Xerox lays plans for divestiture of digital radiography firm dpiX

White knight looms in the form of imaging and military consortium

It’s déjà vu all over again in the digital x-ray detector segment. Six months after the financial backer of AMLCD-maker Optical Imaging Systems (OIS) pulled the plug on that company (SCAN 9/30/98), document imaging firm Xerox is in discussions with a consortium of imaging and military firms to sell a majority interest in dpiX, its AMLCD and digital radiography subsidiary.

An offer has been received from the consortium, and a decision on it is expected early this week, according to Xerox spokesman Judd Everhart. In the event an acquisition is not completed, Xerox will shut down operations by the end of the year at dpiX, which was spun off by Xerox’s Palo Alto Research Center unit in 1996.

The news highlights the difficulties that many companies are having in making money in the digital radiography segment. The costs required to develop digital x-ray technology are huge, but the payoff is still uncertain. Digital radiography systems are just beginning to hit the market, but at prices far higher than what hospitals are used to paying for x-ray technology.

Xerox apparently has better things to do with its cash than wait for the radiology community to make up its mind on digital x-ray. The company decided to sell dpiX because of the relatively small amount of revenue it generated, which was not significant enough for a company the size of Xerox, Everhart said.

“The flat-panel display and the x-ray sensor business looked promising at the outset, but they just haven’t been the success we hoped they would be,” Everhart said.

A source familiar with the situation said that dpiX had 1998 revenues of $11 million, and 1997 revenues of $8.5 million. The firm has never been profitable and Xerox invested more than $50 million in the venture, according to the source.

Xerox and dpiX declined to identify firms participating in the consortium, with the exception of display firm Planar, which issued a press release in March announcing that it had been informed by Xerox about its decision to sell dpiX. Planar employs dpiX’s thin-film transistor (TFT) arrays for use in its commercial and military avionics displays.

A knowledgeable source, however, told SCAN that the consortium angling to buy dpiX was thought to include Varian Medical Systems (formerly Varian Associates), French digital radiography developer Trixell (a joint venture between Siemens, Philips, and Thomson Tubes), and defense firm L3 Communications. Both Palo Alto, CA-based Varian and Trixell employ TFT arrays from dpiX in their imaging products. Xerox will maintain a minority stake in the company.

Xerox began winding down dpiX’s operations early last month, when it told dpiX employees that if a buyer was not found, operations would cease by the end of the year. At the same time, 15 employees were let go. Further layoffs at the company would occur in May in the event it is not acquired, Everhart said. It will fulfill all existing contracts, however.

As part of its efforts to make dpiX more attractive to outside investors, Xerox and dpiX’s management team decided last month to shelve plans to commercialize its Gradient 500 AMLCD 2.5K x 2K flat-panel gray-scale display and its Expression 100 1280 x 1024 color display. The company showcased Gradient 500 at the 1998 RSNA meeting and debuted Expression 100 at the 1997 RSNA show (SCAN 1/21/98).

The sensor side of the business was more profitable than displays, according to a source at dpiX who requested to remain anonymous.

“The market for these displays didn’t develop as fast as we anticipated, and the display business is very volume dependent,” the source said.

If market dynamics become more favorable in the future, dpiX could potentially revive these products, however, according to the source.

A short history. Xerox’s technology R&D lab, Xerox PARC, spun off dpiX in March 1996 to commercialize TFT array technology that could be used both for digitizing x-ray studies and for viewing images. The company’s first offering was FlashScan 20, which uses dpiX’s basic TFT array but adds the electronics needed for image processing. FlashScan 20 is an 8 x 10-inch amorphous silicon image sensor designed to be sold to OEMs for incorporation into x-ray imaging devices (SCAN 12/4/96). That release was followed up by FlashScan 30, a 12 x 16-inch detector. Instead of offering its products directly to end users, dpiX elected to pursue an OEM distribution model for its digital radiography technology.

Trixell and Varian employ dpiX’s TFT arrays, while Varian also markets the FlashScan detectors as a complement to that firm’s Large Area Sensing Technology (LAST) digital fluoroscopy detectors. Many large medical imaging OEMs have purchased FlashScan units for testing, a dpiX source said. To date, no other medical imaging firm besides Varian has signed on to market FlashScan technology.

Approximately two-thirds of dpiX’s revenue comes from medical operations, while one-third comes from AMLCD sales to military avionics firms, according to the dpiX source. The healthcare component of dpiX’s business is the most profitable for the company, according to the dpiX source.

“DpiX has been a successful company, but the amorphous silicon business requires a lot of cash, and therefore Xerox is looking at other options,” the source said.

Although Trixell declined to confirm its involvement in the consortium to purchase dpiX, a Trixell representative told SCAN that a shutdown of dpiX would not affect production of Trixell’s Pixium 4600 digital x-ray detector. Trixell has an additional supply of TFT arrays from another firm affiliated with a Trixell parent company, which it declined to identify. As a change in dpiX’s operations may affect other products in development, Trixell is evaluating various scenarios to ensure that it maintains two sources for TFT arrays, according to the firm.

One digital radiography company that will not be affected by the dpiX developments is Sterling Diagnostic Imaging’s Direct Radiography Company. The Glasgow, DE-based firm, which saw the supply of TFT arrays for its DirectRay technology affected by the demise of OIS, has signed a non-exclusive contract with an Asian TFT supplier. Although the company declined to identify the supplier, Direct Radiography officials told SCAN that the supply source should be a stable one: The new TFT supplier is a company that had annual revenues larger than those of pharmaceutical giant Du Pont.

TFT arrays suitable for manufacturing will be delivered next month, according to Tom Umbel, DRC vice president and general manager. In the meantime, Direct Radiography has enough TFT arrays on hand from OIS to meet production needs, he said. Systems employing the new arrays are expected to be available in July.

Like Trixell, Direct Radiography still plans to pursue a dual-sourcing strategy for its arrays, and is in discussions with two other firms. DRC executives do not expect an agreement in the near future, however.

Meanwhile, the company continues to sell its iiRad systems around the world. The firm’s first two European sites for its DR1000C digital chest system have been installed at Addenbrooke’s NHS Trust in Cambridge, U.K., and The Nordland Central Hospital in Bodoe, Norway. In Asia, DRC has installed a digital chest system incorporating a DirectRay detector at Seoul National University Hospital in Korea. In U.S. sales, Kuakini Medical Center in Hawaii has implemented a DR1000C unit.