GE’s Immelt, Philips’ Sivignon bemoan DRA effects

October 23, 2007

The worst effects from the Deficit Reduction Act may be over, according to GE Chairman and CEO Jeffrey R. Immelt. But Pierre-Jean Sivignon, chief financial officer of Koninklijke Philips Electronics, has some reservations.

The worst effects from the Deficit Reduction Act may be over, according to GE Chairman and CEO Jeffrey R. Immelt. But Pierre-Jean Sivignon, chief financial officer of Koninklijke Philips Electronics, has some reservations.

Speaking days apart on teleconferences held after the release of their companies' third quarter financials, Sivignon and Immelt described a strong global market for imaging equipment. They each noted, however, that the U.S. market for high-end equipment remains stricken by legislation aimed at curbing Medicare spending. Cuts in outpatient reimbursement for imaging procedures, mandated by the DRA, have put the kibosh on capital equipment spending. Hardest hit have been MR, CT, and PET/CT.

In a teleconference Oct. 12, Immelt described the U.S. marketplace for these products as depressed but stable.

"When we look at 2008, we are not going to count on any improvement, but we are not going to count on it getting worse either," he said.

Lobbying efforts on Capitol Hill, punctuated by a White House meeting attended by healthcare executives from GE, Siemens, and other vendors (DI SCAN 9/17/07, Industry execs visit White House) have made a strong argument against further cuts, Immelt said.

"We have stated our case on DRA pretty clearly," he said. "We believe they are going to let what has already been done settle in and that we are not going to see additional cuts in 2008."

Sivignon was cautious about a recovery, drawing hope from past experiences in the medical imaging market while noting present day concerns.

"We've been in down markets before," he said in an Oct. 15 teleconference. "It has normally lasted quarters. It's never really been something that has lasted for years. But until such time that we really see it bouncing back, it's a bit hard to make comments."

Sivignon has reason to be careful. Philips underestimated the severity of the DRA's impact earlier in the year. In the first quarter, the company projected a 1% drop in growth. Philips executives have steadily revised their assessment quarter by quarter, or "half point by half point," as Sivignon said. He now expects that the DRA will cut growth in medical equipment sales by two full points by year's end. Most of the trouble has occurred in CT.

Clearly, CT has suffered more than other modalities. Consolidated estimates from the major vendors suggest a double-digit drop in revenues from CT equipment shipped to sites in the U.S. during the first half of the year (DI SCAN 10/9/07, CT market stumbles in first-half 2007). Speaking to financial analysts, however, Sivignon said that the CT market for Philips has deteriorated since then.

"Late in the third quarter, we saw probably a little stronger effect than what we had anticipated on CT," he said. "But we are a little bit split between whether it is basically DRA or it is the fact that, in the particular territory of CT, a new technology is expected at RSNA in a few weeks from now."

Sivignon did not name the technology, but it is widely known that Toshiba's long-awaited 256-slice CT, which is slated for commercial release in mid-2008, will debut at the RSNA meeting. Typically, such releases do not occur in a vacuum, as competitors try to keep pace with each other. Prospective customers, in turn, may not want to commit to capital equipment purchases until new unveilings are known, and this may explain the downward blip reported by Philips in CT orders in the third quarter.

Sivignon was optimistic about prospects for medical sales, however, and projected a strong fourth quarter. He cited a 4.3% growth during 3Q07 in equipment orders over the third quarter of the previous year. This compares with the 3% growth rate achieved in 3Q07 from the year-earlier period. Much of this growth is coming from demand for ultrasound and patient monitors, which have largely escaped the adverse effects of DRA.

Additional growth may also be in the offing on the heels of new products introduced by Philips at the RSNA, Sivignon said. (See "Philips CFO deflects questions about RSNA innovations." )

Although he was careful not to tip Philips' hand, Sivignon hinted that the upcoming introductions could light a fire under next year's market and counteract negative forces in the U.S. market.

"There are lots of discussions currently going on. Some of them are positive; some of them are negative," he said. "But the important thing is that there will be innovation."

The near term appears hopeful as well. Sivignon noted that the fourth quarter of the calendar year is usually a strong one for Philips Medical. Adding to these revenues may be shipments that were scheduled for the third quarter but delayed by "a few logistic and customer-readiness issues," he said.

"We have a bit of a back-ended situation this year," Sivignon said.

Immelt was similarly optimistic about a positive fourth quarter, particularly as it compares with the year-earlier period. GE has been without revenues from its OEC business since late last year, when it implemented a voluntary stop shipment policy at its C-arm manufacturer. This occurred after FDA officials uncovered "nonconformities in GE Healthcare's quality system practices" at the Salt Lake City plant (see "GE-OEC suspends surgical C-arm shipments" under Week in review).

Fixes to those problems are now near at hand, according to Immelt, who expects the plant to resume shipping equipment soon. This will turn into substantial revenue, as he cited a $200 million backlog.

"Very little of it has been canceled," he said.

Explaining customer loyalty, Immelt credits the company's products as being superior to those of its competitors, as well as the strength of OEC itself.

"When we went into the consent decree, this was one of the strongest, if not the strongest, franchise in our entire portfolio," he said.