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Although 2021 may seem a distant memory, vendors’ performances in its final quarter, along with the circumstances which shaped them, offer mixed fortunes for medical imaging’s biggest companies in 2022.

The quarter’s results showed some continuing reticence as a result of the coronavirus pandemic’s ongoing disruption, with new variants causing further headaches for vendors and providers alike. More broadly however, vendors’ results were mixed. Many fell into the ‘unremarkable’ category, such as Philip’s Diagnosis and Treatment business, and Nuance’s Healthcare business. These vendors were able to deliver low single digit revenue growth over the quarter, enough to appease, but not delight, investors.

Other vendors had more dramatic quarters. Fujifilm presents the highest quarterly growth compared to the same quarter in 2020, with a huge 47% increase, including a 56.7% increase in its Medical Systems business. The vendor did have a good quarter, noting in particular the demand for its ultraportable digital X-ray imaging systems and ultrasound systems, however much of this growth was only on paper as a result of turning Fujifilm Healthcare, which includes Hitachi’s diagnostic imaging business, into a consolidated subsidiary. Other standouts were Siemens Healthineers’ Imaging segment, which posted revenues 12% higher at EUR2.53bn, and Change Healthcare which posted revenues 10% higher than a year ago at $866m. Sitting at the other end of the spectrum was GE Healthcare and Shimadzu Medical Systems, which saw revenues fall by four and six percent respectively.

The Signify View

One of the central factors determining how vendors performed in the quarter, stemmed from their response to one of the quarter’s most significant challenges; the immense disruption to supply chains. This disruption and its impact was highlighted by many vendors, and, as explained in Signify Research’s Q321 analysis, its management would be among factors that defined their performance.

These differing approaches were apparent in the vendors’ financial figures. Siemens Healthineers revenue growth of 12% looks good on paper, but this came at the cost of the vendor’s margins. Siemens’ Imaging EBIT margin was still strong at 20%, but this was 340 basis points below those of the prior year quarter. Looking ahead the vendor said that margins would continue to be affected throughout 2022, with the most significant impact to be felt in the first half of the fiscal year.

Essentially, Siemens has shouldered much of the increased costs caused by supply chain disruption and component shortages. Philips also saw margins decline, falling from 14% to 13% on an adjusted EBITDA basis, however, comparable sales growth was flat, suggesting that the vendor was less willing to absorb the additional expense in a bid to protect margin. The vendor claims that this hasn’t cost it any business. It has, however, reported double-digit growth in the order book for its Diagnosis & Treatment business, implying that the vendor is enjoying similar demand to its German competitor, but could be less willing or able to spend more on fulfilling those orders immediately, instead choosing to wait to convert them into sales, but, hopefully, without sacrificing margin.

GE Healthcare also appears to fit this mould. At $5.3bn, the segment enjoyed a 7% increase in orders, however these future sales are contrasted by a 4% fall in revenue to $4.6bn, an 18% drop in profit to $800m and a 290 base point decline in margin to 16.5%. Another vendor fitting a similar pattern is Canon, which, in its Medical segment, saw net sales increase by 4.6%, but profit fall by 20% from 10.3bn Yen to 8.2bn.

Of course, these headwinds didn’t impact all vendors equally. Supply chains and logistics are obviously of less importance to vendors focused on software and imaging IT, a fact borne out by Change Healthcare and Sectra’s Imaging IT Solutions group, showing strong results, with revenues 10% and 7% higher respectively.

Expanding Inflationary Pressures

These supply chain difficulties also come amid global inflationary pressures. Many of the tracked vendors have increasingly been moving clients onto longer and ever more comprehensive managed service contracts. While this brings stability, with providers tied into deals for extended periods, vendors may lack the flexibility to raise their prices, despite facing higher costs themselves. While these eventualities will have been somewhat priced into deals, it could hurt vendors’ margins over an extended period. Such effects would hit those vendors who have most readily adopted these sorts of deals hardest, but, it could also have knock-on effects further in the future, as providers coming to the end of a managed service contract could find themselves suddenly hit with a dramatic increase in costs. Effectively being forced to stomach several years of inflation all at once.

Some vendors will also benefit from more positive currents over the coming years. Fujifilm and Canon, which are strongest in their home nation of Japan, were well supported throughout the pandemic by the Japanese government, which invested strongly in order to bolster the nation’s ability to fight the pandemic. Canon and Fujifilm benefited from this spend both in the near term, with hospitals acquiring additional systems for use in Covid care but are also likely to reap rewards for years to come, with the possibility of additional service revenues and upsell opportunities stemming from those additional hardware sales and expansion of their installed bases.

More broadly, vendors offered limited commentary about less developed markets. Philips noted that its Diagnosis and Treatment business enjoyed double-digit growth in Latin America and India, as well as mid-single-digit growth in China, but otherwise information was limited. This absence suggests that for most vendors, performances in emerging markets, excluding China, were neither remarkable, nor an area of particular focus. This makes sense. Although there is potential in these markets in the future, at present, the lower vaccination rates among their populations, the proportionately higher costs of tackling the pandemic compared to more developed regions, and wider pandemic-induced economic instability means that these are poor areas on which to focus, particularly when so much attention is required to deal with the challenges in their core markets. Vendors need to ensure resources are delivered to their highest-margin products, particularly in instances where they have had to absorb additional costs.

Fighting Fires

Headwinds facing the tracked vendors are, in many cases, more severe than they have been over the preceding few quarters, but, for the most part vendors are doing a fair job of managing them. Judging solely by the fourth quarter results (for those that have published at time of writing), vendors have, to a greater or lesser extent, been able to mitigate the impact of the headwinds by shouldering costs themselves, pushing out installations and sales, and relying on their service sales and add-ons to drive revenues.

These are primarily defensive moves, which see the tracked vendors protecting their revenues, and protecting their customer bases. Expending effort on such defence will naturally mean that these companies will have less capacity with which to address their longer-term objectives, meaning that advances in broader industry directions such as precision medicine, AI and digital twinning, for example, could be delayed. There are tailwinds that are set to offset some of these headwinds. If vendors can service demand, then the enormous backlog of elective procedures will provide a boon to those vendors who offer interventional imaging and therapy technologies, these will be strong growth drivers. Other vendors will see changes in some product categories offset changes in others. CT, for example was used heavily in Covid care, so the improving coronavirus situation will see demand for new systems diminish, however, this will be somewhat offset by increases in MR system sales, which were dampened during the pandemic.

The culmination of these various factors means that 2022 will be a challenging, albeit manageable year. Instead of being able to focus on long-term ambitions, vendors must be reactive and dynamic, shifting their resources to deal with the issues of the moment. Several vendors have suggested that supply chain conditions will improve in the second half of 2022, at which point increasingly normal service will resume. Until then, however, the vendors that perform the most strongly, are likely to be those that can most effectively juggle this breadth of challenges, without dropping any important balls.

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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