CT vendors struggle to shake off falling prices and maintain growth

June 11, 2003

First quarter results raise concerns about market viabilityPrices have begun eroding less than a year after the commercial release of 16-slice CT scanners, dipping below the magic million-dollar mark and possibly setting the stage

First quarter results raise concerns about market viability

Prices have begun eroding less than a year after the commercial release of 16-slice CT scanners, dipping below the magic million-dollar mark and possibly setting the stage for a new round of slice wars. The modest financial results of the first quarter of this year are as worrisome as price erosion. Despite increasing shipments of 16-slice scanners, revenues dropped sharply from the preceding quarter and barely held even with the year earlier period-before 16-slice scanners had entered vendors' portfolios. Most distressing are reports that orders taken during Q1 were fewer than the number of units shipped, indicating that the second quarter will be worse than the first.

Corporate executives believe the best hope to shore up prices and fuel future growth may be to push forward with the next generation of flagship products. R&D staff, however, are uncertain how many slices should be built into these products. The answer will be derived from what is technologically possible and clinically indicated, executives agree. But the clinical component of this equation could prove vexing. Physicians are only now beginning to appreciate the value of 16-slice scanners in patient management.

The quandary over CT's future has taken the industry by surprise. Quadslice scanners held their market value for more than four years after their 1998 introduction. Only one vendor, GE Medical Systems, released in the U.S. an eight-slice version. Philips, Siemens, and Toshiba each opted to go straight to 16 slices. That decision may have been the undoing of the industry, however, as a rabid sales effort by manufacturers to win market share in a highly competitive 16-slice marketplace led to early price cutting.

Price erosion has helped create a cloud over the industry. About $300 million in new CT scanners shipped in the first quarter of the calendar year, according to industry estimates. This number is about even with Q1 2002 performance but well below last year's Q4 revenues of more than $400 million. In 2002, revenues stair-stepped upward as each quarter outperformed the previous one.

This sluggishness might be due to seasonality, as shipments have historically peaked at the end of the calendar year. But the quarter had a peculiar feel to it, according to corporate execs, who noted reluctance by customers to order new systems. They cited fears about the then-looming war in Iraq and concerns about a sputtering economy.

These are relatively new worries for the industry, which until recently appeared to be immune from such macroeconomic problems. But executives have also been aware that booms inevitably come to an end.

"I look at the size of this market and the number of units, and my history tells me that this growth rate is not sustainable," said John Zimmer, vice president of marketing for Toshiba America Medical Systems. "There has to be a cooling down. We just hope it will cool down to a healthy level."

Zimmer expects the recent surge in demand by outpatient imaging centers for superpremium CTs to flatten. The next step may be less expansion of the installed base and more dependence on replacement sales, whereby outdated CTs are scrapped in favor of the latest systems.

Executives agree that the CT installed base is a long way from being saturated with 16-slice scanners. William Cassidy, Philips vice president for CT, said Philips' customer base includes a lot of aging systems.

"We have many single-slice systems out there that need to be replaced, and there are a lot of dual and quad owners that will want to move up," he said.

Sites that acquired quadslice scanners soon after their introduction in 1998 will soon be coming off five-year leases. This could prop up sales for another year or two, Zimmer said. But then the market will likely flatten. It could even drop. And the drop could happen sooner rather than later.

Raising mild concern now is the surge of sales into the outpatient marketplace to entrepreneurs with little or no grounding in radiology. A similar phenomenon in the late 1980s led to a glut on the market of refurbished equipment, when poorly run centers went out of business. This pulled down the price manufacturers could charge for new equipment.

Zimmer believes vendors have learned from the past and will not repeat their mistakes. Toshiba spends considerable time ensuring that entrepreneurs who buy its Aquilion 16s have solid business plans and the right demographics. He acknowledges, however, there is risk.

"It could be devastating if enough of these centers cannot turn a profit," he said. "It could snowball very quickly."

CT manufacturers aren't taking chances that natural forces will fuel an expanding marketplace for CTs. R&D is focused on creating next-generation CTs that they hope will boost prices and trigger another wave of demand. Before these scanners can go into production, however, company strategists must determine how many slices this next generation should have.

Corporate executives are vacillating between 32 and 64, knowing that sales of these scanners may be decided on which company can outslice the other. If 32 slices becomes the benchmark, companies conceivably might add a slice or two to get an advantage over competitors.

The equipment they develop will also depend on the clinical success of 16-slice scanners. CT angiography and trauma utilization will continue growing in popularity, said Bappa Choudhury, Siemens group vice president for CT. Lung and cardiac studies, as well as virtual colonoscopy, could further boost demand for superpremium systems in the next couple of years.

"We are growing into clinical areas that we have never touched before," he said.

Executives' worst fear is that it might not be possible to regain the momentum they had with quadslice scanners.

"Tomorrow some terrorists could strike, and the economy could tank again," Cassidy said.

The first quarter financial results have added to the foreboding. Usually, increasing sales of newer products push revenues upward-but not last quarter. The revenues and number of units shipped, as well as the number ordered, fell in the first quarter of 2003 compared with the fourth quarter of 2002, even though a greater percentage of shipments were high-performance scanners.

About 70% of the systems shipped in the U.S. in Q1 2003 delivered more than four slices per rotation, based on a survey of CT manufacturers. Vendors agree their sales staff have been selling more and more flagship products each quarter compared with other products in their portfolios. The problem is that they are getting less for them.

Not since the mid-1990s, when the speed and capacity of computers artificially distinguished the different tiers of CT scanners, have flagship systems commanded less than a million dollars. Those days have returned, according to Choudhury.

"It was quite common a little while ago to sell a 16-slice scanner in the $1.2 million to $1.3 million range," he said. "Now we are seeing 16-slice scanners in the $900,000 range."

Falling prices for premium systems typically pull down the prices for mid- and low-tier systems, and that is exactly what is happening in CT today, Choudhury said. Quadslice scanners that only two years ago cost end users more than a million dollars are now going for hundreds of thousands of dollars less. Accelerating the fall in CT prices is the availability of refurbished units, which are being priced well below new ones.

"This is pure market economics," Choudhury said. "To reverse this trend, we have to come up with the next technological leap."