Elscint Ltd.

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Elscint Ltd.

P.O. Box 550
Haifa, 31004
(972) 4-831-0390
Fax: (972) 4-855-1216
Web site: http://www.elscint.co.il

Public Subsidiary
Employees: 1,950
Sales: US $311.42 million
Stock Exchanges: New York
SICs: 3845 Electromedical Equipment

Haifa-based Elscint Ltd. is a world leader in the advanced medical imaging equipment, successfully competing against such industry giants as General Electric and others to capture a strong share of this market. Elscint, one of the oldest of Israels high-technology companies, is a vertically integrated designer, manufacturer, and distributor of computerized tomography (CT), nuclear medicine (NMI), mammography, and magnetic resonance (MRI) imaging systems. The company also supplies multi-modality workstations and connectivity systems to support its imaging products.

Elscint operates five manufacturing facilities, at its Haifa headquarters and in Tirat Hacarmel and Maalot in Israel, in Fort Collins, Colorado, and in Oxfordshire, England, as well as an assembly facility in Hackensack, New Jersey. Elscints 13 subsidiaries are based around the world, governing the activities of its network of sales offices and representatives in dozens of countries. Also, since 1996, Elscint has engaged in cooperative development and manufacturing agreements, including a development and manufacturing agreement with Siemens, and a distribution agreement with Philips. In 1997, the company announced an agreement with General Electric to launch a joint-venture company, based in Israel, for the engineering, manufacturing, and distribution of products for nuclear medicine imaging systems.

After the companys de-merger from former parent and sister company Elbit Computers Ltd., Elscint remains a publicly traded subsidiary of Elron Electronics Industries Ltd., an Israel-based, multinational high-technology holding company. Shares in Elscint have been traded on the New York Stock Exchange since the early 1980s. With approximately 97 percent of the companys annual sales generated by imports, Elscint conducts its business and reports its sales in U.S. dollars. In 1996, Elscints revenues reached $311 million. Approximately 10 percent of the companys sales are earmarked for its leading-edge research and development activities.

Leading Israels High-Tech Boom in the 1970s

Elscinta contraction of the words electronic and scientificwas founded in 1969 by a team of graduates, led by Avraham Suhami, from the Israel Institute of Technology, also known as the Technion, with the purpose of using advanced scientific research to develop and market products. Born in Izmir, in western Turkey, in 1935, Suhami immigrated by himself to Israel when he was 14 years old. Suhami spent two years on a kibbutz, then worked for a textile factory, before joining the Israeli army. In 1956, after three years of military service, Suhami went to Hebrew University in Jerusalem, earning degrees in physics and mathematics, then transferred to the Technion in 1960, where he completed a doctorate in nuclear physics and was appointed to the faculty.

In 1969, Suhami and a group of fellow researchers left the Technion after receiving encouragement to apply his scientific and technical knowledge to commercial uses from another former Technion professor, Uzia Galil, who had recently founded Elron Electronic Industries, and from Dan Tolkowsky, then managing director of the Israeli investment firm Discount Investment Corporation. Galil and Tolkowsky staked Suhami to the $250,000 needed to start Elscint, which would be grouped as a subsidiary under Elron. Tolkowskya Spitfire pilot for the British Royal Air Force in World War II and later the commander of the Israeli Air Force, was appointed chairman, while Suhami, as CEO, led the companys operations.

Elscint initially eyed markets based on the core nuclear physics expertise of Suhami and colleagues, producing equipment for recording measurements in nuclear experiments at laboratories including Argonne and Brookhaven. But, as Suhami explained to the New York Times, the whole world market was a few hundred units, which we sold for $800. You soon find out that you just cannot make enough profit per unit. The company quickly moved into medical imaging equipment. Its first product in this area was a nuclear camera designed to detect cancer. That product, however, proved unsuccessful. Next, the company developed the VDP1, a rectrolinear gamma scanner used for tracking radioactive isotopes in the body. The VDP1, which was priced at $25,000, was the first in the industry to feature digital image processing and display.

This product proved the companys first success, helping the company to sales of $1 million, with a loss of just $25,000, for its first year of operations. Then, when the VDP1 was displayed at a Los Angeles trade show, it attracted the attention of General Electric, the world leader in medical imaging equipment. In 1971, Elscint and General Electric entered a distribution agreement that madeGE the VDPls exclusive North American sales agent. Placing its name on the product, GE insisted that the product match its own quality standards, forcing the young company to expand its technical and manufacturing capabilities, a process Tolkowsky described to Fortune as absolute hell. For Suhami, the GE agreement would provide the learning experience for the companys future success. As he told Fortune: GE taught me that the paint job on the outside was just as important as the electronics on the inside. Suhami took the marketing lessons learned from GE to heart, and soon began establishing international sales and marketing subsidiaries, beginning in Belgium in 1972, to bring the companys products to the world market.

Elscints agreement with GE was to last three years, with neither party envisaging a permanent relationship. By 1972, Suhami began searching for a new partner, hoping to find a larger corporation to invest in the company. Instead, Suhami met Frederick Adler, a New York investor specializing in small scientific companies. Adler convinced Suhami that the better course was to take Elscint publicand thereby allow the company to remain independent. Suhami agreed, and Adler arranged the sale of 400,000 shares, trading on the over-the-counter market. Adler also proved to be a mentor for Suhami, whom Adler described as initially a rotten manager, but telling Fortune, I saw Suhami develop into one of the worlds finest scientific managers.

By the mid-1970s, however, sales of Elscints gamma scanners and other measuring devices barely generated $12 million, while profits lingered under $400,000. In 1975, Suhami abruptly decided to move the company into a new product market altogether. Computer tomography, invented by EMI Ltd. of Britain and developed in the early 1970s, represented a major breakthrough in medical imaging techniques. The process, which used computers to record and reconstruct images from thousands of x-rays, enabling the more accurate and refined imaging of bones and organs than conventional x-ray techniques, represented not only an important advancement in medical diagnostics, but also a vastand extremely valuable new market. By leading Elscint into CT, Suhami was taking the tiny company into head-to-head competition with dozens of other companies, including Pfizer, Siemens, Hitachi, Toshiba, Philips, and former partner GE. As Suhami admitted to Fortune: My friends used to tell me, Avraham, you must be mad.

The cost of developing its own CT scanner, which the company placed on the market in 1977, cut deeply into Elscints financial health. Between 1975 and 1978, the companys capital dropped from $100 million to $2 million, while the company struggled to remain profitable. By then, too, the CT industry was undergoing a shakeout that was forcing many of Elscints competitorsincluding the industrys founder EMIout of the scanner market, and many out of business altogether. By the start of the 1980s, the final throes of the shakeout had produced a narrowed field of winners. GE led the market, followed by to the surprise of manyElscint.

The companys sales began a steady growth, from $21 million in 1979 to $42.6 million in 1981. In that year, Elscint, which had placed more than 100 of its CT scanners in hospitals and other medical and research facilities around the world, received an added boost when it acquired the servicing operations of Pfizer Inc.s CT scanners, as that company, which until then had held the number two sales spot, announced it was exiting the CT market. Elscint, which would see its three percent market share rise to 10 percent by the middle of the decade, was content to allow GE to maintain its market leadership position. We have no desire to overtake GE, Suhami told Fortune, We prefer to live under their price umbrella and let them educate the market.

Company Perspectives:

We see our mission as serving healthcare worldwide. Medical professionals on all continents use Elscint equipment to help tens of thousands of patients every day. Sales and service networks are closely attuned to the unique customs and practices of each country in which we operate. Elscint is deeply committed to an active presence on the medical scene in the global village of which we are all a part.

A High-Tech Wreck in the 1980s

Elscint continued to improve its CT scannerbringing out a sixth version by the beginning of 1981, while also expanding the companys operations. In 1980, the company acquired Cambridge Advanced Research Laboratories in Cambridge, Massachusetts, and opened a plant in Brookline, Massachusetts, the following year, for its Elscint Inc. subsidiary. Elscint had also expanded its product offerings, adding nuclear cameras and ultrasound imagers to its line of CT scanners, digital radiography, and conventional x-ray equipment, making it the only small company in the world to produce equipment for all of the advanced imaging technologies. As the 1980s began, the company also launched into developing its own equipment for the latest breakthrough in medical imaging, the magnetic resonance imaging system. Meanwhile, the company had been extending its manufacturing capacity, becoming a vertically integrated manufacturer and distributor, with more than 3,000 employees at plants and research facilities in Oxford, England, Paris, Milan, Jerusalem, as well as in Haifa and Boston. In 1983, the company added a Chicago plant, when it purchased the x-ray sales and services operations from the failing Elgin, Illinois-based Xonics Inc. for $10 million. By then, sales had reached $132 million, and the company announced a net profit of $12.6 million.

While corporate sales were indeed strong, Elscints profits proved an illusion. In fact, the company had been covering up a growing financial crisis that would cause the company nearly to collapse by the mid-1980s. Part of Elscints difficulties were beyond its control. In 1983, the U.S. government tightened restrictions on Medicaid spending, a prime source of funding for expensive advanced imaging procedures, leading to a slump in new purchases from the crucial U.S. hospital market. Yet, much of Elscints problems were self-generated. Entering the MRI market had cost the company dearly, with research and development costs of some $60 million per year, while the high price tag on the MRI scannersof $1.5 million or moreand the earlier entry of larger competitors such as Johnson & Johnson helped to limit the market, despite the technologys future promise. More critical to Elscints financial crisis, however, had been its rapid expansion in the early 1980s. The addition of too many new plants and research facilities, and the Xonics acquisition, helped sink the company deeply into debt, just as Israeli government restrictions on foreign borrowing were causing Elscints creditors to apply pressure. Heavily dependent on exportswith only 3 percent of sales in its home countrythe company had been pouring money into sales and marketing overseas. But Elscints projections for revenue growthwith expectations of topping $220 million in 1985failed to materialize. In 1985, with sales rising only to $142 million, the company posted a $33 million loss, a loss which was later adjusted, when the full scope of the crisis was revealed, upward to a loss of $50.3 million.

This loss, however, was only a taste of what was to come. In the meantime, Shuhami, who had taken over as president of the companys U.S. subsidiary in March 1985, resigned from Elscintand fled Israel altogetherin June of that year, stating, as reported by the Financial Times, that he was resigning because the loss resulted from the business strategy of which I was the author and executor, and I must take responsibility. Elron chairman Uzia Galil stepped in as Elscints chairman, and began searching for a way to rescue the company. In 1986, the company cut more than a third of its workforce, and reorganized management, bringing in Benjamin Paled, formerly head of Israels Air Force, to lead Elscints operations. But in March 1986, the companys true financial position was finally revealed. As revenues for the year fell to $120 million, Elscint posted a loss of $115 million, the largest in Israeli corporate history.

The rescue of Israels flagship high-technology company was ordered by a commission chaired by then Prime Minister Shimon Peres. In exchange for stock options in Elscint and exemptions from the foreign borrowing restrictions, Elscints bank creditors, including Bank Leumi, Bank Hapoalim, Israel Discount Bank, United Mizrahi Bank, and the First International Bank of Israel, agreed to write off some $80 million of Elscints $150 million in debt. Elron, which held a 29 percent controlling interest in the company, also wrote off some $10 million in debt.

Rebounding in the 1990s

These steps rescued Elscint from immediate bankruptcy. But it would not be until the end of the decade that the company would again see a profit. The company reorganized, shutting its Paris, Milan, and Chicago plants, as well as other research facilities, and eliminated some of its product lines, including conventional x-ray equipment and ultrasound systems (which was eventually sold to Elbit Computers). Elscint also found its customers confidence in the companys long-term survival shaken, and sales regained only slowly, to $133 million in 1987. In that year, the companys losses continued, reaching $51 million, in part because of the companys reluctance to implement its proposed workforce reduction. While extraordinary gains from restructuring charges enabled Elscint to post net gains in 1988, it was not until the following year that the company returned to profitability, with net earnings of $3 million on sales of $147 million.

At the end of 1989, Elron, which had written off its interest in Elscint in 1988 in order to enable the holding company to restore its own profitability, announced a shuffling of shares that gave Elscints sister company, Elbit Computers, controlling interest (of 73 percent) in Elscint. The deal would also give Elscint access to its profitable new parents strong cash reserves. With this brightening outlook for its next decade, Elscint could refocus on its advanced medical imaging products in its core CT, MRI, and NMI systems markets. Despite the companys financial difficulties, Elscint retained its worldwide reputation for quality and leading-edge technology, a position further enhanced with an announcement of an exclusive marketing agreement with JEOL Trading Co. to bring Elscints products to Japan, the worlds largest market for medical imaging systems. This agreement proved significant as well, as it marked an end to Japans long acquiescence to the Arab-led embargo against Israel.

Elscint posted steady gains through the first half of the 1990s. Revenues rose from $191 million in 1991 to $221 million in 1992; by 1995, the sales, led by new generations of CT and MRI systems, as well as the introduction of advanced mammography systems, multimodal workstations, and connectivity and telephony productswhich, for example, enabled a hospital in California to view the real-time MRI images of a procedure in New Yorkto $282 million. The company seemed to put its losses behind it as well, while continuing to invest heavily in research and development. And in January 1997, Elscint recorded another significant moment among Israels high-technology industries, when it announced the sale of an MRI to Jordans Al-Basheer Hospital, the first major Israeli high-technology product to be sold in that country.

Principal Subsidiaries

Elscint Inc. (U.S.A.); Elscint France S.A.; Elscint Central and Eastern Europe (Austria); Elscint Canada Ltd.

Further Reading

Balnerman, Joel H., Israel 3: Sudden Plunge into Losses, Financial Times, June 1, 1987, p. 21.

Ellis, Walter, Israels Electronics Innovators Show Signs of Vulnerability, Financial Times, December 3, 1985, p. 22.

Elscint: Scanner, Scan Thyself, The Economist, September 20,1986, p. 74.

Friedlin, Jennifer, Elscint Wins Tender in Jordan, Jerusalem Post, January 28, 1997, p. 8.

Landau, Pinhas, New Look for Group: Everyone Benefits in Elron Deal, Jerusalem Post, November 14, 1989.

Lennon, David, Elscint Chairman Resigns After Slide into Losses, Financial Times, June 27, 1985, p. 16.

Lipkis, Galit, Elscint Profit Soars, Jerusalem Post, March 13, 1991.

Nash, Nathaniel C., Israels Apostle of High Technology, New York Times, July 8, 1984, Sec. 3, p. 6.

Ozanne, Julian, High-Tech Horizons, Financial Times, February 25, 1995, p. 20.

Taub, Stephen, Spotlight on Israels High-Tech, Financial World, August 15, 1983, p. 36.

Tinnin, David, How Elscint Profits from Inside Information, Fortune, March 23, 1981, p. 127.

M. L. Cohen