Fonar enjoys revenue growth, but scanner sales still languish

Vendor is developing breast MRI system

MRI developer Fonar may be flush with cash, but the company is still having trouble selling scanners. The Melville, NY, company last month released second-quarter financial figures indicating healthy revenue growth, but from physician practice management services rather than from product revenues. Fonar has several irons in the R&D fire that it hopes will boost scanner sales, however.

For its second quarter of fiscal 1998 (end-December), Fonar reported revenue of $6.8 million, up 50% compared with $4.5 million in the second quarter of fiscal 1997. The company posted a net loss for the quarter of $2.1 million, compared with a net income of $4.5 million in the same quarter the year before, a profit primarily due to proceeds from one of the company's patent lawsuits. The quarterly numbers for both periods include revenues from Raymond V. Damadian, M.D. MR Scanning Centers Management Company, as well as two related firms, which Fonar bought in June 1997.

A look at the numbers behind the quarterly results shows that sales of the company's Quad scanners have yet to break out of a rut. For the first six months of the 1998 fiscal year, Fonar had product sales of $2.5 million, compared with $2.6 million for the first six months of fiscal 1997. Over the same period, scanning and management fees related to the company's physician practice management business rose to $9.6 million, compared with $4.7 million in the same period of fiscal 1997. Fonar entered the physician practice management field last year with the formation of its U.S. Health Management (HMC) division (SCAN 8/6/97). HMC manages 24 MRI scanning centers.

Fonar's operating losses are due to low product sales volume in its MRI equipment business, according to documents filed with the Securities and Exchange Commission. Fonar believes its sales will rise as the benefits of the Quad line become more well known. Two new projects may also improve revenues, according to the company.

The first project is OR 360, an MR scanner designed specifically for MR-guided surgical environments. First displayed at last year's Radiological Society of North America meeting (SCANSpecial Report 12/97), OR 360 features an enlarged, room-sized magnet that allows physicians to perform conventional surgical procedures under MR guidance. Work on an OR 360 prototype is 50% complete, according to the company, and Fonar plans to file for Food and Drug Administration clearance by June.

Another new system under development is a dedicated MR mammography system. Fonar has built a prototype and the scanner is awaiting clinical trials, which are expected to be completed in the next 18 months, according to the company.

Fonar has patents on MR breast scanning technology, and has discussed using patient beds configured carousel-style to achieve the patient throughput necessary to offer MR mammography at a reasonable price. If a Fonar MR mammography system were to reach market, it would join the Aurora scanner marketed by Caprius as the only dedicated MR mammography systems commercially available.

Fonar estimates that it will cost a further $4 million to complete development of OR 360, and $2 million to finalize the MR mammography scanner. Coming up with the money should be no problem, however. As of Dec. 31, Fonar had cash and cash equivalents of $75 million, thanks to its successful prosecution of MR patent claims against GE Medical Systems.