Intermagnetics sues Trex Medical after MRI scanner deal breaks down

IGC calls off effort to sell scanner for clinical use

In a move that reflects the difficulties small companies face entering a mature MRI market, MR magnet supplier Intermagnetics General (IGC) of Latham, NY, opted this month to shut down its Field Effects subsidiary and abandon any attempt to market its 0.15-tesla permanent magnet MRI system for clinical applications. At the same time, IGC filed suit against its intended MRI sales partner, Trex Medical of Danbury, CT, claiming breach of contract over a scanner distribution deal that apparently went south.

IGC provides magnets, superconducting wire, and other related technology for several industries besides medical imaging. Most of its work involves OEM supply rather than direct sales, but the company began to branch out when it developed its own MRI scanner in conjunction with a British partner, Surrey Medical Imaging Systems (SMIS) of Guildford, U.K. IGC owns an equity stake in SMIS, which provided the imaging software and console for the MRI system. Field Effects developed the magnet and other parts of the system.

The scanner was cleared by the Food and Drug Administration in January of 1997, and IGC set up a limited-liability company, IMiG, to sell the system under the brand name IMiG-MRI. With a list price of $500,000, the scanner was touted as the lowest priced whole-body MRI scanner in the world, especially well suited for developing countries. Four units were sold under the IMiG label, according to Glenn Epstein, president and COO of IGC. Field Effects, however, continued to perform below a break-even profit level.

When Epstein joined IGC in 1997, he decided it would be best for the company to find a partner with an existing distribution network rather than trying to build its MRI business from scratch.

"We went looking (for a partner)," Epstein said. "Trex was also looking. They appeared to be an ideal partner. They had a strong distribution system, were already a dominant player in x-ray, and were interested in going to another modality."

Trex brought the IMiG-MRI system to the 1997 Radiological Society of North American exhibition and renamed the product Trex-MRI (SCAN 12/17/97). The relationship was seen as part of an effort by Trex to expand from its core franchise in x-ray into new markets. Although the relationship eventually broke down, Trex president and CEO Hal Kirshner said his company fully intended to sell the IGC scanner.

"Were we getting ready to go to market? Absolutely," Kirshner said.

In its legal complaint, provided to SCAN by IGC, the company charges Trex, among other things, with failing to develop and submit to it a business plan to sell and distribute the MRI system, failure to promote and advertise the system, and failure to provide IGC with sales forecasts and estimated delivery dates.

"On Sept. 1, 1998, defendant (Trex) repudiated the contract, indicating that it would not promote, market, or distribute the IMiG-MRI system," IGC claims in its complaint.

Trex counters that IGC actually ended the relationship when it notified Trex that it was dismantling the Field Effects operations, according to Kirshner. Although Kirshner spoke with SCAN prior to having seen the entire IGC complaint, he said there is no basis for the lawsuit and that Trex will defend itself vigorously. IGC filed the suit in the U.S. District Court for the District of Connecticut.

IGC will incorporate the Field Effects business into its Latham headquarters and will continue targeting the basic MR technology to industry segments outside medical imaging, Epstein said. The company has already sold two food-inspection systems using MR technology to Abbott Laboratories for about $1.3 million apiece. These systems use the same magnet with a different gradient and radio-frequency system in order to inspect aseptically packaged baby food for bacterial spoilage.

Trex's stock price rose slightly when the litigation was announced on Nov. 9, while IGC's stock price did not change. However, Trex's stock was pummeled the next day when the company reported that operating income dropped by 28% during the fourth quarter (end-October), from $7.6 million in fiscal 1997 to $5.5 million in 1998. Revenue was up for the quarter, to $68 million from $57 million in the fourth quarter of 1997.

Trex stock was the biggest loser on the American Stock Exchange that Tuesday, shedding 21% of its value and temporarily halting trading. Kirshner commented in the financial report that revenue was kept down in the fourth quarter by hospital construction delays, which held back equipment
shipments.

In unrelated news, IGC announced on Nov. 11 that company founder Carl Rosner is planning to retire next May, relinquishing his position as CEO of the company. Rosner said he expects the company's board to name Epstein as CEO. Rosner will remain chairman of the company.