Diasonics split builds pressure on ultrasound

Diasonics Ultrasound will have about a year to start earning cashbefore it is otherwise required to seek additional financing insupport of its efforts to regain a leadership position in theultrasound market. Diasonics shareholders will meet on Sept. 17to vote on splitting the Milpitas, CA, medical imaging and therapeuticequipment manufacturer into three separate companies (SCAN 2/24/93).

While specialty x-ray manufacturer OEC Diasonics of Salt LakeCity continues to earn profits, that division has also been hitby the recent downturn in hospital purchasing, according to Diasonics'proxy statement to shareholders.

Market softness led to a sharp drop in OEC net income in 1992,from $18.9 million in the prior year to $5.7 million. The lowprofit last year also reflected a $6 million restructuring chargeand a $3 million reserve for unfavorable litigation.

If approved by shareholders, the restructuring plan calls forOEC to be the continuing company, with shareholders receivinga share of Diasonics Ultrasound and a share of the third company,Focal Surgery, for each share in Diasonics. The name of the continuingcompany would then be changed to OEC Medical Systems.

OEC's main products include the Series 9400 mobile C-arm andUroView 2500 urology table with integrated digital fluoroscopy.The company also supplies x-ray guided electrophysiology equipmentand other intraoperative x-ray imaging systems. This businesshas been more profitable than ultrasound over the last five years,although bringing in less revenue (see graphs).

As the continuing business, the OEC net income also includessubstantial net gains from sale of Diasonics' MRI business toToshiba four years ago. On the flip side, the company continuesto be a party--along with Toshiba--to MRI-related litigation.

OEC has also struggled with Food and Drug Administration GoodManufacturing Practices certification. Over the past two years,the company received a warning letter from the FDA and four observancesof noncompliance. David Rose, president of OEC-Diasonics, willcontinue as president and CEO of OEC Medical Systems. RuedigerNaumann-Etienne, a former Diasonics president and COO and continuingboard member, will be chairman.

Diasonics Ultrasound, over a year into the launch of its majorVST product upgrade (SCAN 4/08/92), continues to struggle withred ink from non-cash expenses such as depreciation, which contributedto a $22 million loss in 1992. Operations earned $74,000 in cashin 1992, and ultrasound's net positive cash from operations increasedto $10 million in the first quarter of this year. Net ultrasoundsales rose 5.6% from $194 million in 1991 to $205 million lastyear. Revenue slumped in 1989 but has risen in the three yearssince.

The ultrasound business earned a slight profit of $648,000in 1991 but that dropped dramatically to the loss last year. Theloss was due primarily to increased price competition in worldwideultrasound markets, new product introduction costs and adversecurrency exchange movements, according to the proxy statement.R&D expenses rose to $13.2 million in 1992, compared with$11.2 million in 1991 and $8.5 million in 1990.

Bruce N. Moore, current ultrasound division president, willcontinue as president and CEO of the new company.

Diasonics Ultrasound will receive $12 million at the time ofthe restructuring and an accounts payable credit of $10 millionfrom OEC next year. The OEC obligation can be canceled under conditionsincluding a merger, acquisition or change in control of DiasonicsUltrasound. The ultrasound business should have sufficient liquidresources to meet working capital requirements into 1994, accordingto the proxy statement.

Diasonics Ultrasound includes both the distribution businessof Sonotron in Europe and the Vingmed color Doppler echocardiographybusiness acquired by Sonotron in 1991 for $17.1 million. Altogether,Diasonics Ultrasound will have about 1000 employees worldwide.Sonotron, including Vingmed, employs over 500 sales, service andmanufacturing personnel and accounts for over 60% of DiasonicsUltrasound's consolidated revenue.

Much of Sonotron's business involves the European sale of ultrasoundequipment made by other vendors. Third-party distribution represented32% of overall ultrasound revenues in 1992. The share of revenuefrom non-Diasonics ultrasound equipment sales had been declininghowever, down from 49% in 1990.

Focal Surgery has a small revenue history based on sales ofDiasonics lithotripsy equipment. However, prospects for this companycenter around high-intensity, focused ultrasound therapy technologynow entering phase three clinical trials at the FDA. Because ofthe new nature of this technology, pre-market approval ratherthan easier 510(k) certification will be required of the Sonablatesystem.

The main focus of this technology is treatment of benign prostatichyperplasia. About 400 cases of BPH are treated in the U.S. annuallyat a cost of $2.8 billion, according to the proxy statement. Themost widely accepted technique today is transuretheral resectionof the prostate.

Lithotripsy market prospects have declined. Only limited futuresales of this technology are anticipated, the company said. FocalSurgery lost $2.7 million last year on net sales of $1 million.

Edward C. Driscoll will serve as president and CEO of FocalSurgery. Driscoll has been president of this division since March,previously serving as vice president and chief technology officerof Diasonics. Stewart Carrell, current Diasonics chairman andCEO, will be chairman of Focal Surgery.

The primary benefit of restructuring outlined to shareholderswill be improved focus on products both in terms of executivetime and financial resources. Division into product-based companieswill allow for easier formation of incentive systems based onproduct performance. This, in turn, should aid in the hiring ofmanagers, the company said.

Prime risk factors of the split include a stretching of financialresources and increased exposure to adverse business conditionsin particular markets brought about by the reduced diversificationof business lines.

BRIEFLY NOTED:

• Elscint experienced surprisingly strong sales during itssecond quarter (end-June). Despite market sluggishness experiencedby many medical imaging vendors, the Israeli firm saw revenuesfor the period rise 16% to $60.3 million from $52.2 million inthe second quarter of 1992. About half of the sales came fromnew products, according to president Shmuel Parag.

Payment resulting from the vendor's nuclear medicine patentsettlement with Sopha (SCAN 7/28/93), along with an accountingchange, helped boost net income 41% to $7.2 million in the secondquarter of 1993 from $5.1 million in the same period last year.