ISG prepares for PACS market boom by securing portfolio of OEM alliances

ISG prepares for PACS market boom by securing portfolio of OEM alliances

Company is on road to recovery after a rocky 1996

Medical imaging software developer ISG Technologies has probably seen more than its fair share of turmoil. The Mississauga, Ontario, firm has an ambitious plan to disseminate its software into a wide range of healthcare applications, but saw its efforts sidetracked last year due to a rancorous battle for control of the company that culminated in December.

ISG's goal in the PACS market is to become the preferred image viewing software supplier to PACS vendors and hospital information systems developers. ISG relies heavily on OEM alliances, a wise strategy for a small company competing in a market that is increasingly dominated by larger firms. If ISG's business plan works-and it is showing signs of success this year-it could give the company a large and profitable revenue stream in the years to come.

ISG began as a flight simulator company in 1982 and entered medical imaging in 1987 as a developer of 3-D visualization workstations. In the early 1990s the company began to shift away from the 3-D visualization market and now participates in four main product segments:

• Imaging Applications Platform (IAP), which ISG licenses to imaging vendors that are developing image processing software;
• The Viewing and Reading Stations (VRS) line of image management workstations, which are platform-independent and run on Unix and Windows NT operating systems;
• Viewing Wand, an image-guided surgery system that enables surgeons to correlate the position of surgical instruments with MRI and CT scans; and
• Contract software engineering.

Keys to the kingdom

The IAP software is the key to ISG's business model. ISG describes it as a combination software toolkit and library, which contains object-oriented building blocks that can be used to develop a wide range of medical imaging software applications. IAP forms the foundation for all of ISG's product lines, and the company estimates that some 50% of the software in its various products uses the same IAP code.

This creates obvious efficiencies in software development and is the basis for ISG's approach to medical imaging. ISG believes that, rather than limit itself to one specific niche in medical imaging, like PACS, it is better off targeting a broad range of medical imaging applications, from PACS to image-guided surgery, for which it can write software using IAP as a foundation.

ISG's product distribution emphasis is on selling its software through alliances with other companies, and it has one of the broadest OEM portfolios in the industry. The company has been a major beneficiary of the recent trend among imaging vendors to outsource PACS components rather than develop them in-house.

In addition to imaging companies, ISG has begun to set its sights on what could be a much larger OEM universe: information systems vendors. For years these companies have neglected to add PACS components to their HIS products, but are now looking more closely at imaging as hospitals begin to demand integrated image and information management solutions.

Quorum's insurgency

ISG's broad-based strategy sounds good on paper, but it has taken some time to implement, and ISG is still trying to achieve profitability on a regular basis. The slow development of ISG's business plan led to shareholder unrest that came to a head last year when the company experienced a very public falling out with its former president and CEO, Thomas Cafarella. The feud eventually led to an unsuccessful takeover attempt launched by Quorum Growth, a major shareholder and backer of Cafarella.

ISG hired Cafarella in 1995 at the prompting of Quorum, which at one time held close to 30% of ISG shares. Cafarella, formerly head of the nuclear medicine business of Siemens Medical Systems, took several steps to move the company to profitability, and implemented a restructuring that saw ISG release some workers as it ended its direct sales program in favor of an OEM approach.

Relations between ISG's board and Cafarella soon soured, however. The company fired the executive in August, and he responded by filing a wrongful termination lawsuit. The other shoe dropped in December, when Quorum announced that it was launching a proxy fight with the intention of taking over ISG and reinstating Cafarella at the head of the company. Quorum and Cafarella said they would divest ISG's Viewing Wand product line and refocus the company on providing PACS software to information systems companies.

The proxy fight ultimately failed when Quorum could not muster enough support from large ISG shareholders. Although ISG won the battle, the fight took its toll on the company. ISG spent about $462,000 (U.S.) on proxy defense costs, and sales suffered-in particular in the Viewing Wand business-due to customer uncertainty about the company's future.

For its second quarter of fiscal 1997 (end-December), ISG posted revenues of $4.5 million (U.S.), down 11% compared with $5.1 million in the same period the year before. ISG had a net loss of $1.3 million, compared with net income of $71,000 in the second quarter of 1996.

The road to recovery

ISG has been trying to put the pieces back together since the beginning of the year. Quorum divested its stake in the company after the proxy fight failed, removing a major distraction to ISG management. Viewing Wand sales have rebounded, and the company's third-quarter financial results, to be announced this month, will show a sharp improvement over its second-quarter figures, according to chairman and CEO Dr. Michael Greenberg. ISG is also planning to put a new management team in place over the next several months to replace the executives lost during Cafarella's tenure.

ISG's recovery plan received a major boost in March when the company signed a licensing deal with Imnet Systems of Atlanta. The agreement makes ISG the exclusive supplier of medical image visualization software for Imnet's MedVision product, which integrates medical images with information from an electronic patient record. Imnet has agreed to pay ISG $7.8 million (U.S.) over the rest of calendar 1997.

ISG could be eligible for additional royalties based on MedVision sales, probably as a result of Imnet's position as a supplier to other IS firms like HBO & Co., IDX Systems, Phamis, and Cerner. ISG, in essence, is gaining all these companies as distributors of its software.

In the next several months, ISG plans to put its management house in order, and Greenberg believes that the company should be profitable a quarter from now as its various PACS partners begin shipping products based on ISG software. ISG is also examining new market niches for its software, and plans to debut some of that work at this year's Radiological Society of North America meeting.

Whether the company finally sees its plans come to fruition depends in large measure on whether the widely anticipated boom in PACS purchasing materializes. If it does, ISG should be well positioned, through its large network of vendor partners, to reap the rewards of hospital spending on information technology.

ISG TECHNOLOGIES
6509 Airport Road
Mississauga, Ontario
Canada L4V 1S7
905/672-2100
Fax 905/672-2307
http://www.isgtec.com

Management
Michael Greenberg, Chairman & CEO
Elan Sober, Acting CFO
Number of employees: 220

Stock trading
NASDAQ Stock Exchange as ISGTF
Toronto Stock Exchange as ISO
52-week NASDAQ high: $5.25
52-week NASDAQ low: $1.38
Currently: $2.56

Financials (U.S. dollars)
1996 (end-June) revenues: $20.6 million
1996 net income (loss): ($643,000)
Earnings per share: (0.05)
Total assets: $30.1 million
Market capitalization: $33.8 million

Product lines

• Viewing Wand image-guided surgery system
• IAP applications development protocol
• VRS and Silhouette PACS workstations
• Software development contract engineering

Product distribution
OEMs and distributors; no direct sales

OEM partners
Literally dozens. Major PACS partners include Sterling, Imnet, Kodak, Konica, Shimadzu, Access Radiology.

Long-term PACS strategy
To expand market position through OEM agreements to supply image-viewing software to major vendors, including information systems companies.