Financial crisis squashesdemand for new scanners

As 2008 drew to a close, so did demand in the U.S. for imaging equipment. The timing couldn't be worse. The crisis in the U.S. credit markets felled an already stumbling market for capital equipment such as MR and CT. Vendors began feeling the pinch in the first half of the year, reflecting a downturn that began last year.

Revenues from CT shipments to U.S. sites in the first half of 2008 fell to $580 million, down from $755 million over the same period a year earlier, according to consolidated estimates cited by industry sources. This financial carnage came on the heels of a double-digit drop in the 2007 compared with 2006, during which total revenues fell to $1.4 billion from $1.75 billion.

MR shipments dropped 16% in the first half of 2008 compared with the previous year's period. The shortfall "about $530 million versus $630 million in the first half of 2007" was foreshadowed by very slow order activity in 2007.

In the first half of 2008, revenue from the shipment of integrated PET/CT systems to U.S. customers plummeted to just $110 million from $155 million in the year-earlier period. By comparison, revenues in the first half of 2006 were about $178 million.

There were some bright spots, typically markets addressed by equipment requiring the least capital investment. Ultrasound, for example, weathered the storm well in the first half of 2008. Consolidated industry estimates indicate that radiology revenues and the number of delivered new units each rose about 3% compared with the previous half year. Ob/gyn revenue rose about 2%, but on substantially fewer units shipped. The industry estimates pegged new unit deliveries at about 18% below the previous half-year period, indicating a trend toward the purchase of expensive, high-performance products.

Mammography was a star performer, as vendors shipped 1200 fullfield digital systems to U.S. customers in the first half of the year. This compared with 765 in the first half of the previous year.

But as vendors entered the fall of 2008, the credit crunch took hold, casting doubt over just about everything with a dollar sign attached.

"When things are up in the air like this, you don't see big-ticket purchases going forward at a normal pace," said Tim Evenson, vice president of sales and marketing for Philips Medical Capital. "Customers are calling to say, ‘I'm still going to go ahead, but I'm just going to take things a little more slowly to see what's going on.'"

While sitting on the sidelines, healthcare providers looked forward to a more normalized financial environment, hatching plans to move ahead with imaging purchasing plans, but only after the credit crunch had passed. Vendors, lenders, and providers drew solace from down markets that had preceded the current one but rebounded sharply from pent-up demand. Continued tightening in reimbursement led to a cautious but nonetheless optimistic assessment.

"There are pressures in the industry so that the profitability of diagnostic imaging is unlikely to be as high as it has been in the past because payers are clamping down," said Scott Clay, senior principal at Noblis Center for Health Innovation. "But most providers will still view diagnostic imaging as a good investment."

Companies that finance imaging systems could afford to be cautious or even relatively optimistic. Roland Chalons-Browne, CEO of Siemens Financial Services, acknowledged the challenge facing the imaging community but reaffirmed the company's commitment to the market and its customer base. Others in the industry are also likely to weather the storm thanks to an extraordinarily broadbased financial foundation.

Philips Medical Capital is a joint venture between Philips Medical Systems and De Lage Landen International, a Dutch leasing company whose parent Rabobank was recently rated as one of the top four safest banks in the world.

"We have zero subprime exposure, so we haven't been affected like the rest of the economy," Evenson said. "That wasn't to say that there would not be some fallout. Everything is linked and interconnected, so even though we are in a position where we could be lending like crazy, we're being a little more cautious as well."

Borrowers are equally skittish. Diagnostic imaging products can be a component of major hospital expansions or renovations that require $25 million to $200 million or more in financing through the capital markets. For the most part, however, capital purchases of imaging equipment are done on an almost routine or special project basis.

"Hospitals generally don't issue debt for $2 million to $3 million projects to expand, replace, or upgrade diagnostic imaging," Clay said. "That's normally funded out of their capital budgets, cash on hand, or earnings from operations."

Healthcare organizations are taking a closer look at financing options that operate outside of capital markets, according to industry executives. One option is leasing. This option was also being affected by the credit crunch, however. Scrutiny is now being applied not just by the lessors but by those signing for the leases.

"There is definitely a higher level of due diligence being conducted by practices to be certain that an imaging acquisition makes sense in light of the current economic climate," said Mike Sweeney, general manager for healthcare finance at US Express Leasing, which makes leasing arrangements with private physician group practices.

Potential lessees were making sure that the presumed economics of an imaging acquisition were in line with expectations concerning reimbursement amounts and patient volumes. Nevertheless, the demand for leasing was at the same level as it was in 2008, Sweeney said.

"We have some examples where clients have been able to acquire equipment during 2008 and make lower or no payments until 2009 by taking advantage of tax benefits and begin their cash flow applications once the equipment is in and generating income," he said.

Both sides of the lender/borrower equation most likely will be wary well into next year and possibly even the year after. Pockets of financial activity will not expand unless the macroeconomic climate improves.

Structural issues associated with mortgage-backed securities will take at least a year to address, Chalons- Browne said. The bigger question is the depth of the economic recession the country appears to have entered. This recession could lead to reduction in demand for health services, reduced hospital revenues, lower rates of philanthropy, and decreased funding from Medicaid.

"It looks like hospitals, just like everyone else, will have to make tough choices about what they spend and how they need to make investments to remain competitive," Clay said. "Hospitals will be more careful to make capital allocations on projects that have a greater return on investment. The good news is that, historically, diagnostic imaging has had a good return on investment."

By Greg Freiherr