Agfa’s acquisition of Sterling will create film powerhouse to rival Eastman Kodak

Fate of DirectRay remains in question as Agfa turns down technology

The need for film and PACS companies to consolidate was again evident earlier this month in the announcement by Agfa 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.

Sterling was created in 1996, when Du Pont sold its Diagnostic Imaging business unit to Houston-based investment firm Sterling Group (SCAN 1/31/96). 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.

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.

Rumors about a Sterling/Agfa combination have been rampant for months and were prevalent at last month’s RSNA meeting in Chicago (SCAN 12/16/98). 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 the Kodak/Imation acquisitions. Both Sterling and Imation trace their origins to 1996 spin-offs from chemical firms—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.

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 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 to be 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 Europe.

In an interesting decision, Agfa elected not to acquire Sterling’s DirectRay digital radiography technology or its iiLinx dry laser printers (formerly Helios). 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 John Glass, medical imaging business group manager. Glass late last year was promoted from his post as head of Agfa Medical’s U.S. operations to lead Agfa’s worldwide healthcare activities.

“We still believe DR has a future, and this is not a reflection on that technology. It just boils down to the fact that we have some interesting CR technology that is easier for customers to cost-justify to take them fully digital, and we’re betting on that horse for the short term,” Glass said.

Sterling’s difficulties with the 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.

Potential for PACS. While market share in film remains important, the future for all film companies undoubtedly is in the digital realm. Although Agfa is already one of the dominant PACS players, the company does plan to make use of Sterling’s activities in digital image management to spark continued growth in its digital business.

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 also 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 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 in 1996 to handle the company’s DR operations, emphasized their commitment to bringing 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. Pending feedback from the Brooke site, the company will hold off on placing new retrofits in the field most likely until March or April, 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 they will be tested for reliability, Umbel said. Perhaps to guard against any future shortages, Sterling is in the final stages of negotiations with another firm. In any event, it expects that a new supply of TFT arrays will begin in the late second quarter.