Agfa blames low film sales for shortcomings in Q2

PACS appears to be finally coming of age as institutions around the world increasingly recognize the benefits of electronic record keeping. The biggest providers of PACS, the film-turned-PACS vendors could expect this to be the time when they realize earnings from their decade-plus investment in this technology. But it is more complicated than that.

The move to digital forced x-ray film providers to implement radical changes to their businesses. Most are still working through the difficult transition from photochemistry expert to IT guru. This process has been complicated by the uneven adoption of digital healthcare solutions worldwide. Belgium-based Agfa-Gevaert exemplifies these growing pains.

The company is blaming a fall in x-ray film use by U.S. customers for its weaker than expected Q2 healthcare results. The drop-off in film orders occurred faster than had been anticipated, according to Luc Thijs, Agfa HealthCare's vice president for radiology and departmental solutions. Increased competition among providers for the limited market has led to price erosion, which cuts further into profits.

Sales by Agfa's HealthCare business group came in at €359 million for Q2 this year, showing little difference from figures for the same period last year (€356 million). Excluding currency effects and recent acquisitions, however, sales were 6.7% lower than in 2004. Operating results amounted to €34 million, as opposed to €53.7 million in 2Q 2004. This gave a return on sales of 9.1%, down from 15.1% in 2004.

"We had expectations, we had forecasts, but unfortunately we experienced a faster than expected decline in film consumption in the U.S.," Thijs said.

It's no surprise that digital technology is penetrating the healthcare environment and that physicians have embraced a workflow that integrates filmless and paperless approaches. The widespread acceptance of multislice CT, particularly devices capable of 16 or more slices, has accelerated the need for soft-copy reading capabilities.

"CT used to be a prime source of film consumption. Now so many slices are produced that it becomes virtually impossible to diagnose from CT using film. That, I would say, is a factor that one should not underestimate," Thijs said.

Although Agfa has anticipated - and planned for - a move away from hard-copy workflow in the healthcare arena, it is faced with a highly fragmented pace of change, he said. Many different factors affect the speed of digital adoption, and the speed of transition varies geographically.

"For example, in Japan, although it is a digital environment, reimbursement rates still motivate users to work with film for every exam," he said. "So what you see there is a market for both digital solutions and film."

Although Agfa is predicting stronger healthcare sales over the next six months, the company does not expect Q3 and Q4 profits to offset the shortfall from the first half of 2005. Two major product launches in Agfa's CR and PACS portfolios are scheduled for the remaining half of the year.

Inherent seasonality in spending patterns, as healthcare providers clear their budgets by the end of the year, will also help, as will the rollout of new interests in the enterprise-wide IT and cardiology sectors, Thijs said. The past 12 months have seen Agfa build up its healthcare IT portfolio through purchases of French EPR-provider Symphonie Online, German enterprise IT specialist GWI, and U.S.-based Heartlab, an innovative designer and supplier of cardiac image and information management software.

"We have invested a lot in innovation and in the acquisition of companies," he said. "The benefits of these acquisitions will start to kick in."

Flagging film sales in the U.S. market are to be countered by restructuring the sales and services organization and by reinvestment in new technologies. U.S. imaging centers and orthopedic practices account for a higher proportion of imaging exams than ever before, Thijs said. Agfa aims to tap into this phenomenon by providing these businesses with comprehensive practice management systems. The company will also continue to support the introduction of integrated PACS/RIS solutions in the acute care environment.

"What matters most to customers today is not necessarily what brand of film they are using, but who can reengineer their workflow best," he said.