Elscint founder sees health-care futurefor high-technology companiesin Israel

March 1, 1995

Elbit sets up imaging services firm in HungaryTwo of the most active companies in the medical imaging industryin 1994 were Elscint and its parent, Elbit. Elscint last yearreshaped its management team and bought the clinical MRI businessof Otsuka

Elbit sets up imaging services firm in Hungary

Two of the most active companies in the medical imaging industryin 1994 were Elscint and its parent, Elbit. Elscint last yearreshaped its management team and bought the clinical MRI businessof Otsuka Electronics, while Elbit purchased ultrasound vendorsDiasonics and Ausonics and merged them into a single ultrasoundgroup (SCAN 12/14/94).

The dramatic expansion of Elscint and Elbit has been well publicized,but the strategy of the companies has been enigmatic. Curiousindustry observers can find clues to the future of Elscint andElbit by examining their past, in particular that of Uzia Galil,chairman, CEO and founder of Haifa-based Elron Electronic Industries,the parent of both Elscint and Elbit.

Galil discussed the corporate strategies of Elscint, Elbitand Elron at a news conference last month in Santa Clara, CA.The event was hosted by the government of Israel's economic missionto the U.S. to publicize the rapid growth of high-tech industriesin Israel. The mission's headquarters is located in Santa Claradue to that city's proximity to Silicon Valley high-tech firms.

Galil founded Elron in 1962 as a small laboratory with themission of commercializing technologies developed at Israel'sprestigious Technion science and technology institute, where Galilheaded the electronics division. With venture capital backingfrom investors such as Nelson and David Rockefeller, Galil grewElron into a high-tech holding company whose affiliated firmshad aggregate sales of over $1 billion last year.

Elron's strategy has been to spin off companies based aroundcore technologies and grow those companies by seeking public financingwhile at the same time maintaining a significant investment position.Elbit, for example, specializes in defense electronics and isthe brightest star in Elron's corporate universe. Elron owns 39%of Elbit, which had revenues of $600 million in 1993. Elbit istraded on the NASDAQ and Tel Aviv stock exchanges.

Elscint Ltd. was initially formed as a sister company to Elbitin the medical imaging industry, but Elbit took over a majorityinterest after Elscint experienced problems with a heavy debtload and a $116 million net loss in 1986 (SCAN 9/16/87). Elbitowns 55% of Elscint, which is traded on the New York Stock Exchange.

Elbit's position in Elscint has come in handy due to the downturnin the Israeli defense industry. Like the U.S., Israel has foundthat peace comes at a price. The country has been forced to downsizeits defense industry as demand for weapons systems decreases.For Elbit, this meant that it had to find new areas for growth.

"Elbit had to make a major decision," Galil toldSCAN. "It wanted to continue to grow in the defense businessand be successful, but it was very clear that from the perceptionof investors, in order to be able to get the right kind of resources,it couldn't be just a defense electronics business."

Elbit decided to expand its position in medical, and foundthe Diasonics and Ausonics acquisitions perfect opportunitiesto make an investment in ultrasound, where Elscint traditionallyhas been weak. Elscint purchased Otsuka to access the type ofcost-effective MRI scanner that is required in the evolving health-careenvironment, Galil said.

Looming culture clash? The departure of Diasonics presidentand CEO Bruce Moore in January has sparked rumblings that Elbitis asserting control over its new acquisition (SCAN 2/15/95).Galil responded by saying that Elbit intends to run Diasonics,now part of Elbit Ultrasound Group, according to the Elron style:Autonomy and decision-making are maintained at local levels, withan emphasis on keeping quality personnel rather than implementinga rigid corporate hierarchy.

"As a group, we have a record that we never impose (anew hierarchy)," Galil said. "We've never come withan outside management and imposed a culture. One of our biggestadvantages is that we adapt ourselves to the existing culture,trying to get the best from the people there and building themup."

Elbit CEO Emmanuel Gill assumed Moore's positions but willremain in Haifa, while local managers at Diasonics' headquartersin Milpitas, CA, were promoted. Elbit may find a new chief executiveto take Moore's place, although Galil said that decision is upto Gill.

Elbit's drive into medical is not going to stop with Diasonics.The company has entered the imaging services market in EasternEurope through its Elbit Medical Services subsidiary, which wasformed four years ago and has six medical imaging and dialysiscenters in Hungary. Eastern Europe is a good growth opportunityfor Elbit because of the lack of existing competition in imagingservices, Galil said. Another advantage is the fact that manyof Elbit's employees are immigrants from Eastern European countriesand know the languages and local customs. These centers are encouragedto purchase Elscint and Diasonics equipment, he said.

In addition to imaging services, Elron sees growth opportunitiesin telemedicine. It is developing a telemedicine capability andhas hired a former IBM executive to build the business, whichmay end up being a separate entity that is also a joint venturebetween existing Elron companies.

"I'm very pragmatic in life," Galil said. "UsuallyI build structures around people rather than looking for people(to build) around a structure."

Finally, to promote Israeli technology, Galil serves as a boardmember on the U.S.-Israel Science and Technology Commission, ajoint project designed to promote technology transfer betweenthe U.S. and Israel. The commission awarded its first grant lastmonth to GE Medical Systems to develop a new type of nuclear medicinedetector that could lead to the commercialization of solid-stategamma cameras (SCAN 2/15/95). The commission will award two moregrants this year, with the next one scheduled to be announcedin June, Galil said.