Bracco cuts ties to scanner market

February 6, 2006

World leader in extremity MR Esaote is on its own. The Italian company, which has been a wholly owned member of the Bracco group since the turn of the decade, has been purchased by a private investment group. But Esaote is not headed into uncharted territory. The divestiture, which took effect Jan. 20 for an undisclosed sum, passes ownership of the maker of MR, ultrasound, and electrocardiography equipment to a group of investors that includes senior Esaote executives.

World leader in extremity MR Esaote is on its own. The Italian company, which has been a wholly owned member of the Bracco group since the turn of the decade, has been purchased by a private investment group. But Esaote is not headed into uncharted territory. The divestiture, which took effect Jan. 20 for an undisclosed sum, passes ownership of the maker of MR, ultrasound, and electrocardiography equipment to a group of investors that includes senior Esaote executives.

Ron Schilling, a general partner in Mi3 Venture Partners, said the deal makes sense for both companies, which have diagnostics in common but are focused on two different aspects: Bracco on contrast media and imaging agents, Esaote on medical equipment and associated software.

"The synergy between the equipment side and the imaging agent side did not seem to develop to a significant point," he said. "The business rule for synergy is that one plus one should add up to more than two. If that is not the case, there is no reason for a relationship."

Since Esaote was founded some 20 years ago, the company has installed 60,000 products for medical and veterinary providers around the world, including more than 1000 MR systems. Annual sales from all Esaote products generate about €240 million. About 200 employees, or 18% of the 1100-strong workforce, are dedicated to R&D.

"The key success factors of the Esaote group are the quality of the medical equipment and the know-how in the software applied to diagnostics," said Carlo Castellano, Esaote's chairman and CEO, who headed the initiative by Esaote managers to buy a stake in their company's future.

At the RSNA meeting last year, Esaote announced a strategic alliance with Hologic to sell its extremity MR scanners in the U.S. This deal is unaffected by news of the divestment, said Jack Cumming, Hologic's chairman and CEO.

Hologic was well aware when it partnered with Esaote that this sale was in the cards, though a nondisclosure agreement prevented any discussion of the prospective spin-off, Cumming said. Rumors also circulated in the Italian press. The fact that the winning bid came from an Italian consortium, and includes people with prior knowledge of the company, is good news for all sides, Cumming said.

"Esaote is going into very good hands," he said. "It doesn't alter the deal at all, and it probably puts us in a stronger position because the company is focused on its device business."

The divestment reflects efforts by Bracco to focus on core capabilities and selected emerging technologies. The company is concentrating particularly on devices oriented toward the administration of diagnostic contrast agents and high-tech adjuncts to therapy.

"In addition to strengthening our direct presence in the international markets, we are redefining our identity in order to present ourselves to the markets as a consistent, highly technological group in the advanced medical diagnostics field," said Diana Bracco, chairman and managing director of Bracco.

Over the years, the privately held company has bolstered its U.S.- and Italian-based research activities on the development of imaging agents, while acquiring Minneapolis-based ACIST, a maker of contrast media injectors, and Volume Interactions, a Singapore developer of software for stereoscopic 3D surgical planning. Esaote had marked the beginning of such investments.

Bracco bought a 15% stake in Esaote in 1995, increased its investment to greater than 50% three years later, and acquired the business outright two years after that. Now, in a change of heart, the two Italian companies are going their separate ways.

Esaote's new owners include Imi Investimenti, the investment company Equinox, and Mps Venture. Banca Intesa organized the financing, contributing funds along with Banca Carige.

"One of Banca Intesa's missions is to sustain Italian companies that are sound from an industrial standpoint, have considerable technological competencies, and are significant in terms of employment," said Corrado Passera, managing director and CEO of Banca Intesa.

A 6% share of the newly independent Esaote has been reserved for 80 key employees, around 7% of the total workforce. This illustrates the company's strong teamwork ethos, according to Fabrizio Landi, managing director of Esaote. A management buyout earlier in Esaote's history involved 25 staff as investors. This time, the net for likely stakeholders was cast further.

Esaote's 10-year-old relationship with Bracco has produced a positive legacy, according to Landi. One key lesson was the emphasis pharmaceutical companies place on finding out their customers' clinical needs.

"To be a success, we have to understand what doctors want to improve their ability to do good to patients," he said.

Esaote's market strategy is unlikely to change now that the company is going it alone, he said. Efforts begun two years ago to concentrate on core technology competencies will continue.

Around 80% of the company's business is focused on ultrasound. Esaote had traditionally been known for making good products with favorable price performance. This reputation is being aided by a phased relocation of some low-level product assembly to a joint venture in China. A drive to innovate in this sector as well has resulted in development of a handheld diagnostic-quality ultrasound system.

"We were one of the first companies to come up with a system weighing less than 10 kg but still with a large screen," Landi said. "We are now trying to be innovative again, to make products that can solve the clinical needs of our customers."

Innovation remains at the forefront of Esaote's MR offerings, which account for 15% of its business interests. Its 80% share of the market for "dedicated MR" grew from scanners devoted wholly to musculoskeletal extremity imaging. A renewed drive to think laterally resulted in the G-scan, an MR system designed to reveal the effects of gravity on load-bearing joints more clearly. This is achieved with the G-scan's tilting table, which permits both upright and supine scanning.

"This comes from doctors telling us what to do," Landi said. "Now we are focusing on taking our products to a new section: rheumatology."

Imaging software is another facet of Esaote's offerings that is growing in importance and will likely continue to do so. This area now accounts for 8% or 9% of the company's business. Of particular interest is breast CAD, but for ultrasound rather than x-ray mammography, Landi said.

Esaote's strategy of boosting market share through partnerships will also remain unchanged following its sale. A long-standing alliance with Hitachi enables Esaote to market a complete portfolio of imaging hardware solutions to radiologists in Italy.

Esaote will move forward in the U.S., with new partner Hologic selling the company's specialty MR scanners. And this may be only the beginning. Additional partnerships to capture new markets in other geographical regions may follow in the future, Landi said.

"We are looking for two things: for products that we can sell and also for partners that can sell our technology in a complementary way in their market," he said.