Health-care reform forces vendors to retool R&D, sales and service

November 9, 1994

Industry limps through second year of recession The steep declinein diagnostic imaging equipment sales is a wake-up call for anyonewho has yet to accept that the industry is undergoing a sweepingtransformation that affects every aspect of

Industry limps through second year of recession

The steep declinein diagnostic imaging equipment sales is a wake-up call for anyonewho has yet to accept that the industry is undergoing a sweepingtransformation that affects every aspect of strategic planning,product design and customer relations.

The industry has endured two horrible years. In 1993, U.S.sales revenue for the five major imaging modalities fell 11.7%to $3.4 billion. Most of that decline originated from a 39% dropin MRI sales revenue. The ultrasound equipment market fell nearly18.2% to $688 million.

The CT market made a modest gain in 1993. Revenue increased3.2% to $490 million on the strength of interest in spiral CTsystems. Optimism about nuclear medicine's prospects was dashedby a 26% sales decline in the fourth quarter of last year andsubsequent declines in the first two quarters of this year. Nuclearequipment sales in 1993 totalled $369 million, a $3 million declinefrom the market's 1992 performance. Sales of x-ray equipment rose$2 million.

A report to be published next month by Diagnostic Imaging forecastsmore losses for 1994. Entitled The U.S. Diagnostic Imaging Market:Global Perspective, the report predicts that total revenue forthe industry's five core modalities is expected to fall 8% to$3.2 billion. Losses are anticipated in every major market segment.CT should exhibit the most residual strength with a 1.8% salesdecline. Product demand will be weakest in the MRI market, wheresales are forecast to fall another 18% to $407 million.

It is easy to blame the flagging market on federal health-carereform. The Clinton administration's reform initiative raisedpurchaser anxiety to panic levels. Ultimately, however, the 103rdCongress was unable to translate any of the president's programinto law. Yet while Congress fumbled, the private sector dashedforward to implement its own reforms by embracing managed care.Under the new system, increased utilization translates into lowerincome because revenue is fixed through capitation.

Radiology departments are no longer viewed as profit centersbut as cost centers. Incentives favor cost-cutting, which leadsto more profits and an improved position for gaining more managed-carecontracts. The driving principle of this new system is the conservation-- not the consumption -- of resources.

Strategies for a shrinking market. Making money is the raisond'être of the diagnostic imaging industry whether the marketis up, down or indifferent, noted Siemens MRI group manager ThomasMiller at the 1994 Society of Magnetic Resonance conference inDallas. Miller suggested strategies for maximizing revenue despitean industry-wide sales downturn.

Reaching out to new markets is one way to maintain sales volume.All major imaging equipment companies are exploring sales andmarketing opportunities in the Pacific Rim. By 1998, the emergingeconomies of the Far East will purchase more MRI systems thanthe rest of the world.

Interest in the emerging economies of Latin America is strong.Although the industry has been impressed by China's sales potential,the China market accounted for only 3.3% of U.S. medical imagingexports last year, according to Morgan Nields, chairman and CEOof Fischer Imaging. Latin America, on the other hand, was responsiblefor 11% of U.S. medical imaging exports in 1993, up from 7% in1988.

The North American Free Trade Agreement gives U.S.-based firmsadvantages over their European and Asian competition by circumventingthe 10% duty rates in Mexico. In addition, fast-developing Chilemay join NAFTA in 1995, with Argentina not far behind and Colombiaand Venezuela on the horizon, Nields said. He predicted that afree trade zone will cover the Western Hemisphere by the year2000. The market will be home to 900 million people, all withintwo time zones of most places in the U.S., Nields said.

In the U.S., product proliferation is a way of protecting marketshare in a competitive market. Purchasing decisions become farmore sensitive to specific price points in recessionary times,according to Miller. Governments and top-level hospital administratorsmore often call the tune in purchasing negotiations, so if a manufacturerdoesn't have a product carrying the customer's preferred featuresand specified price, the company doesn't get the sale.

Manufacturers have fortified themselves against the recessionby capitalizing on their secondary revenue resources. Servicerevenue has risen in prominence as equipment revenues fall. Newprograms, such as remote system diagnostics, have been introducedto protect this important revenue source. Initiatives like GE'sCompreCare, the company's new multivendor service program, aredesigned to capture service revenue from the competition (SCAN8/31/94).

As with service, upgrades have become important revenue sourcesfor vendors. Ultrasound companies realized one dollar in upgraderevenue for every $10 in new equipment sales in 1993. Acuson'sAcoustic Response Technology (ART) upgrade generated $24 millionin sales. Diasonics Ultrasound's Masters Series was credited bychief executive Bruce Moore for burnishing the company's reputationand its financial performance.

A survey of radiologists conducted by Diagnostic Imaging inMay 1994 registered lukewarm interest in upgrades. The strongestinterest was expressed for ultrasound, CT and MRI upgrades. About15% of the respondents said their facility was very likely toacquire an ultrasound upgrade in the next 12 months. About 18%of the respondents expressed a very strong interest in CT upgrades,and 18% said their facility was very likely to buy an MRI upgradeduring the period.

Market prospects for new equipment. Conditions remain too unsettledto confidently predict recovery in 1995. Customers were stillwary in the third quarter of 1994. Sales remained sluggish ashospital administrators stretched out their equipment replacementcycles to save money.

The ultrasound market should stabilize and may even grow slightlyin 1995, according to Harvey Klein, president of Klein BiomedicalConsultants in New York. A recovery, if it comes next year, willbe powered by demand for ultrasound system upgrades, Klein said.New products are expected from ATL, Siemens and the Philips/Hewlett-Packardjoint venture.

MRI hit rock bottom in 1994. The MRI market was on a downwardtrend even before the health-care reform panic. U.S. markets reachedsaturation, reimbursement declined and anti-self-referral legislationbegan to take effect. Procedural growth from the introductionof new contrast agents never materialized.

Sales for the next several years will depend on internationalmarket growth. In the meantime, the domestic market awaits thenext breakthrough imaging application, which could be in breastcancer management, interventional MRI or cardiac imaging.

The nuclear medicine industry is running on residual demandfor dual-head SPECT, although demand could increase with the promiseof new peptide-based radiopharmaceuticals and simultaneous transmission-emissionattenuation correction upgrades. Data from the National ElectricalManufacturers Association indicate that the modality's nine-monthrecession may be stabilizing.

Positron emission tomography got a much-needed boost from theFood and Drug Administration's clearance of fluorine-18 fluorodeoxyglucose(SCAN 9/14/94). Medicare reimbursement for evaluations of themyocardium using rubidium-based PET scanning may be approved in1995.

Spiral CT is a hot ticket in an otherwise icy market.

For more information about The U.S. Diagnostic Imaging Market:Global Perspective, call Sharon Cauchi at 415/905-2550.