Agfa plans acquisition of Sterling but passes on DirectRay, Helios unitsDeal would create a film powerhouse to rival Eastman KodakBigger is better. That was undoubtedly the mantra of many film and PACS vendors in 1998 and continuing into
Deal would create a film powerhouse to rival Eastman Kodak
Bigger is better. That was undoubtedly the mantra of many film and PACS vendors in 1998 and continuing into 1999.
With the new year less than two weeks old, film and PACS vendor Agfa announced that it would acquire most of the assets of digital radiography developer and film company Sterling Diagnostic Imaging. If the deal closes as expected in the next several months, it will create a company with worldwide revenues from healthcare operations of $1 billion, a U.S. film market share in the 40% range, and a formidable PACS organization.
Although terms were not disclosed, The New York Times pegged the value of the Agfa/Sterling agreement at approximately $700 million. Approval from antitrust authorities must be secured for the deal, which is expected to close in the late first quarter or early second quarter.
Rumors about a Sterling/Agfa combination were the talk of the industry throughout last year (PNN 7/98) and were especially prevalent at the RSNA meeting (PNN 1/99). In fact, talks had been under way for over a year and a half about a potential deal, said John Glass, medical imaging business group managing director.
The two firms had been working together on an OEM basis for two and a half years, with Agfa providing Sterling with a dry imaging printer and film-handling equipment and processors.
Many industry observers believed that an acquisition or merger of the two firms was inevitable, because both needed to gain additional scale to compete with Eastman Kodak. In December, Kodak bought the medical imaging business of Imation in a deal that bolstered the Rochester, NY, company in two major ways: adding to its already large share of the film market and giving it access to Imation's hot-selling DryView line of dry laser printers.
Indeed, similarities abound between the Agfa/Sterling and Kodak/Imation acquisitions. Both Sterling and Imation trace their origins to 1996 spin-offs from chemical firms, arising from Du Pont and 3M, respectively. In addition, Agfa itself is on the verge of being spun off from Bayer, which maintains strong positions in chemicals and pharmaceuticals.
Sterling was created in 1996 when Du Pont sold its Diagnostic Imaging business unit to Houston-based investment firm Sterling Group. Sterling is owned by a combination of company management and private investors, has annual revenues of about $500 million, and employs about 2000 workers worldwide.
While the history of the companies is noteworthy, it is the immediate future of an Agfa/Sterling combination that is of more interest to other medical imaging and PACS firms. Although Agfa and Sterling executives declined to comment on the potential market share of the combined companies, Sterling in the past has estimated its North American market share position in the low 30s, while Agfa's share has been estimated by market watchers as being in the low teens. Kodak's share of the U.S. market following its Imation acquisition is believed to be in the low to mid-40s. Agfa's market share historically has been stronger in the European market.
Sterling also has experienced success at landing large group purchasing organization contracts, which will certainly benefit Agfa. Sterling has exclusive film supplier contracts with Columbia/HCA, Premier, and HSCA.
As part of the deal, Agfa receives Sterling's Brevard, NC, manufacturing facility, which adds a North American x-ray film emulsion coating plant to the company's manufacturing portfolio. This will allow Agfa to perform the majority of film manufacturing operations in the U.S. for its customers in North America. Agfa's Bushy Park, SC, facility serves as a finishing facility.
Fate of DirectRay, Helios?
In an interesting decision, Agfa elected not to acquire Sterling's DirectRay digital radiography technology or its Helios dry laser printers. Sterling business groups handling those efforts will likely be spun off prior to the deal and sold to an OEM firm. Sterling has retained investment bankers to facilitate this process, and the Greenville, SC-based company has had discussions with several firms regarding a possible sale, said Rodney Wolford, Sterling chairman and CEO.
Agfa took a pass on DirectRay because it wants to focus its efforts on its CR product line. The company has some new CR technology in the R&D pipeline that it believes will make CR even more competitive with DR, said Glass, who was promoted late last year from his post as head of Agfa Medical's U.S. operations to lead Agfa's worldwide healthcare activities.
"This decision is not a reflection on their technology at all," he said. "We just chose to put our resources into the development of our CR products."
Sterling's difficulties with its supply of thin-film transistor (TFT) arrays from its previous supplier, Optical Imaging Systems (OIS), played no part in the decision, he said. In the long term, Agfa plans to participate in the DR market, although Glass declined to comment on what approach the company would take to achieve that goal.
Despite Agfa's decision not to continue with the DR and Helios products, existing customers won't be left high and dry. Agfa has entered into a commitment with the remaining Sterling entities for consumables, service, and parts for DR and Helios customers.
While market share in film remains important, the future for all film companies undoubtedly is in the digital realm. Agfa is already a dominant PACS player and will benefit even further from Sterling's additional activities in digital image management.
Sterling also brings to the table a large number of film customers to whom Agfa can pitch its Impax product line. Adding these customers should help Agfa fend off inroads from other companies, in particular GE Medical Systems of Milwaukee, which has aggressively built its PACS program over the past year.
Sterling has begun to experience success with its own PACS technology, which includes components from firms such as ISG Technologies of Mississauga, Ontario, and Access Radiology of Lexington, MA. With Access holding a nonexclusive agreement to provide its Framewave product line to GE as part of that company's PACS offering, it will be interesting to see if Agfa will elect to keep that portion of the product line.
Since the deal has not closed, no decisions have been made about technology integration, although both PACS product lines will certainly continue to be supported, Glass said. A transition team will be formed upon closing to study all integration issues, he said.
In the meantime, executives at Sterling's Direct Radiography Corporation, a subsidiary formed to handle the company's DR operations, emphasized their commitment to bring DirectRay technology to market, regardless of whether the firm is acquired or not. The company has no preference between an acquisition or continued operation as an independent firm, said Thomas Umbel, vice president and general manager of DRC.
"We will be comparing the benefits and financial elements of whatever offers we see from outside firms with the opportunity of operating as a freestanding entity," he said.
In product developments, six of Sterling's iiRad DR1000C digital chest systems have been installed at locations in North America and Europe, and a digital retrofit has been placed at Brooke Army Medical Center in Fort Sam Houston, TX. The company will hold off on placing new retrofits in the field, most likely until March or April, pending feedback from the Brooke site, Umbel said.
Sterling expects to sell at least an additional 40 iiRad systems in 1999, over half of which will probably be DR1000C installations, he said. Availability of the company's DR1000 general radiographic system is expected in June. DR1000C has a market price of $350,000, while DR1000 will cost $395,000, according to the company.
In addition, Sterling is close to firming up its supply of TFT arrays following the collapse of OIS. While enough TFT arrays are on hand to meet customer demand, the firm has entered into an agreement with an unnamed company to supply it with TFT arrays. Prototypes are expected to arrive by the end of the month and will be tested for reliability, Umbel said. Perhaps to guard against future shortages, Sterling is in the final stages of negotiations with an additional firm. In any event, it expects that a new supply of TFT arrays will be available in the late second quarter.
In other Agfa news, Glass in his new role as head of Agfa's worldwide healthcare operations has begun a reorganization effort that will divide the company into two distinct business groups. Impax Solutions will include all the firm's computed radiography offerings and PACS organization, while the company's Imaging Systems group will include the film and wet and dry printer businesses.
Patrick Artinoff will direct Agfa's Impax Solutions group and will report to Glass. Artinoff has been employed at Agfa for five years and has served as head of the company's Canadian efforts. Bob Cooke has been named head of Impax Solutions for the NAFTA region. Other positions for the European and Asian regions have not yet been filled.