CTI revenues skyrocket on heels of increasing demand for PET

May 28, 2003

Troubling signs for the future cloud rosy quarterly reportThe booming PET market is drawing one of the principal makers of PET equipment into uncharted financial territory. CTI Molecular Imaging has reported sharply higher revenues

Troubling signs for the future cloud rosy quarterly report

The booming PET market is drawing one of the principal makers of PET equipment into uncharted financial territory. CTI Molecular Imaging has reported sharply higher revenues and net earnings for the second quarter, ended March 31, reflecting an overall PET market that shows no signs of slowing. But revenues are not the whole story.

Revenues for the quarter totaled $82 million, up 48% over the $55.3 million in revenues reported during the same period a year ago. The revenues represent "the high end of expectations," according to David Gill, the company's chief financial officer. Net income totaled $4.5 million, or 10¢ per share, compared with a net loss of $12.8 million, or 46¢ per share, during the second quarter of 2002. Market share for CPS Innovations increased from about 45% in 2002 to more than 55%, according to CTI chairman and CEO Terry Douglass. The CTI subsidiary manufactures PET technology for sale by its parent and OEMs, including Siemens Medical Solutions.

Siemens executives share CTI's belief that the PET market is strong and will continue to grow. Siemens' PET business has increased 50% compared with a year ago, according to Jonathan Frey, manager of PET marketing for Siemens.

"The numbers reported by CTI are a combination of orders received by CTI's direct distribution channels and orders placed by other distributors, including Siemens," said Frey, who noted there has been no loss of business to competitors GE and Philips.

Underscoring the growth that PET continues to see, CTI's P.E.T.Net Pharmaceuticals reported revenue growth for 2Q 2003 of 33% over the same period in the previous year, despite decreasing prices for FDG. Revenues were driven largely by a 57% increase in the number of FDG doses ordered. Revenue growth was not enough, however, to make the division profitable, as P.E.T.Net lost $364,000 in the quarter. The bottom line will continue to be affected by soft end-user prices for FDG, said Douglass, who expects the per dose price to drop again by year's end to between $300 and $310.

There are other signs that the near future may not be as bright as the recent past. One is a drop in orders received by CTI for PET scanners in the quarter just completed. The company garnered 23 orders in Q2-three fewer than the same period a year ago. CTI executives indicated the drop may be due to a slowdown in the hospital sector but said they were not concerned. Sales of PET scanners have been particularly robust in the nonhospital segment, according to Douglass.

"We continue to experience rapid demand for our PET scanners due to the huge unmet demand for PET scans," he said.

The fall in orders is likely one of several factors contributing to the 20% decline in CTI stock price the day after quarterly results were released. Other factors may have included confirmation by CFO Gill in the analyst conference call May 7 that Wachovia Capital Partners, CTI's sole private equity investor, plans to sell some or all of its interest in CTI. Wachovia currently holds about 6% of outstanding shares. Gill downplayed any effect this may have on the company and the possibility that it may be related to dimming future prospects.

"We do expect Wachovia to gradually begin selling some of their stock so that they can invest in new ventures," Gill said.

Adding fuel to the fire, however, Gill revealed that Wachovia was not the only major investor looking to sell. He noted that over the next year Mike Phelps, a CTI board member, also plans to sell CTI stock-about 400,000 shares. This amounts to less than 15% of Phelps's holdings. In the conference call, Phelps said the sale is to help him diversify his portfolio.

Also hanging over the company is litigation initiated several months ago by GE Medical Systems. The civil suit alleges that several CTI employees, including Thomas Hook, took trade secrets and confidential information with them when they left GE to join CTI. Jim Griffin, an attorney for CTI, said discovery has begun in the suit.

Hook remains on the CTI payroll, and he is expected to play an instrumental role in boosting future earnings. In February, Hook took over the P.E.T.Net subsidiary. As company revenues were reported during the conference call, Hook committed to making P.E.T.Net profitable by the end of the current quarter.

"I'm driving P.E.T.Net to be profitable at the end of the third quarter of this fiscal year," Hook said. "I expect results, and we will get them."

To that end, Hook has already changed P.E.T.Net's sales strategy. A key element of the new strategy is to secure long-term contracts with large users. This involves reevaluating all areas of the business-from order fulfillment to sales and marketing. So far, it appears to be working.

"We've already won one major national account back," Douglass said. "And we expect to announce many more in the future. P.E.T.Net is focused on regaining its growth trends and extending its market share."