The PACSman Living and dying in three-quarter time By Michael Cannavo

The question of whether small players in the PACS arena can survive has long been debated. Many of the 40 or so independent companies continue to fight for a market share even though market dominance clearly belongs to the major players. In addition, more than 100 peripherals manufacturers at this year's RSNA meeting are vying to score the game's winning hit with incorporation of their products into one of the major's systems. The reality is that while the evaluation process drags on, less than half will survive, as the others fall victim to undercapitalization and market uncertainty.

ALI Technologies, DeJarnette, DR Systems, E-Med Technologies, Rogan, and countless others are still holding their own in a market that is being taken over by the majors (witness GE's sevenfold market share increase from 1998 to 1999 alone). Though the independents clearly have a role in this market, it is changing, based on market dynamics and the investments required to make PACS work well.

From a technological perspective, the independents typically outshine their larger competitors, offering innovative technologies months or years before the majors. Why then is there such a dramatic fall-off mere months after the RSNA meeting?

Staying in the PACS game takes an incredible amount of money. Few PACS companies are profitable and those that are-DR Systems, for example-have become so by shrewdly picking and choosing both their markets and their customers. In a market that requires money to make money, few companies have the resources to endure. And those that do, such as ALI Technologies, are finding it harder to compete, with ever-shrinking margins.

ALI's profits and earnings were solid when the company was a niche player in the ultrasound miniPACS market, but the impact of expansion into full PACS no doubt affected the company's bottom line. While ALI recently reported a 26% revenue gain for the third quarter '99 over Q2 '98, it also showed a two-thirds reduction in net income and earnings per share from the prior year. The company is still in the black, generating over $1.4 million on sales of $25 million, but it has to overcome the "fear factor" instilled by the major companies. Being profitable, according to the majors, isn't enough; you need size. What few see is that financial performance of the major companies' PACS divisions were often substantially outperformed by the independents. Financial losses from PACS are usually offset by other products' gains, allowing PACS divisions to tough it out while smaller companies can do nothing but sit back and etch their tombstones.

E-Med Technologies (formerly Access Radiology) is another market survivor. E-Med had to deal with hospitals' uncertainty about it when its initial public offering (IPO) was abruptly canceled due to "market conditions." (The real reason had more to do with Bear-Stearns, the company that represented E-Med to the investment community.)

"There is still a marketplace for providers who offer uniquely postured applications without leveraging against other products," said Dave Mahoney, E-Med's vice president of sales. Indeed, the E-Med and ALI booths are substantially larger than in the past, a sure a sign of corporate stability.

What, then, does it take for a small vendor to survive? Courage and the ability to hemorrhage money until profitability becomes a reality. For many, that day cannot come soon enough. For most others at this year's RSNA show, it may already be too late.

Michael Cannavo is president of Image Management Consultants. He can be reached by e-mail at pacsman@ix.netcom.com