February 2000

Acuson closed on its acquisition of Ecton Inc. (Plymouth Meeting, Pa.), which gives Acuson a low-end, portable, all-digital phased array echocardiography platform. Under the revised final agreement, Ecton shareholders received approximately 1.4 million shares of Acuson stock valued at approximately $17 million and $4 million in cash.

At the time of the initial proposal, the estimated value of the stock transaction was $23 million.

Ecton shareholders also may be entitled to as much as $17 million, based on performance results, through 2004, one year longer than initially proposed.

Ecton becomes Acuson’s Small Systems division and will remain in Plymouth Meeting. Its principal product is a digital echocardiography ultrasound with an all-digital, phased array system that features 2D, M-Mode, color flow, spectral Doppler, harmonic mode, digital image storage, direct DICOM networking, stress echo and contrast agent imaging. The portable system weighs less than 20 pounds and can be used on a table top or on a custom mobile cart.

Acuson will market the system as the Cypress, initially priced between $40,000 and $60,000.

Cypress received FDA 510(k) clearance in 1998 under the Ecton product name of Sonnet. The first shipment of the Cypress is scheduled for the second half of this year. That’s when Acuson also expects to begin generating revenues from the Ecton acquisition.

Acuson also is branching beyond its usual markets and making its first entry into the disposable device area thanks to its recent FDA 510(k) clearance of its AcuNav diagnostic ultrasound catheter.

AcuNav was developed under a joint program between Acuson and the Mayo Clinic’s Echocardiography Laboratory (Rochester, Minn.). AcuNav miniaturizes the technology in an ultrasound transducer and puts it into a catheter for imaging the interior of the heart.

The catheter is inserted in the femoral or the jugular vein and threaded into the right atrium or right ventricle of the heart. From there, the device obtains Doppler blood flow information and diagnostic images from within the heart.

“We designed the trials to show AcuNav was capable of imaging cardiac anatomy and physiology,” said Michael Curley, Acuson’s program director for the interventional devices business. “The anatomy specifically 16 targets that we picked in all chambers of the heart. We wanted to prove we could see all areas of the heart and we did prove that.”

AcuNav is the first in a line of similar disposable products Acuson hopes to release in the next two years.

Del expects to close on the remainder of the R/F company in April or May after it receives certified audits for 1999. Once it receives the results, Del has 60 days to move on the acquisition. The companies are in the process of due diligence. Villa plans to retain a 20 percent stake in the company.

The Union Bank of Switzerland owns a 90 percent stake in Villa. Del has granted the bank 50,000 six-year warrants to buy shares of Del Global at $7.94 per share as compensation.

So far, Del has paid $233,000 for the acquisition excluding accounting for options, legal and administrative fees. Del expects those costs to be in the $100,000 to $200,000 range, making the total acquisition price between $333,000 and $433,000.

“That gets the whole thing done,” said Leonard Trugman, Del’s CEO and president. “The price was a lot higher two years ago.”

Villa offers a line of low-cost imaging products, including radiographic, fluoroscopic, tilting tables and mammography systems. Villa also provides portable C-arms and dental imaging products. The deal gives Del an entrance into the dental imaging market.

“There is zero overlap in the product matrix,” said Trugman, adding that Villa’s mobile imaging systems would complement Del’s lower-end systems.

Villa also is an OEM supplier of R/F systems, with Philips Medical Systems North America (Shelton, Conn.) on its customer list.

The transaction would give Del a strong boost in its European market expansion. Villa is ISO 9001-certified and derives approximately 25 percent of its $20 million in annual sales from the Italian market. Another 40 percent of sales are in Europe outside of Italy.

While the agreement offers promising upside potential for both companies, the pact has a downside for Marconi Medical Systems Inc. (Highland Heights, Ohio).

The Varian-GEMS pact will negate Varian’s longstanding agreement with Marconi, through which Varian helped Marconi (then-Picker International Inc.) develop Marconi’s AcqSim for radiation therapy applications.

Varian and GEMS also plan to collaborate on information technology and product development to integrate diagnostic and radiation therapy systems for improved patient care and cancer management. In addition, Varian will become the exclusive distributor of GEMS’ CT, nuclear medicine and PET (positron emission tomography) products to radiation oncology customers in North America.

Varian is well-known for its intensity modulated radiation therapy (IMRT) technology, which aids in the eradication of cancer through the delivery of customized high doses of radiation to very small volumes of cancer tissue. High-resolution imaging of 3D anatomy is required to locate malignant tumors.

“We believe the starting point will be to harmonize imaging technologies around the technology of IMRT,” said GEMS President and CEO Jeffrey R. Immelt.

Financial terms of the four-year agreement were not disclosed. Immelt declined to estimate the revenue potential from the alliance, other than to say both companies “see incremental revenues coming from this agreement” after the initial start-up period that will begin this month.

“The opportunity is in the area of developing products — both hardware accessories and software products — that make it easier to use advanced images to develop optimized treatment plans for high-resolution IMRT,” said Varian President and CEO Richard M. Levy.

Levy said the agreement with Marconi will lapse by mid-February.

While Marconi officials were aware of the pending Varian-GEMS’ announcement, the company had not commented, as of press time, on what effect Varian’s move may have on Marconi.

In July 1998, Varian and Marconi expanded their 1993 strategic partnership for cancer therapy treatment products to allow Varian to offer Marconi’s CT simulation systems with AcqSim. The pact also allowed Varian to offer Marconi’s CT scanners in conjunction with Varian’s SomaVision, a PC-based imaging and visualization system and CAD Plan, a 3D treatment planning system.

Levy estimated the North American market for capital equipment for linear accelerators is between 100 to 150 units per year. What he has seen is what he describes as “phenomenal growth”

in ancillary products which enable IMRT. Those products include software enhancements and CT, MRI and PET scanners, he added.

“Until now, most of the diagnostic equipment in the U.S. has been purchased through the radiology department,” Levy said. “I think that with IMRT we will see a change and radiation oncology departments will purchase more and more of this diagnostic equipment directly to dedicate for their treatment planning for IMRT.”

Since the company separated from its two affiliated divisions early last year, Varian Medical Systems has taken advantage of its autonomy to pursue its own business strategy.

In an interview at the 1999 annual meeting of the Radiological Society of North America, Varian President and CEO Richard M. Levy told Medical Imaging that Varian’s board and management team want to grow through acquisition and strategic partnerships.

Oncology products and services are, by far, Varian’s largest business segment. “I think the largest single driver is intensity modulated radiation therapy [IMRT], which is literally increasing cure rates by as much as 70 percent,” Levy said.

In fiscal year 1999, Varian’s oncology business orders grew 22 percent, Levy said. Along with IMRT, he credited demand from an under-served market outside of the U.S. and the growth of freestanding cancer and disease management centers for the positive results.

IMRT sales — excluding service and capital equipment — contribute between $130 million to $150 million to Varian’s revenues and drive purchases of Varian’s linear accelerators.

While in Levy’s view IMRT has much upside potential, the issue remains how long it will take for healthcare providers to use the technology on a regular basis to help treat cancer.

“I don’t think it is a matter of buying the equipment,” he said. “I think it is a matter of changing the entire process of how therapy is delivered in the hospitals now. It’s training; it’s computer education; it’s different process mapping of what’s done.”

Levy estimated there are only 25 to 30 hospitals worldwide practicing IMRT. While he does not believe there is a provider skepticism to IMRT, the major obstacle to adaptation simply may be one’s mindset.

“If a doctor has been doing [cancer treatment] the same way for 15 years and the staff is trained that way,” Levy said, “and they have 30 or 40 patients a day, they don’t have the luxury of stopping what they are doing, retraining everybody and adjusting. It’s a big step.”

Another major part of Varian’s business is X-ray tubes. The company manufactures approximately 22,000 tubes annually and is a leader in all segments, competing against GEMS and Marconi Medical Systems Inc. (Highland Heights, Ohio).

Varian currently is shipping a 12-kilowatt tube that Levy feels will “revolutionize the high-end CT market.” Among Varian’s customers is Toshiba America Medical Systems (Tustin, Calif.), which uses the powerful tube for its Aquilion CT system.

Varian also markets its amorphous silicon, flat panel detectors for digital X-ray equipment.

“That will clearly be a growth business for a few companies,” Levy said. “We think that three or four companies will win in that arena and we’d like to be one of them.”

X-ray accounts for approximately 20 percent to Varian’s revenues.

Varian’s brachytherapy business contributes another $10 million to the company’s coffers.

Last year, Varian acquired the Therapy Planning Systems (TPS) division of Multimedia Medical Systems Inc. (Charlottesville, Va.), bringing additional treatment planning software for low-dose brachytherapy to Varian’s treatment planning products for high dose rate brachytherapy.

Ziehm is considered the market leader in Germany for surgical imaging products and a leading supplier in the U.S., the Netherlands and Scandinavia. The company has more than two decades of experience in operating-room surgical C-arm imaging. In 1998, the Ziehm companies tallied sales of approximately $23 million.

Ziehm’s surgical imaging companies have approximately 135 employees and have research-and-development, marketing and manufacturing operations in Nuremberg and Riverside, California.

If and when the acquisition is completed, Instrumentarium plans to merge its X-ray operations with those of Ziehm into a new, larger Instrumentarium Imaging Inc. division. Jurgen Ziehm, managing director and founder of Ziehm GmbH, would serve as an advisor for Instrumentarium Imaging.

Instrumentarium did not disclose financial details of the proposed transaction.

Instrumentarium Imaging — part of Instrumentarium’s Medical Equipment and Supplies business segment — manufactures dental X-ray and mammography systems, as well surgical C-arm imaging systems. In 1998, Instrumentarium Imaging posted sales of $31 million, with some 300 employees.

Instrumentarium Imaging’s North American operations are headquartered in Milwaukee.

Instrumentarium Imaging General Manager Folke Lindberg said Ziehm’s C-arm products and clinical experience, “combined with our own skills in digital X-ray imaging, will allow us to provide state-of-the-art digital solutions for our customers.”

Under the agreement, which is subject to regulatory approvals, Hitachi and and Esaote will join efforts in research and development and work to improve commercial cooperation in specific countries. The ultimate goal is to complete and complement each other’s ultrasound product line.

The companies will partner in three main areas — joint development of new products; exchange and transfer of technical information and components; and shared application and technology road mapping.

The technical cooperation agreement is for three years.

The panel’s recommendations are not a final approval, although the FDA follows the panel decisions in most cases.

The panel said GEMS’ pre-market approval (PMA) application — filed in October — was sufficient to establish the safety and effectiveness of the device in producing hard-copy images when compared with existing film/screen mammography. The recommendation makes GEMS the first manufacturer to receive a positive ruling from an FDA panel for full-field digital mammography.

Company officials expect final clearance for the hard-copy application of the digital system early this year. That approval would allow purchasers of the system to acquire mammograms digitally, but only read the images on hard copy. A separate clearance is required before the images can used for soft-copy diagnosis.

“The panel’s recommendation — not only for hard copy, but to stipulate expediting soft copy review — is extremely positive for us,” said Scott Donnelly, GEMS’ vice president of global technology. “We’ll work with the FDA to see what post-market studies will be required and clearly that will be very focused on soft-copy review and approval.”

The panel’s recommendation on the PMA is a result of the FDA’s decision to recommend that digital mammography manufacturers pursue a pre-market approval for the systems, rather than a 510(k) approval, which it previously recommended. At that time, GEMS changed its application to a PMA from a 510(k).

Company officials declined to provide a price range on the product until it has received full clearance from the FDA. It currently is marketed outside the U.S.

Richardson Electronics (LaFox, Ill.) has added Barco Display Systems Inc.’s (Atlanta) new 2MegaPixel medical greyscale display (MGD221) to its distribution list. Introduced at RSNA ’99, the MGD221 is a medium-resolution, 21-inch portrait greyscale display that has been designed specifically for medical imaging applications.

Precision Handling Systems Inc. (Orfordville, Wis.) and Agilent Technologies Inc. (North Andover, Mass.) are partnering to offer mobile ultrasound companies a complete turnkey program for the acquisition of Agilent ultrasound systems, as well as vans to transport the ultrasound equipment. Precision’s lift mechanism can be incorporated into a standard, unmodified vehicle.

E.G. Baldwin & Associates (Cleveland) will distribute MedAssets Exchange’s (Wood Dale, Ill.) line of refurbished medical equipment exclusively in Ohio and Pennsylvania. Baldwin also will distribute MedAssets’ fleet of rental mobile suites of cardiac cath labs, CT scanners and MRI systems in New Jersey, eastern New York, eastern Indiana, northern Kentucky and northwest Virginia. The pact marks Baldwin’s first entry into the high-end refurbished medical equipment industry.

Hitachi Medical Systems America Inc. (Twinsburg, Ohio) has inked an agreement to make its Airis II open MRI available to members of Radiologix Inc.’s (Dallas) radiology services network. Radiologix is comprised primarily of freestanding medical imaging centers. The company owns, operates or maintains an ownership interest in some 120 locations and provides management services to 10 radiology practices.

With the addition of 11 contracts in the last five months, Genesis Technology Partners (San Dimas, Calif.) now has signed 38 hospitals and healthcare facilities for its asset management program. Genesis also announced the first licensing agreement for its Internet-accessible database management system, Genesis On-Line. OhioHealth (Columbus, Ohio) is one of the largest integrated healthcare delivery systems in the Midwest. Genesis On-Line allows OhioHealth, among other features, to perform trend analysis of maintenance cost performance for similar equipment throughout its healthcare system and Genesis’ hospital customer database.

eMed Technologies Corp. (Lexington, Mass.) has signed a five-year marketing and product development deal with Aware Inc. (Bedford, Mass.) to develop advanced image visualization and communication products for the Web. Aware develops dynamic HTML technology which, according to a company statement, allows for ‘on-the-fly’ assembly of data elements, including radiographic images and information.

The FDA has given marketing clearance to Nucletron B.V. (Veenendaal, The Netherlands) for its new Inverse Treatment Planning (ITP) software on the Plato radiotherapy treatment planning system. Nucletron’s Plato ITP software is designed to provide the first fast inverse planning system that is integrated into a fully featured 3D planning system. ITP is the first step in delivering intensity modulation radiation therapy with modern medical linear accelerators.

Mallinckrodt Inc. (St. Louis) has received FDA marketing clearance for its contrast agent OptiMark for use in MRI diagnostic procedures to provide increased enhancement and visualization of lesions of the brain, spine and liver, including tumors. The company expects to begin shipping OptiMark in the first quarter.

Vital Images Inc. (Minneapolis) finally has filled its president and CEO positions on a permanent basis. Albert Emola assumes the two titles. Emola most recently has been an independent management consultant for start-up medical device companies. From August 1994 to January 1999, he served as president and CEO of Flexmedics Corp. (Minnetonka, Minn.), a designer of nitinol-based medical products. He replaces Andrew M. Weiss, who stepped down two years ago. Chairman Douglas M. Pihl has served as acting president and CEO since then.

International Isotopes Inc. (Denton, Texas) founder Ira Lon Morgan, has retired from his position as chairman of the board and will be replaced by director William W. Nicholson. Morgan will continue as head of the firm’s Imaging Division and will serve as a director.

ATL Ultrasound (Bothell, Wash.) has added the duties of senior vice president of global marketing to Victor H. Reddick’s responsibilities. Reddick has served as senior vice president of worldwide sales and customer service since January 1999. He replaces Cass Diaz, who is retiring after 12 years with ATL. The company also named Ron Leichner as vice president of global marketing. Leichner most recently held the post of senior director of worldwide marketing.

Radiologix Inc. (Dallas) lost its CFO and Senior Vice President Sami S. Abbasi. Abbasi left the radiology services provider at the end of the year to take a senior management post with a technology company based in Denver. David Young, the company’s controller, chief accounting officer and treasurer, has been appointed vice president of finance and assumed Abbasi’s responsibilities.

Richardson Electronics Ltd. (LaFox, Ill.) has named Kevin C. Oakley as vice president and general manager of its Medical Systems Group. Oakley will oversee planning, organizing, leading and controlling Richardson’s business results in the medical market segment. Oakley most recently served as senior vice president at Infimed Inc. (Liverpool, N.Y.).

In its quarterly review of public healthcare stock prices, HealthCare Markets Group (Hilton Head, S.C.) found that the Imaging Devices sector rose 3.8 percent for all of 1999. By comparison, the Dow Jones Industrial Average climbed 25 percent in 1999. Share prices in the overall healthcare industry increased 19 percent for 1999, after climbing just 2 percent in 1998 and 10 percent in 1997.

The silver lining for Imaging Devices is that the year-end positive number is a turnaround from the third quarter, when the sector was down 4.6 percent for the nine-month period and down 20 percent at the middle of 1999. Imaging Devices share prices fell 23 percent during 1998.

Two public companies easily outperformed their colleagues. SonoSite Inc. (Bothell, Wash.) gained 205 percent to close 1999 at $31.63 per share, while Vital Images Inc. (Minneapolis) posted a gain of 152 percent to end the year at $4.67.

Other Imaging Devices companies continued to take price hits in 1999, as their respective financial performances did not match expectations.

Acuson Corp. (Mountain View, Calif.) slipped 15 percent to $12.56, while ADAC Laboratories Inc. (Milpitas, Calif.) declined 46 percent to $10.75. Trex Medical Corp. (Danbury, Conn.) declined 67 percent to $2.81 per share, as Hologic Inc. (Bedford, Mass.) lost 52 percent to $5.75 per share.

What is in store for the segment this year?

“I do not see — exclusive of a few companies — a compelling reason why the market would all of a sudden generate significant interest [in Imaging Devices stocks] unless there are some acquisitions or there are some significant technologies introduced,” said John W. Cumming, HealthCare Markets’ CEO.

Cumming cited Wall Street’s continued fascination with Internet and technology stocks and the impressive performance of the pharmaceutical market as two main reasons why institutional investors have shied from Imaging Devices companies.

In FY99, the company posted restructuring charges of $4 million, an in-process research and development charge of $1.4 million and other non-ordinary charges and expenses of $29.7 million. The charges resulted in a net loss of $33.6 million, compared with net income of $7.4 million in FY98. Excluding the charges, ADAC’s FY99 loss was $6.6 million. ADAC’s only comment on the SEC probe appears in its 10-K filing. The company said that it is “continuing to cooperate with the SEC. The company is unable to predict the outcome of the investigation at this time.”

A formal SEC investigation gives the regulatory agency the power to subpoena individuals and documents.

According to The New York Times, the SEC has declined to confirm or deny the existence of a formal investigation of ADAC.

ADAC also announced that the company has reached an agreement-in-principle to settle the consolidated shareholder class action lawsuit currently pending against the company. Under the proposal, shareholders would receive $20 million in full settlement of their claims. A final settlement is contingent upon several conditions, including approvals by the Federal Court in the Northern District of California and ADAC’s board of directors. The consolidated suit stems from 11 shareholder actions taken against the company one year ago, after ADAC announced that it would restate its financial results for fiscal years 1996 and 1997, as well as the first three quarters of fiscal year 1999.

ADAC estimates that the total pre-tax cost of the settlements (net of insurance) is expected to be approximately $9 million. That cost will lead to a non-ordinary pre-tax charge of $10 million to $11 million in ADAC’s first fiscal quarter of FY2000, ending Jan. 2.

Del Global Technologies Corp. (Valhalla, N.Y.) continued to ride the wave of OEM outsourcing to post gains in sales and earnings in its first fiscal quarter, ending Oct. 30. Net sales grew 6 percent to $15.7 million, compared with $14.8 million in the first quarter of FY99. Net income gained 7 percent to $1.5 million, up from $1.4 million in the year-ago period.

Analogic Corp.’s (Peabody, Mass.) new fiscal year got off to a bumpy start. In the first quarter, ending Oct. 31, revenues slipped to $65.4 million, down from $67.2 million in the first quarter of FY99. Net income declined to $2.5 million, compared with $4.7 million in the year-ago quarter. Analogic President/COO Thomas Miller said the company will “compensate” for its first-quarter revenue shortfall with “increased sales and improved productivity” in the second half-year to avoid “disappointing” results in FY2000.

E-Z-Em Inc. (Westbury, N.Y.) notched greater revenues and earnings in its second fiscal quarter, ending Nov. 27, 1999. The company achieved net sales of $28 million, compared with $26.5 million in the second quarter of FY99. Net income grew to $1.8 million, up from $1.5 million in the year-ago quarter. For the six-month period, net sales increased to $55.2 million, compared with $52.2 million in the first half of FY99. Earnings reached $3.6 million, up from $3 million in the year-ago period.

Agfa-Gevaert Group (Mortsel, Belgium) is predicting that sales of its digital medical imaging products to the European hospital market will double in 2000 to approximately $25