ADAC Laboratories sets its course after ‘disruptive’ 1999
In his ten-plus years at ADAC Laboratories Inc. (Milpitas. Calif.), it is hard to imagine a more eventful year than 1999 for Chairman and CEO R. Andrew Eckert. In a span of 12 months, the company restated its financial results for fiscal years 1996 and 1997 and the first three quarters of fiscal year 1998; saw its stock price fall precipitously as a result; announced an agreement in principle to settle a subsequent shareholder litigation case for $21 million; and bolstered its reserves to compensate for customer payment problems in South America.
While revenues rose 14 percent to $342 million in FY99, ending Oct. 3, 1999, charges related to restructuring, in-process research and development and other non-ordinary expenses resulted in a net loss of $33 million in FY99.
Despite the rocky financial terrain, ADAC seems to have survived the ride fairly well. The company has continued to forge ahead with new product development and introductions — such as its recently FDA-cleared Skylight “gantry-free” gamma camera — while restructuring its organization and adopting more stringent accounting policies.
In addition, in July 1999, ADAC began consolidating its ADAC Medical Technologies refurbishing business into its core nuclear medicine manufacturing operations and embarked on a two-year, $10 million initiative to implement a new internal information technology systems strategy.
Eckert joined ADAC Labs in 1990 as controller of the Customer Support division and later that same year, he was promoted to director of operations for the Nuclear Medicine division. In 1993, he became vice president and general manager of the division.
One year later, Eckert was named president and general manager of the newly formed ADAC Medical Systems, with direct responsibility for the company’s nuclear medicine, radiation therapy
planning and customer support business units. By 1997, Eckert was in the president’s chair in addition to his new COO duties and was promoted to CEO later that year. In April 1999, he was named chairman of ADAC’s board of directors.
Eckert spoke with Medical Imaging about the state of ADAC as the company emerges from its adventures of 1999.
What are your reflections today as you look back on the events of late 1998 and 1999?
Certainly, 1999 was a period of great change for our company. We had the unpleasant reality of having to restate our numbers for [fiscal years] 1996 and 1997 and the first three quarters of 1998. That was precipitated by a significant change in revenue recognition policies throughout our business, which I think are reflective of the Securities and Exchange Commission’s stance in the accounting world. It is a more conservative way to run our business.
While it was very disruptive during the period we were getting used to all the changes in revenue recognition and uncovering other historic problems in our business, we can take a great degree of satisfaction from the fact that — with the exception of our rather large [$21 million] shareholder litigation payment — the changes associated with our restatement and other financial restructuring did not involve too much cash. Essentially, the changes were accounting adjustments; there was not a large outflow of cash from the business.
Despite these distractions, we have established a great deal of momentum in the last couple of quarters. We have generated about $30 million in operating cash flow cumulatively in the last two quarters, excluding the litigation settlement. We have beaten our earnings expectations in the last three quarters. We have collected record amounts of money, given the new, more conservative revenue recognition policies. Our inventories are at all-time low levels.
Do you believe these issues are sufficiently behind the company now?
Yes, we have taken a whole set of corrective measures. We have doubled our finance staff. We have brought on two new board members, both of whom are seasoned financial executives. We have established internal audit programs and upgraded the information technology (IT) within the company. I believe the IT infrastructure of the company did not keep pace with both the size and the diversity and complexity of the business.
Many of the things that were not deemed priorities in the past are very strong priorities today and we are beginning to see the benefits of that.
Last summer, there was some concern about nonpayment of orders in South America. What is the status today?
In South America, we had some complicated customer arrangements, which were further exacerbated by financing their receivables through a third party. It was a complicated financing arrangement we had constructed. Then, upon the dramatic currency devaluation in Brazil in late 1998 and early 1999, customers had a very difficult time keeping up with the payments. Instead of trying to restructure the arrangements all at once, we decided the most prudent step was to take a very large reserve against those [receivables] and begin one-by-one to restructure those accounts, which we are pursuing.
Do you see any more company restructuring on the horizon for ADAC?
I would say there is no short-term restructuring envisioned. We have three primary businesses. One is Medical Systems, which includes nuclear medicine and PET (positron emission tomography). That business is doing quite well at the current time.
In our Radiation Therapy Products (RTP) division, the market has become a bit more saturated with 3D planning systems. However, we feel there is a very open playing field for the next wave of innovation in that business, which revolves around Intensity Modulation Radiotherapy (IMRT). We intend to be strong players in IMRT and CT simulation.
Our Health Care Information Systems (HCIS of Houston) division has an enviable installed base of a kind of ‘Who’s Who in American Healthcare.’ We have installed some 100 client/server clients, reflecting more than 200 different clinical locations. We are trying to address all possible customer segments with our RIS and we are branching into the image management or PACS world. We feel that will be a longer, riskier play, but one which has a high degree of reward associated with it, if we can execute it.
How much of an upside do you believe the PACS market offers?
I would suggest it is a marketplace that is more complicated than medical imaging equipment — perhaps not more technologically complicated, but certainly strategically and operationally. It is a market where the unmet need is huge. We have 325 hospitals throughout the U.S. that use our information technology. We have 100 installed client/server sites of QuadRIS, our latest generation RIS. We think our next closest competitor has 10 [sites].
We have been through many growing pains and now we are aggressively adopting the client/server technology to a thin client structure, so it will be easier to implement and support within a customer’s setting.
How do the three business segments compare from a revenue standpoint?
Medical Systems — including customer support — represents approximately 75 percent of the company’s revenues. The two software businesses — RTP and HCIS — represent about 12 to 13 percent each of total revenues.
What are your thoughts on the current nuclear medicine market?
The nuclear medicine market is healthy right now, certainly in the U.S. We see the signs of a dramatic and positive turnaround in Europe and nuclear medicine continues to perform consistently in Asia.
We expect the growth to be between 5 and 10 percent a year. We expect our growth to be better than that, given that we believe we will continue to gain market share.
Last year, we signed with Hitachi Medical to be their nuclear medicine partner in Japan, the second-largest market in the world. We feel we are off to a strong start in this very important market.
Has ADAC ever considered using any of Hitachi’s nuclear medicine technology now that Hitachi has opted out of new equipment production?
It is not currently envisioned. I think Hitachi is very comfortable with our technology. We are working cooperatively with Hitachi to adapt our products to the Japanese market. That is the extent of our relationship today.
There are specific clinical software needs in the Japanese market that are unique. We are working closely with Hitachi to develop what we hope will be best-in-class solutions for that market’s specific needs.
Where does that development stand?
It is right on plan. Over the course of the year, there will be the several releases to enhance our position in Japan.
Where do you see the greatest growth potential for the nuclear medicine market and, consequently, ADAC?
Our strategy throughout this decade — where we have established our strong leadership in nuclear medicine — has been to focus on innovation and technology and try to deliver the highest degree of clinical value to customers. It was clear to us that the dual-headed, gamma camera market would be the driving force in nuclear medicine, in particular the variable-angle marketplace. As a result, we think we clearly have been the strong leader in this area.
We’ve had several different generations of the Vertex variable-angle gamma camera and now the Forte gamma camera. At RSNA ‘99, we introduced the Skylight gamma camera, which is the next major innovation in nuclear medicine. We believe it will facilitate all current nuclear medicine applications and additional applications across medical imaging that are not feasible today with the current available equipment.
The real driving force in the industry and within our company is in PET imaging. In 1995, we introduced molecular coincidence detection (MCD) and later advanced that with molecular coincidence detection with attenuation correction (MCD/AC). Today, we have more than 220 sites of MCD/AC installed around the world.
We have been strong proponents of PET technology on a gamma camera or in dedicated equipment fashion. I think all the spadework we did in the late 1990s to educate the market to understand the impact of clinical education and reimbursement trends has been very important. We also have been very active in the recent approval of reimbursement for PET imaging.
We are benefiting, along with the entire industry, from the very rapid growth in the overall PET market. We see the PET market growing between 40 and 60 percent a year for the next several years. Our position is very strong and we enhanced that position in 1999 when we acquired our long-time technology partner, UGM Medical Systems (Philadelphia).
Today, there are only three meaningful players in PET imaging — ADAC, Siemens [Medical Systems] and GE [Medical Systems] — and we intend to be the leader in this area.
We feel that our CPET dedicated PET system addresses the most rapidly growing segment in PET imaging; that is, the clinical facility doing everyday patient care.
We booked 16 CPET units in the second fiscal quarter [ending April 2], which was a good sequential step forward from the prior quarter, as well as the prior year. We see ever-increasing market momentum in that product area.
Is non-PET nuclear medicine area flattening out?
Well, we have had great success with the Forte gamma camera, which was introduced in 1998. Its volume continues to grow. In the last quarter, we saw a strong performance particularly in Europe for our business and we are adding sales people, so we can effectively sell into what is now a larger and more rapidly growing marketplace, if you include both nuclear medicine and PET imaging.
Given that the PET market has come on so strongly so quickly, I think that did create some level of modest distraction from the non-PET products.
In second fiscal quarter results, you described the performance of ADAC’s RTP and HCIS businesses as “sluggish.” What is happening there?
On the RTP side, I think the market had a real acceleration into 2000 due to an older installed base of non-Y2K-compliant systems. I think the market took a deep breath in the first calendar quarter of the year. We already see our level of RTP business beginning to pick up, although we don’t expect that market to be a growth market over the next year or so. With HCIS, the market has been very sluggish and quite confused with respect to new Web offerings vs. client/server offerings. There are many delays and extra thinking in the every day sales processes.
I think we are at point where there is a massive technology shift that is occurring throughout our economy. It is very exciting, but certainly puts added pressure on buyers of mission-critical information systems to make the right decision with respect to both technology and functionality. Healthcare institutions are struggling to decide if they should buy now or buy later and I think people are understandably devoting more time to the decision-making process. This is a 10-year decision for these hospitals. They have to be very careful. We can understand that.
What is on the immediate horizon for ADAC?
We have a new mission that we formed about a year ago and that is to be a $1 billion business by 2003. We recognize the value of being larger, but we want to do it in a smart way and not over-stretch. We’re just putting one foot in front of the next and staying abreast of growth markets where we think we can participate in a competitive fashion. 
