CT industry sets revenue records in 2005

April 20, 2006

Revenue from the delivery of new CT units in the U.S. last year grew 15% compared with the previous year, and unit volume rose about 3%, making 2005 the best sales year in the history of the modality. The availability of 64-slice scanners capable of coronary CT angiography led the industry to those heights. This year, however, vendors are just hoping to hold onto last year’s gains.

Revenue from the delivery of new CT units in the U.S. last year grew 15% compared with the previous year, and unit volume rose about 3%, making 2005 the best sales year in the history of the modality. The availability of 64-slice scanners capable of coronary CT angiography led the industry to those heights. This year, however, vendors are just hoping to hold onto last year's gains.

Top executives at CT firms expect price erosion to begin eating into profits. Because all the major CT vendors (Toshiba, Siemens, GE, and Philips) are now in full production with 64-slice scanners, competition is heating up, and that means lower prices for new buyers.

Already by the end of last year, prices had slipped 8% to 10% as Philips joined the pack with full production of its 64-slice system. Consensus among vendors put the average price of a basic 64-slice scanner at about $1.3 million. If history is a guide, more price erosion is inevitable.

"We will probably see another 8% to 10% decline by the end of 2006," said Jim Fulton, senior vice president and general manager of CT at Philips Medical Systems.

Unit volume might slip this year as well, if government efforts successfully rein in healthcare spending. Last year Medicare changed course on reimbursement for the diagnosis of contiguous body parts, as happens when a CT scanner runs the head, neck, chest, and abdomen of a patient, for example. The first body area is being reimbursed at 100% of the typical rate, but those that follow are reimbursed at only 50%.

Adding uncertainty to the already down-directed spiral in reimbursement is the Deficit Reduction Act of 2005, which portends deep cuts for outpatient operators of CT scanners. The act may yet be altered in some way, but just the possibility of lower reimbursement is giving some prospective buyers pause.

So far, no major aberrations have surfaced in the marketplace. Vendors remain buoyant, coming off what all agree was a very positive year. In 2005, the CT industry garnered about $1.5 billion from the shipment of new units to U.S. customers, according to consolidated vendor estimates. This was up 15% from the previous year. Estimates of orders for new systems constituted an even rosier picture with revenues of $1.9 billion compared with $1.4 billion in 2004, an increase of 35%. Vendors caution, however, that not all these orders will necessarily turn into shipments, as some carry delivery dates in 2007.

Revenues were driven by a relatively small increase in the number of units shipped. Industry executives suggest that the actual number of systems installed last year may have increased by only about 3%. Orders for units, however, increased by about 11% over 2004.

The disparity in percentages between revenues and units is explained by a strong shift toward the high end of the CT spectrum. Vendors agree that systems with 17 or more slices accounted for about 70% of the units shipped and ordered in 2005. In this mix, populated by 32- (GE, Siemens, Toshiba), 40- (Philips), and 64-slice (all vendors) scanners, the 64-slice systems accounted for a majority of sales. Estimates peg the share of scanners in this group at 60% to 70%, compared with the 30% to 40% share held by the 32- and 40-slice systems.

"The swing toward 64 was even faster than the swing toward 16-slice scanners in the early 2000s," said Doug Ryan, director of the CT business unit at Toshiba.

The workhorse of radiology, the 16-slice scanner, fell from grace in 2005. The widespread availability of 64-slice devices last year drove down interest in 16-slice systems. Revenues from the installation of new 16-slice units fell from $850 million in 2004 to about $550 million last year. Orders for these systems showed a deeper dive from about $800 million in 2004 to about $350 million in 2005. Lack of interest caused the price of these systems to plummet to around $700,000, down nearly 20% from the previous year.

The silver lining may be that continuing price erosion could spark new interest in the 16-slice, as customer preferences for this scanner rise at the expense of lesser slice models, particularly quads and duals.

"I wouldn't be surprised if it grows a little over the next year and becomes a stable market for a few years," Ryan said.

The one distinguishing quality between earlier and current generations of CT is the inherently improved ability of 64-slice scanners to visualize the heart and coronary vessels, according to Brian Duchinsky, global general manager for the CT imaging business at GE Healthcare.

"Cardiac CT in one year has gone from an intellectual curiosity to being perceived as inevitable," he said. "Customers want to get serious about it right now."

Vendors are aggressively positioning megaslice CT as a noninvasive alternative to cardiac cath, while highlighting the devices' ability to handle any and all radiological applications faster than before. Radiologists, who constitute the majority of customers, use these systems for routine applications while judiciously performing cardiac exams that will build and establish their technical expertise in this fledgling clinical area.

"In the U.S., the majority of our (Philips) systems have cardiac functionality built into them," Fulton said. "But the number of people using this functionality on a regular basis is substantially lower than the number of units we sell."

Fulton said the idea may be to establish the competence - and, if possible, the contacts in the cardiology community - to support coronary CT angiography referrals when reimbursement becomes available. Toshiba is trying to give that process a boost. The company has established a cardiac marketing management team in the U.S. to help bridge the gap between the two specialties.

"We are trying to help hospitals form relationships between cardiology and radiology," Ryan said. "It is essential to our success and essential to patients' success that we encourage this."

The insurance industry is helping, as some third-party payers are already recognizing 64-slice coronary CTA as a reimbursable procedure. Broad-based reimbursement may be available within a year or two. If or when this happens, the sales driver may come from the cardiology community - and the sale of high-end CT scanners could skyrocket, according to vendors.

GE and Toshiba are actively pursuing this future, spending millions to support multicenter clinical trials aimed at finding where 64-slice scanners fit in the diagnostic scheme. Philips and Siemens may follow suit. Doing so, however, carries certain risks.

Shortly after the introduction of 16-slice scanners, Philips supported multicenter trials to document its cardiac utility. The results, although clinically positive, produced little positive effect on Philips' sales of 16-slice scanners. The innovation cycle in CT overtook the results, Fulton said.

"By then the market had moved to 64-slice scanners," he said. "So now we need to gather new data."

Technical innovation is less likely to make clinical data obsolete this time around, as 64-slice scanners are widely believed to be sufficient to perform coronary CTA. Subsequent generations will probably not offer any clinical advantage that would negate the use of 64-slice systems. Clinical results from 64-slice trials will not, however, be universally applicable. Siemens late last year released a superpremium CT scanner featuring two x-ray tubes that offers advances in temporal resolution designed specifically for cardiac imaging.

Preliminary tests indicate that the Somatom Definition may be extraordinarily good at imaging the heart and coronaries. Its dual-source imaging chains can freeze the heart at rates of up to 110 beats per minute, according to Scott Goodwin, vice president of CT for Siemens Medical Solutions. Substantial clinical data to this effect, however, have yet to be gathered.

The first site in the U.S. to get a Somatom Definition is just now taking delivery, he said. The next several are scheduled for delivery by the end of summer. Many of these will be oriented toward cardiology, although the higher energy output possible with two x-ray tubes makes it attractive for the growing portion of the U.S. population that is overweight.

"The Definition isn't just a cardiac machine," Goodwin said. "It has the ability to provide bariatric services, and, in a future yet to be defined by the use of two different energies, we might see CT change like it did following spiral imaging many years ago."

In the meantime, Siemens is touting its 64-slice Sensation, one of the first such products to enter the global marketplace. Goodwin reports that sales remain brisk but acknowledges that the introduction of the Definition is affecting sales. In trying to capture the leading edge of cardiac imaging, the company has put itself in the position of having two flagships: one priced in the mainstream of other 64-slice scanners, around $1.3 million, and the Definition, priced at about twice that amount.

Goodwin recounts a discussion with a prospective customer at the RSNA meeting last year who wanted to see Siemens' "really fast" CT scanner. Goodwin distinguished the 64-slice Sensation from the Definition as a matter of clinical approach.

"I said 'If you want to see a really fast CT scanner, I'll show you the 64-slice; If you want to see an instrument that could change clinical workflow, let's talk about the Definition,'" Goodwin said.

Looming cuts in reimbursement for outpatient facilities, in the context of cuts already in effect, have trimmed some of the broad-based enthusiasm for 64-slice scanners. Cuts imposed by the Centers for Medicare and Medicaid Services will reduce reimbursement for imaging exams on contiguous body parts in the same session by 25% in 2006, with an additional 25% reduction to take effect in 2007. These directly address CT, which often scans several body parts in a single session. The Deficit Reduction Act, passed last year and due to take effect Jan. 1, 2007, would do further damage by capping the technical component reimbursement for outpatient imaging to the lesser amount set out in the Hospital Outpatient Prospective Payment System or the Medicare Fee Schedule.

These moves have begun to spook customers shopping for new CTs. Fulton cites a prospective outpatient customer who indicated interest last year in buying a 64-slice scanner only to backpedal from making a commitment until the reimbursement picture is clearer.

"There are some very concerned operators, especially of outpatient facilities," he said.

No orders have yet been canceled due to these concerns, the vendors report. But some customers currently on the fence might stay there awhile, putting a dent in this year's CT revenues.

Although the year ahead may not shine as brightly as 2005, vendors remain optimistic. Delays in purchases made by outpatient clinics might be offset at least partly by increased sales in hospitals. Efforts to make CT scanners more productive, to make up for lost income, might entice some in the outpatient arena to go ahead with plans to buy high-end scanners this year.

These should buoy the market and keep the industry from experiencing too great a shortfall in 2006, according to vendors. And then there is the prospect of coronary CTA reimbursement, which may not be all that far away.