SonoSite looked like it was out of ideas. Why, after all, would the maker of portable ultrasound machines spend $89 million of hard-earned cash to buy back shares a couple months ago? That’s one of those time-honored financial engineering tricks that companies often do when they don’t have any promising new products to boost sales, and they need some artificial means of inflating their stock price.
Since Xconomy’s lens is fixated on innovation in the Northwest, I figured it was safe to turn the page on SonoSite, as just another maturing company doing its best to sell what it already has. Then the Bothell, WA-based company (NASDAQ: SONO) surprised me. Last week, SonoSite paid $71 million to acquire Toronto-based Visualsonics.
It was a bold move to obtain a new kind of ultrasound technology that’s five times more sensitive than anything on the market, and which can be used to offer extremely high-resolution images in places where ultrasound could never go before—to watch a developing fetus, a tumor, or a blood vessel forming inside a lab mouse, for example. Conventional ultrasound machines, like those sold by Siemens, Philips Healthcare, and General Electric, typically use a frequency range that provides good pictures when you get 3 centimeters or more below the skin, but aren’t useful just beneath the skin. SonoSite, which has sought for the past 12 years to match or beat the big boys with its miniaturized ultrasound technology, is now seeking to miniaturize this powerful and sensitive new breed of ultrasound, to keep a technical advantage over its rivals and to crack open entirely new markets.
“It’s gotten me very jacked up,” says SonoSite CEO Kevin Goodwin.
Visualsonics has been pursuing this idea of ultra high frequency, microscopic-level ultrasound for more than a decade. The company was founded in 1999 by Stuart Foster at Sunnybrook Health Sciences Center in Toronto. Over the years, Visualsonics showed it could make a system that uses five times the frequency currently used in conventional ultrasound systems (40MHz versus 8MHz). That frequency range essentially allows the Visualsonics ultrasound system to see biological structures as narrow as the width of a human hair (30 microns).
The initial market for Visualsonics has been in preclinical biology labs. The company developed a $200,000 cart-bound ultrasound system, complete with probes, disposable products needed to operate the machine, and software to help analyze the images. It was a completely new market for ultrasound, and something that has caught on with academic researchers. Suddenly, they could do animal experiments with, say, a cancer drug and examine its anti-tumor effect over and over after repeat doses, rather than dissect the mouse. Other non-invasive forms of imaging, like CT scans, magnetic resonance imaging (MRI), or positron emission tomography (PET), weren’t practical because of cost and hassle factors. Ultrasound, in the way Visualsonics offered it, made sense. The company generated $30 million in sales over the past 12 months, and turned a $5 million operating profit.
“Simply put, we like the business, we like the technology, we like the management team,” Goodwin told analysts on a conference call last week to explain the deal.
From a strictly financial point of view, in today’s numbers, this deal looks hard to justify. SonoSite is coming off a bad year in 2009. Annual revenue—for the first time in SonoSite’s history—declined 6.6 percent last year to $227 million. It was partly because of a tough market, as hospitals tightened their belts on purchasing new equipment in the recession.
So SonoSite is counting on the Visualsonics acquisition to pay off in a much bigger way over time. The plan has a couple key components. First, it will boost sales of the existing technology overseas, where Visualsonics has never really had the money or manpower to fulfill its potential. More importantly, SonoSite is planning to take the new company’s high-resolution technology and marry it with its in-house miniaturization experts to create a cheaper, easier-to-use product.
That product development effort ought to result in a new portable, super high-resolution ultrasound tool by late 2012 or early 2013, Goodwin says. It will cost $50,000 or less, much lower than the current tool from Visualsonics. And it will be aimed at visualizing things in human beings, not just animals.
SonoSite has some ideas about how exactly this new capability might be used. One obvious place is in the neonatal intensive care units of hospitals, where doctors may want a cheap and easy way to visualize what’s happening inside tiny, premature babies. Then there is pediatric oncology, in which ultrasound isn’t currently used to visualize how, say, chemotherapy might be affecting a tumor. Dermatologists don’t use ultrasound now, but they might try it if they had a tool that was sensitive enough to see if the wrinkle filler they prescribed was really doing a good enough job just below the skin. Tissue engineers might use it to see if their concoctions are working or not. Probes mounted on catheters could be so sharp as to distinguish between arterial blockages that are vulnerable to breaking off and causing a stroke, or tell whether those plaques are actually pretty safe and stable.
“You can see what you have never seen before,” Goodwin told analysts. “The biggest application is yet to be determined. It lies in the imagination of our future clinical users.”
Of course, a million things can go wrong in an acquisition. SonoSite is retaining the Visualsonics team of about 100 people in Toronto, and their management will report up to Goodwin’s executive team in Seattle. SonoSite now has about 770 people worldwide, Goodwin says. The cultures might not fit, the product might not launch on time, or the markets might not materialize the way SonoSite and Visualsonics expect they will for super high-resolution ultrasound.
But that’s all part of the risk that comes with the territory with an innovative undertaking. None of SonoSite’s competitors are anywhere close with a rival product, Goodwin says. He makes it plain that this new acquisition is meant to keep his company out in front of the pack.
“We’ve been innovating for 12 years around conventional ultrasound, through both miniaturization and simplification, and with market development for new users,” Goodwin says. “SonoSite is now on its way to having 60,000 systems installed. We are the unequivocal leader in our market. Now we’re bringing a new layer. We are bringing greater access to visualization in medicine. It’s for the betterment of medicine.”