Slow-developing clinical market forces MSI firm BTI to restructure

February 5, 1997

Firm to cut work force in half to conserve capitalBiomagnetic Technologies is discovering the pitfalls that canoccur when a high-tech company shifts to a new product line. TheSan Diego developer of magnetic source imaging (MSI) systems hasbeen

Firm to cut work force in half to conserve capital

Biomagnetic Technologies is discovering the pitfalls that canoccur when a high-tech company shifts to a new product line. TheSan Diego developer of magnetic source imaging (MSI) systems hasbeen forced to restructure operations due to a revenue shortfallcaused by delays in the rollout of its new Magnes 2500 Whole Head(WH) system.

BTI's systems are based on superconducting quantum interferencedevices (SQUIDs), which measure magnetic fields generated by activenerve cells in the brain to give clinicians information aboutthe relationship between brain function and anatomy (SCAN 3/15/95).MSI systems generate waveform-like charts of electrical activityin the brain that are often overlaid onto images produced by CTor MRI scans.

Developers of MSI systems, which include BTI and multimodalityvendor Picker International, believe the devices offer the onlymethod of capturing and localizing rapid changes in organ functionwithout injecting radioisotopes or surgically placing electrodesin the body. Despite its promise, however, the clinical developmentof MSI has been hindered by the newness of the technology andits price: BTI's systems range from $1.5 million to $2.5 million.

Existing clinical applications include presurgical mapping ofbrain function to enable surgeons to avoid critical healthy tissuewhen resecting tumors or arteriovenous malformations. Anotherapplication is localizing the source of epileptic seizures inthe brain. Over 70 insurance companies have reimbursed for applicationsin these fields, according to the company.

BTI has high hopes that its new Magnes 2500 WH system will helpphysicians develop new applications that enable MSI to move intoroutine clinical use. Magnes 2500 WH features 148 SQUID detectors,which allow clinicians to study the entire functional brain witha single measurement, with patients either seated or lying down.

BTI has encountered difficulties in completing the developmentof Magnes 2500 WH, however, which has led to a cash crunch atthe company. In December, BTI announced a restructuring in which16 employees were let go; this year, layoffs of 28 more workerswill follow once the final development phase of Magnes 2500 WHis completed. By the time the cuts are over, BTI will have shedhalf its work force (SCAN 1/22/97).

The restructuring was implemented due to the company's uncertaintyabout near-term sales prospects for Magnes 2500 WH, accordingto James Schumacher, chairman and CEO. Several sales that BTIwas expecting have been postponed or are uncertain, Schumachersaid, and as a result the company has scaled back its manufacturingcapacity in line with the reduced expectations.

"We had sized ourselves for an earlier surge in the market,"Schumacher said. "We decided to scale back the company toa size that is more affordable to conserve capital while we getour initial Whole Head systems out and running and operational,and then grow back as we see the market solidify."

As part of the moves, BTI promoted former vice president of productoperations Scott Buchanan to president, a position previouslyheld by Schumacher. Buchanan will oversee the company's day-to-dayoperations, while Schumacher will concentrate on strategic planning,such as securing new revenue sources through activities like contracttechnology development and manufacturing.

The difficulties BTI has been experiencing have been reflectedin the company's financial results. BTI posted a $14.8 millionnet loss in fiscal 1996, compared with a $6.7 million net lossin 1995. The delay in Magnes 2500 WH shipments resulted in a dramaticrevenue slump: 1996 revenues were $733,000, compared with $9 millionin sales the year before.

BTI had a working capital deficiency of $3 million as of Sept.30, 1996, according to the company's 10-K filing with the Securitiesand Exchange Commission. A $3 million working capital loan withBTI's principal shareholder, Dassesta International of Switzerland,helped fund the company's operations through the second half of1996, and was converted into equity on Dec. 31.

BTI's situation wasn't helped when Picker introduced a new MSIdevice, Vectorview, at December's Radiological Society of NorthAmerica meeting. The system features 300 channels, twice thoseof Magnes 2500 WH, and Picker can also trade on its size and trackrecord as a multimodality vendor to help leverage sales.

Despite the adversity, Schumacher is optimistic about BTI's prospects.The company has shipped six Magnes 2500 WH devices, with two moreto be shipped in the next several months. The firm expects torecord revenue from all of those shipments this year, which willhelp its working capital position. BTI's backlog, which expandedpartly because of the Magnes delays, stands at $16 million. BTIalso expects to get Food and Drug Administration clearance thisyear for Magnes 2500 WH.

"We sincerely believe this is an issue of timing, not ofwhether the technology is going to ever be there," Schumachersaid. "The issue continues to be: How soon will the excellentresearch that's been done on these devices be transmitted intoa full-fledged clinical market?"