REMORA AMONG THE SHARKS:

IMATRON INC. AND CT SCANNER COMPETITION IN THE 1980s

The advertisement sounded wonderful. Finally, in April 1987, Imatron was approaching the goal its founders had set out to accomplish in 1976 - developing the fastest useful medical computed tomography (CT) scanner in the world. However, the company was having difficulty competing in the CT subfield of the diagnostic imaging industry. By the end of 1987, it had sold only 14 of the million dollar systems and lost more than $30 million. The diagnostic imaging equipment giants - GE, Siemens, Philips, Toshiba, and Picker - were capturing the majority of the sales of CT systems. Imatron needed to obtain a competitive edge.

CT DEVICES

The British recording company and electronics components producer, EMI PLC, introduced CT equipment to world medical markets in 1972. Because it produced images of a single plane of the body, the technology promised to be a major advance over conventional x-ray equipment and other diagnostic imaging instruments, which produce pictures that superimpose organs and bones. The CT systems diffused quickly at first, but sales then slowed as technical and regulatory issues suppressed the initial demand.

Early equipment produced relatively poor images, limiting its applications to those in which conventional x-ray techniques were not possible. The first success for CT equipment came in the neurology segment of the medical market, where it largely replaced low-resolution nuclear imaging as a method of obtaining images of the brain. At the same time, CT devices were expensive, priced at a quarter million dollars and up, causing the public agencies which directly or indirectly underwrote capital purchases by hospitals throughout the world to impose purchase constraints. However, manufacturers soon overcame the early design flaws and hospitals, especially in the

U.S., found methods to circumvent capital purchase regulation. By 1980, CT imaging was firmly established in medical practice in Western Europe, Japan, and the United States.

The earliest CT devices were limited to producing images of the brain and neck. Later, whole-body instruments were introduced. The whole body instruments produced images of abdominal organs. Head-related applications, however, continue to provide the most common use of the systems.

CT equipment quickly moved through several design generations. EMI's first generation instrument used a single X ray beam to produce an image in about 5 minutes. During that time period, the patient invariably would move and create artifacts (extraneous noise) in the image. In the mid 1970s, researchers at Stanford University developed a second generation system that decreased scan times by using two X ray beams and faster computer algorithms to construct the image in less than 2 minutes. The clearer images made the instruments more attractive to radiologists, the traditional users of imaging devices.

Stanford licensed the second-generation system to Syntex, a nearby pharmaceutical company. Syntex introduced a commercial system in 1975. When the Syntex venture failed, Stanford licensed the system to the General Electric Company (GE). GE, however, focused its commercial effort on a third generation system, also licensed from Stanford, which used a fan of X ray beams and even faster algorithms to reduce scan times to less than 5 seconds. Because moving organs, such as the heart, produced severe artifacts in the CT image, both the second and third generation designs were limited to scanning static tissues.

IMATRON

FAST-CARDIAC CT: PRODUCT AND MARKET

In 1976, Dr. Douglas P. Boyd, one of the principal developers of the second generation system, left Stanford to move to the Radiology Department of the San Francisco campus of the University of California (UCSF). At UCSF, Dr. Boyd and others began to work on a multi-slice CT scanner capable of scan speeds far surpassing existing equipment. Their goal was to produce real-time images of the beating heart on video tape.

The system differed from static-image CT systems in two principal ways. First, electron beams replaced mechanically rotating x-ray tubes to realize faster scan times. Second, the instrument decreased scan times by scanning contiguous sections of the body without moving the patient. By combining the two capabilities, the researchers hoped to produce a device which would freeze images of the heart's chambers in motion.

Early in 1981, Dr. Boyd, other researchers from the UCSF Department of Radiology, and the Emerson Radio Corporation established Imatron Associates, a general partnership, with Dr. Boyd as the general partner. Emerson and Imatron licensed the scanner commercialization rights from the University of California. Emerson and the researchers saw a major technical and commercial opportunity. Although nuclear medical, electrocardiographic, ultrasonic, and x-ray angiographic techniques could produce some analyses of cardiac function, no commercial imaging device could produce real-time cardiac images. In August 1983, the business went public as Imatron Inc. with Dr. Boyd, who held about 1.7 million shares, as its President and CEO. Emerson initially retained a 19% interest, but by 1988 its holding had fallen below 5%.

In 1983, the company and University of California researchers began preliminary clinical studies on a research prototype instrument. Finally, in 1984, the company moved a commercial prototype of its C-100 scanner out of its assembly plant in South San Francisco and into a clinical placement at UCSF. The new system could acquire up to 17 images per second, compared to one image per second for standard computed tomography equipment. Its unique speed allowed the system to carry out dynamic studies of heart functions.

The 1984 list price of the unit was almost $1.6 million, compared to approximately $450 thousand to $1.4 million for a conventional CT body scanner during the early 1980s. The price included a 12-month warranty, including the services of an on-site technician. After the expiration of the warranty, customers had the option of acquiring ongoing service contracts. In 1987, Imatron obtained over $3 million in multi-year service contracts.

In return for clinical testing to be carried out at the clinical sites, most Imatron scanners were sold at discounts of about 20%. Researchers using the equipment at the clinical sites usually presented papers at medical conferences and published the results of studies in medical journals.

Several more placements followed the first. By mid 1985, the company had placed four scanners in U.S. hospitals and one scanner in a freestanding imaging clinic. But sales demand did not develop as quickly as the company had anticipated. By the end of 1987, the company's global placements totaled 14 scanners, with 7 additional units on order.

Although the first commercial prototype was significantly faster than any other CT device, the cardiac images were still of lower clarity than expected. Moreover, the cardiologists to whom the instruments were targeted balked at the price of the instrument. Cardiologists were accustomed to paying much less money for imaging-type devices, such as electrocardiographs and conventional x-ray cardiovascular angiographic systems. Radiologists in hospitals and freestanding imaging clinics, who were accustomed to high prices for imaging equipment, might have been interested in the cardiac device as a means of expanding their services. However, the poorer quality of the images was discouraging.

MANAGEMENT

Imatron's early management team consisted of Dr. Boyd as president and four other researchers from the UCSF radiology department who filled technical vice president positions; vice presidents of marketing, manufacturing, and finance who had experience with established diagnostic imaging and computer equipment manufacturers; and a corporate planning vice president who had recently received Stanford JD and MBA degrees. By late 1987, the sales, finance, and manufacturing positions had all turned over at least once, and the finance and manufacturing roles were merged. Imatron recruited its new senior managers from established diagnostic imaging or other high-technology product firms.

Dr. Boyd and one of the technical vice presidents also served on the Board of Directors. Emerson's president served as a board member of Imatron until 1984. A senior manager of a freestanding imaging operation which had purchased an Imatron scanner served on the board from 1984 to 1987. Most other board members were representatives of securities and legal firms.

Senior management received annual compensation ranging from $50 thousand to $90 thousand, while Dr. Boyd received approximately $110 thousand. In addition, Dr. Boyd received 1% of annual net after-tax profit, to maximum compensation of $150,000. Most employees were eligible for stock options, which vested over four years; a stock purchase plan, with stock purchase at 85% of market price being permitted up to 10% of salary; and pension contributions of 10% of salary.

FINANCIAL SUPPORT

Initially, a commercial CT scanning company provided financing for work during the 1970s. The company withdrew from the CT business in 1978 and assigned all rights in the project to the University of California, which were later licensed to Imatron. Upon the formation of Imatron Associates, the partners provided $1.6 million, with an additional contribution of $1.9 million from the limited partners in 1982. Early financial support also came from a National Institute of Health (NIH) contract administered by UCSF. Later, R&D contracts continued to be performed for government agencies and academic sites; the financing provided under such contracts might provide the federal agencies with grounds for claiming patent rights on Imatron technology.

In 1983, Imatron received almost $30 million from its initial public offering. YY (Each two shares of common stock included a warrant to purchase an additional share at $6.) A secondary offering, in 1986, netted another $9 million. During 1987 and early 1988, two private placements to Imatron's Japanese distributor provided almost $3 million in return for a 5.5% equity position. In early 1988, the company realized another $1.4 million by converting 1990 and 1991 warrants into shares of common stock.

MARKETING

United States

Imatron promoted its system on the basis of high speed and visual clarity. The initial marketing efforts were directed towards hospitals with national reputations in either diagnostic imaging research or diagnosis and treatment of cardiovascular disease. Its first contacts were with the universities and medical schools with which its founders had been associated and at which close colleagues worked. Subsequent contacts were made as information about the Imatron system passed through the medical community, supported by advertisements in medical and imaging industry journals. Almost all contacts were based in research-oriented American medical institutions, with discussions with potential buyers involving personal contact by the founders and by members of the marketing staff. When an institution showed interest, Imatron's technical people usually visited it. In addition, Imatron prepared displays for most major trade shows and typically brought a potential buyer to one of its clinical sites, to show the system in operation.

The company offered the scanners both as outright sale and as long-term leases with options to purchase. Significant down payments were required prior to assembly, with construction of leased equipment being financed by third-party lenders.

Other markets

For sales outside the United States, Imatron relied on distributors to carry out sales and service, planning to sell systems to them at a 25-35% discount from list price. By early 1988, however, the company had placed only one unit outside the U.S.

In Europe, a two-year exclusive contract for distribution in West Germany was in place by early 1984. There had been no European placements by the end of 1987, although information about the system was spreading through personal contact and advertisement. In 1986, Imatron signed an agreement with a distributor for Taiwan and the People's Republic of China, and later extended the agreement to include Hong Kong, Singapore, and other areas in Southeast Asia.

In Japan, the company was represented by a distributor by 1984, but achieved no sales before signing an exclusive sales agreement with the Japanese firm Mitsui in 1986. By the end of 1987, the company had shipped one scanner to a clinical test site in Japan. Once marketing approval was received from Japanese regulatory authorities, which was expected to take place during 1988 or 1989, more sites were expected.

MANUFACTURING

Imatron signed a ten-year lease on a new 90,000 square foot manufacturing facility near San Francisco, at which it assembled its scanners, with annual net rental expense of about $800,000. YY The figure is net of revenue from 23,000 square feet which were sublicensed. The facilities included 15 laboratory rooms, 2 patient scanning suites, 2 clean room complexes, a solvent cleaning facility, and several scanner assembly and test cells. The capacity of the facility was estimated to be 24 to 48 units per year. In 1987, the company renegotiated the lease, giving up about a third of the manufacturing space. YY now had 64,000 square feet in total.

Although many of the components used in the Imatron scanner were generally available, some key components had to be manufactured to Imatron's specifications. The company was dependent on key suppliers for several components, such as electron beam guns, vacuum components, computer components, fiber optics, and X ray detection and data acquisition. By the late 1980s, the company had developed alternative suppliers for many key components.

The company maintained an inventory of many long-lead time components. It did not, though, maintain an inventory of assembled scanners, instead manufacturing each device on a build-to-order basis. Assembly required about six months.

PRODUCT DEVELOPMENT

Initial product development focused on improving the C-100 by developing new applications and image processing software. The company hoped to develop procedures to study joint motion, airway obstruction, and blood flow in arteries and solid organs. YY Additional software development staff were added during 1984. Where possible, new hardware and software would be designed with retrofit capability and be installed as part of initial sales agreements or subsequent service contracts.

By 1984, the key development track was an effort to enhance the quality of the company's cardiac scanner to levels similar to those required for conventional CT radiological studies. In August 1986, the company shipped its first dual-mode C-100 scanner. The new C-100 scanner could produce either high speed cardiac images or slower speed, higher clarity organ head and body images. Imatron then retrofitted all existing placements with the dual-mode capability. The company marketed the dual-mode scanner as an all purpose body scanner which could also image the heart. Continued refinement was necessary for the system to compete with conventional CT scanners in the radiology market. YY the image reconstruction time of the C-100 was longer than state-of-the art scanners; could not produce variable-thickness slices; poorer targeting. By the end of 1987, Imatron had dealt with most of the early problems and had added many applications suited to radiology. During the year the company made 266 engineering changes and nearly 40 field modifications. However, it still faced at least 12 months of further refinement, during which the scanner would compare unfavorably with top of the line conventional CT instruments. YY Applications now included cardiac stress testing, pediatric imaging, trauma, interventional work, contrast studies of the liver, total chest/abdomen/pelvis scans, and blood flow studies.

OTHER PRODUCTS

In addition to development of the C-100, Imatron carried development contracts for several public agencies, such as the National Institute of Health (NIH). During 1987, the company signed six multi-year agreements totaling $2.6 million, with the principal contract being a $2.1 million contract with the Army to develop a 1600 pound portable conventional CT scanner for combat zones. YY FMS 500. Imatron hoped that the mobile scanner would lead the company into a new and substantial market. The contract did not guarantee any orders, as the military planned to compare the Imatron scanner with other available instruments.

Other imaging equipment manufacturers which had built specialized military equipment, such as Picker, had found that military contracts provided both costs and benefits. The military tended to be demanding of time and effort. At the same time, however, there was the hope of fair-size volumes and of technical spillover to civilian products.

In addition to the fast-cardiac and military systems, Imatron began to develop other medical imaging products during 1987. One was a low cost, lightweight, portable CT scanner. A second was a bone densitronomy system, used by radiologists to measure bone mineral content. Imatron created the first CT phantom (a container used to calibrate and test imaging equipment) for bone mineral work, and won a contract with NASA and the NIH to develop a leading edge densitronomy system, with the clinical development taking place at UCSF.

PATENTS AND TRADE SECRETS

By the late 1980s, Imatron had filed for approximately 20 patents. Typically, filing occurred in North America, Japan, and Western Europe. Imatron believed that several of its electronic components, proprietary software, and manufacturing processes were unique, critically important trade secrets.

Imatron was also the exclusive licensee of a key UCSF patent. The patent was obtained through a subsidiary of Emerson. The license agreement required Imatron to pay a royalty of approximately 2% of net sales and leases of products using the licensed rights, subject to minimum payments, with a maximum payment of $5 million. After the obligation to the University was met, Imatron agreed to pay another $5 million to Emersub as a 0.5% royalty. If Imatron failed to meet the requirements, UCSF could rescind the license. In 1986, the exclusive license was extended for the remaining 13- year life of the patent, with an additional $5 million royalty.

Because several of the subassemblies used to produce Imatron' s scanners were similar to those used by earlier companies, Imatron was concerned about possibly being subjected to other royalty arrangements. Thorn-EMI, which held a portfolio of about 150 CT-related patents, had successfully arranged such royalties with several other CT manufacturers. Thorn-EMI typically demanded a royalty of about 6% of sales.

CROSS-CURRENTS OF INDUSTRIAL FORTUNE

USERS AND MARKET DEMAND

Hospitals and freestanding clinics

The US market for CT equipment focused primarily on hospitals and freestanding imaging clinics. In general, hospitals sought equipment which was both technically superior to the equipment that they currently used and affordable in a given payment environment. Key factors when choosing a company from which to buy equipment included product development, customer support, and marketing ability. It was important that the supplying company be able to provide the proper training and upgrading of the equipment. A manufacturer's prior reputation played a large role in purchase decisions. Traditionally, for instance, some hospitals might be "Picker shops", while entire regions might have a bias in favour of General Electric equipment. The formal purchase decision was usually made by hospital or clinic administrators, with strong influence from radiologists and weaker influence from other doctors. In some cases, hospitals preferred to lease the equipment because the option eliminated payments on obsolete equipment.

In the U.S., there were approximately 6,000 hospitals. Approximately 3000 had more than 100 beds and 1,000 had cardiac catheterization laboratories. Two broad classes of hospitals existed, each with slightly different demands. Teaching hospitals and tertiary care units tended to require new features and as many applications as possible, including applications that were not yet clinically proven. Research-oriented physicians at such institutions place a premium on obtaining leading-edge medical technology. Accordingly, such institutions were relatively insensitive to price. Community and secondary care hospitals, which tended to be more price sensitive, primarily required established applications.

Freestanding imaging centers, meanwhile, are strongly influenced by whether or not they were associated with a hospital. Through the mid 1980s, most centers were at least partially financed by leading hospitals, and tended to follow the purchasing habits traditionally found in those institutions. By the end of the decade, many of the centers were instead being established independent of hospitals.

American sales

American sales of CT devices rose rapidly following the first placement in 1973, reaching $360 million in 1977. Most early sales were made to research-oriented medical schools and university departments. In 1978, the market collapsed to $240 million. Several factors combined to produce the severe reduction. First, most states initiated Certificate of Need (CON) programs, designed to curtail purchases of medical equipment priced above a ceiling (often, about $150,000), with CT devices being a primary target. In addition, some states initiated flat-rate payment programs for Medicare and Medicaid patients, reducing the effective cross-subsidy that operating charges had provided for capital costs since the formation of the programs in the late 1960s. In turn, private and not-for-profit third-party insurers, such as Blue Cross, tended to follow the lead of Medicare and Medicaid and adjusted their payment schedules. Second, technical confusion reduced demand, as several generations of designs competed simultaneously. Third, the pipeline to leading hospitals was full, as research-oriented radiologists experimented with the new devices to find out just what clinical value they would have.

With the collapse of the market, a niche for mobile CT imaging systems for use in community hospitals appeared. Because CON regulation made it difficult for geographically close hospitals to each acquire a system, manufacturers began to place CT instruments on trucks with specially-designed bodies, which served as mobile clinics serving several hospitals. Some of the mobile devices were owned by a hospital or consortium of hospitals, while others were operated by independent mobile imaging companies.

The American market did not fully recover until about 1981. By 1983, the recovery was more than complete, with sales reaching $750 million. The recovery owed its strength to a reversal of the factors which caused the collapse. First, hospitals, physicians, and manufacturers found methods of avoiding capital cost regulation. The earliest technique involved selling a CT system as components, each priced below the Certificate of Need ceiling. By the time regulators closed the loop-hole, entrepreneurial hospitals and physicians had learned how to set up freestanding outpatient imaging clinics, some on the same grounds as a hospital, which were not subject to the capital limits. Second, as General Electric's third generation system set a standard, technical confusion subsided. Third, as radiologists used their early instruments and developed uses for them, the pipeline reopened. Following the 1983 peak, which was partly driven by advance purchases in fear of potential regulatory effects, the CT market tapered off into a gradual but steady decline.

Since most leading hospitals having acquired CT instruments by the early 1980s, the major market opportunities for new sales were in smaller community hospitals and imaging clinics. The small hospitals and imaging clinics tended to have fewer resources for capital equipment than university-associated institutions. However, they continued to demand relatively sophisticated equipment because of their physicians' preferences and indirect financing by third-party insurers.

Other sales

In the Western European markets, growth was much more stable, as effective cost constraints in the public medical agencies held diffusion of CT instruments to a steady rise. By the mid 1980s, the combined markets of Western Europe were similar in size to the U.S. hospital market. The national market in West Germany was the largest, followed by Britain, France, and Italy. Buyers in each country had a somewhat more downmarket system-sophistication tendency than that in the U.S. In some countries, particularly France, procurement biases tended to favour nationally-based manufacturers.

Although the Japanese market for medical equipment was approximately one fourth of the size of the US market, the Japanese market for imaging equipment was approximately one-half of the US market. By the mid- 1980s, 12% of the Japanese market consisted of imports. The most effective method of short-term entry was contracting with a Japanese distributor. Direct contact with hospitals was ineffective because the Japanese hospital system was fragmented into many small hospitals and a few large university associated institutions.

Similarly, although purchase decisions were made by the doctors who ran hospitals, the Japanese market was heavily influenced by the capital purchase policies of the national health care agency. Japanese medical payment policies held health care costs to about 5% of GNP, compared to more than 10% in the U.S. Furthermore, the health cost share of GNP was falling in Japan, while rising in the United States.

Unlike the European health care systems, however, Japan decided to support CT purchases. Placements grew steadily following initial introduction of an EMI system in about 1975, then faltered in the early 1980s. The health agency then initiated a goal of placing a CT device in every hospital in the country. By the late 1980s, there were slightly more CT instruments in Japan than in the U.S. or in all of Western Europe. Unlike the U.S., however, the Japanese health care system did curtail expenditure, by setting a low payment per imaging procedure. Japanese CT purchases, therefore, initially tended to favour lower-cost head-only devices and later to be restricted to relatively simple whole-body instruments.

SOCIAL CROSS-STREAM

In the U.S., the regulatory efforts of the 1970s had been so ineffective that many states had dismantled the Certificate of Need programs by the late 1980s. In their place, however, the federal government initiated a national prospective payment system (PPS) in 1983, which introduced flat-rate payment based on diagnostic related groups (DRG) for medical care covered by the Medicare program. Other third party payors again followed the lead of the national agency. Despite industry fears, however, the 1980s impact of the PPS on imaging sales was slight, as overall sales of imaging equipment continued to grow at pre-PPS rates.

In addition to payment regulation during the 1970s and 1980s, medical device safety regulation by the Food and Drug Administration (FDA) roughly parallel to FDA pharmaceutical regulation was introduced in 1976. Since new computed tomography devices could be introduced, under a grandparent clause, as "substantially equivalent" to pre-regulation devices, the direct impact on CT equipment was relatively slight. Traditionally, the FDA has was extremely lenient in judging the "substantial equivalence".

However, device manufacturers in the U.S. were subject to good manufacturing practice (GMP) inspections. (Similar regulatory regimes existed in Japan and the Western European countries, each requiring different product tests and inspections, with Japan considered to be the most stringent.) Consequently, if products failed or were recalled, they were subjected to adverse publicity. FDA inspections of Imatron's manufacturing facilities during 1984 and 1986 identified several areas in which the FDA asserted that Imatron was not in compliance with required manufacturing standards.

PRODUCT CROSS-STREAM

New designs

Although GE's third generation design was the market standard by the early 1980s, new challenges to conventional CT devices were emerging. One potential challenge was Imatron's electron-beam nonmechanical system. A second was the revitalization of interest in a fourth generation system developed during the late 1970s, by EMI and by a small manufacturer of airport x-ray scanners. Among the major players only Picker offered a fourth-generation commercial product during the mid 1980s. Although the fourth generation system had not achieved the acceptance of the third generation design, research interest continued. A principal reason for the interest was that the design, in which x-ray source and detector rotated as a unit, promised fewer artifacts in the image. By the mid 1980s, several firms were known to be working on fourth generation research prototypes.

New products

When Imatron introduced its scanner, the most commonly used methods of diagnosing heart disease included electrocardiograms, ultrasonic echocardiography, nuclear medical procedures, and angiographic catheterization. By the mid 1980s, cardiac imaging and other imaging advances were emerging on several new technical fronts. One of the most successful technical advances was magnetic resonance imaging instruments (MRI), which were first introduced in 1980. MRI produced images as clear or clearer than CT without the use of potential carcinogenic X radiation. The primary drawback of MRI was its cost, with top end systems manufactured by the leading imaging industry firms priced at up to $2 million. Although lower powered MRI systems were available in the $500,000 to $1.2 million range, roughly the price spread of contemporary CT systems, some uncertainty remained about their value in clinical practice and the stability of their manufacturers.

Like CT instruments, commercial MRI devices were limited to static applications. Other potential uses appeared to be on the horizon, however, including magnetic resonance spectroscopy and fast-NMR imaging. Spectroscopy produced chemical-level information about physiological function, rather than images. Fast-MRI produced real-time images of moving organs such as the heart. Although academic and corporate research prototypes of both types of instruments had been developed, commercialization appeared to be unlikely until the late 1980s.

The second challenge came from digital radiography instruments, introduced in 1981. These systems used computer techniques to store and manipulate data obtained from conventional x-ray instruments. However, driven in part by the early commercial participation of the leading x-ray equipment firms, sales of digital radiography instruments slumped dramatically during the mid 1980s. Following an initial burst of success, the early promise was not met by the first generations of digital systems, which were technically flawed.

Nonetheless, a successful niche was developing for digital subtraction angiography (DSA) systems. DSA systems obtained images of blood vessels near the heart. This advance was a major improvement for cardiovascular angiography, the leading method of obtaining cardiac diagnosis. Conventional angiographic devices produced high clarity images, but involved invasive catheterization and produced images that included overlapping tissue. Although it had not yet significantly decreased the number of cardiac catheterizations performed each year, DSA promised to overcome many of these drawbacks.

Advances in ultrasound imaging were also creating a potential challenge to CT sales. Diagnostic ultrasound devices had been available in Europe, Japan, and the U.S. since the late 1950s. They were primarily used in departments such as neurology, obstetrics, and urology, not radiology and cardiology. Ultrasonic images were not clear enough for radiologists. Moreover, ultrasonic waves could not pass through the ribs to produce cardiac images for cardiologists.

During the 1970s, several technical ultrasonic advances took place, opening applications in radiology and cardiology. Mechanical sector devices, mainly commercialized by small American firms, opened a radiology niche during the late 1970s and early 1980s. At about the same time, American and Japanese ultrasound specialists and by broad-based Japanese imaging industry participants introduced phased array devices. Phased array devices produced sonic waves which could bypass the ribs and provide ultrasonic images of the heart. Other important new applications included the development of devices for combining images with blood flow data from vessels in the chest.

Further important ultrasound developments took place during the early to mid 1980s. One, introduced by a company started by an ex-employee of one of the phased array manufacturers, was a digital ultrasound system. The digital system produced high-quality real-time images that would allow an obstetrician to watch a fetus's heart beat. These systems were priced at less than $200,000. While the price was more than obstetricians were used to paying, it was well within the capabilities of radiology departments which saw an opportunity to expand their turf.

Another 1980s ultrasound advance, introduced by a Japanese ultrasound specialist, was a system which produced colorized cardiac information. Although the Japanese device was largely unsuccessful in the U.S., an American startup company quickly introduced a color system that did achieve clinical acceptance. Other ultrasound specialists, in both the cardiology and radiology segments, soon introduced color instruments.

Traditionally, few of the strongest imaging industry incumbents had made a strong commitment to ultrasound development, although several leaders in the Japanese market were early participants and possessed market strength in Europe. With the advances of the late 1970s and 1980s, however, companies such as General Electric and Philips began to play a more active role.

Moreover, nuclear medical techniques presented challenges during the 1980s. After quickly being overcome in their neurological niche by CT, nuclear imaging manufacturers and academic researchers developed cardiac applications by the late 1970s. Major imaging industry manufacturers began introducing computed nuclear medical devices, such as Single Photon Emission Computed Tomography (SPECT) and Positron Emission Tomography (PET) instruments. Initially targeted at neurological applications, both types of computed nuclear medical devices instruments developed broader usage, with SPECT becoming a general-purpose imaging instrument and PET acquiring cardiac applications. YY Thallium.

Complementary products

Several major products with the potential to complement and potentially change CT systems were on the horizon or in commercial prototype stages by the mid 1980s. One was the possible replacement of minicomputers with microcomputers, which offered both size and cost advantages. A second was the development of Picture Archiving and Communications Systems (PACS), which might eventually tie together a hospital's entire radiology department. The PACS goal was to create a network of all imaging devices, so that diagnostic imaging information could be stored, retrieved, and transferred among sites. Among other problems, difficulties in establishing standards for networking devices manufactured by different firms was interfering with PACS commercialization. A subsection of the PACS market was the emergence of a market for workstations, to which several imaging devices were networked.

Global competition

In addition to product competition, CT equipment manufacturers throughout the world faced stronger global competition during the 1980s. Although imaging markets remained domestic, requiring specialized distribution and service systems and some tailoring of product design, many of the strong national players strengthened their international presence. Between the late 1950s and mid-1970s, European firms became the first to expand into the U.S. Shortly thereafter, during the 1960s and 1970s, the European firms entered Japan. Likewise, many Japanese firms expanded into Europe and the U.S. during the late 1960s and throughout the 1970s. American manufacturers began to significantly penetrate the European markets and to develop minor positions in the Japanese market during the 1970s. During the 1980s, most major players strengthened their positions throughout the three major markets.

UPSTREAM

Conventional CT instruments were relatively simple to construct, so that assembly operations which put together generally available components were technically feasible. With product cost becoming more of an issue in the U.S., and being very important in Europe and Japan, cost effective manufacturing and assembly of components and systems were achieving importance. New design development had largely moved out of academic institutions and into existing manufacturers. Although some university-based researchers continued to carry out design projects, most academic research now was targeted at CT applications, often with financial and equipment support from CT manufacturers.

Although standard imaging instruments were relatively easy to construct from available components, many of the components were changing and were exceedingly difficult to design. The most important changes occurred in the computer and semiconductor areas. Accordingly, modern imaging systems had to incorporate advances in semiconductor technology.

R&D costs varied significantly. Because components were often available, an entrant could put together a standard product with relatively low investment. For leading edge systems, however, massive R&D investment was often necessary. For instance, the leading imaging industry manufacturers each invested more than $150 million in magnetic resonance imaging R&D during the 1970s and 1980s. Similarly, firms developing new CT systems invested tens of millions of dollars in the efforts. Even at the innovative edge of the industry, however, low capital entrants were able to find niches, with R&D expenditures ranging from $1 to $50 million. Some had carried out judicious and/or lucky investment of limited R&D budgets, while others had extremely narrow focuses.

MIDSTREAM: TRENDS AND PLAYERS IN THE 1980s

Consolidation

With the collapse of the U.S. market for CT instruments during the late 1970s and the decline of the Japanese medical equipment market during 1980 and 1981, several early CT manufacturers left the industry. In 1978, Thorn PLC, a small British firm with no medical sector experience, acquired EMI. At the time of the acquisition, EMI was under severe financial and technical pressure. One year later, Thorn sold EMI's international CT operations to General Electric. GE planned to purchase the EMI' s U.S. operations also, but was blocked by the Department of Justice. Instead, Omnimedical, a player in the mobile CT imaging equipment niche which had previously licensed second-generation technology from EMI, purchased the rights to EMI' s third generation technology and its American distribution and service system.

Many American firms also exited. The nuclear imaging leader G.D. Searle entered in 1977 by hiring design staff from Litton, an x-ray equipment manufacturer, and exited in 1978, selling its technology to EMI. Technicare, the first serious challenger to EMI, was acquired by Johnson and Johnson, the medical sundries manufacturer and distributor, in 1978, after rushing a flawed third generation system to market in response to GE. Artronix, the first firm to introduce a commercial system based on the third-generation design, was in bankruptcy by 1979. During 1981, General Electric held 60% of the U.S. market for CT systems and the Hirschman-Herfindahl Index for the industry had swelled to 3800, from 2300 in 1978.

Japanese entrants, too, were not immune. The electronics manufacturer JEOL briefly introduced a system to the Japanese market during the late 1970s and then withdrew it following dissatisfaction with its technical capabilities.

Even as the market recovered during the 1980s, several firms left the industry. Pfizer, another early challenger to EMI, shut down its 4th generation CT operation in 1981. Omnimedical lasted until 1984, then collapsed.

Major players

By 1988, almost all major CT manufacturers in the world were broad-based manufacturers of diagnostic imaging equipment, including General Electric, Siemens, Philips, Picker, Toshiba, and Hitachi. Although several other firms held measurable positions, including the Israeli firm Elscint and the Japanese manufacturer Shimadzu, the top six controlled about 80% of global sales. The HHI in the American market, though, had shrunk to about 2600. The key players reportedly earned few profits on sales of new systems, but earned significant net revenue from after-sales service contracts. (Service manuals tended to be guarded more carefully than system blueprints, while several independent service companies had been sued by established manufacturers.)

General Electric Medical Systems (GEMS). At the turn of the century, General Electric was one of the first companies to introduce x-ray equipment. By the early 1970s, it possessed the largest radiology direct distribution system in the United States and had a strong reputation as an effective manufacturer of x-ray equipment. It also had a reputation as a slow and staid operation, however, with almost all its activities focused on markets and technical sources in the U.S.

During the late 1970s and early 1980s, GE significantly changed its strategy. The changes took place on both product and geographic dimensions. GE expanded into nuclear and ultrasonic imaging, by acquiring firms operating in those subfields of the imaging industry, licensing in technology from American and Japanese firms and universities, carrying out joint research with academic researchers, and initiating in-house research projects.

General Electric began an in-house CT research project within a year of EMI's entry into the U.S. market, but waited several years before its first significant product introduction - the third generation system licensed from Stanford and further refined in-house. By 1981, GE held 60% of the U.S. market for CT systems. GE's share in the U.S. market was under some pressure by the late 1980s, but it shored up the position by acquiring Technicare's distribution and service contracts when Johnson and Johnson shut down the operation in 1986.

During the 1980s, GE also increased its global presence, reaching about a 25% imaging market share by the end of the decade. In Japan, where it had used a distributor for CT systems since 1978, GE set up a manufacturing joint venture with an electronics manufacturer and by the late 1980s had achieved the number two imaging market position (behind Toshiba and ahead of Hitachi). Part of the success occurred because the joint venture over-ruled the parent firm's objections and developed a micro-computer based system which was much cheaper than GE's standard third-generation minicomputer-based unit, while retaining similar quality. GE also set up a distribution joint venture with the Korean firm Samsung and was the market leader in Latin America. In Europe, meanwhile, GE acquired the leading French medical imaging equipment manufacturer, CGR, in 1987 (as part of GE's sale of the RCA consumer electronics operation to CGR's parent, Thomson) and by 1988 was negotiating with the British imaging leader GEC to set up a joint venture.

Like all imaging industry leaders, General Electric was a relatively minor player in cardiac applications. However, the company was a market leader in the sale of digital radiographic DSA systems and had a significant nuclear imaging presence. The company also was financing the commercial development of fast-cardiac magnetic resonance imaging, through a research contract with a startup firm.

Siemens. Siemens, a broad-based German electronics manufacturer, began marketing commercial x-ray products in 1896. The firm has long been the dominant player in the West German imaging equipment market. Its involvement in the international imaging markets, where it held a reputation as a relatively slow but tenacious competitor, was based on a combination of in-house products and the distribution of innovative products from small firms. Although the firm held a major position in Europe, it did not have a significant presence in the United States until the 1970s. Similarly, Siemens' presence in Japan was long established but relatively small, until it entered into a joint venture with Asahi in the mid 1980s. By the end of the decade, the German firm held the number two position with a 20% share in international imaging markets, and the number two CT position in the U.S.

Like GE, Siemens was a relatively minor player in cardiac fields, but had a strong nuclear imaging operation and a significant DSA share. Most of its research was carried out in Germany, but the company had strong contacts with international academic researchers and a small company-owned operation in California, where it was designing a color cardiac ultrasound imaging system. In addition, by late 1987 the company had completed early trials of a $1.2 million premium CT system that could carry out some dynamic studies of organ activity, including contrast studies of the kidney and liver.

Philips. Philips, a broad-based electronics manufacturer with a partially-independent subsidiary in the United States, was the dominant player in the Netherlands and a longtime leader in the international x-ray equipment field. Although its presence in Japan was practically nonexistent, the company had about a 15% global market share. (It was debating with Toshiba about which company held third place.) While the majority of its R&D occurred in the Netherlands, the company had contacts with some American university researchers and an ultrasound operation based in California.

Philips introduced CT systems during the 1970s, but was unable to challenge General Electric and Siemens. About 1982, Philips began to distribute low-cost CT scanners manufactured by Hitachi in Japan. By the late 1980s, most of the company's CT manufacturing was being performed by Hitachi. Although the companies had long-term plans to set up a manufacturing facility in the United States, manufacturing continued to occur in Japan. Philips' computed tomography R&D continued to be based in Europe, where Philips was developing a research prototype of a new system, after having licensed fourth generation technology from Thorn-EMI. Philips was among the first firms to introduce digital radiographic DSA and had introduced one of the first commercial picture archiving systems.

During the 1980s, Philips was involved in many alliances with small and large imaging industry participants. The arrangements ranged from minority positions in PACS components manufacturers, to research contracts with the leading color-cardiac ultrasound manufacturer, to CT and ultrasound manufacturing and distribution contracts with Hitachi. Philips also attempted a joint venture with Picker in 1987, but the effort collapsed at the 11th hour.

Toshiba. Toshiba, a broad-based electronics manufacturer which began manufacturing x-ray equipment during the first decade of the century, was the strongest Japanese imaging market participant by the 1980s. The company began distributing its products in the U.S. and Europe through distributors during the 1960s. In 1976, it became the first Japanese imaging equipment manufacturer to set up foreign direct distribution systems. After slow growth during the early 1980s, particularly in the U.S. where it had difficulty penetrating established markets, the company achieved about a 15% worldwide share by the end of the decade.

Toshiba held about 10% of the U.S. CT market, importing most of its systems from Japan while carrying out some assembly at the Toshiba USA electronic equipment plant in California. Initially, the company sold relatively low-end, low-cost CT systems in the U.S., but then moved up-line. Like Philips, Toshiba had licensed 4th generation CT technology from Thorn-EMI, and introduced a prototype system to Asian markets during the mid 1980s. Although a 4th generation system was introduced to American customers during 1986, all the key software operations were not until the end of 1987. By the end of 1987, Toshiba had placements and orders for about 45 of the $1.2 million systems throughout the world, with 7 in the United States. Like the Siemens prototype high-end product, the Toshiba system was capable of carrying out some dynamic studies and produced particularly high resolution images. Toshiba was also trying to move quickly into commercialization of picture archiving systems.

Picker International. Picker, a company which began producing x-ray equipment at the beginning of the century, was a traditional leader in the U.S. radiology market, but a minor player abroad. The company made significant innovative contributions to the nuclear and ultrasonic subfields of the imaging industry during the 1960s, but lagged during the 1970s. At the end of the decade, the business then underwent two takeovers in three years. In 1979, Picker was acquired by RCA, when the electronics company entered the financial services sector by acquiring Picker's parent, CIT Financial. RCA then spun off the Picker imaging operation in 1981, selling it to the British radiology industry leader, GEC. Although GEC is a relatively broad-based electronics firm, the American operation had little access to the British operations. At the same time, the parent was under pressure in its British market and severely restricted R&D expenditure by its American subsidiary. By the end of the 1980s, the firm was being pressed by Toshiba for fourth position in the United States.

Picker made some attempts to achieve global presence. During the mid 1980s, it set up a Japanese manufacturing and distribution joint venture with two minor imaging industry participants in that country. By the end of the decade, the venture had achieved relatively minor success.

Hitachi. Hitachi was a traditional leader in the Japanese imaging market and held strong positions in world markets for ultrasound and CT systems. It usually provided the instruments to other firms for distribution. By the end of the decade, Hitachi was beginning to expand its U.S. distribution and service system, particularly for ultrasonic equipment.

Shimadzu and Elscint. In addition to the six major players, Shimadzu and Elscint held significant places in the world imaging markets. Shimadzu was a long-established player in the Japanese x-ray market that, during the 1980s, was gradually moving into global imaging equipment markets. Its presence in the U.S. and Europe relied entirely on distributors, but it planned to establish a direct distribution system in the U.S. Elscint, meanwhile, was a small Israeli nuclear medical equipment firm established during the late 1960s. The company had expanded to Europe and the United States during the 1970s, winning a profitable niche in nuclear medical markets. During the 1980s, it had expanded into the MRI, CT, ultrasound, and conventional x-ray subfields of the imaging industry, building an extensive distribution system within the community hospital segment of the market. Elscint had placed particular emphasis on CT expansion during the early 1980s. Unfortunate product development and firm acquisition choices, however, had led to serious losses by the end of the decade.

Fringe entry

Despite the consolidation and strength of the major players, several small CT manufacturers entered the industry during the 1980s. Most acquired key know-how from earlier entrants, either under license or informally through personal contact. Most such entrants attempted to mine product or geographic market niches, usually offering inexpensive systems in the U.S. or to buyers in Latin American countries. Few survived long, however, and almost all had left the industry by the end of the decade.

CONCLUSION

By 1988, Imatron had lost almost $35 million. Sales were expected to grow slightly during fiscal 1988, but it was clear that the company needed to adjust its strategies if it hoped to survive.

POST CASE RESULTS

MARKETING

In 1988, Imatron decided that it could not support the necessary sales and service internally. Therefore, in August 1988, it replaced it in-house system by signing exclusive agreements with Italimprese of Italy and Picker International to carry out European and North American sales and service. Italimprese was a minor European player, while Picker was a traditional leader in the radiology segment of the American imaging market. Imatron would now focus on the technical sides of the business, continuing to improve the civilian and military systems. Almost all Imatron's domestic sales and service personnel joined Picker's staff.

August 1988. Imatron chooses Italimprese of Italy as exclusive European distributor, sales and service. Italimpresse sold first system in December, to a Paris hospital (went into operation in August 1989). This was Imatron's first and, by March 1990, only European placement.

Figures

1. CT market shares, 1973-1987

2. U.S. CT and imaging market sales, 1973-1987

3. Imatron financial and operating summaries, 1981-1989.

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