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CPS will fill orders in Positron's backlogPositron this month took a step toward getting its financial house in order by signing a letter of intent to outsource its manufacturing and service capacity to fellow PET developer CTI PET Systems (CPS).
CPS will fill orders in Positron's backlog
Positron this month took a step toward getting its financial house in order by signing a letter of intent to outsource its manufacturing and service capacity to fellow PET developer CTI PET Systems (CPS). While the agreement will enable cash-strapped Positron to recognize revenue from several sales in its backlog, the Houston company's outlook still appears hazy due to ongoing financial problems.
Positron and CPS announced the three-year agreement on Jan. 5. Under the terms of the deal, CPS will provide the working capital, personnel, and manufacturing and service facilities to enable Positron to deliver three systems in its backlog. CPS will also manufacture future PET scanners sold by Positron, and will service Positron's installed base. In return, CPS will receive 50% of the gross profits from the sale of PET cameras sold by Positron. The deal is expected to be finalized in the next several months.
The agreement comes after the end of a rocky year for Positron. The company was hamstrung throughout 1997 by a working capital shortage that prevented it from finishing work on three Posicam scanners in its backlog, according to CFO David Rodrigue. The company recorded no system sales for its 1997 fiscal year (end-December) because it lacked the cash to buy components to complete the orders, Rodrigue said.
Positron has also fallen behind on payments to its suppliers, and the company's employees have deferred payment on salaries worth a total of $720,000 as of Sept. 30, according to documents on file with the Securities and Exchange Commission.
Positron's woes are the result of years of stagnation in the U.S. PET market. U.S. hospitals have been reluctant to buy PET cameras due to their high price and the lack of Medicare reimbursement for scans using fluorodeoxyglucose, the most widely used PET radiopharmaceutical. Positron sought to build economies of scale by acquiring the PET manufacturing capacity of GE Medical Systems in July 1996, but the deal fell through in April 1997 because Positron couldn't raise the financing (SCAN 4/30/97).
Unlike Positron and GE, CPS has a thriving PET business. The company is a joint venture between CTI of Knoxville, TN, and Iselin, NJ-based Siemens Medical Systems, which sells CPS-manufactured cameras under the ECAT label. Most ECAT sales have been outside the U.S., and Siemens executives estimate that the company has a 78% share of the PET market.
CPS president Terry Douglass sees the Positron deal as providing more volume for his company's manufacturing facility, while giving CPS an additional distribution outlet. The volume CPS enjoys through its Siemens relationship is what Positron has been missing in its business model, according to Rodrigue.
"There will be significant economies of scale that can be gained through the additional production they'll bring in to their shop. They can spread the overhead significantly further than we can," Rodrigue said. "We build (systems) in ones or twos. You need to build seven or eight to order (components) in quantities that are economical."
CPS and Positron are still in discussions over whether CPS will take over manufacturing of Positron's Posicam system, Douglass said. CPS hopes to supply the customers in Positron's backlog with ECAT machines, a move that will enable the company to fill the orders more quickly. CPS will manufacture Posicam systems if there is enough demand in the market for the product line.
The agreement will probably not result in any job cuts at Positron, according to Rodrigue. The company reduced its work force throughout 1997 as it sought to cut expenses, and now has 23 employees, compared with about 35 a year ago. For its part, CPS anticipates bringing on additional employees as it takes over service of Positron's installed base, and some of those hires may be former Positron personnel.
What will be left of Positron after the agreement is completed? The company plans to retain one executive to handle direct sales in the U.S. In addition to that person, Positron has existing PET distribution agreements with Imatron Japan in that country and with Elscint in international markets.
The payments Positron receives for filling its order backlog should help move the company on the road to sounder financial footing. Rodrigue estimated the value of the three cameras in the backlog at about $4.5 million, putting Positron's share at just over $2 million. Positron is in discussions with its suppliers on developing a payment plan for the money it owes them, and is also looking for additional equity investment to help the company out of its cash crunch. Although the CPS deal includes a provision giving CPS an option to buy up to 51% of Positron's common stock, both companies say that such an investment is not likely in the near future.
Ironically, Positron's woes come as prospects for the PET market are looking brighter than ever, thanks to the Health Care Financing Administration's announcement of Medicare reimbursement for FDG lung studies (see story, page 1). Douglass sees the move as the single most significant development yet in the U.S. market for PET, and believes that Medicare reimbursement for additional applications will be forthcoming. In addition to helping existing PET centers get paid, it will also prompt hospitals to look more closely at acquiring the technology.
"A lot of (PET centers) are operating and not getting paid for 40% to 50% of the studies that they do," Douglass said. "This will be incremental income for those centers, and hopefully will turn them from unprofitable to break-even or profitable. I think it will encourage other new centers to start as well."