Philips puts up $426 million to acquire nuclear leader ADAC Laboratories

By Robert Bruce

Royal Philips Electronics announced last week that it has agreed to acquire ADAC Laboratories for $426 million, or $18.50 a share of ADAC's outstanding common stock. The offer is subject to regulatory approval. It is good until Dec. 12 and could be extended.

ADAC is a world leader in nuclear medicine imaging equipment and radiation therapy planning systems. It emerged as a leader in PET systems as well, following its acquisition a year ago of UGM Medical, a developer and manufacturer of low-cost PET devices.

"In cardiology, one of our focus areas, this acquisition will complement our HeartCare program, since nuclear medicine is one of the important tools clinicians rely on to assess cardiovascular disease," said Hans Barella, president and CEO of Philips Medical Systems.

This is the third major merger in the imaging industry over the past several weeks. Siemens Medical Engineering just closed on its $700 million acquisition of Acuson, while Kodak announced Nov. 9 that it would spend $39 million to buy CR systems from Lumisys.

The merger, which had been the subject of online rumors for several weeks, comes at a time when Philips Medical Systems is planning to move its North American headquarters from Shelton, CT, to Seattle, where it will be near its ultrasound subsidiary, ATL. Company officials said the ADAC deal was not related to the move.

ADAC would keep its identity as "ADAC, a Philips Medical Systems company," according to Philips' corporate spokesperson Ben Geerts in Amsterdam. The companies will have separate booths at the RSNA meeting, he said.

The acquisition will enable Philips to round out its offerings as a multimodality company‹particularly crucial in this time of industry consolidation.

"There is lots of concentration in medical systems in the world where (specialty companies) are being taken over by multimodality companies," Geerts said. "Our company is doing the same. Nuclear medicine was the only important modality we were lacking."

U.S. Medicare's expansion of PET reimbursement has generated considerable expansion in that modality, according to Geerts. PET reimbursement was expanded significantly in 1999, to include recurrent melanoma detection, lymphoma staging, and recurrent colorectal cancer evaluation. Prior to the expansion, PET was only covered for staging of non-small cell lung cancer. The Health Care Financing Administration is considering expanding coverage of PET to include other applications.

"The market for PET systems has grown in the past year because of reimbursement from Medicare, and we expect that to continue," he said. "There is widespread acceptance for PET, especially in cancer detection."

ADAC won the coveted Malcolm Baldrige National Quality Award in 1996, the first healthcare company to receive the award since its inception in 1988. The award is given by the U.S. Department of Commerce each year to recognize excellence by U.S. companies.

"ADAC is known for excellent quality," Geerts said. "It's a world leader in nuclear imaging. We felt this segment was lacking, and healthcare groups and hospitals worldwide are asking for a complete package of products."

Siemens claims a nuclear medicine market share of about 35% (SCAN, 11/8/00). GE Medical Systems and ADAC also hold large market shares, but neither company would discuss their positions. Both companies are well below Siemens, however, according to the German company.

ADAC announced last month that it was selling its Health Care Information Systems (HCIS) division to Cerner of Kansas City, MO, for $6 million, citing poor financial performance and a difficult market climate for healthcare information systems. The company had already signed a letter of intent to sell its Cardiology Systems Group to Camtronics Medical Systems, a subsidiary of Analogic (SCAN, 11/8/00).

Although the reasons given at the time were that ADAC wanted to sharpen its nuclear medicine focus, it is now apparent that the divestments made the company more attractive for acquisition,