Market forces in nuclear medicine drive GE and Elscint to joint venture

Elscint sees partnering as key to plans for global growth

It's no surprise that the nuclear medicine industry has been ripefor consolidation. What has been unexpected is how few gamma cameravendors have been willing to pursue mergers or acquisitions withother companies. Last week, two major nuclear medicine playerstook the plunge, when GE Medical Systems and Elscint agreed toform a joint venture company to develop nuclear medicine productsthat will be marketed independently by each company.

The companies announced on Feb. 10 that they had reached a tentativeagreement to form a 50/50 joint venture that will be based inIsrael to develop and manufacture equipment now produced independentlyby each company. The product lines of GE and Elscint will be merged,with the joint venture taking the best technology from each vendor.The resulting products will be sold and serviced by each companyunder its own brand name. If the agreement is finalized, the jointventure should be up and running by April.

Although the deal does not reflect well on the overall healthof the nuclear medicine industry, it does make sense for GE andElscint. At $600 million in annual sales, the global nuclear medicinemarket is flat at best, yet is crowded with 10 gamma camera vendors,according to Jonathan Adereth, president of Elscint of Haifa,Israel. The nuclear medicine divisions of Elscint and GE eachmake about $60 million a year in revenues, but the companies mustplow about $10 million annually into R&D to stay current.With those economics, it's hard to make money.

"It's the beginning of the consolidation in nuclear medicine,because there is no room for 10 parties to compete there,"Adereth said. "We decided not to stay and watch, but to takethe lead, and instead of talking about consolidation, to moveand lead the industry."

Other recent consolidation moves in nuclear medicine include themerger of Sopha Medical and Summit Nuclear into SMV in 1995 (SCAN6/21/95), and Picker International's acquisition of Scinticorthe same year (SCAN 9/27/95).

By partnering, the GE/Elscint joint venture will take advantageof economies of scale and shared technologies to become a $120million player that can afford to invest $10 million in R&Dwhile remaining profitable.

The companies have not yet decided on a name for the joint venture,which will probably be based in Haifa, Adereth said. Most of itsemployees will come from Elscint's R&D and manufacturing operations,although GE workers will be welcome if they are willing to relocate.Elscint will probably produce materials and components for thejoint venture, with final product assembly conducted by the jointventure itself.

There are about 100 workers in GE's U.S. nuclear medicine division,handling engineering, manufacturing, product marketing, and marketingsupport services, according to Sharon Banaszewski, general managerfor GE's global nuclear/PET business. Some will lose their jobsas GE shuts down its R&D and manufacturing operations, butBanaszewski expects that GE will be able to reassign most of themwithin its organization. GE may also set up a satellite engineeringoperation in Milwaukee.

When the joint venture agreement is finalized, GE and Elscintexecutives will examine each company's product line to determinewhich systems will be manufactured by the new firm. Adereth believesthere are synergies between the lines, as Elscint has developedpremium systems such as its VariCam variable-angle dual-head gammacamera, while GE has developed a number of low-cost single-headand dual-head cameras in recent years.

There is some overlap, however. At last year's Radiological Societyof North America meeting, GE debuted Millennium MG, a new variable-angledual-head (SCAN Special Report 12/96). Both companies also havefixed 90¡ dual-heads for cardiac applications.

Solid-state detector development is another area of overlap, althoughGE's R&D work in this area has received much more attentionbecause Elscint has not gone public with its solid-state effort.Adereth, however, claimed that despite the company's low profile,Elscint's solid-state program is just as advanced as that of GE.Indeed, one of Elscint's former partners in the solid-state programwas Isorad, the Israeli company that is now collaborating withGE (SCAN 2/15/95). As with gamma cameras, each firm's solid-stateprogram will be merged in the joint venture, Adereth said.

Adereth hopes to display the new product line at the upcomingSociety of Nuclear Medicine meeting in San Antonio in June. Atthe very least, the finalized product line will be demonstratedseparately by GE and Elscint at this year's RSNA meeting.

Pursuing a partnership. Both GE and Elscint have valid reasonsfor pursuing a collaboration. GE's position in nuclear medicinehad been slipping through the early '90s, due to the company'stardiness in capitalizing on the booming dual-head gamma cameramarket. It was also one of the last major vendors to develop avariable-angle dual-head camera. GE has shown technological leadershipwith its solid-state digital program, however.

The agreement with Elscint follows GE's deal with Positron tosell PET manufacturing rights to that company. The Elscint andPositron agreements are not linked, however, according to Banaszewski(SCAN 7/31/96).

"They are not directly related in any way. Both of them areresults of our efforts to provide the best products to our customersat the best quality, at the best cost position, in a time framethat the customers need them," she said. "In both caseswe will still focus on distribution, sales, marketing, and serviceof the products."

Elscint has been saddled with issues of its own. The company'sVariCam system is well regarded, but the vendor lacks the marketingmuscle of GE or Siemens. Nor does it have a large home marketthat it can rely on for steady sales, as does ADAC Laboratoriesin the U.S. Partnering with other companies is a way for Elscintto penetrate new markets and increase revenues without the expenseof building new sales and marketing organizations, according toAdereth.

That was the logic behind Elscint's agreement with Siemens forthe joint development of CT components to be used in each other'sscanners (SCAN 9/11/96). Elscint also inked a deal with Philipsfor VariCam sales in Japan (SCAN 1/8/97).

"We need to expand our capacity by partnering with othercompanies that have big home markets, that enjoy the ability tocapture large market share in their home markets, which we don'thave," Adereth said. "If, all of a sudden, instead ofselling five or 10 or 15 more CT scanners, we can sell 400 moredetector assemblies or other subassemblies inside the Siemensgantry, we'd better do it."

MRI and mammography are two of Elscint's remaining modalitiesin which the company does not have strategic partnerships on thelevel of the GE and Siemens agreements. The company does havetactical agreements in MRI: It has a production and distributionagreement with Magna-Lab, and it also supplied subassemblies toMedison for that company's new Magnum 1-tesla scanner. Look forElscint to sign on more partners in the near future, Adereth said.