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: [[ticker: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
