Kodak renews medical emphasis, while Imation chooses to bow out

Acquisition will give Kodak access to Imation's dry laser printers

Late last year, Eastman Kodak and Imation were companies in remarkably similar situations. Both were well-respected technology firms with sizable operations in the medical imaging market. At the same time, both were struggling with profitability problems that raised concerns about the long-term direction that each would pursue in healthcare.

Any questions about either firm's strategic approach to medical imaging were answered this month with the announcement that Kodak would acquire Imation's medical imaging business in a deal worth $520 million. The acquisition will have repercussions in both the x-ray film and PACS segments, but is perhaps most significant for its potential impact on the film output market, as Kodak will gain access to Imation's hot-selling DryView line of dry-process laser printers.

Imation is based in Oakdale, MN, and is the progeny of 3M, which spun off its data storage and imaging systems business units to form Imation in 1996. Analysts portrayed the divestiture as a smart move by 3M to improve profit margins by jettisoning underperforming businesses. The benefits of the spin-off were a little less clear for the businesses that made up Imation, however. The company hit profitability problems early on, and was forced to implement a restructuring plan to cut costs just 18 months after it officially began operations as an independent company.

Not that Imation did not achieve success in the medical imaging market: The company's DryView printers have been a runaway success since they began shipping in 1995. In addition, Imation solidified its position in the PACS market last year by acquiring Cemax-Icon of Fremont, CA (SCAN 5/28/97).

Kodak of Rochester, NY, has experienced profitability problems of its own over the last year. The company has been struggling to cope with inroads made by Fuji in the consumer film market. Within medical imaging, the vendor has encountered difficulties embracing the PACS market, in which any x-ray film vendor must be a player if it hopes to participate in healthcare over the long term. Kodak announced its own restructuring just prior to last year's Radiological Society of North America meeting, when the company stated that it would cut 16,600 jobs across the entire firm.

Kodak's timing for the restructuring announcement could not have been worse, at least from the perspective of its Health Imaging unit. The company exhibited at radiology's showcase meeting under a cloud, and rumors were rampant on the RSNA exhibit floor that Health Imaging would be sold, possibly to Johnson & Johnson. Kodak executives were compelled to make public denials of the rumors and to restate the company's commitment to healthcare (SCAN 1/21/98).

Kodak's situation began to improve this year, however. The company in July shocked Wall Street by reporting surprisingly strong second-quarter earnings of $495 million. The rebound was sparked by the success of Kodak's cost-cutting program, and the company appears to have slowed its losses to Fuji in consumer film.

The Imation acquisition was viewed by some analysts as a signal that Kodak as a whole has emerged from its cocoon and is ready to put itself back on a growth track. The fact that the company chose medical imaging as a symbol of its comeback was not lost on Health Imaging executives, including Martin Coyne, president of the division.

"It's a significant vote of confidence that Kodak wants to participate in the medical imaging market over the long term, as well as a vote of confidence in the Health Imaging management team and organization," Coyne said. "This acquisition ought to send a very clear message to all of our customers about Kodak's commitment to healthcare."

Putting the pieces together. What will Kodak get with its purchase? Imation's medical imaging operations generated about $500 million in revenue last year and involve about 1600 employees worldwide. Assets going to Kodak will include manufacturing sites in White City, OR, and Oakdale. An x-ray film plant in Ferrania, Italy, will not immediately be transferred, but will supply Kodak with the Imation film line. Kodak said it will integrate the Imation businesses into the Health Imaging division.

On the technology side, Imation's DryView line will bolster Kodak's offerings in the laser printer market, as the company's lineup does not currently include a commercially shipping dry laser. At last year's RSNA meeting, Kodak displayed 9000D, a work-in-progress dry laser that Kodak said would begin shipping later this year. Kodak executives declined to comment on how or whether 9000D will be integrated with the DryView products. Regardless of 9000D's fate, Kodak's massive sales force will probably pump up DryView sales even further.

Imation's position in the x-ray film market is small compared with Kodak's. Imation is estimated to hold a 10% share of the U.S. film market and a 9% share globally, compared with Kodak's 33% share of the North American market and 27% international share. The acquisition will enable Kodak to eliminate any doubts as to who is the largest x-ray film vendor, however. Kodak's leadership in the market has been challenged by Sterling Diagnostic Imaging of Greenville, SC, which last year claimed a U.S. market share in the 35% range as a result of several large group purchasing organization contracts.

The picture is a little cloudy in PACS, however. Imation's PACS business, the outgrowth of the Cemax-Icon acquisition, is acknowledged to be one of the leading players in the digital image management market. But Kodak has a PACS operation of its own, and it is unknown how the businesses will be integrated. Kodak may find it unwieldy to maintain facilities in both Fremont and Dallas, where Imation's and Kodak's PACS businesses are located, respectively.

The integration of PACS technologies from each company could also be difficult, and could prompt a realignment of business relationships as things get sorted out. Imation is in the process of moving its AutoRad diagnostic workstation software from the Unix platform to Windows NT. Kodak in recent years has relied on Windows NT-based software from Applicare Medical Imaging of the Netherlands as its PACS solution.

"The biggest challenge for both companies will be defining a business strategy for PACS, since they have two completely different product lines," said Michael Cannavo, president of Image Management Consultants in Winter Springs, FL.

Kodak does have plenty of time to figure out how to integrate its new acquisition. Paperwork regarding the acquisition will be forwarded to regulatory authorities in the U.S. and Europe in the next several months for antitrust review. The deal is expected to close in the first quarter of 1999.