A Diagnostics & Imaging Week

On the heels of its report of another quarterly loss – consecutively, its sixth – Eastman Kodak (Rochester, New York) late last week said that it is exploring "strategic alternatives" for its Health Group. The company said it has retained Goldman, Sachs & Co. as its adviser in the exploration of the alternative possibilities, which normally means a sell-off.

Kodak reported a 1Q loss of $298 million, compared to a loss of $146 million in the year-ago period, the increase driven largely by efforts to move from its traditional film-based product line to largely digital offerings.

As a result, the potential spin-off of the health group appears somewhat counterintuitive since the Health Group, with 2005 revenue of $2.7 billion, is also pursuing the increased emphasis on digital technologies. The group's health imaging products include digital X-ray capture, medical printers and X-ray film.

In a conference call, Antonio Perez – who assumed the CEO and chairmanship posts at the company last June – described the proposed alternatives for the Health Group as part of the company's overall repositioning.

He called the Health Group "a very valuable business" with leading products and leading sector shares for those products and "a tremendous heritage in the health imaging market."

But, he said that the "dynamics" in the sector "are redefining the business model and the scale required for sustained success and leadership."

The move to explore alternatives, he said, had not been decided recently, he assured investors.

"We have been preparing for this possibility for some time and will move this process forward as rapidly as possible," he said. "While the Health Group is enjoying strong organic growth in elements of its digital portfolio, such as digital capture solutions and healthcare information solutions, we have been observing for some time consolidation in this industry. Given our valuable assets and the changing market landscape, we feel that now is the time to investigate strategic alternatives."

Perez told listeners that the restructuring costs would be the highest in 2006, with the restructuring completed in 2007.

In other deal activity: In its continuing effort to add cash and stay flexible, Human Genome Sciences (HGS; Rockville, Maryland) signed a $425 million agreement with BioMed Realty Trust (San Diego), related to the sale and leaseback of HGS' large-scale manufacturing facility in Rockville, Maryland, as well as a new lease for its headquarters office and laboratories facility.

The deals are expected to add about $380 million in net additional cash for operations, including $220 million in new cash and $160 million in cash freed up by the headquarters lease.

Once wholly owned, the manufacturing facility was finished last year and measures 290,000 sq. ft., while headquarters totals 635,000 sq. ft. and previously was the subject of a "synthetic" lease, under which it was not reported as an asset and payments were treated as operating expenses.

Under the synthetic lease, HGS last year had to keep $204 million in cash restricted, but the deal with BioMed calls for only $46 million to be kept restricted. BioMed will buy the manufacturing facility, HQ (also in Rockville) and land for $425 million, and the $380 million in added cash is net of the restricted $46 million.

HGS will enter into 20-year leases, with options to renew, and with the right to repurchase each facility under certain circumstances. The initial rent hike, offset by increased interest income, amounts to about $20 million, and HGS is "exploring opportunities to offset" the amount, with guidance for investors expected as part of second-quarter financial results.