Vital Images hits jackpot amid rising demand for 3D

Execs seek partnerships and M&A opportunities

Since its first commercial use in the late 1980s, 3D reconstruction has been a solution without a problem. Finally, advanced postprocessing algorithms are addressing real clinical needs, and the result is having a positive effect on the bottom line of the industry's leading vendor of postprocessing solutions.

Sixteen-slice CT scanners produce such an enormous volume of data that 3D and 4D imaging software is needed to interpret them, according to executives at Vital Images. This clinical need has been exacerbated by a shortage of radiologists, which has increased the pressure for efficiency in order to maintain or boost productivity. These two factors, along with a rising interest in screening for heart disease and cancer by baby boomers, are responsible for record revenues achieved during 4Q 2002 by the Minneapolis company, said Jay D. Miller, president and CEO.

Revenue for the fourth quarter, which ended Dec. 31, increased 36% over the year earlier fourth quarter, from $4.5 million to $6.2 million. Revenue from the company's core revenue components-software license fees and maintenance and services-rose 33%, from $3.9 million to $5.2 million for the same period of 2001. Net income quadrupled from the year earlier: $416,000 compared with $144,000.

But as revenues are increasing, so are operating expenses, which rose 27% to $4.5 million in Q4 and 24% to $16 million over the year. Leading the rise in costs were sales and marketing expenses, which rose to $2.6 million in Q4, a 30% increase over the prior year. R&D expenses totaled $1.2 million in the fourth quarter of 2002, up 28% over the year earlier period.

Miller believes expenses will rise in the future, but their increase will not exceed the rate of revenue growth.

"We expect strong revenue growth in the foreseeable future," he said.

Buoyed by the 4Q results, year-end revenues increased 39% to $21.1 million from $15.2 million the previous year. Revenue from core revenue components grew 45% to $18.2 million for 2002 versus $12.5 million for the prior year. Net income for 2002 reached $790,000, in contrast to the previous year's net loss of $1 million, making 2002 the first full profitable year in the firm's history.

The company projects revenue growth in core components of 35% to 45% in the year ahead, leveling out to about 30% in 2004 and 2005, Miller said. Operating expenses are also expected to increase, but at a lower rate than revenue growth. Net income for 2003 is projected to be in the range of $2.5 million to $2.9 million.

An alliance expected to add to near-term results is the continuing arrangement to supply Toshiba with a CT computing solution built around Vital Images' flagship product, Vitrea 2. In 4Q, the arrangement contributed $1.8 million, or 28% of the company's revenue. For all of 2002, revenue from Toshiba totaled $7.2 million, or 34% of total Vital Images revenue.

Other alliances that could benefit Vital Images in the long run are an agreement to integrate R2 Technology's computer-aided detection technology for lung cancer imaging into Vitrea 2 (currently in clinical trials), a partnership with E-Z-EM to distribute a CT colonography product based on Vitrea 2 technology, and a joint product development agreement with Medtronic SNT aimed at image-guided surgery.

The partnerships are aimed at expanding sales channels and integrating technologies from outside sources. But the company is also looking into another way to achieve these goals, according to Miller.

"Under the right conditions, we may pursue merger and acquisition opportunities, if they arise and can add value to the business," he said.

On the product side, Feb. 5 the company released version 3.2 of Vitrea 2, which includes a CT Cardiac option with capabilities for coronary vessel analysis and imaging of a beating heart. The latest release allows the visualization of both hard and soft plaque in the coronary arteries and offers improvements in CT colonography.

Vital Images regularly releases updated versions of its Vitrea software. In the past, these have been focused on radiological applications. That could soon change, however. For the past year, engineers have been developing a new architecture as part of a project called "Vitrea Everywhere," Miller said.

"Although part is focused on PACS, we expect it to go well beyond the PACS market into a range of different areas of medicine outside radiology," he said.