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Signify Premium Insight: Vendor Financials Round-up – The Health of the Imaging Sector Q1 2023

Whisper it, if you must, but it seems that for the first time in several years, medical imaging vendors have been able to enjoy a comparatively uneventful quarter. Since the Covid-19 pandemic first took hold in early 2020, it has seemed that every quarter has been rocked by some global macroeconomic drama. Whether the pandemic itself and its resultant restrictions on elective procedures and non-urgent imaging, the supply chain disruption and logistics nightmares, spiraling energy prices as Russia invaded Ukraine, or the dramatic inflation which has rocked much of the world, it has not been an easy period to steer a medical imaging vendor forward.

Now, however, in the first quarter of 2023 many of these disruptions seem to have abated somewhat, enabling medical imaging vendors to return their focus to business as usual, rather than fighting fires as they arise. Further, some vendors had to make difficult decisions, downsizing workforces and adjusting strategies following the beatings the previous years doled out, with these changes made, vendors are better equipped to face the year to come.

Signify Premium Insight: Annalise.ai Enters into Nuanced Partnership

This Insight is part of your subscription to Signify Premium Insights – Medical Imaging. The content is only available to companies that have subscribed to this paid-for service. To view other recent Premium Insights that are part of the service please click here.

Medical imaging AI vendor Annalise.ai and Nuance Communications, a vendor which specialises in reporting and ambient clinical intelligence tools, have announced a partnership which will connect Annalise.ai’s diagnostic support solutions to more than 12,000 healthcare facilities currently on Nuance’s Precision Imaging Network globally.

With the agreement, Annalise hopes to gain exposure to a greater number of sites, allowing it to scale rapidly, while Nuance can utilise Annalise’s solution to enhance its growing Clinical Analytics Platform and complement its Natural Language Processing tools.

The Signify View

Medical imaging AI vendors are keen to extol the virtues of their partnerships. While these vendors are often quick to boast that their algorithms are being hosted by one of a growing number of AI platforms, the truth is that these platform providers are sometimes not very discerning. Some platform providers aim to simply give customers the broadest range of solutions possible. Sometimes these are bundled into clinical suites or workflow packages, but the breadth of solutions on offer is usually of paramount importance.

The approach of Nuance, bolstered by its recent acquisition by Microsoft, is subtly different. The partnerships it has fostered do help offer a range of capability to customers, but above that ambition, Nuance has been more discerning, only partnering with vendors which deliver solutions that offer providers significant clinical value. It is essentially only interested in collaborating with the vendors it deems the leaders in any product category. This marks a divergence from its original platform play, which took the form of a more conventional ‘marketplace’ approach aiming to offer a wide variety of tools to the end-user, but that platform, like many of the early marketplaces, failed to gain significant traction.

Annalise.ai, as well as Nuance’s other announced partners, Densitas and Perspectum, embody this ‘quality over quantity’ approach. In the case of Annalise, which can be regarded as a market leader given the sophistication of its comprehensive solution, the clinical value it has the potential to offer and the funding and clearances it has secured, the adoption of a comprehensive solution eschews the need for Nuance to adopt and integrate solutions from multiple providers for the same body area modality combination. Nuance’s orchestration capabilities mean that customers on its Precision Imaging Network can leverage Annalise’s strength to identify a multitude of findings, before findings are pushed to their reporting solution, ensuring they can more readily be utilised in clinical workflows.

Historic Improvements

In addition to this, however, Annalise.ai’s solutions could be used in synergy with Nuance’s strength in natural language processing (NLP). Nuance’s NLP could mine historic radiology reports to identify reports of interest. These reports could then be analysed by Annalise to identify incidental findings. While this would, in the first instance, enable providers to improve patient outcomes, it would also have broader implications, allowing the health of entire populations to be more effectively managed overall.

As well as having a presence in almost 80% of US hospitals (according to the vendor) Nuance’s network connects radiologists, providers, health-plans, self-insured employers, life sciences companies and other imaging stakeholders. The two vendors will hope that this breadth will enable such retrospective analytics to deliver value to providers beyond the clinician, and identify other areas where additional value can be delivered.

This highlights the difference between Annalise and Nuance’s collaboration, compared to other comparable partnerships. Where often vendors in partnerships essentially co-exist harmoniously, Nuance and Annalise hope to collaborate synergistically. Working together they hope to enhance the quality of reporting and efficiently enrich the quality of reports with data directly from the algorithms.

Regulation Restrictions

Wider trends in the medical imaging market also emphasise the potential offered by the partnership. Annalise has, as noted in past Insights, been progressing quickly in Australasia and Europe. However, its progress in the US has been stymied by the US-FDA’s reluctance to approve comprehensive solutions, treating the detection of an individual finding as though it were assessing a separate tool. Such an approach effectively prevents Annalise, which claims its CXR chest X-ray solution can identify 124 findings, from gaining regulatory approval in the US. Resultantly, Annalise has, been forced to break up its solution in a bid to secure approval for smaller subsets of the solution. Further, to accelerate the pace of crossing regulatory hurdles and forge an installed base in the US, the vendor has also been forced to settle for its tool’s use as a triage and notification solution, rather than one that can be used for diagnosis.

These barriers mean that Annalise would be facing a long, hard road to gain ground in the US, especially in the face of other vendors which have gained success with a single solution before expanding out to encompass increased clinical requirements. Partnering with Nuance, and gaining access to its vast installed base, immediately ameliorates that difficulty. The scale of Nuance, as well as its integration into providers’ workflows, means that for the time being, the lack of regulatory approval for detection won’t severely hinder Annalise, enabling it to be valuable as just a triage solution, albeit for a smaller number of its CXR solutions. Further, if the US-FDA does eventually rethink its approach to comprehensive solutions, it will be well placed to dramatically capitalise.

Even at present, though, both companies stand to benefit, while also granting their customers new opportunities. This is particularly true given that Nuance’s workflow integrations will help tackle another of the hurdles facing providers hoping to utilise AI for historic analysis; how to bring the analysis of historic data into current clinical workflows. Annalise needs to be able to access the data harboured by Nuance’s 12,000 care facilities, which depends on that data not only being made available, but also being formatted into a unified manner, where NLP and image analysis can be leveraged.

Patient Finding

The fruits of overcoming this challenging, in private markets at least, can be substantial. Providers connected to Nuance’s network who choose to use Annalise’s solution on their historic data could identify significant numbers of patients with incidental findings, missed findings or even misdiagnosis. In doing so, if these patients can be incorporated into hospital’s workflows, and assigned treatment pathways, they represent additional sources of revenue for providers. By utilising the collaboration between Nuance and Annalise, providers should be able identify patients that will benefit from interventions, which they themselves can charge for, while also improving outcomes for the patient.

Further, the purported access to data granted by the agreement with Nuance will also give Annalise another longer-term advantage, with the vendor being able to utilise the data as it continues to refine its algorithms and presumably expand into other clinical areas, as well as validating its solutions to increasingly convince providers and regulators alike of its merits.

Even with the apparent strengths offered by the partnership, there are several questions whose answers will be revealed over time. How invested in medical imaging is Microsoft and Nuance, for example? One of the motivations driving investment in medical imaging by cloud infrastructure providers is simply to sell more cloud services. This is likely one of the reasons for Microsoft’s acquisition of Nuance in the first place. The partnership with Annalise and other AI vendors will, if successful, aid in this regard, helping convince providers to transition to the cloud. However, Nuance’s heritage and strategy suggests this is not the sole motivation. Another question raised is why Annalise hasn’t developed its own platform? AI scale-ups offering their own platforms is fast becoming a developing trend, and Annalise are well placed to make such a move. However, the opportunity to scale with Nuance is too significant to ignore, especially in the US, and Annalise will hope to use it to “leapfrog” algorithm developers that natively developed platforms.

These are, however, relatively small matters in what is a grander ambition. The volume of platform launches throughout the year has increased dramatically, but against this backdrop, Nuance’s partnerships with Annalise, Densitas, and Perspectum have brought something different. Sophisticated AI solutions, AI orchestration expertise, a large global footprint of potential sites, backed by a global cloud technology behemoth with very deep pockets; a combination which could prove a recipe for success.

About Signify Premium Insights

This Insight is part of your subscription to Signify Premium Insights – Medical Imaging. The content is only available to companies that have subscribed to this paid-for service. To view other recent Premium Insights that are part of the service please click here

Signify Premium Insight: Vendor Financials Roundup – The Health of the Imaging Sector Q1 2022

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.

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.

Mixed Risks

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.

Inflated Concerns

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.

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