SensorMedics, Soviets Sign Deal to Assemble Diagnostic Equipment : Trade: Under terms of the joint venture, subject to Moscow’s approval, the Orange County company will be paid with cash from the sale of dismantled army tanks.

A small Yorba Linda company is forming a joint venture in the Soviet Union to assemble medical equipment to diagnose respiratory problems caused by environmental pollution and smoking.

The deal, subject to Moscow’s final approval, would have an interesting twist in this era of warming East-West relations: The Soviets plan to generate cash to buy parts for the assembly operation by selling scrap metal from dismantled Soviet tanks.

George D. Holmes, chief executive of Yorba Linda-based SensorMedics Corp., said the venture illustrates the Soviet Union’s resolve to divert money from military spending to meet pressing domestic needs, such as improving medical care for Soviet citizens.

Privately held SensorMedics manufactures computerized-diagnostic equipment used to detect such diseases as asthma and emphysema by measuring a patient’s respiratory functions and metabolism.

Under the deal, SensorMedics has agreed to train Soviet technicians to assemble and service the medical equipment.

A Swiss broker would act as middleman to sell the Soviet scrap metal. The broker and SensorMedics would each own 24.5% of the joint venture. The Soviet government would own 51%.

The Yorba Linda company expects to gain at least $10 million in annual sales from the venture, which Holmes said is in “the final stages” of negotiation.

“Obviously,” he said, “changes in the political climate in the Soviet Union, which could happen at any moment, could cause the project to go down the tubes. But so far we haven’t run into any major problems. We believe most of the top people in the Soviet Ministry of Health have approved it, and it is just a matter of getting signatures.”

The diagnostic equipment would be assembled at a former defense electronics plant near Moscow. The Soviet workers who lost their jobs when the military plant shut down will be retrained to assemble the hardware, Holmes said.

The president of the joint venture will be Alexandre G. Chuchalin, vice president of the U.S.S.R. Academy of Medical Sciences.

Holmes said the market for respiratory diagnostic equipment is growing much faster overseas than in the United States. He added that the potential for sales is especially great in Eastern Europe, where lung disease is rampant.

“The Eastern bloc has horrible smog problems,” Holmes said. “They burn coal, use a lot of asbestos and are heavy smokers.”

SensorMedics has sold its diagnostic equipment through a distributor to Soviet hospitals and clinics for the last three years. Soviet sales make up 5% of the firm’s total sales of about $46 million, Holmes said.

A major drawback to doing business in the Soviet Union, he said, has been the country’s shortage of internationally traded currency: “One of the biggest problems everybody has is getting paid. Rubles aren’t worth anything outside the Eastern bloc.”

To overcome that problem, Soviet officials agreed to earmark cash raised from the sale of scrap military steel to buy the company’s medical equipment. The steel, Holmes said, is reprocessed in Australia, then shipped to automobile manufacturers in South Korea and Japan.

Holmes said Soviet customers pay for SensorMedics’ products with letters of credit, which authorize the U.S. firm to immediately withdraw a cash payment from a bank.

“We get paid faster than we do from hospitals in the United States,” he said.

Until now, SensorMedics’ equipment has been sold only in such major Soviet cities as Leningrad, Kiev and Moscow. But, Holmes said, the Soviet government plans to open clinics throughout the nation to diagnose lung disease.

“Their plans are limited only by their funds,” he said.

He said SensorMedics is developing a new low-cost product for testing lungs that would be manufactured exclusively in the Soviet Union by the joint venture.