the GE and Picker announcements, Elbit executives said they were unhappy with the return on investment Elscint had produced over the years.

“Elbit sold Diasonics, and they got a good dollar for it,” said Peter Annand, general manager of Elscint’s U.S. operations in Rockleigh, NJ. “They could see that in medical imaging we are a small player, and that consolidations are going to take place.”

A technology franchise. What are GE and Picker getting for their investments? For the most part, their reward is some intriguing technology that probably hasn’t received the audience it deserves. GE is already familiar with Elscint’s nuclear medicine technology through the ELGEMS joint venture between the vendors, and so there is no overlap in product lines. GE sells several Elscint-designed gamma cameras, such as the dual-head variable-angle VariCam system, which GE markets as Millennium VG.

The match between the companies in MRI is not as seamless. GE lays claim to be the world’s largest MRI vendor, and much of the Elscint product line duplicates scanners already offered by GE. There are two exceptions: Elscint’s 2-tesla Prestige scanner offers higher field strength than GE’s most powerful commercial offering. In addition, Elscint is preparing to ship Prima 1TG, a 1-tesla scanner that uses unique twin-gradient coils. While GE may bring some Elscint scanners into its product line, it’s most likely that the Milwaukee company will cherry-pick some of the Elscint technologies for incorporation into systems down the road.

Either way, the price that GE paid for its acquisition can’t be beat, according to John Cumming, president of WDI Healthcare Markets Group in Hilton Head, SC. According to Elscint’s 1997 annual report, the company’s MRI business generated worldwide revenues of $49.1 million last year, while nuclear medicine produced $55.7 million and Elscint’s share of the ELGEMS joint venture generated close to $15 million (all figures are from product sales and do not include service). All told, that’s 55% of Elscint’s product-related revenues, for a price almost one-third of what Picker has agreed to pay.

“For the technology that GE is buying, it is a very favorable deal for them,” Cumming said.

Not that Picker is complaining. Acquiring Elscint will round out several holes in the company’s product portfolio. It will give the Cleveland vendor access to Elscint’s large installed base of CT scanners, making Picker’s growing service operation more efficient. Picker’s efforts to expand its international presence will also get a big boost from Elscint’s global sales network. In some countries, such as France and Brazil, Elscint is the CT market-share leader, according to John Barni, vice president and general manager of Picker’s CT division.

“In the last few years we’ve been coming on strong globally, but this puts our strategy together,” Barni said. “We need service people in some precincts. We need salespeople in some precincts. That is what we pick up with the Elscint acquisition.”

On the product side, Elscint’s dual-slice CT-Twin scanner will give Picker a counter to the multislice scanners being introduced by its competitors (SCAN 9/16/98). Elscint pioneered multislice scanning, introducing CT-Twin in 1992. On the low end, Elscint markets Select/SP, a compact system that offers spiral scanning at an entry-level price point. The product is particularly well suited for the developing countries that Picker is targeting. Elscint’s CT division generated product revenues of $91.3 million last year (not including service), which made up 42% of the company’s product-related sales. Barni estimates that acquiring Elscint will give Picker a 20% share of the global CT market.

Tying up loose ends. There are a number of loose ends remaining in the wake of the Elscint divestiture announcement, mostly relating to partnerships Elscint held with other companies. Picker has agreed to take over the CT collaboration between Elscint and Siemens, and the relationship will be expanded to include Picker scanners.

Siemens had been providing its ultrafast ceramic (UFC) detectors and sub-second imaging components to Elscint; by adding Picker scanners Siemens will be able to double the output from its factories, according to John Sandstrom, director of strategic marketing and CT for the Iselin, NJ, vendor. In addition, the multislice technology that Elscint had been providing to Siemens will now be made available to Picker.

Not all of Elscint’s relationships will be taken care of so neatly, however. The company only a month ago signed a relationship with Swissray International of New York City to sell that company’s AddOn-Multi-System in international markets. The changes could turn positive for Swissray if one of Elscint’s new owners chooses to pick up distribution of AddOn-Multi-System, said Ueli Laupper, vice president of sales and marketing for Swissray. If not, Swissray may have to find a new partner.

One division of Elscint that was not covered in the September announcements is Elscint’s fledgling mammography business. Elscint’s mammography products, which include Glory and MAM-CH22S, produced minuscule revenues in 1997, but the company in the spring granted European marketing rights to the systems to Philips Medical Systems International of Best, the Netherlands (SCAN 5/13/98).

Elscint itself will not entirely disappear from the medical imaging scene. Elbit executives indicate that Elscint will continue as a manufacturing operation that supplies components to GE and Picker. How large this business will be in revenue terms is unknown. Assuming the acquisitions are completed in November, the company most likely will not exhibit at this year’s Radiological Society of North America meeting. Instead, its products will probably be displayed in the GE and Picker booths, according to Annand.

Specific details as to how GE and Picker will integrate their new purchases are also unclear. GE and Picker representatives declined to comment, as the firms are in the due diligence phases of the acquisitions. Annand believes that the companies will maintain most of Elscint’s sales, service, and applications support personnel. Upper management will probably not be so lucky, he said.

“As you go up the ladder, it’s harder to justify keeping people,” he said.

Elscint executives may not be the only ones hitting the street in the months to come. The Elscint divestiture is the fourth major acquisition to take place in the last two months, with other deals involving GE’s purchase of Marquette Medical Systems (see story, page 6), Eastman Kodak’s purchase of the medical imaging division of Imation (SCAN 8/19/98), and Philips’ acquisition of ATL Ultrasound (SCAN 8/5/98).

Some market watchers believe that the industry’s consolidation is far from over. Medical imaging companies have been too slow to respond to the changes wrought on healthcare by group purchasing organizations and managed care, according to WDI’s Cumming. While some acquisitions and mergers have occurred, they have mostly involved the industry’s smaller players, rather than the more dominant companies. As a result, earnings for imaging device firms have lagged most other healthcare segments as too many companies compete for slices of a shrinking pie.

“Medical imaging is not growing at the same level as some other medical device segments,” Cumming said. “Companies are realizing that with the erosion of margins, with buying power becoming greater and greater among bigger providers, and discounts going deeper, consolidation is the path of the future.”