Hologic’s acquisition of DRC opens new chapter for DirectRay

Closing of Agfa/Sterling deal appears imminent

Sterling’s Direct Radiography Corp. digital x-ray subsidiary has found a home. DRC will become a part of bone densitometry company Hologic under a $30 million deal reached between the companies late last month. DRC was put on the block after Agfa declined to pick up the operation as part of its acquisition of Sterling (SCAN 4/28/98).

While the acquisition of DRC was no surprise, the winning bidder certainly was, as many industry analysts had predicted a large modality or PACS player would be the logical purchaser. In fact, large OEMs and PACS vendors were involved in the bidding process, but DRC elected to accept the Hologic offer for a number of reasons, including the price and Hologic’s ability to quickly close the deal, said Tom Umbel, general manager of DRC. Another benefit was the inclusion of DRC-owned real estate in the purchase, he said.

For its part, Hologic’s entry into the radiography market appears to be a necessary move, due to slumping sales in its core densitometry market. Hologic has been exploring acquisition opportunities to diversify beyond its densitometry products for over three years, said David Ellenbogen, Hologic chairman and CEO. The company hopes to use the DRC technology as a platform for further expansion into the radiology market, which could take the form of further acquisitions, distribution agreements, or OEM relationships, he said.

Hologic’s move into the radiology sector does not guarantee instant financial success, however. The flat-panel x-ray market has been slow to develop, largely because of the high cost of these systems compared with computed radiography and conventional analog-based x-ray units. Complicating the issue is the growing number of vendors in this space, with large players such as GE, Philips, Siemens, and Picker all gaining FDA clearance for their respective offerings in recent months.

Hologic believes, however, that the move towards digital radiology departments is so strong that there will be more than enough business to go around.

“We understand that the field has been slower than predicted to develop,” Ellenbogen said. “But with the rate of adoption that we see based on the current installation of PACS networks, we think our needs will be satisfied with the pace of development.”

The difficulties and early developmental stage of the market are also evident in DRC’s 1998 financial results. Despite being the first company to receive Food and Drug Administration 510(k) clearance for a flat-panel digital radiography system (SCAN 7/22/98), Sterling was unable to translate its head start in the market into a strong financial performance. DRC had 1998 revenues of only $1 million, with a net loss of $13.8 million. Sales seem to be picking up, however. As of the end of April, 10 iiRad systems have been installed in North America and Europe.

In future development plans, Hologic will explore the possible incorporation of DRC’s DirectRay technology into a densitometer, Ellenbogen said. Hologic’s FluoroScan Imaging Systems’ C-arm subsidiary might also be able to take advantage of DirectRay technology.

DRC will emphasize development of imaging plates at its Delaware facility, while Hologic will contribute resources for development of complete x-ray systems and expansion of the product line, Ellenbogen said.

Under the terms of the agreement, Hologic will pay $10 million in cash and issue 2.5 million shares of its stock at closing, which is expected within a few weeks. Hologic gets DRC’s 90 employees as well as a 168,000-sq-ft R&D, manufacturing, and administrative site in Newark, DE. Hologic also inherits DRC’s international patents and 26 U.S. patents.

DRC will be run as a wholly owned subsidiary, and the management team will remain intact, Umbel said. With the deal in place, DRC will build up its direct sales force to take over sales responsibilities formerly handled largely by Sterling’s organization. Hologic’s sales force will participate in sales efforts of iiRad systems, as well, Ellenbogen said.

DRC executives expect that the company’s OEM relationships will remain unchanged. DRC maintains an OEM and supplier relationship with Fischer Imaging, in which DRC provides DirectRay panels to the Denver-based firm for that company’s digital trauma unit. Fischer also provides DRC with nondigital components for iiRad products.

In other deals, DRC maintains an OEM relationship with Korean x-ray equipment manufacturer Dong Kang. Additional OEM agreements will be announced soon, Umbel said.