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.
Medical imaging vendors are facing stern challenges. The lasting disruption caused by the Covid-19 pandemic, for instance, has meant that hospitals are dealing with enormous volumes of patients who saw their elective procedures and screening exams delayed. Logistical challenges such as disruption to supply chains and shortages of key components are hampering vendors’ ability to produce enough systems to satisfy demand, while pushing their production costs higher. Further, there are also shortages of key personnel at healthcare providers, with recruitment challenges that are particularly acute in some regions.
There is also one particularly pervasive challenge. After years of relative price stability, inflation is rising across the world, forcing vendors to make difficult decisions and making a true picture of their growth harder to discern. In the face of inflation, what can vendors do to best protect themselves, or even capitalise?
The Signify View
Despite the pervasiveness of the ongoing inflation, some groups and sectors are being hit harder than others. Fuel and energy prices are one of the key inflationary drivers, costs that are carried by almost all industries, with businesses and consumers alike being affected; other increases, however, are more industry specific. Fortunately for medical imaging vendors, for the most part, these increased costs and the disruption they bring have not fully translated into the medical imaging market.
Contracts in medical imaging are frequently agreed for extended periods and include fixed pricing. Such a model may make it harder for medical imaging vendors to take advantage of some sudden spike in demand, for example, but it at least cushions them from short-term instability. These contracts can’t isolate them indefinitely, and over time, as contracts come up for renewal, prices will rise. However, the staggered nature of renewals will help shield providers from dramatic increases at the same time, even if costs overall are rising.
This is just as well. Hospitals are facing pressures across the board. While the elevated numbers of deaths attributed to Covid have passed, the disease is still having a significant impact. There is pent-up demand for services as well as an enormous backlog of elective procedures. There is, in many specialisms, a distinct shortage of staff, while those staff that do remain are frequently overstretched and burnt out from the demands of the previous years’ tribulations. Increases in the cost of consumer goods will also leave vendors facing higher wage bills and likely higher turnover, as staff seek to offset reductions in their own spending power. These challenges will, in some markets, be exacerbated by emergency state healthcare spending linked to the Covid 19 pandemic running out as governments are forced to deal with their own economic challenges.
Spend or Save
Healthcare providers can deal with these challenges in one of two ways. One option is to simply cut back on spending, avoiding outlay wherever possible. The alternative approach, which, judging by providers’ response to Covid seems likely, is for providers to smartly invest in the right technologies. Providers could well be swayed into investing in new systems that improve efficiency, streamlining processes and improving operational workflow. This has occurred both for the IT side, but also on the modality side, with providers choosing to replace aging systems with updated equipment that allows higher patient throughput and is easier to use, a valuable quality at times of high staff turnover.
This willingness to invest will, however, only extend to proven products, with the strains put on providers making them more risk averse. Vendors promoting nascent technologies such as AI are likely to struggle to gain traction without robust cost-benefit and clinical outcome evidence, with providers not having the resource or will to expend on adopting products which remain economically untested. A factor which could restrain and shape such markets near-term.
Similarly, a provider’s choice of vendor is also likely to become more conservative. Some hospitals might be tempted by the lower costs of less-established Chinese vendors such as United Imaging or Mindray, but for most, the security and surety of service offered by the likes of GE HealthCare, Philips Healthcare and Siemens Healthineers, will outweigh a modest saving over the long-term. This is especially true given the advanced fleet management and workflow tools these long-established vendors also offer.
This more conservative approach will also prevail for vendors, with many emerging markets now looking far less attractive than those that are well established. While many have traditionally served as growth engines, the volatility in many of those markets now makes them look a far too risky proposition. In Argentina, for example, inflation is forecast to reach 90% by year’s end while in Turkey, that figure is above 60%. Such inflation rates cause countless headaches for any international business with prices becoming obsolete on an almost daily basis and their ability to forecast and plan significantly hampered. Dealing with such headaches, in return for markets that often contribute a modest amount of revenue to a vendor’s total income, will, for many, be deemed simply not worth the effort. Instead, international vendors will concentrate their efforts on established markets and reduce their exposure to such emerging market volatility.
Reasons for Growth
Even without such dramatic increases, rising inflation rates make truly assessing a business’ performance difficult, making it challenging to determine how much of a market’s growth is a result of wider economic factors.
One approach to this issue is a comparison of ‘typical’ historical average shipment prices for each imaging segment, figures that range from +2% to -6% depending on the imaging modality market, against a forecast that includes inflationary impact. Such a comparison will, given consistent unit shipment demand across scenarios, effectively isolate the impact of inflation.
There are some caveats to this analysis: The impact of Covid 19 already being “baked in” to both forecasts; a change in product mix resulting from the pandemic will bias the effect of inflation more in some segments and less in others; and 2022 and 2023 forecasts being projections based on expectation rather than 2021 being based on reported data.
However, even given these limitations this forecast comparison highlights that inflation effect and increases in supply chain costs are set to add around 3-6% to global imaging market revenue growth between 2021 and 2023. This effectively means that globally, some $3.9bn of the overall imaging market over that period is a result of inflation; an average of 1.6% additional year-on-year revenue “growth”.
Against such a backdrop, different types of vendors will fare differently. Smaller vendors, which are nimbler and can react more quickly to changes in the market compared to their larger kin, could assume they are in a strong position; however, apart from in some exceptional cases, this is a fallacy.
Large international vendors will still be able to rapidly adapt to changing market requirements. They could, for example, respond to tightened budgets by making refinements to products or focusing on development of certain tiers that are likely to be in high demand: value and workhorse offerings rather than the very top-end, for instance.
Beyond such direct product changes, the breadth of large international vendors also grants them more flexibility. Such flexibility can manifest in numerous ways, from adapting supply chains, to changing regional focus. More significant, however are these vendors’ ability to take a longer-term view. Large medical imaging vendors are increasingly looking to derive revenues from long-term, managed-service partnership deals. With the length of these deals growing, vendors can look to absorb the near-term inflationary pressures, offering cost-competitive deals for providers from which vendors will hope to derive significant returns further into the future. Given the certainty such deals offer, providers will also likely be keen to enter extended contracts, giving them some security amidst broader volatility.
There are limits to this flexibility, though, with vendors’ agendas set, inflation priced into deals and projections, and provider’s purchasing plans already made. As such for the next 12-24 months vendors won’t need to deviate from their current strategies. Longer-term however, from 2024 onwards, the level of uncertainty is much higher. If recession bites severely, governments could look to cut healthcare spending, the balance between private and public healthcare could shift as patients who can, look to go private. AI could become more pervasive in hospitals as a potential counter to limited staffing, but long-expected consolidation in that market could finally materialise.
Alternatively, the global economic outlook could improve, a resolution to Russia’s invasion of Ukraine could bring cheaper energy, and 2024 may herald a return to a focus on cutting-edge innovation for medical imaging. In whichever case, vendors need to hold their nerve over the coming years. Profitability may be hit, margins may slim and priorities may change, but inflation, like Covid before it, is another challenge that leading vendors can and must ride out.
About Signify Premium Insights
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