Hologic refocuses digital R&D and exits conventional x-ray

Company efforts reflect new realities in radiography

The x-ray business is tough-no one will contest that. GE, Siemens, and Philips can rationalize the low margins inherent in conventional x-ray and the high cost of R&D in digital x-ray by pointing to their need to offer equipment in all modalities. Such rationalizations are not possible for smaller companies such as Hologic, which set out several years ago to diversify from its niche in bone densitometry only to find its chosen area littered with financial land mines.

For the fiscal year ended Sept. 29, 2001, Hologic lost $20.1 million. The previous year, the company lost $18.6 million. On the positive side, top line revenues are going through the roof. Gross revenues have risen from $93.7 million in fiscal 2000 to $178.4 million last year, thanks largely to a vastly expanded product portfolio obtained through acquisitions.

Now Hologic must face the dual challenge of reining in costs, while delivering the products

customers will need in the future. In the process, the company has become a pathfinder for x-ray companies that now must wrestle with the vagaries of digital technologies as well as traditional film.

Hologic is reinventing itself. The company is refocusing its efforts on women's healthcare, maintaining a strong market position in screen-film mammography, while judiciously exploring digital alternatives. Digital R&D projects are chosen carefully to manage expenditures.

The company last year exited the conventional x-ray market, a segment Hologic entered after buying the Bennett and Continental x-ray assets of now-defunct Trex Medical. Hologic continues to invest in digital radiography equipment, in expectation that sales of flat-panel components and complete digital radiography systems will pick up in the future. But the adoption rate for DR technology over the last several years has not lived up to expectations, said Hologic president and CEO Jack W. Cumming. Accordingly, Cumming has pulled back on the number of digital radiography projects as a way to trim its losses.

The new game plan reflects current market conditions, he said, and the fact that small companies, such as Hologic, have to be realistic about what projects to take on. The key to success may be just surviving long enough to see the widespread acceptance of digital x-ray. Before Cumming took charge in August 2001, following the death of company cofounder David Ellenbogen, cutting costs was not a major concern.

The Bedford, MA, company, once primarily a bone densitometry vendor, was deep in a strategy aimed at diversification through acquisition. Its expansion, however, led to mounting losses. One of the loss leaders was R&D related to the flat-panel technology obtained when Direct Radiography Corp. (DRC) was acquired.

Soon after taking the helm, Cumming slashed costs and refocused R&D expenditures. The number of Hologic facilities was reduced and its overall workforce trimmed by 25%. Engineering teams focused on fewer specific projects with more immediate paybacks.

The company now hopes to share the risk of longer-term projects with partners through cooperative R&D. An example is the digital mammography development agreement that Hologic struck with Siemens late last year, Cumming said. The Siemens agreement not only provides Hologic with a potential customer for its DRC flat-panel detectors in future digital mammography systems but also offers the small firm access to the technological infrastructure and competencies of the giant German vendor.

"The fact that they will buy their (digital mammography) plates exclusively from us will, over the long term, bring down our plate costs," he said. "There are significant economies of scale from having Siemens as a partner in mammography."

Hologic hopes to reach breakeven in its DRC business as volume increases, Cumming said. This includes OEM supply agreements regarding its digital detectors, such as those with Kodak and Agfa. Direct sales of Hologic DR systems should also help cut costs by raising the volume of plates being manufactured. Hologic entered into a three-year DR purchasing agreement last month with Novation, the supply management company that provides equipment bargains to some 2300 VHA and University HealthSystem Consortium hospitals.

Hologic's large base of more than 3000 mammography systems, acquired along with the purchase of Lorad (also once a part of Trex Medical), provides the vendor with a considerable potential for flat-panel sales through digital upgrades, he said. This synergy with the DRC business, as well as the good fit with Hologic's bone densitometry line, are reasons why Hologic is maintaining its full line of mammography systems as part of its women's healthcare focus.

Hologic has come up with other ways to mitigate costs as well. Last year, the firm entered into distribution deals with two European x-ray suppliers, Sedecal in France and Radiologia in Spain and Portugal. Hologic will maintain its direct sales office in Belgium, serving that national market and supplying parts and service support for the rest of the region. The move will allow Hologic to reduce direct sales operations in Europe, focusing instead on the support of distributors and dealers.

"This will lower our cost basis for doing business internationally and provide us with better distribution in densitometry and mammography," Cumming said.