Syncor exits PET joint venture after large loss in first year

April 2, 1997

Radiopharmacy firm sets diversification as goalRadiopharmacy operator Syncor International of Chatsworth, CA, has bailed out of its ownership stake in a joint venture to develop positron emission tomography (PET) isotopes, although it still plans

Radiopharmacy firm sets diversification as goal

Radiopharmacy operator Syncor International of Chatsworth, CA, has bailed out of its ownership stake in a joint venture to develop positron emission tomography (PET) isotopes, although it still plans to distribute PET agents under development by the venture. The effort simply proved too expensive, according to Syncor president and CEO Robert Funari.

While PET agent development proved to be a dead end for the firm, Syncor is marching ahead in its drive to diversify. New areas include medical imaging services and medical equipment distribution. Now almost exclusively focused on its chain of 129 nuclear medicine pharmacies, Syncor could shift a third of its business into other fields over the next five years, Funari said.

Diversification can reduce the risk associated with relying on one technology, according to Funari. It will also help the company develop skills and resources necessary to be a player in the corporate consolidation under way in healthcare.

"We are looking to leverage some of the skills we have in just-in-time distribution, regulatory compliance, and customer service," he said. "As consolidation takes place, there will be opportunities for us to bring to bear our skills and a set of relationships that we have enjoyed over the years in nuclear medicine, and to cross-link that, certainly with involvement in other diagnostic imaging modalities, but also perhaps on a broader basis throughout healthcare."

Syncor entered into its joint venture in PET isotope development last spring with CTI of Knoxville, TN (SCAN 5/22/96). The joint venture operated under the name P.E.T.Net Pharmaceutical Services and was entirely funded by Syncor.

Following Syncor's evaluation of P.E.T.Net's progress in 1996 and a reestimation of the amount of capital required to reach break-even revenue levels, the radiopharmacy firm opted to cut its investment losses, while retaining a slimmed-down business relationship with the PET agent developer. The PET radiopharmaceutical development project is being continued by CTI and other investors, although as a new legal entity.

"It became clear to us that this is a far bigger undertaking than we might have imagined and that the only way we are going to get (to profitability) is if we have a much broader base of involvement, support, and investment across the industry," Funari said.

Syncor also decided to give up its exclusive arrangement for distribution of P.E.T.Net products in the hope that other firms would join in building demand for PET radiopharmaceuticals. Syncor has retained a preferred distribution arrangement with CTI, however, which provides for a first call on distribution and preferential pricing of the fluorodeoxyglucose (FDG) isotopes produced by the PET venture, Funari told SCAN.

Syncor's investment in P.E.T.Net generated a pre-tax loss of $3.7 million in fiscal 1996 (end-December). As a result of this loss, net income fell slightly to $4.6 million, compared with $4.7 million in 1995, even though net sales for the year increased 10.6% to $366.4 million from $331.4 million in 1995.

PET verdict. Syncor's exit from PET development follows closely a court victory by the Food and Drug Administration that affirmed the FDA's authority to regulate the manufacture and distribution of PET isotopes (SCAN 2/5/97). Cyclotron operators believe that their operations should be regulated under state rules guiding the practice of pharmacy. Introducing new restrictions on the sale of cyclotron-produced isotopes could alter the PET business equation. Funari maintained, however, that the adverse ruling was not a large factor in Syncor's decision.

"We are going to continue to appeal the judgment that was given to the FDA because we think there is a broader principle involved here (concerning) the whole issue of the practice of pharmacy," he said. "We are prepared to continue to move forward in our efforts to appeal that decision. It was not a pivotal factor in our decision to sell our interest in P.E.T.Net."

Customers continue to exhibit a growing interest in gaining access to PET agents for use in metabolic imaging, Funari said. The difficult task will not only be producing these positron isotopes but also putting in place a sufficient delivery system. The latter will be a continuing focus for Syncor.

Meanwhile, other opportunities call. Syncor entered into a 50% joint venture in February to own and operate open-MRI centers with National Diagnostic Services (NDS) of Thousand Oaks, CA (SCAN 2/19/97).

The venture, Syncor Diagnostics, is in the process of starting up a number of centers, Funari said. Five or six should be in operation within two to three months. Syncor Diagnostics' goal is to have 10 open-MRI centers operating across the U.S. by the end of this year.

Entering imaging services with an experienced partner like NDS will help Syncor gain new skills and physician relationships, he said. Targeting this entrance into the relatively new niche of open-MRI services enables the company to get in on the ground level of a growing segment in imaging services.

"Open MRI represents an opportunity for us to make an entrée into this market," Funari said. "There is an awful lot of appeal with open MRI in terms of its patient-friendly nature."

Later, Syncor may look at combining other modalities in its centers, particularly nuclear medicine, where it could benefit from existing relationships in the physician community, he said.

In its latest diversification move, Syncor in March signed an overseas distribution agreement with Imaging Diagnostic Systems (IDSI) of Fort Lauderdale, FL. That deal provides the firm with exclusive rights to sell IDSI's CT Laser Mammography device in New Zealand, Australia, India, Indonesia, Malaysia, Singapore, Thailand, Brunei, China, Hong Kong, Macau, and the Philippines.

Syncor wasn't targeting a new field for expansion as much as jumping on a good business opportunity when it signed this new breast imaging distribution relationship, Funari said. The company hopes that the CT Laser Mammography system will result in about $10 million of additional annual sales.

CT Laser Mammography produces 3-D cross-sectional images of the breast without the need for breast compression or radiation. While the technology still needs to undergo clinical investigation and FDA certification in the U.S., there are indications that it could result in high specificity and sensitivity when imaging women with implants or dense breasts, Funari said.

"This technology is going to find its first real application in the overseas markets, given the process involved in getting FDA approval for some of these technologies," he said.