Acuson Corporation

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Acuson Corporation

1220 Charleston Road
P.O. Box 7393
Mountain View, California 94039-7393
U.S.A.
(415) 969-9112
Fax: (415) 962-8018

Public Company
Incorporated: 1982
Employees: 1,500
Sales: $295 million
Stock Exchanges: New York
SICs: 3845 Electromedical Apparatus

Acuson Corporation is one of the top manufacturers of ultrasound imaging equipment for medical diagnosis. These systems beam low-power, high-frequency sound waves into the body, and the returning echoes are processed as real-time, moving images of internal organs and blood flows. In 1993, Acuson led the radiology segment of the industry, with a market share estimated at 40 to 50 percent, and was strongly competitive in cardiology, ranking second only to Hewlett-Packard.

Founder Samuel Maslak became interested in ultrasound in the early 1970s, when he was a doctoral student at the Massachusetts Institute of Technology. At that time, his wife was pregnant with their second child, and doctors ordered an examination of the fetus using ultrasound to test for intrauterine growth retardation. His daughter turned out to be fine, but Maslak noted that the existing technology was relatively crude. Moreover, he recognized that ultrasound had the potential to give doctors a tremendous amount of information, noninvasively, about the body. Maslak thus found a subject for his dissertation, as well as the keystone for a $300 million company.

After graduating from MIT, Maslak moved to California to work on ultrasound for Hewlett-Packard. While his achievement in creating and patenting a key subsystem of the company’s ultrasound system was recognized, Hewlett-Packard did not want to press ahead with additional improvements. However, Maslak believed that much greater advances could be made, and he left the company in December 1978, continuing to investigate ultrasound technology and the potential market for innovative products. Over the next nine months, he supported himself through a part-time job as a circuit design consultant, drawing on personal savings and home equity as well.

In September 1979, Maslak formed a general partnership with Robert Younge, a colleague at Hewlett-Packard; another engineer, Amin Hanafy, came on board in 1981. Maslak later asserted that instead of aiming at an immediate market introduction, the three spent much of their time thinking about how they could contribute to the industry’s development. During this period, they picked up $100,000 in seed money from entrepreneur Karl Johannsmeier, and, late in 1981, the three partners distributed a business plan among several venture capital firms. While all of the firms expressed interest in the company, the partners decided that, besides Johannsmeier, they would limit their outside investors to the firm of Kleiner, Perkins, Caufield & Byers of Palo Alto. Kleiner, Perkins initially invested $2.5 million, raising another $22 million over the next three years. The partners filed incorporation papers in 1982, and the following year Acuson introduced its first ultrasound machine. Acuson gained listing on the New York Stock Exchange in 1986, raising $21 million in an initial public offering.

Describing industry conditions during this time, Business Week observed that “the market is nearly saturated, and sales have started to slip,” while one of Acuson’s competitors characterized the industry as ’ ’very difficult... to break into, because the mature companies can quickly match any advances that come along.” Nevertheless, the fledgling Acuson increased its sales from $3 million in 1983 to $18 million in 1984, while revenues rose 60 percent or more annually, reaching $169 million by 1988. Moreover, following the usual initial losses for a start-up company during this time, Acuson’s pretax margins reached 13 percent in 1985, and from 1986 to 1988 they were a superlative 24 to 26 percent. Acuson managed to overcome the odds through the superiority of their product.

Ultrasound was often the physician’s imaging technique of choice, because is was noninvasive, easy to use, and relatively inexpensive. Although good for soft tissue, the ultrasound could not penetrate bone or air-filled tissue, and was therefore not used to examine the brain or lungs, for example. However, in a wide variety of applications ultrasound was the first test that doctors ordered, being both the safest—there was no ionizing radiation or toxic dye—and the cheapest.

Given the strong preference for ultrasound testing, Maslak predicted that hospitals and doctors would be willing to pay more—as much as 30 percent more—for superior equipment that produced a clearer, sharper image. Acuson’s first offering, the Acuson 128 ultrasound system, was so-named because it was equipped with 128 separate transmit/receive channels for image formation, which enabled it to produce a better picture than existing machines that had only 64 channels.

The Acuson system could utilize more channels because it was based on a hybrid analog/digital computer. While computer technologies had long been used in ultrasound systems to control ancillary functions, like measurements and calculations, in Acuson’s machines the image itself was formed in an ultrasound computer under software control. As in photography, conventional ultrasound technology produced images that had much sharper resolution in the focal center of their fields than elsewhere. In contrast, Acuson systems could electronically focus at each point of the field of view, optimize the lens aperture at each focal point, and substantially filter out stray reflected sound ordinarily captured by conventional units. The result was superior pictures that doctors widely praised. Indeed, in some cases it allowed them to make diagnoses that would have been unlikely using conventional equipment. And Acuson systems proved extremely reliable, with up-time of better than 99.9 percent.

The emphasis on computer technology was also essential to the second key factor in Acuson’s success: field upgradeability. Every unit that Acuson sold could be upgraded, at the customer’s site, to the level of the most advanced current model, simply by adding new software. Although complete upgradeability would appear to act as a drag on sales of new machines, sales of new units continued to rise in the 1980s, since doctors continued to find new applications in which Acuson’s products outperformed those of competitors.

Acuson’s string of impressive sales increases reflected its commitment to upgrading its technology. Outlays for product development rose from $2 million in 1983 to $18 million in 1988, representing ten to 12 percent of sales for most of this period. In late 1985, Acuson began to market its Doppler option, which measured the velocity of blood flow in the heart and major arteries. Doppler could instantly alert doctors to constricted blood flow in a vessel, helping them determine the extent of the blockage and the need for further intervention. In September 1987, Acuson shipped its first color Doppler imaging system, an important diagnostic tool for physicians since it allowed them to visualize directly the flow of blood, depicted as a color overlay on the standard black and white ultrasound image.

Early on, Acuson established an international presence, setting up operations in the United Kingdom and Germany. Wholly owned sales and service subsidiaries followed in Sweden and Australia in 1986 and in Canada and France in 1987. The company also began to make significant shipments to China and other Asian markets. By 1989, 18 percent of Acuson’s sales, $40 million, came from international operations, up 68 percent from the prior year.

That year, Acuson passed several milestones. Cardiology equipment became its second largest segment, after radiology. Acuson employed over 1,000 people worldwide, and sales surged beyond the $200 million level for the first time, rising 35 percent from the prior-year total to $227 million. Profitability remained stunning, with gross, pretax, and net margins at 62, 27, and 17 percent. Net income rose to $38 million, up 40 percent from the prior year and more than double the $17 million recorded in 1987.

In July 1990, Acuson introduced its 128XP, its first new system mainframe since it entered the ultrasound market in 1983. The new model featured Vector Array, which provided a wider field of view in many ultrasound applications where anatomical access to the organ of interest was limited, such as when imaging near ribs, wounds, sutures, or bandages. The new machine also provided for higher resolution and higher quality images. The company continued to post record results; sales for the year totaled $282 million (up 24 percent) and net earnings were $48 million (up 26 percent). Strong performance continued in 1991, as sales grew 19 percent and earnings 22 percent. During that year, the company introduced the 128XP Xcelerator, which significantly enhanced the capabilities that the 128XP had introduced.

In 1992, Acuson suffered its first significant reversal. During a period of economic recession worldwide, hospitals became more cost-conscious, and, instead of buying new systems, they were making do with older equipment. Moreover, the ultrasound market had been driven by dramatic technological improvements, and while the company’s new products represented significant advances, they were not as revolutionary as those it had introduced in the 1980s. Earnings dropped from $59 million to $37 million on basically flat sales of $343 million. Acuson’s decline in net income was also a result of its increased expenses for expanding the field sales organization and for product development. Indeed, while other companies cut research and development when business conditions worsened, Acuson continued to increase product development expenditures, regardless of market conditions; outlays more than doubled to $47 million between 1989 and 1992, representing almost 14 percent of total sales.

Acuson’s hopes for a quick turnaround in 1993 were dashed when Bill Clinton assumed the U.S. presidency. Clinton’s plans for health care reform caused a great deal of uncertainty in the medical sector, and makers of ultrasound equipment—like those of other medical devices—found that hospitals and clinics were postponing significant new purchases until they had a clearer idea of the possible impacts of new health care plans. In this tough business climate, the company decided to cut its work force by 15 percent and took a $ 12 million charge for restructuring costs. In addition, continuing recessions in Europe and Japan hurt overseas markets, and international sales fell from $88 million to $78 million, or about 26 percent of total revenue. For the year, worldwide sales at Acuson were down 14 percent to $295 million, while earnings tumbled 89 percent to just $4 million.

Acuson also faced the possibility of new competition in the market. By 1993, large medical equipment makers—General Electric, Siemens A.G. of Germany, and Philips Electronics NV of the Netherlands—had not significantly penetrated the ultrasound sector, each having market shares of less than ten percent. However, these firms were beginning to realize that, with hospitals scrambling to cut costs, relatively inexpensive ultrasonic systems would prove more attractive to hard-pressed administrators than their magnetic resonance imaging (MRI) machines and computed topography (CT) scanners. Moreover, ultrasound had already replaced MRI and CT as the preferred imaging method in some applications and was well positioned to challenge the two competing modes in cardiology and abdominal imaging. Thus, the shift of health care dollars to ultrasound promised bigger markets for the industry’s leaders in the future. Although smaller companies like Acuson had proved more flexible and quicker to bring new technologies to market, some large firms considered refocusing their operations to compete in the ultrasound market, representing a palpable threat to Acuson.

Nevertheless, Acuson held an advantage as an established and reputable player in the ultrasound industry. Moreover, the company continued to win praise for its steadfast commitment to product development. Despite the contraction in sales and profits in 1993, the company continued to pour funds into research and development, bolstered by its strong, debt-free balance sheet. In fact, its research and development outlays increased to $58 million—up 22 percent from 1992 levels and representing nearly 20 percent of sales. This expenditure proved worthwhile, as Acuson introduced successful new products, like Acoustic Response Technology, which provided a significant enhancement to image quality. With its commitment to innovation, Acuson appeared well positioned to take advantage of potential upturns in the industry’s fortunes.