Thermo Electron to reorganize, sell Trex subsidiary

For sale: Major medical imaging equipment manufacturer with solidified product line, strong market share and financial troubles. Price negotiable.

That description could be the ad for Trex Medical Corp. (Danbury, Conn.), as its parent company, Thermo Electron Corp. (Waltham, Mass.), on Jan. 31 unveiled its complex reorganization plan. The goal is to shift focus to its core business of measurement and detection instruments and spin off or sell non-core businesses.

Thermo Electron has decided to sell several subsidiaries, including Trex, as part of that reorganization. It also will combine the remainder of its more thane 20 publicly traded subsidiaries into three public companies to consolidate its business.

The plan is expected to take one year and involve “spinning in” several public subsidiaries into Thermo Electron to make it one integrated public company. Thermo Electron also will spin into two companies, including Thermo Fibertek, and a newly created public medical products company. Trex will not be involved in either venture.

The new medical products company will include Thermo Electron’s neurodiagnostic, patient monitoring, auditory, respiratory and medical polymers product lines. Trex Medical will be sold with several other subsidiaries. (See chart.)

According to a company statement, Thermo Electron “does not expect to incur losses from the disposition of these businesses.”

The reorganization plan is meant to simplify what has become a complex group of public subsidiaries at Thermo Electron. Most market watchers feel this will accomplish that goal. In a Reuters report, Goldman Sachs analyst Deane Dray said Thermo Electron “had gotten too complicated in its subsidiary structure.”

The conclusion that Trex Medical does not fit in with Thermo Electron’s future plans is not a total surprise to observers, given the recent spiral of bad news for the subsidiary.

Just over a year ago, Trex appointed William Webb as president and CEO, hoping he could turn around the company. In May 1999, Trex revealed plans to close two of its manufacturing facilities and reduce its work force by 15 percent after reporting a $4.2 million net loss in the second fiscal quarter.

By the end of FY99, ending Oct. 2, Trex reported revenues of $241.6 million, compared with $267.0 million in FY98. Trex’s net loss was $28.1 million, compared with net income of $18.2 million in FY98.

“I think this is something that has been in the works for a year now,” said Juan Noble, a medical device industry analyst with Fahnestock & Co. Inc. (New York), who tracks Trex Medical. Thermo Electron “had been in this spin-out strategy for years, so clearly they had to do something to regain shareholder confidence.”

Last May, Thermo Electron proposed a deal where the ThermoTrex group – of which Trex is a part – would become a wholly owned subsidiary of Thermo Electron. Trex would remain public and would become a direct subsidiary of Thermo Electron. That plan was still in place when Thermo Electron filed its 10-K statement on Dec. 19.

“I think overall [Trex] had what is reputed to be a strong product line, but they have had their problems in the recent years, not the least of which was the FDA’s rejection of their full-field digital mammography system,” said Noble. “That turn-down by the FDA seemed like it torpedoed a lot of hopes at the company. Coming on the heels of some other things, it just exacerbated Trex’s problems.”

The saga of Trex’s full-field digital mammography system has been well-documented. In August 1999, 18 months after submission, the company received a letter from the FDA ruling that Trex’s 510(k) submission for digital mammography was not substantially equivalent to film screen mammography.

According to the company’s Dec. 19 10-K filing with the Securities and Exchange Commission, Trex was reevaluating its submission. The document offered no timetable for when Trex would unveil any major changes or resubmit the system to the FDA. The news in early February that GE Medical Systems (Waukesha, Wis.) had received final clearance from the FDA on digital mammography (see page 12) only adds insult to injury, as Trex was the first to submit its digital mammography system for clearance in December 1997.

The stock price of Trex has suffered from the bad news in the past year, too. In March 1999, it was trading at more than $8 per share. On Jan. 31, Trex closed at $3.50, down 50 cents per share for the day.

Trex officials were unavailable for comment on this story.