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In August, Carestream Health, the century old medical imaging company, announced that it had filed for Chapter 11 bankruptcy protection, with an agreement put in place to free the company of $470m of debt.

The firm, which specialises in digital X-ray equipment, computed radiography, X-ray film and printing products, said that its level of debt, which in 2021 stood at more than $1bn, was not sustainable given the headwinds that it faced in the medical imaging industry.

The company, whose revenue last year stood at $1.1bn, has seen its revenues decline by $100m since 2018 as customers increasingly turned away from its analogue radiography products in favour of digital alternatives.

The vendor has said it will continue to operate while in bankruptcy, but, in light of its challenges, are there any reasons for optimism?

The Signify View

Unfortunately for Carestream Health, at a time of adversity such as this, its origins as part of the Eastman Kodak company, from which it was spun out in 2007, make comparisons between the two firms inevitable.

Photography pioneer, Kodak, once produced around 90% of the photography film used in the United States and at its peak in 1997 could boast of a market value of $31bn. However, in a dramatic decline culminating in bankruptcy, its predilection for film blinkered its vision and meant that it failed to adapt to advancing technology. This was particularly humiliating given that the first handheld digital camera, the innovation that would bring the firm to its knees, was actually invented by a Kodak engineer.

Speaking to the New York Times in 2008, that engineer, Steven Sassoon, recalled the response to his invention from the film company: “The technical people loved it, but it was filmless photography, so management’s reaction was ‘that’s cute – but don’t tell anyone about it.”

There is no such ignominy in Carestream’s own fate, although it is clear that the vendor also failed to adapt to and capitalise on changes in the markets it serves.

In its domestic market of North America, the vendor holds the second highest market share of any vendor in general radiography, accounting for 15% of the market in 2021, with revenues of $94.7m. However, despite this market standing, compared to its peer’s Carestream’s product range is limited. Unlike almost all other vendors which hold significant share of the general radiography market in North America, Carestream Health’s focus is overwhelmingly on general radiography with a lack of a more holistic medical imaging portfolio.

Suffering from Specialism

This lack of breadth will have been a hindrance to the vendor. Providers are increasingly consolidating their purchases and looking to single vendors to meet their medical imaging modality needs. Carestream Health’s focus on X-ray means that tenders from these providers will have been out of reach for the vendor. This situation has worsened over time.

While the Covid pandemic will have offered temporary respite to Carestream Health, with its mobile X-ray devices proving a valuable diagnostic tool during 2020, with sales increasing by over 200%, other holistic medical imaging vendors have frequently proved to be providers’ vendors of choice since. Adding to Carestream Health’s woes is the fact that it has previously sold its Imaging IT business to Philips. Even if a sophisticated software offering wouldn’t have brought the company more immediate sales, by affording the vendor more service sales and upsell opportunities, it would have helped the vendor capitalise on the boost in sales it enjoyed during the pandemic for longer.

Carestream Health has also parted ways with other parts of its imaging portfolio over the years, having sold its dental digital business in April 2017 to private equity firms Clayton Dubilier & Rice and the Hillhouse Capital Management group, part of CareCapital Group. Carestream Health’s Ultrasound business also came to a halt in 2018.

Difficulties for Carestream Health were also not confined to its domestic market. Medical films and printing products accounted for around 44% of the company’s revenue in 2021, much of which came from emerging markets such as Latin America, Africa and India, where analogue radiography is still more widely used. In these areas however, providers will, over time, increasingly transition to digital radiography systems as the technology becomes more affordable and they have the infrastructure to facilitate such a transition.

What Could Have Been

Carestream Health would have been in a strong position to help these providers transition to digital radiography, and in doing so would have been well placed to retain them as Carestream customers. The vendor could, for example have offered alternative purchasing models or leasing and subscription plans in a bid to help customers in these markets afford the transition and lock them in as customers over coming years. The vendor has failed to do this, leaving the door open for other vendors from China and elsewhere, which can offer digital radiography more cost effectively, to capitalise on the transition to digital radiography in these markets.

Carestream Health has increasingly lost out to both other Western vendors which have established production facilities in some target markets and are investing in their value ranges, and vendors from China, India and customers’ own regions that can offer solutions at more competitive prices. This has been, in part, catalysed by increasingly affordable flat panel detectors, which have led to price declines of up to 15%-20% over the last five years. Adding to these woes, Carestream Health has also fallen foul of government policies in some countries aimed at reducing healthcare spending and boosting local procurement. These moves, which prioritise equipment produced domestically and promote bulk purchasing, will also have hit the vendors’ bottom line.

Carestream Health, in short, has increasingly been squeezed out of the medical markets from which it seeks to derive revenues.

Given these headwinds it is difficult to see a way forward for Carestream Health. The vendor’s dependence on the US market, its positioning in the mid-high tiers of the market and its lack of a complete portfolio will make the years ahead challenging. Carestream Health has secured an $80m loan which it intends to use to fund operations while the company restructures, but even with this lifeline, optimism is hard to come by. After all, with such financial limitations and such a focus on sustaining the business, it is hard to see how the company will continue to invest in product development, which, over time, will make it harder to fight against its larger competitors and make expanding its market share look ever more unlikely. This is particularly true as software and AI capabilities become increasingly important in purchasing decisions, technologies which are costly to develop and sell given their distinct support and post-sale service requirements.

Someone Else’s Problem?

Another route forward would be to invite acquisitions. Carestream Health did try to find a buyer for its business in 2021, but its significant debt made such a move unfeasible. Now, given the restructuring it is undergoing this might again prove an option, although quite who would take on such a vendor remains to be seen. For the right price, there may be interest from one of the leading international medical imaging vendors, which could be tempted by Carestream’s share of the US market, and sense an opportunity over the longer term to make software and service sales, as well as hardware sales, to this significant customer base. These vendors may also be keen to capitalise on Carestream’s customers in emerging markets, although as highlighted in a previous Premium Insight, these markets are unlikely to be a priority at present given the prevailing economic headwinds.

A less glamourous alternative would be to restructure, sell assets to clear debt, and wholly refocus on its most profitable product lines. Effectively, cut costs to weather the storms and then, over the years begin to build itself back up. This would not be easy, and  the Carestream Health that would emerge in the future would likely be very different to that of today, but it would at least force the company to deal with some of its biggest obstacles and hopefully set it on the right course for the future.

Meanwhile, Carestream Health representatives are providing reassurance that it is still “business as usual”, and that there will be no disruptions from an operational standpoint. However, prospective customers may experience some reluctancy and choose to tread more cautiously in purchasing decisions, with longevity and sustainability of medical imaging devices being paramount. Conversely, the significant installed base it has in countries such as North America, India, Latin America and the Middle East means business cannot simply be halted.

It’s the Hope that Hurts

Whichever path is taken, there is a hard road ahead but at least there is hope. Kodak, a company that has (sometimes fairly) been the butt of many jokes, emerged from bankruptcy in 2013. It is a very different company than it was in its pomp, having gone through dramatic restructuring, divesting itself of many of its business units, and leaving many of the markets that it was famous for; it no longer makes any cameras, for example. However, despite this it has battled on and is heading toward the light at the end of the tunnel, delivering revenue growth in all its segments in 2021 for “the first time in years”, according to the firm’s executive chairman at its 2021 results presentation.

Carestream Health may be entering a difficult period, hard choices will have to be made, losses will have to be accepted, and ideals must be foregone in favour of pragmatic solutions. But, as all things must, this dark spell will end. Carestream Health’s actions will determine how.

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This Insight is part of your subscription to Signify Premium Insights – Medical Imaging. This content is only available to individuals with an active account for this paid-for service and is the copyright of Signify Research. Content cannot be shared or distributed to non-subscribers or other third parties without express written consent from Signify Research. To view other recent Premium Insights that are part of the service please click here