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We believe that healthcare economics, patient demands and new technology will continue to drive minimally invasive procedures. Most minimally invasive procedures will require improved visualization for a wide array of applications ... and across many physical locations in the healthcare delivery network. As you will see in our annual report, OEC is already participating in many of these applications and locations. Our plan for growth is based on solidifying and extending our reach into minimally invasive healthcare.
OEC Medical Systems, Inc. is a leading manufacturer and marketer of medical imaging systems and accessories for fluoroscopic intraoperative and interventional applications--a segment of the X-ray industry. The company's digital X-ray imaging C-arms and fixed-room products are used most frequently in minimally invasive surgical settings for general, orthopedic, vascular, neurovascular, urological, and cardiac procedures. As OEC Medical Chief Executive Officer (CEO) Joseph Pepper told Christine Bushey of television network MSNBC, "It's the same technology as the big X-ray machine in the basement of most hospitals, with two exceptions. Ours is mobile ... and also, instead of using the word 'radiographic,' which typically [refers to] X-ray film, the description of our equipment is 'fluoroscopic,' which means it's real-time imaging.' Hence a surgeon, for instance, can use OEC equipment to guide his or her procedure, observing the actions as they occur. This is particularly useful in minimally invasive surgery, a technique which involves small incisions and the insertion of small equipment, rather than the more drastic measures associated with traditional surgery. OEC's surgical imaging equipment--often referred to as "C-arm' systems--is mobile, and the company has remained focused on this segment of the market.
The Early Years
Founded in Warsaw, Indiana in 1942, OEC originally marketed to orthopedic surgeons--hence, its name at that time: "Orthopedic Equipment Company.' OEC's equipment for orthopedic surgeons originally included pins, plates, and other orthopedic devices necessary for correcting skeletal deformities in patients. In the process of marketing these orthopedic devices, it became apparent that providing real-time imaging to the surgeon would be an invaluable tool; thus, in the early 1970s, OEC moved in the direction of mobile X-ray imaging. In 1983, OEC was purchased by Diasonics, Inc. and became OEC-Diasonics, a subsidiary of that company.
Milipitas, California-based Diasonics had come into existence in 1978, growing quickly. In February 1983, it went public with the sale of 5.6 million shares of stock--the second-largest high-technology initial public offering (IPO) in the early 1980s. The stock had the blessing of Wall Street guru Arthur Rock, who had influenced the success of Intel Corporation and Apple Computer, and the company's price per share shot up rapidly from $22 to $29. But a year later, in February 1984, Forbes reported that the price per share had dropped to $6.50, and the company expected a $60 to $65 million pre-tax loss. The company, according to Forbes, was losing money in a number of areas. The X-ray imaging business represented by OEC-Diasonics, however, remained profitable throughout this period.
After another twenty months, the prognosis was even more negative, as Barron's proclaimed with a dirge-like headline in November 1985: "Burnt Offering: Why Diasonics Failed to Set the World on Fire.' Much of the failure, William Alpert of Barron's asserted, could be blamed on "lackluster demand for the company's digital X-ray systems.' With the addition of Steward Carrell to the CEO position in 1984, however, things were looking up for Diasonics. Among other changes, Carrell trimmed the company's holdings down to its three most promising lines: magnetic resonance imaging (MRI) technology, ultrasound technology, and mobile X-ray technology.
The Early 1990s: OEC Spins Off
As it turned out, Diasonics' ownership of OEC was to be only a ten-year affair. In May 1993, the Wall Street Journal announced that the parent company had lost $2 million in the first quarter of that year, and had opted to split into three separate corporations: Diasonics Ultrasound, Inc., Focal Surgery, Inc., and OEC Medical Systems, Inc. According to the Wall Street Journal, drastic health-care reform proposals then under consideration by President Bill Clinton--including a plan to have the federal government take over a large portion of the nation's health care--had helped to create the situation: "medical supply companies like Diasonics are hurting as hospitals delay capital expenditures amid uncertainties over the Clinton administration's proposed health-care reform.'
Under the breakup plan, Diasonics would cease to exist--which it did in September 1993--and OEC Medical Systems would merge with the former parent and become the legal entity traded on the New York Stock Exchange under the trading symbol OXE. The company would focus on its specialty mobile X-ray imaging and urology equipment. According to a Diasonics executive quoted in the San Jose, California Business Journal, "Investors like simple things, things they can understand. This is inherently simpler.' Hence, Jim Nash of the Business Journal reported, "Executives at each of Diasonics' new offspring said the move will enable each company to more fully concentrate on what it does.' The parent company had become overgrown in the first place, Nash observed, because it "bought into the conventional wisdom that bigger firms were better prepared to compete than small ones.' According to OEC's newly-appointed CEO, David Rose, Diasonics was "on a spending spree' when it purchased OEC. Thus, Nash wrote, "in an attempt to compete with larger players, Diasonics expanded as well. The aim was to offer a full line of medical-imaging devices.'
As for OEC, which had ceased to be a Diasonics subsidiary only a week before, Nash reported that it already begun "performing better than its parent.' In the second quarter of 1993, the company reported profits of $200,000 on revenues of $22.5 million. During the same period a year earlier, it had suffered losses of $400,000 on revenues of $23.5 million--due to the fact that its parent company was spending faster than OEC could earn. As it struck out on its own with 300 employees, however, the future was looking bright for OEC Medical Systems. "As an independent company,' Rose told Nash, "we can focus our entire team 100 percent on what we are doing.'
An Undervalued Company in the Mid-1990s?
In December 1994, OEC Medical Systems announced that it would buy back some 750,000 shares of its common stock. "We believe OEC is significantly undervalued,' Rose stated in a press release, "and believe that a buy-back of our stock is a sound investment of a portion of our cash reserves. We are the market leader in our segment ... and we are optimistic about our potential for growth.'
But when OEC announced its results for fiscal 1994 a month later, in January 1995, the news was not good. It had made $8.7 million on revenues of $98.2 million, compared with a 1993 profit of $9.8 million on $100 million in sales. Rose explained in another press release: "While much of the medical industry has suffered, we were pleased to have closed the year with anticipated earnings and healthy cash flow. However, we were disappointed that delays in shipments of the Series 9600 [one of the company's principal imaging products] in the second quarter, and weaker-than-desired gross margins throughout the year, took their toll on annual performance.' Yet "On a positive note,' he stated, "we are seeing a broadening acceptance of our new 9600 product.' For 1995, Rose announced, the company planned to introduce new products, develop its distribution alliances, and grow its international business.
But more change was looming on the horizon, and it would affect Rose directly. A month after the year-end report was issued, in February 1995, the company announced that Rose was out. He would be resigning as CEO and president, a press release stated, to be replaced by board chairman Ruediger Naumann-Etienne. The latter, according to the press release, was a former Texas Instruments executive who had been involved with OEC Medical Systems since 1984. "While the company achieved a number of significant accomplishments during 1994,' Naumann-Etienne stated, "we did not achieve our financial objectives, and are committed to improvements ahead. I remain confident of OEC's prospects, and expect a number of positive developments to be reported during the next several months.'
Two months later, the situation was already looking better. For the first quarter of 1995, which ended March 31, the company had made $2.5 million on $22.8 million in revenues, as compared to $2.3 million on $23.3 million a year earlier. "The first quarter of 1995,' Naumann-Etienne told Equities magazine, "was one of OEC's strongest first quarters for C-Arm bookings, and overall revenues were within expectations despite the softness of the urology fixed-room market.' During that quarter, OEC Medical Systems had introduced the Uroview 2600 urological table and digital imaging system. "According to Naumann,' Equities reported, "the state-of-the-art system is designed with digital advancements and enhanced product features for both the patient and clinical professional, all with no increase in cost. This value-oriented product introduction is designed to bolster the company's sales opportunities in a resource-limited market.'
OEC Medical Systems's balance sheet looked so good by March 1996 that rumors of a buyout began to develop. Gene Marcial of Business Week reported the possibility of a buyout bid by a large medical-supply company. Marcial, who did not report the name of the company that had made the offer, wrote that the would-be buyer had made a similar proposal in 1995, "But OEC and the suitor couldn't agree on a price.' He quoted an unnamed investment advisor as saying that OEC was more attractive in 1996 as an acquisition target, especially because it had "practically no debt and ... lots of cash on hand.' But the buyout rumors proved to be just that, and OEC continued to operate successfully on its own.
At that point, OEC's product line had expanded to include a new urological X-ray system that brought together both radiographic and fluoroscopic capabilities with digital image-processing. The company had signed a two-year contract, worth $10 million, with Columbia/HCA Healthcare to supply mobile C-arms and urological imaging tables. It had also developed distribution subsidiaries in France, Germany, Italy, and Switzerland.
OEC finished 1996 with a stronger balance sheet than ever. Sales were up from $102 million in 1995 to $128 million, and profits had risen from $11.8 million to $12.9 million. International sales had not grown according to the company's projections, but international bookings--leasing of equipment--had experienced a substantial upsurge. OEC had added several products, including the small and large field-of-view Mini 6600, for use in minimally invasive surgery involving extremities. Thus, by March 1997, people were again saying that OEC Medical Systems' stock was undervalued--only this time the claim was not originating from just the company's management, but from the shareholders themselves, as Marcial reported in Business Week.
A New Century: Growth in a Specialized Market
Joseph Pepper replaced Naumann-Etienne as CEO in 1997. Soon thereafter, during his interview on MSNBC, he described what the company's innovations in fluoroscopic technology meant for patients and doctors: "[B]efore fluoroscopic imaging,' he said, "X-rays were ... used in the operating room, but it was a portable X-ray machine that made film, and if a surgeon needed to know for some reason what he had just done, the machine was wheeled into the operating room, and then they had to wait while the film was taken some place and developed.' Then, in the early 1970s, "OEC introduced the first real-time fluoroscopic imaging equipment in the United States, and ... that allowed [the surgeon] to do ... whatever he needed to be done, right there on the spot.' As for minimally invasive surgery, this was an advancement that could not have been possible without improvements such as OEC's in imaging technology, which assisted surgeons in seeing what they were doing. "They can use our equipment to guide some catheters into the right place,' Pepper said, or "to map out the veinous structure, or the arterial structure.' Minimally invasive surgery involved less trauma to a patient's body, fewer negative side-effects, and shorter recovery times. OEC's advancements were making procedures such as minimally-invasive surgery easier and more feasible, and thus it was clear that the company's work in this specialized field would carry it far into the future.
As for the business end of OEC Medical, Pepper reported that the company had three distribution channels, including direct sales representatives employed by OEC; independent distributors who sell OEC's product along with other products; and "exclusive independent distributors.' The latter, Pepper said, constituted a two-thirds majority, "and the relationship that OEC has built with these people over five, ten, fifteen years is a key to our success.' On the international scene, in addition to its direct distribution channels in France, Germany, Italy, and Switzerland, OEC had relationships with distributors in some forty countries around the globe.
Near the end of the 1990s, OEC Medical Systems enjoyed a 55 percent share of the domestic market and a 15 percent share of the international market for its products. According to CEO Pepper, the company's "competition in the United States, in the world, for full-size C-arms are GE, Philips and Siemens. Having said that, that's the good news and the bad news. The bad news is we compete against high-quality, very powerful companies in the medical field. The good news is that we've maintained and grown this 50 percent share, a point or two a year over the past three or four years. So, we're small. Those companies have good product lines, but they do everything in X-ray. We only do one thing. We live or die by how well we design, how fast we come out with new product innovations, how well we listen to the customer ... how responsive our sales force is.'
At the end of 1997, OEC Medical Systems reported another strong year, with sales up 21 percent to $155 million. Net income had increased by an even greater percentage--up 28 percent to $12.2 million, and international sales had increased significantly. The company also completed the construction of a new 40,000 square foot expansion to its Salt Lake City headquarters. Looking into the future, Pepper set a top and bottom line growth goal for the company of 20 percent. If past performance was truly an indicator of future success, then OEC seemed to be poised to meet Pepper's goal.
Principal Subsidiaries: Barwig Medizinische Systeme (Germany).
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