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Security market "explodes" with activity.

This month the security technologies market once again became the focus of increased attention. The Madrid, Spain train bombings that killed 190 and wounded 1,800 highlighted even more security vulnerabilities. On the business front, GE's $900 million acquisition of InVision Technologies (see IBO 3/15/04) and Smiths purchase of Cyrano Sciences (see IBO 3/15/04) illustrate tire continuing consolidation in the sector and that these companies, among others, are increasing their foothold in the security-related instrument and technologies market. Such deals also suggest the direction of the market and what technologies will be required for it. In addition, the largely government-related business of the market, especially the higher profile US government efforts, is playing a significant role in shaping market priorities and demand.

A few technologies, and their vendors, currently dominate the civilian chemical explosives detection market in the US. However, the shortcomings of these technologies have created significant demand for new explosives screening tools. In the short term, the need for technical enhancements and modifications to existing equipment is expected to drive sales. In both cases, new technologies and technical configurations are being called upon to do the job, resulting in greater competition, new product developments and shifting market opportunities.

One of the most dominant, but not new (see IBO 10/15/02), trends in this market is technological integration. "The direction of the market is a migration away from people-intensive security towards technology-intensive security," says Jim Bergen, director of Public Relations for GE Ion Track, a division of GE Infrastructure Security. "This creates a 'natural regiment' for establishing a totally integrated security solution where the best available technologies work in concert with a minimum of human intervention."

GE's purchase of InVision, one of only two providers of TSA-certified explosive detection systems (EDS), follows its acquisition of Ion Track (see IBO 9/30/02). As GE Infrastructure President and CEO Bill Woodburn commented on a conference call, the company plans to combine the Ion Track and InVision technologies with its CT imaging and Global Research Center capabilities to create new products. "I believe our strength in Ion Track on chemistry and the strengths in InVision on physical detection and analysis, coupled together, will make for a very powerful capability."

Before the acquisition, InVision itself had been expanding to its technical capabilities. Last year, it added Yxlon International Holding GmbH (see IBO 2/28/03) to its business, which also includes Quantum Magnetics, a maker of quantum resonance technology. Smiths Detection has also built up its technology offerings. In 2002, it bought Heimann Systems GmbH (see IBO 10/15/02). As Robert Judd, president of Smiths Detection US Defense & Intelligence, and Steven Sunshine, president of Smiths Detection-Pasadena, told IBO, file integration of the companies' technologies will enable the creation of new detection systems as well as the addition of new capabilities to existing systems. Security applications for Cyrano's chemical sensor include personnel badges for chemical and biological agent direction, distributed monitoring and chemical/biological detection systems for cargo monitoring. However, GE and Smiths have not been the only companies making acquisitions (see table page 6). Earlier this year, OSI Systems completed its acquisition of Advanced Research & Applications Corporation (ARACOR) (see IBO 2/15/ 04). OSI Systems' explosive detection business now includes x-rays, thermal neutron technology and pulsed fast neutron systems.

Increased awareness since 9/11, the formation of the Transportation Security Administration (TSA), public policy priorities ,and mounting threats have all increased funding for both the R&D and purchase of explosive detection equipment. Although the first wave of funding was directed at airport baggage and passenger screening, cargo screening has been the latest area under scrutiny. New air cargo security rules are expected to be released this year by the TSA, and a security directive issued by the TSA last year requires random inspections of air cargo, including the use of EDS screening. For fiscal 2004, TSA has allocated $55 million for the assessment of EDS application to air cargo screening. Earlier this year, the TSA requested proposals for off-the-shelf instruments to screen noncontainer air cargo. President Bush's fiscal 2005 budget proposal includes $85 million for air cargo security, including the R&D of screening technologies.

For cargo shipped by sea, the Department of Homeland Security's (DHS) Customs and Border Protection Agency initiated the Container Security Initiative last year. Among its requirements is the pre-screening of containers that "pose a risk" at the foreign port of departure using nonintrusive detection technology, such as gamma or X-ray imaging systems. As of March 8th, 37 ports in 18 countries had implemented procedures in accordance with the Initiative. The TSA's fiscal 2004 budget designates $64 million for port inspection, including the use of screening technologies. In addition, earlier this month, the DHS announced the Rail & Transit Security Initiative, which includes a pilot program for the screening of luggage and carry-on baggage at train stations.

As for airport baggage and passenger screening, it remains incomplete. In response to the inadequacies of current equipment, the TSA is funding the development of so-called "next generation" EDS and ETS equipment. According to Cathleen A. Berrick, director of the Homeland Security and Justice for the Government Accounting Office, approximately $45 million of TSA's fiscal 2004 budget is for the R&D of next generation EDS equipment for hold baggage, carry-on baggage and passenger screening. President Bush's fiscal 2005 budget requests $49 million for applied R&D and $50 million for next generation systems. Also, in the planning stages is the Manhattan II program, which aims to develop improved checked baggage screening systems over the next 5 to 10 years. In addition, concerted efforts are being made internationally to develop explosive detection equipment. The European Commission's recently issued report "Research for a Secure Europe" urges 65 million [euro] be spent between now and 2006 to implement an EU security research program.

The next generation of EDS and explosive trace detection (ETD) equipment is expected to utilize and integrate several technologies. Such technologies will be key in making EDS and ETD equipment, as well as other detection devices, faster, smaller, more automated, highly accurate and less expensive. Ideally, they will also combine multiple functions into one system, such as screening for a wider range of explosives, or simultaneously screening for chemical, biological and radioactive threats. In addition, portable, inexpensive, easy to use and flexible systems will be required for the first responder market and screening in other locations.

The demand for new systems has attracted companies both big and small. The security detection divisions of companies such as GE and Smiths are drawing on a number of technologies through acquisitions, partnerships and licenses as well as R&D investments. Military and academic groups, as well as start-ups, are among the licensors. Also, defense contractors have also stepped up their presence. Northrop Grumman recently announced the establishment of a Chem-Bio Defense Technology Center that will draw upon the company's mass spectrometry, electro-optics and micro-electro-mechanical systems bioassays technologies to develop systems for chemical and biological agent detection. Last year, Lockheed Martin signed a marketing agreement with Analogic, which supplies its Explosive Assessment CT systems to L-3 Communications for their EDS machines, for its COBRA (Carry-On Baggage Real-Time Assessment) Explosive and Weapons Detection System for screening carry-on baggage.

Among the technologies under serious consideration for future chemical detection equipment are imaging systems. In particular, millimeter wave systems, which allow the nonintrusive screening of people and objects and can detect explosives as well as metal, ceramic and plastic weapons. Licensed from Pacific Northwest National Laboratory Technology, SafeView's millimeter wave system generates holographic images by bouncing radar waves off an individual, which are then read by a sensor array. Last year, InVision made a strategic investment in SafeView, which is currently developing a portal system for passenger screening (see IBO 5/31/03). QinetiQ's passive millimeter wave camera emits no radiation and allows scanning of objects in motion. Boeing has partnered with the company to further develop the system. Also TeraView has touted the screening applications of its terahertz imaging technology (see IBO 3/15/04). The DHS Technical Support Working Group recently awarded the New Jersey Institute of Technology a $713,838 contract to develop a terahertz system to identify explosives.

For baggage screening, new X-ray technologies are expected to add to the capabilities of current systems. Reveal Technologies received a $2.38 million contract from the TSA to develop a next generation EDS using its FACT technology that combines computed tomography (CT) and dual energy x-rays. Analogic also received a $1.15 million contract for the development of an EDS using its CT technology. Both the Reveal and Analogic systems use networked systems allowing one person to monitor several systems.

Trace detection is also expected to look different in the future. For the hand-held market, InVision signed an exclusive contract with Implant Science for evaluation of its noncontact ETD technology. Designed for the US Navy, implant Sciences' Quantum Sniffer can detect explosives at the part per trillion level and is expected to have a commercial price of between $30,000 and $45,000. Under a $1 million contract with the TSA, the company is developing a bench-top ETD for use at airport check-in counters.

But not all monies are going toward future systems. Currently installed EDS are also being upgraded. Among the priorities are in-line EDS systems for checked baggage. For fiscal 2004, $150 million is allocated for the purchase of EDS equipment and $250 million for EDS installation. Only eight airports currently have full in-line EDS systems. Funding for installation of in-line systems at 60 airports seeking them is estimated at $4 billion, excluding the EDS purchase. But only nine airports have received commitments to fund such systems so far.

While in-line systems will clear space, increase throughput and decrease required staffing levels, such systems do not address the high false alarm rates and down time that currently plague EDS equipment. The TSA is attempting to address such problems through EDS modifications. Last fall, a $3.85 million contract from the TSA went to Analogic and Lockheed Martin for performance enhancements to EDS equipment. Also, a fall 2003 contract of $2.04 million went to InVision for EDS performance enhancement. Also OSI Systems' Rapiscan single and dual energy x-ray systems gained 3-D imaging capabilities under a manufacturing and sales agreement with Image Scan for incorporation of ImageScan's AXIS 3-D camera.

Also driving product development is the need to grow sales. With many larger airports having purchased EDS and ETD equipment to meet current guidelines, sales to that market segment have slowed. For the first six months of fiscal 2004, OSI Systems' revenues from security and inspection products increased just 2% to $52.7 million. Smiths Detection reported "subdued" activity for its airport business for the year ending January 31, 2004. InVision reported that 2003 EDS product revenues fell 24.8% to $303.0 million. It stated, "We anticipate that EDS product revenues will continue to decline in 2004," noting the increase demand for in-line systems. L-3 sales of EDS equipment declined 29.9% in 2003 to $101.5 million, due to decreased demand from the TSA. But such dips are to be expected, according to Mr. Bergen. "Government budgets are inherently cyclical, however in times of great security needs, appropriations can, and have, allocated funding for immediate deployment of security equipment." Mr. Judd told IBO that governments usually have a five-year budget plan, which provides companies with a relatively predictable spending pattern.

The TSA and other US agencies' commitment to technology-driven solutions for explosive detection and screening, the demand for new systems and the nature of TSA certification and purchases, which award large contracts for certified systems, all suggest rapid market growth. In addition, international demand, public venue screening and private security needs hold further opportunities. But the competitive and political nature of the market, as well as the government funding process, present challenges that favor companies experienced in the market, and their partners.
2002 and 2003 Explosive Detection Related Acquisitions

Buyer Acquired Technologies

General Electric Ion Track Ion Mobility Spectrometry
InVision Yxlon International X-Ray (Diffraction)
 Technologies GmbH
Markland Science and Ion Mobility Spectrometry
 Technologies Technology Research
OSI Systems ARACOR X-Ray (CT, Digital and
 Real-TimeTradiography)
SAIC Exploranium G.S. Radiation Detection
Smiths Detection Heimann Systems GmbH X-ray (CT, Diffraction, Dual
 Energy) Metal Detection
 Biometrics
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Publication:Instrument Business Outlook
Geographic Code:1USA
Date:Mar 31, 2004
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