Medical Device Link.

The radiology sector of the medical device industry has been hit hard by the drive to get big. The needs to compete globally, to cut costs and expand offerings, and to grow the business have become such priorities that even the most fiercely independent and single-mindedly dedicated companies have knuckled under. So complete has been this turnover and so hungry have been the acquirers that all the independent vendors of imaging equipment with any substantial market share have now been gobbled up.

Diagnostic ultrasound was once teeming with independent companies. Acuson (Mountain View, CA), among the most fiercely independent, was acquired last year by Siemens Medical Systems (Malvern, PA). Agilent Healthcare Solutions Group (formerly Hewlett-Packard; Palo Alto, CA) is in the process of being acquired by Philips (Amsterdam, The Netherlands).

Another segment of radiology once replete with independents was nuclear medicine. Consolidation among small players in the mid-1990s created two medium-sized firms dedicated to this product area. Both were purchased in late 2000—Sopha Medical Vision (SMV; Twinsburg, OH) by GE Medical Systems (Chicago), and ADAC Laboratories (Milpitas, CA) by Philips.

Preceding these purchases were major acquisitions in 1998 involving two other leaders in ultrasound—Diasonics Vingmed (Santa Clara, CA) by GE, and ATL (Bothell, WA) by Philips. Diasonics Vingmed came into GE's hands in a roundabout way, having first been acquired by the multimodality firm Elscint (Haifa, Israel), which was carved into pieces and sold off that year. The magnetic resonance imaging (MRI) division went to GE; the computed tomography (CT) division went to Picker International (now Marconi Medical Systems; Cleveland). Also in that year, Eastman Kodak (Rochester, NY) bought film and networking giant Imation (Oakdale, MN), a prelude to the 1999 merger of two other such companies, Agfa (Ridgefield Park, NJ) and Sterling Diagnostic Imaging (Greenville, SC).

For the most part, these mergers and acquisitions have been driven by major vendors' need to fill out portfolios. The two weakest segments of the radiology sector, characterized by the large number of independents, were ultrasound and nuclear medicine. The incentive for some of those companies being acquired was the pinch of being lone wolves.

"In order to meet customer needs in today's healthcare marketplace, we realized that we either had to make a commitment to invest heavily in the future of Agilent's Healthcare Solutions Group or sell the unit to a company with a complementary business and a commitment to invest in the ongoing success of the businesses," says Ned Barnholt, president and CEO of Agilent Technologies. "We regard the agreement to be acquired by Philips as a win for our customers, our shareholders, and our companies."

Companies with only one type of offering were often boxed out of deals with hospitals. Multimodality companies bundled several types of equipment together, creating discounts with which single-modality companies could not compete. They also offered service and maintenance contracts that covered multiple products, again at discounts beyond the reach of single-modality vendors. Even Elscint, which offered MRI, CT, nuclear medicine, and ultrasound products (thanks to Diasonics Vingmed), had trouble turning a profit and was put on the block by its parent company.

Not all radiology vendors, however, have succumbed to the M&A mania. Executives at Toshiba (Tokyo) believe acquisitions are a waste of money. The acquired companies are overpriced, they say, and the costs do not end with their purchase.

"The reality is that integrating different companies into your own culture is not a trivial pursuit," says John Zimmer, vice president of marketing at Toshiba America Medical Systems (Tustin, CA). "Very few companies are able to do it successfully."

Figure 2. The Asteion midtier, multislice CT scanner is part of a product line that resulted from Toshiba's decision to forego M&A fever and focus on in-house R&D.

Rather than spending money to buy other companies, the Japanese firm has channeled its funds into highly selective and focused R&D. Toshiba has emphasized multislice CT, currently one of the hottest topics in radiology (see Figure 2). The strategy has been to develop high-performance systems at multiple price points. In MRI, Toshiba's R&D spending has been concentrated on developing technologies that reduce patient angst. Toshiba was the first company to attack the banging and screeching that often occur when gradients vibrate while emitting radiofrequency energy during pulse sequences.

"We are piloting things that customers want," Zimmer says.

Strange New World

Figure 3. Two magnetic coils encircle the patient as part of GE's Signa TwinSpeed MRI scanner. The product evolved from R&D done by Elscint, whose MRI assets were bought by GE in 1998.

In the turbulent waters created by the M&A feeding frenzy, strange things have happened. Consolidation used to mean that product lines were merged and product shares grew or collapsed, depending on which products were kept on. But that's not the case anymore. Siemens and Acuson have spread out their considerable offerings in diagnostic ultrasound, vowing not only to maintain the product lines to support the installed base, but to continue evolving the products.

"The intent is absolutely to continue both product lines and simply integrate and combine the best of both worlds," says John D. Pavlidis, president of the Siemens ultrasound division. "They have their unique advantages and they can only get better in the future."

R&D will probably bring the best and brightest of these multiple products together in a single offering.

"The best practices and best technologies from the product families can migrate to one another," says Samuel Maslak, former CEO and chairman of Acuson, who has joined Siemens as a consultant in product development and strategic planning. "Through this collaboration, the customers are really going to win, because whichever platform they have or are thinking about, that platform's prospects just got brighter."

The same thing happened following GE's acquisition of SMV late last year. The nuclear medicine product lines of the two companies were merged, creating an extensive range of single- and dual-detector systems, as well as a line of hybrid systems that combine CT and nuclear medicine cameras (see Figure 1).

Figure 4. The TwinSpeed offers flexibility for cardiology and neurology, providing GE with a platform for both segments of the MRI market.

This spreading of products has even begun to occur in MRI, the most conservative and expensive segment of the entire radiology sector. The GE purchase of Elscint's MRI division provided advanced technology, including a system that has two imaging coils built into one (see Figure 3). Originally released some five years ago as the Prima 1TG, this technology disappeared from sight, only to reappear last year as a brand-new system, the Signa TwinSpeed (see Figure 4). GE boosted the field strength of the system and added "quiet technology," which cuts the noise produced during the scan by 40%. In this way, dual-gradient technology provided the means for improving performance and making the product more patient-friendly.

"Gradient performance is what it's all about in MRI," says Dennis C. Cooke, manager of GE's global MRI business. "It's clear that everyone is wrestling with the same physics limitations that we face. However, we have now shown people how to go beyond them." Among the prizes in GE's acquisition of Elscint was the R&D center in Haifa, where engineers first developed and have continued to refine the twin-gradient platform.

Figure 5. The MX 8000 system by Marconi Medical Systems (Cleveland) was developed through research done at Elscint. Marconi acquired the technology through its 1998 purchase of Elscint's CT business.

Other odd events have occurred. Among them has been the partnering of previous rivals. Witness the case of Siemens and Marconi Medical Systems, which now make components for use in each other's most powerful and expensive CT scanners. It happened when Marconi bought the CT business from Elscint. Along with the deal came an agreement to codevelop sophisticated CT technology (see Figure 5). Siemens's arrangement with Elscint was no problem, since the Israeli company was not a serious threat to market share held by Siemens. Marconi, on the other hand, is a major competitor. But the two have gotten along famously and continue to codevelop their premium-end CT products.

This atmosphere of cooperation among once-bitter rivals has spread throughout the sector. Siemens manufactures an assortment of technologies for Toshiba—not just components, but end-user products. Chief among them is a line of nuclear medicine systems called E.CAM, which Toshiba has renamed T.CAM (see Figure 6). Toshiba buys, relabels, and refines products from other companies as well. Agfa is a major provider of networking products. Vital Images (Plymouth, MN) provides premium-end workstations.

"We can offer best-in-class technology, whether it is made by Toshiba or one of our partners," Zimmer says. "We don't have to own our partners to have a controlling position."

Widespread Effect

Figure 6. The E.CAM, a gamma camera developed in the mid-1990s by Siemens Medical Systems (Malvern, PA), is now being marketed by Toshiba under the name T.CAM.

In this way, the M&A process has ironically transformed even those companies that do not subscribe to it. The old taboos that have kept this sector staid and focused on themselves and their own products for nearly a century have been broken. Companies seeking good acquisitions have taken the radical position of looking beyond the traditional bounds of medical imaging. They are acquiring firms that build patient monitors and defibrillators, make Internet software and data-storage solutions, or provide home-healthcare products. Rather than spinning these pieces off, they are being viewed as enabling capabilities for future growth.

Philips exemplifies this approach. If the deal with Agilent Technologies goes through, Philips will have spent $4 billion over the last three years to acquire medical device companies. In this process, the company has also made investments specifically outside medical imaging, including the acquisition of a medical document service provider and an equity investment in an Israeli home-healthcare company.

"Because of these acquisitions, we have enormous breadth and depth," says Hans Barella, president and CEO of Philips Medical Systems. "We have high-growth products, so there will be a lot of strong growth."

Acquisition is the yin of Philips's strategy. Diversity is the yang. Along with a huge installed base and strong offering in cardiac ultrasound— as promised by the acquisition of Agilent Healthcare Solutions Group—Philips will also gain a strong foothold in two markets outside of imaging—patient- monitoring equipment and defibrillators. Expanding the company's medical device repertoire is essential to growth, according to Barella.

Demand for medical services is going up, but spending is not keeping pace, constraining the growth of financial markets to only about 5% per year, Barella adds. The way to bring these two into alignment is to increase efficiency and the quality of healthcare, he says. To do so, the breadth of services must increase.

"Companies with a limited product range cannot succeed," Barella notes. "To meet the demands from customers, companies need broad and deep portfolios of technologies. We have been lucky enough to get first-class companies together—ones that are the best in what they are doing—and by combining them we will be able to meet these demands from consumers."

Figure 7. The Sonoline Elegra scanner established Siemens as a major provider of radiology ultrasound—but not cardiac—products.

These multiple and varied products are being viewed not as single opportunities but as opportunities within a greater whole. Arguably, Siemens already had a strong offering in ultrasound. Its internal development of ultrasound equipment had forged a superpremium product that could compete with those of any other maker. The clinical range, unfortunately, was limited. This system, called the Sonoline Elegra, is not equipped to generate images of the heart (see Figure 7). This inability stood out as an obvious weakness for Siemens, which has established a worldwide reputation in x-ray–based cardiac imaging. The acquisition of Acuson and its echocardiography products solved that problem (see Figure 8).

"If you look at Siemens's position in the area of angiography, CT, MRI, and nuclear medicine, as well as in patient-monitoring and information technology, you'll see we are in a unique position to offer solutions to the cardiac segment," says Erich R. Reinhardt, group president and CEO of Siemens Medical Engineering.

Disease-Centric Marketing

Figure 8. Siemens's acquisition of Acuson provided the company with cardiac scanners and bolstered ultrasound products.

Siemens has been moving toward the development of a strategy that focuses assets on markets oriented toward specific diseases. Similarly, Philips strategists have embraced this disease-centric model of marketing. Cardiology is a big part of that picture. X-ray–based cardiac catheterization and angiography products have made Philips a powerhouse in the cardiology marketplace. Cardiac ultrasound systems and defibrillators from Agilent, along with nuclear medicine products from ADAC Laboratories, will enhance the company's position in this market.

"By combining the companies' ranges of products and services, we will be able to offer our customers more disease-specific solutions, helping to improve patient outcome and efficiency," says Barella.

Philips is not alone in its quest for a disease-centric approach to the market. Competitors with 70- and 80-year histories rooted in x-ray tubes are reorganizing along disease- management lines—specifically, cardiology, oncology, neurology, and women's health. The first company to formally embrace this idea was GE, which last year created GE Medical Systems Cardiology, an internal organization staffed with almost 200 professionals grounded in cardiology. The goal is to market GE products more efficiently (see Figure 9).

"We've been doing fragmented, individual, device-oriented selling and marketing," says D. Brent Shafer, general manager of GE Medical Systems Cardiology. "We're now very much focused on delivering a coordinated effort, where our approach is really solution-oriented sales and marketing for cardiology."

Figure 9. Hybrid products developed by GE Medical Systems fuse images from CT and positron emission tomography. GE continues to add such products through in-house R&D and corporate acquisition.

GE reached this point partly through its 1998 acquisition of Marquette Medical Systems (Milwaukee), whose main attractions were cardiological products such as imaging systems, patient monitors, and networking products. And GE is nowhere near finished with making acquisitions.

In late 2000, the head of GE Medical Systems, Jeff Immelt, stepped down to begin his apprenticeship as the ordained future leader of GE, which is expected to happen upon Jack Welch's retirement in the next 12 to 18 months. Joe Hogan, an Immelt protégé, was tapped to lead GE Medical. And Hogan is expected to follow in the footsteps of his predecessor.

"Our acquisitions strategy is offensive, not defensive," Hogan says. "We are not buying companies so others don't buy us. I want to do acquisitions because it makes sense for the industry and for us."

Radiography and Networking

The obvious targets remaining within radiology are made up of two separate segments, radiography and networking. Radiography is replete with start-ups created around new digital-imaging technologies such as flat-panel detectors and charge-coupled devices that translate x-rays into electrical signals. The networking side of the sector is energized with integrators and software engineers, as well as Internet entrepreneurs who want to develop application service providers (ASPs) tailored to medical imaging.

While these small companies have plenty of good ideas, few have much of an advantage over the big vendors if they were to decide to target their R&D in this area. Nor do many of these companies even have a modest market share. For the past 10 years, the major companies have been developing picture-archiving and communications equipment designed specifically for medical imaging. Along the way, they have bought companies with market share and good ideas, directing these groups to continue their development. The multitude of little companies has bobbed to the surface since then.

If the major radiology vendors shine their M&A light on networking, the focus will be on companies with a breadth of offerings, as occurred last year when Siemens purchased Shared Medical Systems (SMS; Malvern, PA), a provider of healthcare information systems and networking services. At the time of its acquisition, SMS claimed an installed base of more than 5000 healthcare customers in 20 countries. A plum in the deal for Siemens was acquisition of the SMS information services center, which handles the company's ASP business. As part of SMS, the center managed applications for more than 1000 healthcare providers, with connections to more than 400,000 customer workstations.

Few networking companies can offer the breadth of technology or customers that SMS possesses. Today's independent x-ray companies are similarly lacking in such attractions. They have, for the most part, been left behind in the high-tech revolution that has galvanized MRI, CT, and ultrasound over the past several decades.

Film-based x-ray equipment is more than 100 years old. No significant changes have been made in these imaging systems during the last several decades. Some five years ago, when digital detectors burst onto the scene, some pundits predicted a revolution. But that did not happen, mostly because the clinical value of digital radiography has not yet been demonstrated. Meanwhile, radiography has assumed a commodity status, absent of distinction and mired in low margins. So bleak is the outlook that Marconi Medical Systems has chosen to stop offering x-ray equipment.

Conclusion

One of the great ironies is that the founding technology of the radiology sector, radiography, today has the least appeal. Another irony is that, unless the M&A fever abates, acquisitions will continue to draw the radiology sector further from its roots and, given the scarcity of attractive companies whose primary business is imaging, continued acquisition will take the sector in an unpredictable direction, perhaps ultimately rendering the radiology sector of the medical device industry unrecognizable.

Greg Freiherr is a freelance writer based in St. Cloud, WI.