Turbulence hits Trex as Kirshner quits, FDA rejects digital mammography filing

Company faces lower 1999 earnings after U.S. Surgical deal dies

The weeks in December between the Radiological Society of North America meeting and the New Year are usually times for medical imaging companies to relax. Not so for Trex Medical last month. In fact, the Danbury, CT, company couldn't have experienced a more turbulent time. As the year wound down, Trex found itself dealing with one challenge after another, ranging from the resignation of its chief executive to the rejection of its 510(k) application for a full-field digital mammography system.

The avalanche of bad news started on Dec. 14, when Trex announced that president and CEO Hal Kirshner had left the company, a development that jolted the medical imaging industry. Kirshner had been the driving force behind Trex's rise, taking a smattering of small and mid-sized x-ray firms and assembling them into a powerhouse in the mammography and radiography markets.

Replacing Kirshner will be William Webb, formerly executive vice president at Picker International, where he was responsible for global sales and service of Picker's medical imaging product line. Kirshner will remain a director and consultant to Trex.

Trex did not provide a detailed explanation of the reason for Kirshner's resignation, but it could be related to the company's financial performance last quarter. Trex under Kirshner's direction posted an impressive record of revenue and earnings growth, but the firm's performance had begun to slow in the fourth quarter of 1998, due to the breakdown of its OEM relationship with U.S. Surgical of Norwalk, CT.

Concurrent with the announcement of Kirshner's resignation, Trex reported that it anticipated lower-than-expected earnings for first quarter of 1999 (end-January), due to lower sales through U.S. Surgical, which had been a purchaser of Trex's StereoGuide stereotactic biopsy tables. The company had fitted them to its ABBI needle biopsy system under a relationship dating back to 1995 (SCAN 11/8/95). The partnership produced revenues for Trex of approximately $50 million per year, according to Kirshner.

That relationship began to sour in June, when Tyco International of Hamilton, Bermuda, purchased U.S. Surgical for about $3.3 billion (SCAN 6/10/98). At the same time, U.S. Surgical informed Trex that it would not be purchasing any more of the StereoGuide units. Trex plans to market the tables directly through its own dealer network, but expects the shift to take about a year before the company sees the same numbers it did with U.S. Surgical.

The other shoe drops. But news of Kirshner's resignation and Trex's cloudy earnings prospects paled in light of what would come next. On Dec. 17, Trex announced that it had received a letter from the Food and Drug Administration rejecting the company's year-old 510(k) application for its full-field digital mammography system, TDMS (Trex Digital Mammography System). News of the FDA's action stunned many market watchers, who had assumed that TDMS was on the brink of clearance.

In the letter, the FDA said it rejected the application because Trex's clinical data did not establish solid equivalence between TDMS and screen-film mammography systems. The FDA's biggest concerns regarding the TDMS application were the protocols used in analyzing data submitted to support the vendor's contention that digital mammography is equivalent to screen-film mammography, according to Trex executives. The FDA was also concerned about the training of clinicians using the devices in the field. In its letter, the agency outlined additional data analysis that would be required for clearance. Trex expects to meet with the FDA soon to discuss the application.

Trex's rejection again raised the issue of the FDA's regulation of full-field digital mammography. The agency has come under fire recently from a variety of sources, including women's health lobby groups, medical device industry groups, and physicians. The agency has changed course several times in the last few years in promulgating guidelines for regulating full-field digital devices, leaving vendors confused. The agency said in August that it would publish revised guidelines under which full-field systems could be cleared (SCAN 9/16/98). Six months later, the industry is still waiting for such a document.

The timing of the Kirshner and FDA announcements prompted some industry observers to speculate that they could be related. Trex executives denied any connection between Kirshner's retirement and the FDA's letter, however, stating that the company did not know about the agency's action until Dec. 16. Indeed, in the Dec. 14 news conference announcing Kirshner's departure, Trex executives said that they expected clearance of TDMS some time in the spring.

Whether the FDA's rejection of Trex's application will affect other full-field digital mammography developers remains to be seen. Market watchers believe that most companies are waiting for the revised guidelines before submitting their filings. Fischer Imaging of Denver still expects to apply for clearance for its digital system early this year, and GE Medical Systems of Milwaukee is also believed to be close to filing a regulatory application for a full-field digital system.

The turbulent month leaves Trex rethinking its business strategy. Before it received the FDA's letter, Trex expected to use sales of its full-field digital mammography system to offset the revenue shortfall created by the breakdown of the U.S. Surgical relationship. That's no longer possible. The company is selling TDMS in Europe, having received the CE Mark there in October (SCAN 10/14/98), but it must do without the lion's share of revenues that would come from the U.S. market.

In addition, Trex was forced to restate its revenues and earnings for its fourth quarter, which were originally reported in November, to reflect the breakdown of the U.S. Surgical deal. Full-year revenues were reduced from $271.6 million to $267 million, while earnings fell from $19.6 million to $18.2 million. The company believes that first-quarter 1999 earnings will be break-even.