Imaging industry remains depressed despite improved first quarter reports

No single pattern explains growing sales and profitability

Is the medical imaging industry on the verge of recovery? Or isthe recent string of improved quarterly reports just a welcomecoincidence for battle-weary companies, many of which are lumberinginto their third year of recession?For whatever reason, the newshas been uncommonly good over the last several weeks for multimodalityvendors, suppliers, and niche players. But what is most strikingis the lack of any single formula for success. In its place isa cacophony of special circumstances and strategic efforts.

Elscint of Haifa, Israel, saw revenues jump 21% in the lastquarter, to $66.1 million. Net income was up 81%, to $4.9 million(SCAN 8/16/95). But the company reports that it is still waitingfor a rebound in the U.S. market; its stellar results were largelydue to strong international growth and especially good sales ofCT scanners.

Fischer Imaging of Denver reported a big turnaround from theprevious year's second quarter. The company had a jump in netearnings to $397,000, compared to a net loss of $69,000 for thesame period in 1994. But revenues, which rose only 2%, playeda relatively small role.

Morgan Nields, chairman and CEO of Fischer, credited effortsto reduce costs and variances as primary reasons for the improvedfinancial results, along with increased international shipments.But the outlook for the market in general remains bleak.

"I don't really think the x-ray business in the U.S. isgoing to rebound for several years," Nields said. "Ithink it'll take (that long) to use up the excess capacity thatis out there as managed care takes over the delivery of services."

Few markets have been as depressed as positron emission tomography.Yet Houston-based Positron reported an increase in revenues of490% in the second quarter. But again, special circumstances prevailed.The rise was due primarily to the shipment of two Posicam PETscanners, as revenue leaped from $506,000 to nearly $3 million.

Imaging sector shows growth. Regardless of the special circumstancesthat led to the overall increase in the medical imaging sector,this quarter was a refreshing contrast to the first quarter ofthe year, when earnings were down 26% on a modest 6% gain in revenues,said Jack Cumming, president of WDI Capital Markets in HiltonHead, SC.

Cumming has calculated that revenue in the medical imagingsector grew 15% this last quarter, while adjusted earnings growthincreased 182%. There is, however, considerable reason for cautionwhen interpreting these data.

The two calculations are out of whack with each other, Cummingsaid, because special circumstances that can inflate as well asdeflate earnings calculations have impacted certain companies.For example, the big jump of 81% in net income reported by Elscintincluded a $1.6 million patent settlement with Sopha Medical.

Analysts often watch for results from suppliers to determinea future upswing in demand for finished products and an upcomingboost in the fortunes of OEMs. But applying that rule to the medicalimaging industry can lead to problems. MRI magnet manufacturerIntermagnetics of Latham, NY, for example, reported a 64% risein revenues and nearly a 100% rise in net income (SCAN 8/2/95).

Those gains do not necessarily mean the MRI market is aboutto climb out of its two-year recession. Rather, they reflect anisolated phenomenon in the industry, caused primarily by the strongdemand that Philips Medical Systems has enjoyed for its lightweightGyroscan NT product line and increasing sales of lightweight magnetsmade by Intermagnetics for other OEMs. The overall MRI marketin the U.S., according to officials at Intermagnetics, remainsdepressed.

Given the bad news besetting the MRI industry, even a glimmerof light at the end of the tunnel is welcome. Such a glimmer hasbeen provided by Advanced NMR of Wilmington, MA, which sells high-speedInstaScan upgrades for MRI scanners, as well as ultra-high-field3-tesla MRI scanners. The company reported record earnings forthe last quarter: $4.3 million, with net income also a recordat $393,161 (SCAN 8/16/95).

These results would have been even better if the company hadnot been pouring money into the R&D effort to develop a dedicatedMR mammography unit at majority-owned subsidiary Advanced MammographySystems, said ANMR chairman Jack Nelson. But does this mean theMRI market in general might be recovering? "I would loveto give a very encouraging and optimistic yes," Nelson said."But while I am still hopeful about that, and obviously myattitude is optimistic, I think it would be a mistake to takeour quarterly results and try to project that onto the marketas a whole."

Stock prices rise. Since the traditional signposts of recovery-- corporate revenues and earnings -- may not reflect the overallmarket, observers are looking for other indicators. Stock pricesare one candidate, because investors tend to build success intothose prices before success is realized. As a whole, stock pricesfor companies in the medical imaging industry have grown in recentmonths.

Under some conditions, stocks can rise even in the shadow ofreduced revenues. Ultrasound vendor Acuson of Mountain View, CA,for example, has seen a steady rise in its stock over the lastseveral months, rising from about $11 a share to the current levelnear $13 at press time, despite a quarterly report that showeda drop in both revenues and net income (SCAN 8/2/95). Net salesslipped to $81.9 million in the second quarter, compared to $88million for the same period in 1994, while net income also dropped,from $4 million to $1 million.

When there is reason for celebration, stock prices can skyrocket.The move by Thermotrex several years ago to pick up Lorad andmove aggressively into the mammography market has paid off handsomely.The stock price of Thermotrex has more than tripled over thattime. Most of increase has taken place in the last few months,a rise due at least partly to the unveiling of the firm's strategyto acquire complementary companies, as in the case of its bidto grab Bennett X-Ray (SCAN 7/6/95). Significantly improved revenuesalso helped. Thermotrex attributed a 23% rise in revenues to strongsales by Lorad.

The indicators are mixed at best, Cumming noted. There is notenough information on hand to determine if the industry is aboutto turn the corner.

"Until we see another quarter of sustained revenue withearnings that are able to continue to show some life, the answeris no, the turnaround is not here for the imaging device segment,"he said.