Picture Brightens for Pioneer in X-ray Systems Technology

By Bonnie Bell for Crain’s Chicago Business
September 16, 1995

Larry Grossman, chairman and CEO of Northbrook-based Fluoro-Scan Imaging Systems Inc., vividly remembers the day in March 1989 when he received a call from his former partner telling him he was “reading the last rites” for the company that Mr. Grossman had founded four years earlier.

Then called HealthMate Inc., the company held exclusive licenses to market low-intensity X-ray devices based on technology developed by the National Aeronautics and Space Administration (NASA). An initial public offering in 1985 had raised $3.5 million.

But HealthMate was anything but healthy after Mr. Grossman quit in 1986 in a disagreement over strategy. (He says he wanted to focus on medical, rather than industrial, markets.) His stock, valued at $9 million when he left, dwindled to nothing.

Still, he wanted to try to resuscitate the company. “I knew the technology was wonderful,” he says.

His belief in its potential was vindicated, although not without a bankruptcy reorganization. And the growing company, while profitable, still faces difficult hurdles as its niche in the diagnostic imaging business grows.

A former medical equipment leasing specialist, Mr. Grossman, 46, had read about the technology in a trade journal; a call to NASA told him that no one had expressed an interest in marketing the concept. He negotiated exclusive agreements to develop the technology until 2002 and signed on the original scientists as consultants.

The company’s mini C-arm X-ray system - a reference to the C-shaped instrument that supports the imaging device - employs NASA’s night vision technology, used by the military in tank sights and sniper scopes.

The mini C-arm devices permit surgeons to spot hairline fractures and view the movement of bones on a monitor. Images are magnified up to five times without distortion by means of a computer.

After filing for Chapter 11 bankruptcy, Mr. Grossman reorganized HealthMate as a private company and chipped away at some $1.5 million in debt. (Creditors were fully repaid by April 1994, according to Securities and Exchange Commission filings.)

Arlen Issette, a former HealthMate executive, joined him as a partner and president of the renamed Fluoroscan. Together, they stepped up production and hired a salesforce to target the U.S. medical market, a potential customer base that includes the nation’s 7,000 hospitals, 18,000 orthopedic surgeons, plus sports medicine specialists, podiatrists and veterinarians.

“We do bones,” Mr. Grossman says, “and it’s a huge mailing list.”

Industrial users account for 5% of revenues. Seattle-based Boeing Co. and Calabasas, Calif.-based Lockheed Corp. use Fluoroscan’s devices to scan for cracks in airplane wings, while companies such as Greenville, S.C.-based Michelin Tire Corp. and Findlay, Ohio-based Cooper Tire & Rubber Co. detect ruptures in steel-belted tires.

Messrs. Grossman and Issette took Fluoroscan public in July 1994 at $6.90 per share, netting about $3.6 million for the company and $2.5 million for selling shareholders. The stock was trading last week around $9, near a 52-week high of $9.25.

Since Fluoroscan’s bankruptcy reorganization plan was approved in 1991, the company has posted annual revenue gains of 50%; last year, revenues hit $9.2 million. Last year’s earnings rose 22% to nearly $1.8 million, compared with the year before.

In the second quarter, sales increased 61% to $3.6 million, compared with the year-earlier quarter, while net income fell 26% to $417,689, reflecting a tax benefit in the year-earlier quarter. Per-share earnings fell 40% to 12 cents per share, because of the addition of shares in the public offering.

Mr. Issette says Fluoroscan’s thrust into international markets, coupled with a promising partnership agreement, is expected to keep sales growing 30% to 40% annually.

The company had been prohibited by the U.S. government from exporting the imaging devices because the technology was classified. But with the end of the Cold War, the ban was lifted. Fluoroscan expects to earn 20% of total revenues overseas, Mr. Issette says, and that figure should jump to 30% in 1996. The company also entered into a worldwide exclusive partnership agreement in June with Norian Corp., a Cupertino, Calif.-based maker of a gluelike bone filler that repairs and promotes healing of fractures.

The product, which has been approved in the Netherlands and is in clinical trials in the United States, requires the use of Fluoroscan imaging equipment.

The $1-billion worldwide diagnostic imaging business is one of the fastest-growing segments of the health care market, and Fluoroscan is the industry leader in the niche it pioneered — mini C-arm systems.

The company’s licenses with NASA run out in 2002, but management says its research and development efforts will have taken the technology well beyond the original patents.

Despite its promise, Fluoroscan faces plenty of hurdles. “There’s still a lot of marketshare they can gain,” says Gary Prestopino, an analyst at Mesirow Financial Inc., which makes a market in the stock. “The key question is, can management control the growth?”

He notes that the company will face much more formidable adversaries as its market niche grows.

“One of three things will happen,” Mr. Prestopino predicts. “(Fluoroscan) will penetrate the market further, they’ll have to develop new products or they’ll be an attractive buyout target.”