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Medical imaging vendors, like their counterparts in other industries, are having to tackle challenges that haven’t had to be faced in years or even decades. Some of these are universal. Inflation, for example. In some countries inflation is at levels not seen in forty years, energy costs have hit new highs impacting manufacturing and shipping, and logistics headaches continue to disrupt supply chains. Some problems are more specific to healthcare such as staff shortages and staff burnout after the toll of the Covid-19 pandemic and enormous backlog of elective procedures that are yet to be undertaken.
Given this gloomy outlook, it would be natural to expect that these challenges are being reflected in medical imaging vendors’ bottom lines, however, for the most part, their Q2 financial results appear remarkably robust.
The Signify View
Almost across the board, vendors have reported revenues higher than they did so in the equivalent quarter a year ago. In most cases these gains are modest, with GE HealthCare, for example, seeing growth of 1.4% while Philips saw growth in its diagnosis and treatment business of 1.9%. However, even given the size of the increases they are still notable, particularly given that for the same quarter a year earlier the market was performing strongly and had largely recovered from the lows seen in 2020 at the pandemic’s peak. Other vendors are seeing even more pronounced gains, with Shimadzu’s Medical Systems group and Konica Minolta’s Healthcare group seeing rises of 11.9% and 12.2% respectively.
There are several reasons for this outwardly surprising robustness. Chief among them is the natural delay inherent in healthcare procurement. Medical imaging, as with healthcare in general, tends to react slowly to changes in the market. Contracts are increasingly lengthy, procurement plans are in place well before they are acted upon and, barring unusual spikes such as that caused by the Covid-19 pandemic, demand is consistent and predictable. As such, wider trends that will, in time, come to have an impact are not yet severely damaging medical imaging vendors’ bottom lines. This could well change over time as economic challenges at hospitals start to filter through to their purchasing plans and therefore medical imaging vendors, while these vendors will at the same time be hit by supply-side costs, with energy, raw materials and logistics all becoming more expensive.
In response to these rising costs, vendors will raise prices. Several vendors referenced this in their financial presentations, with some even producing schematics to illustrate the price increases in the short-to-mid-term, as pricing measures chase cost increases to restore margins. The results of these price increases will not be felt right away. This is both a reflection of the implementation of the increases, but also stemming from vendors’ willingness to accommodate the budgetary challenges of providers.
Results to Order
Another factor supporting the financial results of medical imaging vendors is that a glut of orders seen in Q3 2021, which vendors’ boasted about in their financial presentations for that quarter, are presently being turned into revenues. This wealth of orders was the result of both the supply chain issues that plagued vendors for much of last year and the fruits of emergency Covid-spending that providers began to wield against the backlog in procedures rather than Covid-care itself. The rapid inflation seen over the last year will have compromised the margin vendors could have expected from these orders, but they have at least helped sustain revenue growth.
As these orders are fulfilled, vendors will need to carefully watch their order books. In doing so they will be best placed to react quickly and balance their need to raise prices and sustain margin with customers’ ability to pay. At present, for most vendors, order books continue to look healthy. In its presentation, Philips boasted of an ‘all-time high orderbook’, Canon noted record order levels for its Medical business, Siemens Healthineers mentioned ‘very good growth in equipment orders’ and GE referred to 1% order growth, albeit comprised of 5% service order growth and a 1% decline in equipment order growth.
Medical imaging vendors do, at least, have the luxury of continued demand. The disruption caused by the Covid pandemic means that providers are servicing a backlog of both elective procedures and other delayed imaging exams, with for example, screening programmes paused amidst the pandemic. To meet this elevated demand, providers are, for the time being, willing to invest in equipment that is proven to deliver improved operational efficiency, both on the hardware and software side. This willingness is, in many countries, and for the time being, supported by post-pandemic economic stimulus packages. As economic pressures mount, governments could reduce or remove this extra spending, impacting hospitals’ ability to purchase new equipment and therefore presenting a challenge to vendors. This is likely to be further exacerbated by the servicing of the procedural backlog. As the size of the backlog diminishes, so too does the necessity for new equipment.
As these effects take hold, vendors will have to react. That could mean simply becoming more aggressive on pricing, focusing on value product ranges or becoming increasingly flexible with regards to payment schedules and purchasing options. Regardless, it is unlikely that this demand will be sustained indefinitely.
So the World Turns
Another factor that held significant sway over the fortunes of medical imaging vendors over the quarter was the regional differences. In some cases this proved a boon, with, for example, Japanese vendors Fujifilm, Canon, Konica Minolta, and Shimadzu all benefiting from the depreciation of the yen, making their products more affordable in export markets.
In other cases, the trends were less favourable. Unlike many major markets, China continued to enforce Covid restrictions in some regions throughout the quarter. Such restrictions severely impacted vendors’ fortunes in the market. This not only manifest in the form of weaker sales, with declines in revenue for a number of vendors, but also added to the logistical problems vendors faced. Philips, for instance, noted that production at several of its Chinese factories, as well as those of its suppliers was suspended for two months during the quarter. This exacerbated supply chain challenges and increased costs, as well as impacting the vendor’s ability to pursue sales activities in the region. One of the only vendors to have enjoyed growth in China was Mindray, which saw overall revenues improve by more than 16% in the quarter. While still affected by lockdowns, the domestic market offered the vendor an advantage compared to some of its international peers. This is likely to continue in the future given the economic conditions which benefit domestic companies, as well as Chinese initiatives such as the Thousand Counties policy and Sunshine procurement plans which can, either directly, or incidentally support Chinese healthcare vendors.
Chinese firms such as Mindray are also looking to target emerging markets such as India. Now could be an opportune time for the likes of Mindray to capitalise, particularly if large international vendors look to limit their exposure to some markets amidst increasing economic volatility. Conversely, in the case of India, Chinese vendors may also find they have increased competition from Indian companies, while themselves facing increasingly protectionist procurement policies.
Accepting the Flow
Such details are, however, eddies in the broader currents of medical imaging. More generally, despite the economic headwinds, vendors are in a relatively strong position. Margins may have to temporarily be sacrificed in the near term to secure and store raw materials and components to ride out disruption to supply chains, and to absorb price shocks and offer flexibility to customers. Vendors may also choose to sacrifice some opportunities for rapid growth in emerging markets in a bid to reduce their exposure to the subsequent volatility and to be able to devote themselves to their core, established markets. Such moves, however, are priced into vendors’ outlooks, a fact reflected in their financial forecasts which remain steady or show only a slight decline.
Ultimately, these vendors exude stability amid broader economic volatility, and will do so for at least 12-18 months. Beyond this, the levels of inflation, energy prices, stability in emerging markets, geopolitical challenges, government spending priorities, staff shortages and recruitment challenges, additional waves of Covid-19 and backlogs for diseases like cancer make forecasting difficult. In these times, the onus is on the leadership teams at individual vendors to be able to capitalise on their strengths. Vendors will, in essence, be forced to chart their own courses.
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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