Volcano acquires Axsun for OCT; questions remain

SAN DIEGO, CA and BILLERICA, MA--Volcano Corporation, developer and manufacturer of products for the diagnosis and treatment of coronary and peripheral artery disease, entered into a definitive agreement to acquire Axsun Technologies for its optical coherence tomography (OCT) expertise. But the acquisition raises many questions about how Axsun’s OCT expertise will be put to the most “profitable” use by Volcano, especially considering that Axsun had already entered into a number of supply agreements for its OCT technology with other companies--agreements that mean Volcano has an instant pool of competitors for any OCT product it would develop using Axsun’s technology. In addition, the acquisition raises questions regarding the future of Axsun’s optical monitoring products for the telecommunications markets. How will Axsun focus on this business when its parent is now focused exclusively on medical diagnostics?

In calendar 2007, Axsun recorded revenues from continuing operations in excess of $18 million. Under terms of the acquisition agreement, Volcano will pay approximately $21.5 million in cash at closing for Axsun--quite a small sum in comparison to Axsun’s $15 million dollar Series D funding round in late 2006 and its initial $111 million and $36 million dollar funding rounds in 2001 and 2000, respectively. Indeed, in the January 6th conference call to explain details of the Axsun acquisition, Scott Huennekens, president and CEO of Volcano, said that the excellent acquisition price was a “no-brainer” in terms of making the ‘rent-versus-buy’ decision when you think of the $140 plus million dollar investment made in Axsun’s technology over the years; Huennekens pointed out that potential sales from 600–800 laser light engines could easily reach the $20 million dollar mark in a year’s time. The OCT light engine from Axsun was described by Huennekens as compelling technology--roughly 1/1000th the size of current laser components and representing a ‘matchbox’ light-engine footprint versus a ‘shoe-box’ footprint--that he didn’t want to see in the hands of his competition.

Volcano emphasizes that its focus is therefore not in the sale of Axsun’s light engines to other companies, but to integration of those engines in its own OCT product portfolio. This is where the acquisition gets cloudy, as Axsun currently has development partnerships with companies serving the cardiology and dental markets. In May 2008, LightLab Imaging (Westford, MA), an OCT systems supplier for cardiac imaging and other applications and wholly owned subsidiary of Goodman Co. Ltd. (Nagoya, Japan), entered into a multi-year exclusive agreement wherein Axsun would supply advanced tunable lasers for LightLab’s next-generation of swept-source OCT imaging systems. Any apparent conflict with the supply agreement was played down in the Axsun conference call wherein Huennekens said that the LightLab engine is different than what it will be developing with Axsun and “falls outside” the technology used for the LightLab agreement. LightLab Imaging president and CEO David Kolstad said, “LightLab values its relationship with Axsun and is monitoring the situation closely.”

As for Axsun’s telecommunications products, which represent the bulk of its current revenue (Axsun has an estimated 50% share of the high-performance optical-monitoring segment), Huennekens said, “The industrial/communications segment of the business is run by a highly competent and experienced team within Axsun and we expect that it will continue to flourish and provide the overall organization with operational leverage.”

Volcano is confident that Axsun’s light-engine expertise will move OCT beyond dental and cardiology applications into peripheral vascular, neurovascular, cancer, and ophthalmic markets--clinical indications and research opportunities that represent sizeable market opportunities beyond those currently served by Volcano’s offerings.

--Gail Overton