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One glance at a newspaper leaves no doubt about the volatility of the world’s economic health. Every day, troubling stories adorn the front pages: shocking rates of inflation, dramatic retreats for some blue-chip stocks, soaring energy costs, the ongoing defence of Ukraine from Russian invasion, continuing coronavirus restrictions in China and extended disruption to chip production and supply chains amongst others. Reading these headlines, it would be natural to assume that medical imaging vendors will be feeling bearish, shouldering the burden of a hard start to the year and preparing to dig their heels in for the long, fallow months ahead.
This assumption, would however, be incorrect. While vendors have been unable to completely avoid these global headwinds, they have, as illustrated in their first quarter financials, largely been able to mitigate some of these challenges.
The Signify View
This is true, of, for example, the supply chain headaches that have been wreaked on the world primarily by the turbulence of the coronavirus pandemic and countries’ responses to it. Although these supply chain challenges have been noted by almost every vendor in their quarterly results, they have not significantly impacted revenues, with most vendors still showing year on year growth. Siemens Healthineers, for example, noted a 150 basis point headwind compared to a year earlier, up from around 100 bps in the previous quarter. However, in the vendor’s Imaging Segment, this translated to an adjusted EBIT margin of 20.2%, down from 21.1% a year earlier, but still a strong figure, particularly given the 10.7% increase in revenue.
This pattern was echoed elsewhere. GE for example saw comparative growth in its Healthcare business of 2%, although profit margin fell 260 bps to 13.6%. Philips’ also saw its EBITDA margin in its Diagnosis & Treatment segment fall, to 9.5% from 12.3% a year earlier, although the Dutch vendor didn’t enjoy the bounce in revenues, which fell 2% year on year.
How vendors have been able to cope with these difficulties in logistics and procurement has been affected by several factors. Some of these are reliant on the vendor’s management of the difficulties such as identifying new suppliers, modifying stock levels and even redesigning or reconfiguring hardware to avoid overreliance on particularly in-demand components and materials. These opportunities for leaner processes will not be able to stave off shortages indefinitely and will require time and effort to implement, but they will help mitigate difficulties in the near term, while, in many cases, also leaving businesses more efficient for the future.
Vendors have less control over other factors. One of the key differentiators are the product mixes that imaging companies entered into this period with. Vendors who are more reliant on high volume, high-profit modalities such as ultrasound and clinical care devices will have been more drastically impacted than those skewing towards lower volume, higher value modalities. This is one of the reasons for the weaker performance of Philips compared to some of its peers.
These troubles have been particularly pronounced to vendors with greater exposure to certain markets. Canon, Konica Minolta and Shimadzu, for instance, are most reliant on their home market of Japan. Canon’s Medical segment saw total sales decrease by 5%, while income before taxes plunged 45.2%. This was largely down to supplementary government spending a year earlier, diminishing provider appetite in 2022, a factor that will have been keenly felt by all Japan-centric vendors.
Of course, pressure in foreign markets will have also hit other vendors’ revenues. Group revenues for Siemens Healthineers in the quarter, for example, fell 10% on a comparable basis in China as the country continued to face strict Covid 19 regulations. It’s a similar story for GE, which also recognised the challenges the region presents in its own announcements. However, unlike the Japanese vendors, Siemens Healthineers, GE Healthcare, and others with exposure to a greater range of international markets were better able to withstand these regional challenges. This highlights a key objective for Canon and Fujifilm; namely, reducing their reliance on a single market. The vendors are already working towards such ambitions, and it is no way an easy objective, but these results highlight its importance. For example, Canon has signalled that the USA is a key growth market for the company, and it is currently overhauling its sales organisation and expanding its sales force.
Another of the key economic concerns for many industries is the spiralling inflation that, after many years of languishing at or near record lows, has leapt dramatically. As with any broad economic change there are countless subtle and often unknowable impacts. However, in this case there is good reason to think that the increased inflation could have a positive impact for many of the large medical imaging vendors.
One of the key trends in medical imaging has been improving the efficiency of the acquisition and analysis of diagnostic images. Some products and technologies have enjoyed success on the back of this trend, with the increased requirement for some types of procedures caused by the Covid 19 pandemic, and the enormous backlog of patients it created particularly driving adoption. The dramatic rise in inflation, and in particular the increase in wages demanded by healthcare professionals means that productivity is once again in the spotlight. This emphasis is expected to drive growth across vendors’ product ranges as providers seek to add capacity. This growth could be particularly noticeable for top-tier systems, which providers could well be more inclined to consider as their features, which help increase productivity, could offset their higher price tag. Such inflationary challenges could, therefore, herald a modest, but noticeable bump for modality vendors, and in particular, those whose portfolios skew towards particularly time-consuming exam times such as MR and CT.
This effect will be most noticeable in acute care in private markets, notably the US, where wage inflation is more significant. In single-payer markets, where wage increases are likely to be more constrained by government policy, the demand for new systems and tools to improve efficiency and automation will be more muted.
Favouring the Familiar
These broader economic and geopolitical challenges bring other reasons for cautious optimism among the largest medical imaging vendors. In times of geopolitical stability and bullish economic outlooks, there is a greater appetite for risk among many cohorts including financial investors and healthcare providers. This readily available capital helps young disruptive companies to grow, while the boldness of providers means that they are more likely to invest in the solutions touted by these young disruptors, potentially at the expense of other longer established vendors. In times such as the present, where economic uncertainty haunts procurement discussions, providers are unlikely to turn their back on a trusted supplier in favour of one that is unproven. This preference for the familiar will provide solace to large imaging vendors, which could have otherwise been threatened in key markets by disruptive start-ups, or quickly growing foreign players such as United Imaging.
Vendors can capitalise on providers’ preference for the familiar even further and look to bolster their service deals. Providers will be increasingly open to more integrated managed service partnerships, with such deals offering them predictability from a procurement and cost perspective, but also the ability to derive more efficiencies through the fleet management and operational workflow advantages that such partnerships can unlock. In these tougher economic times, when many providers are inundated with procedures postponed by Covid, the importance of minimising downtime, and extracting maximum value from equipment and personnel is increased, all of which can be gained through managed service partnerships.
Budgeting for Service
Vendors can also use the agreements to increasingly embed themselves at providers. By offering more comprehensive packages, of which service plays an ever-larger part, vendors can look to benefit from a hospital’s broader operational budget, a fund far greater than the radiology budgets which they would have historically looked to target.
Vendors can also look to strengthen their ties to providers and effectively lock them in for longer-term deals. As well as offering efficiency and operational improvements, large vendors will also be able to leverage their size to offer flexible payment plans. Offering early upgrades or effectively financing equipment purchases for a hospital, as part of longer-term deals.
This opportunistic thinking has been seized upon by many vendors, several of which have raised their guidance for the year, in part on the back of continuing strong order intake, which, for many vendors, continues to provide support and reassurance even given some of the immediate challenges they face.
More broadly too, the largest medical imaging vendors should feel reassured by the latest quarterly figures even as the world economy looks to be stalling. They will no doubt face some challenges, and they must continue to overcome some obstacles, but that is the nature of business. In the longer term, this volatility is an opportunity which they are best placed to benefit from. They, unlike many of their smaller peers, have the scale, diversity and cash reserves to persevere and gain ground while others falter. This may mean sacrifices in the near term, accepting lower margins or sacrificing niche opportunities in the name of focus, but, if they can hold their nerve and deliver on their promises, they could position themselves perfectly to capitalise when the winds change.
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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