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CTI Deal Sealed Suddenly; Sale to Siemens Expected, but Not so Quickly

Posted on: Friday, 13 May 2005, 12:00 CDT

The $1 billion sale of CTI Molecular Imaging to partner Siemens was expected, but it was still sudden.

The potential acquisition of at least a portion of Knoxville- based CTI by Siemens Medical Solutions, a subsidiary of the German manufacturing giant, has been on the drawing board for years. The two companies partnered to manufacture CTI's positron emission tomography, or PET, scanners in 1987.

It took just a few hours, however, to wrap up the cash deal and announce it to the world.

Friday started with approval of the merger by Siemens' board of directors at 7 a.m., approval by CTI's board in Knoxville at 8 a.m., a 9:30 a.m. press release and a 10 a.m. company meeting to notify CTI's 963 employees of their new owner.

Siemens will buy outstanding shares of CTI stock as well as unregistered shares and options for $20.50 per share, a 17-percent premium over CTI's closing stock price of $17.53 on Thursday.

"The deal did happen ... much faster than we anticipated," CTI CEO Ron Nutt said Friday in an interview, adding that the sale price was determined through negotiations between the companies and their investment bankers.

He said CTI and Siemens have been in discussions about the acquisition for six to eight months, but until two weeks ago the companies were negotiating a way for Siemens to acquire only a portion of the company.

Siemens already holds a 49.9 percent stake in CTI PET systems, or CPS. CPS is the manufacturing division of CTI that produces PET scanners. The scanners are sold to health-care providers to diagnose cancer and other diseases.

The scanner maps the body by means of a radioactive drug injected into the patient that allows a PET machine to highlight its metabolic function and pinpoint areas of disease.

Doing the deal

According to the agreement between CTI and Siemens, Siemens had an option to buy controlling interest in CPS once a certain number of scanners were sold within a particular time frame. Then Siemens could acquire the entire company. CTI officials have said sales projections would have triggered the put/call arrangement in late 2005 at the earliest.

Ultimately, Siemens decided to buy CTI as a whole and to do so earlier than the put/call deadline, said Nutt, because of the interdependency of CTI's divisions and because of Siemens' interest in working with CTI to create new products on both the medical device and pharmaceutical sides of the business.

"We had a lot of discussions about separating the company," he said. "What we learned in that exercise is that these parts are very important to be together. ... (The merger) was a lot easier because we stopped the process of trying to divide the company into two companies and the process was just much simpler."

The CTI acquisition is part of an overall strategy that Siemens is pursuing in regard to medical care, said Michael Reitermann, president of Siemens Medical Solutions' nuclear medicine group, under which CTI will operate post-merger.

"We basically have a new strategy where we have different approaches to what we call personalized medicine," Reitermann said Friday in an interview. "CTI is a key building block for this whole strategy. The realization just grew over the last 12 to 24 months that this is definitely a good fit for both parties."

Nutt said CTI under Siemens will work to design PET technology that, as with the combination PET/CT machine, can be paired with other medical imaging technologies, such as magnetic resonance imaging, or MRI.

Local future

Reitermann said he sees the company's local operations and local employees as a vital part of the acquisition and said Siemens plans to keep CTI in Knoxville and intact.

CTI employs 963 people worldwide and about 650 at its Knoxville headquarters and manufacturing facility and at manufacturing facilities in Rockford.

"We acquired the people and the know-how," Reitermann said. "There are no plans to move locations."

Nutt said retaining local employees was part of the deal "or we would not be doing it."

As for the company's executives, including Nutt, he said it remains to be seen what roles they'll take within Siemens.

Reitermann said in the coming weeks Siemens will meet with CTI executives to determine what their future roles may be.

Nutt, 66, said he doesn't plan to retire from CTI, although "Michael and I have not had time to discuss the details of that. I will be involved with the company on an ongoing basis."

Nutt said he did not know what role CTI founder and former CEO Terry Douglass might play at CTI. Douglass resigned in October 2003 and now serves as chairman of the board.

"I'm not exactly sure what the phase-out of the CTI board will be. I know for an interim period there is a commitment by the board to stay intact and continue to function," Nutt said. "Exactly what Terry's responsibility will be will be defined as we go."

Nutt said he anticipates the business will grow under Siemens' management as the company develops new PET technologies for the health-care market.

"The business is growing very rapidly," he said. "We expect that to continue."

The growth CTI has experienced this year was one reason the company became an attractive buy following a lackluster period in the PET market last year, Reitermann said.

Last month, CTI announced first quarter revenue of $67 million, up 21 percent from $55.5 million in first quarter 2003. CTI projected sales would continue to flourish in 2005 as the U.S. PET market recovers and demand increases overseas.

Clearing hurdles

CTI has experienced its share of ups and downs since its founding in 1983. First, it effectively took some 17 years for PET scans to become reimbursable by Medicare, a critical step for the success of any medical device.

CTI went public June 22, 2002, opening at $17 per share and climbing on its first day of public trading to $19.50 per share.

CTI fared well on Wall Street until the fall of 2003, when it had to adjust a couple of earnings projections and, shortly thereafter, replaced founding CEO Douglass with Nutt, who was operating CTI PET Systems at the time.

In conjunction with the initial public offering, CTI began selling PET scanners under its own name and launched an education and marketing campaign to spread the word about PET, a relatively new diagnostic tool in the medical world.

The company struggled, however, to compete against the world's biggest medical device companies, including General Electric and Philips, as well as to carve out a niche separate from Siemens, which also was selling CTI's products under its own name.

The executive reshuffling in 2003 was followed by layoffs in 2004, which trimmed 78 employees from CTI's work force. And throughout 2004, the company suffered from sluggish demand in its U.S. market.

At the same time, Nutt reorganized CTI to separate the company's pharmaceutical research and distribution from its scanner manufacturing operations in preparation for ultimate acquisition of CTI PET Systems by Siemens.

In the end, Siemens decided to buy it all.

Local payoff

Nutt said CTI's acquisition benefits the community in a couple of ways.

First, employees with stock options will have more money to spend or invest locally, he said.

CTI executives also are reaping a windfall from the sale. Major shareholders Nutt, Douglass and co-founder Michael Phelps together will make more than $240 million from the deal, based on Securities and Exchange Commission filings in February.

"Every employee in the company has stock options that have value and those will be cashed out as part of the deal," Nutt said. "There's a lot of money that will come by way of the employees into the community."

He said Knoxville also would benefit from Siemens' presence here.

"We've got a major national company coming to Knoxville, Tennessee," he said. "We expect a much broader set of opportunities for CTI than we had before."

Business writer Larisa Brass may be reached at 865-342-6318.

CTI MOLECULAR IMAGING

* Founded: 1983

* Headquarters: Knoxville

* 2004 Employees: 963 total, 650 in Knoxville and Blount County

* Products: PET scanners, radiopharmaceuticals, cyclotrons, computer software, PET-related services

* 2004 revenue: $402 million

* 2004 net income: $18.6 million

* Ownership: Publicly traded on Nasdaq stock market, symbol CTMI

* Divisions: PET Systems, PETNET Solutions, Mirada Solutions, CTI Molecular Technologies, CTI Concorde Microsystems

* Competitors: GE Healthcare, Philips Electronics

SIEMENS AG

* Founded: 1847

* Headquarters: Munich, Germany

* 2004 Employees: 419,200

* Products: Telecom network equipment and mobile phones, home appliances, computer and entertainment equipment

* 2004 revenue: $93.4 billion

* 2004 net income: $4.2 billion

* Ownership: Publicly traded on New York Stock Exchange, symbol SI

* Divisions: Siemens' Medical Solutions (the division buying CTI); industrial automation and control; information and communications; power; transportation; lighting; financing and real estate.

* Competitors: ABB, GE, Hitachi

Sources: CTI Molecular Imaging; Siemens AG; Hoover's Online business reports; Securities and Exchange Commission filings; Associated Press

CHRONOLOGY

* 1983: Terry Douglass, Ron Nutt, Michael Phelps, Mike Crabtree (no longer with the company) and Kelly Milam (retired) start CTI.

* 1987: CTI forms CTI PET Systems as a joint venture with Siemens to bring together CTIs PET experience with Siemens global distribution network.

* 1992: CTI develops the first whole body imaging capability.

* 1998: Invents the combined PET/CT scanner and demonstrates the first clinical image using this scan.

* 2002: CTI goes public on the Nasdaq Stock Market, introducing its stock at $17 per share.

* 2003: CTI founding president and CEO Terry Douglass steps down and is replaced by co-founder Ron Nutt. Douglass remains chairman.

* 2005: CTI announces sale to Siemens.

Source: News Sentinel

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