CT market struggles as vendors prepare new generation of scanners

April 21, 2004

Return of growth depends on megaslice productsThe arrival of the next generation of CT scanners--32-, 40-, and 64-slice products--promises to reinvigorate a market that stumbled last year and showed continued weakness in the first

Return of growth depends on megaslice products

The arrival of the next generation of CT scanners--32-, 40-, and 64-slice products--promises to reinvigorate a market that stumbled last year and showed continued weakness in the first quarter of 2004. The bad news is that these new megaslice systems could make matters worse before they get better. Slowing demand for 16-slice scanners and the introduction of more powerful new systems whose applications have yet to be proven could lead to a decline in unit sales and revenues this year and next.

These worries are coming on top of what was a disappointing CT sales performance in 2003. Industry sources report that revenues from the shipment of new CTs declined in 2003, although unit shipments remained flat or slightly higher than the year before. CT executives are predicting more of the same in 2004--or slightly worse.

Doug Ryan, Toshiba CT business unit director, believes the number of units shipped this year will remain about the same as last. He expects revenues to slip, however, between 5% and 7%. Bappa Choudhury, Siemens group vice president of CT, believes this generally dark picture for 2004 might brighten by year's end.

"I think you will see similar unit sales, maybe even a few less this year, with a further decline in dollars because of price erosion," Choudhury said. "But as the year winds down, the next wave of technology, the 32s, 40s, and 64s, will come into play and there will probably be a little spike in units and a dollar volume increase."

That spike, however, is not expected to last, as orders from early adopters are filled and the industry awaits a more generalized adoption of the new scanners. Vendors will be further squeezed in 2005 by softening prices for 16-slice systems precipitated by the commercial availability of 32-, 40-, and 64-slice products.

"As soon as a new technology gets brought into the top, the slice configurations below it cascade downward," said Jim Fulton, vice president of global marketing for Philips CT.

On the bright side, the CT market had achieved impressive numbers before leveling off. Despite an uneven performance throughout 2003, the industry brought in about $1.2 billion in revenues from North American CT sales on more than 1400 units. Sixteen-slice scanners accounted for about 70% of the revenue and about 65% of the units sold. Vendors scored another $100 million from the sale of used and refurbished units.

The strong secondary market for pre-owned equipment put pressure on vendors to reduce the price of new units. Aggressive competition, particularly the widespread sale of 16-slice scanners into community hospitals, added further pressure.

The soft market in 2003, coming on the heels of weakness in the previous year, pushed vendors to bring out the next generation of CT scanners earlier than they would have liked. The 16-slice generation enjoyed less time at the top of the heap than did its quadslice predecessor, which reigned supreme from 1997 to 2001, when the first 16-slice scanners began to ship. And the window for return on investment may continue to shrink. Industry executives acknowledge that they may begin talking seriously about launching 128- and 256-slice scanners within two or three years. Whether these systems are commercialized in that tight time frame will depend on the success of this next generation of 32, 40, and 64-slice scanners. Unlike previous generations, this one will benefit cardiology more than radiology.

"The cardiovascular market is one of the biggest opportunities for growth of equipment, but more important, it could have a very profound effect on the way we deliver healthcare," said Peter Arduini, general manager of functional and CT imaging at GE Healthcare Technologies. "You could have a definitive answer in five minutes using CT, rather than sending a patient to cardiac cath."

The adoption of CT by cardiologists could have a profound effect on radiology as well. Cardiologists are not familiar with the use of CT, yet they have a long history of adopting imaging technologies when their utility in cardiology is proven--witness x-ray fluoroscopy, nuclear medicine, and echocardiography. Coronary CT was a hit at the annual meeting of the American College of Cardiology.

Whether these leads will turn into sales is the $1.5 million dollar question for Siemens, which will begin selling its megaslice scanner later this year at this proposed price point. The system, which uses a dual focal spot and 32 detector rows to generate 64 slices per rotation, claims 0.4-mm spatial resolution and a 0.37-sec rotation. It delivers enough horsepower to spring CT into a complementary role with cardiac cath for the noninvasive assessment of heart patients (see accompanying story this issue).

Siemens and the vendors of similar systems hope to push the price ceiling for CT beyond its traditional $1.2 million. They recognize, however, that this will not be easy. Diagnostic cardiologists are far more sensitive to the price of equipment than their interventional colleagues, a fact long known to Imatron, which tried with lackluster success to sell its electron-beam CT systems for $1.7 million. GE Healthcare, which purchased Imatron, has sold five e-Speeds since this latest electron-beam tomography system was released some 18 months ago.

The new breed of CT scanners may expand the CT installed base further by attracting the interest of physicians who will want to perform virtual colonography. But neither group--cardiologists nor GI specialists--will buy substantial numbers of these advanced CTs until their clinical value is documented and reimbursement is in place.

Winning acceptance for megaslice scanners has become monumentally important to the CT industry, which has already weathered two difficult years. With demand beginning to taper off in 2002, vendors embraced entrepreneurs who founded outpatient centers devoted to screening. The plan backfired when many of these centers failed and virtually new16-slice scanners were dumped into the general marketplace in 2003 (SCAN June 11, 2003).

These problems are no more, as this equipment has now been absorbed. The used equipment market, however, persists and will likely accelerate when early adopters snatch up the new generation of scanners scheduled to hit the streets later this year. The looming wave of used systems will come from two sources: customers trading in 16-slice scanners that have been in service for a year or more to buy the 32-, 40-, and 64-slice scanners, and those who are upgrading from 16 slice products being bought right now.

These upgrades are being crafted by vendors seeking to avert a sales slump that could occur if prospective buyers elect to wait for the next generation of systems to arrive later this year before making their decisions. To keep revenues flowing, vendors are selling 16-slice scanners and promising to swap them out when the 32-, 40-, and 64-slice systems become available.

"The bottom line is I am trying to sell as many 16s as I can right now," Choudhury said.

When these scanners reappear on the secondary market, they will likely dampen the selling price of newly manufactured 16-slice scanners. The effect, however, will not be devastating, according to Ryan.

"A one-year-old 16-slice CT bought for $1.2 million will not hit the market for $300,000 or $400,000," he said. "The pricing on these used models will be quite high, because they keep their value."

The market should support fairly stable prices for the remainder of this year, Ryan said, noting that the dramatic price swings that occurred toward the end of last year are not likely to recur. Much of this volatility, he said, came from Siemens and Philips closing out their older lines of CT scanners, which shared several of the same components due to a technology collaboration hatched by the two companies some years ago. Siemens' release of the Straton, a high-performance x-ray tube built into the Sensation 64, as well as a souped-up version of the Sensation 16, is helping to distinguish this family of CT scanners from its competition. Ditto for the changes in detector technology introduced into the Philips Brilliance CT family, most notably the Brilliance 40.

Price swings were exacerbated last year by the pressures faced by companies to make a strong finish to their fiscal years. Similar pressures will arise this year--and they will come at about the time the Sensation 64 and Brilliance 40 CT go into routine production. GE will also be releasing its LightSpeed VCT in the second half of 2004, as will Toshiba its Aquilion 32. The confluence of these various factors should even things out with a bias toward increased sales and revenues--the slight spike to which Choudhury alludes.

GE's Arduini believes this coming generation of CT scanners will reinvigorate the market, if not immediately, certainly over the long haul.

"The 16-slice wasn't a disrupter the way this new generation will be, so it will have more value in the marketplace," Arduini said. "It will carry a higher price primarily because of the technology, but that will be warranted because it will do something that can't be done with the 4-, 8- or 16-slice products."

If and when the industry sees the return of a growth market in CT will depend in large part on how well the four vendors of these systems manage the transition to their new platforms. The future is both exciting and potentially dangerous to the radiology community.

Speculation surrounds the acceptance of CT as a viable diagnostic alternative to cardiac cath and colonoscopy. A prima facie argument can be made for the use of CT on the basis of its technology alone, but physicians will demand to see documented clinical results. Vendors are already planning or working with luminaries to generate that proof. They have less control, however, over reimbursement. That will come only after research demonstrates a clinical imperative to use the technology.

Meanwhile, radiologists, who constitute the vast majority of CT users, have a lot at stake. They are painfully aware of past instances when formerly radiologic modalities have slipped through their fingers and into the hands of competing physicians. This time around they have the advantage of being able to acquire the products that competitors may someday want and apply them in their routine practices to generate revenue until the reimbursement picture expands to include new applications. The difficulty for radiologists--and the industry--will be in justifying the higher price tag of these systems until clinical utility and viability are proven.