PET sales boom drives CTI revenues and profits in Q1 2003

Most new customers choose fast scintillator

A quick and unexpected shift to LSO detectors helped make a good quarter for CTI Molecular Imaging even better and promised continuing growth for the Knoxville, TN, company. The maker of PET technology reported Feb. 5 that 75% of the scanners shipped and 90% of the scanner orders taken in Q1 2003, which ended Dec. 31, included detectors made of lutetium oxyorthosilicate. This percentage was up from 60% of the orders in the prior quarter.

"We expect that by the end of the year, all our orders will be for LSO-based machines," said Terry Douglass, CTI chairman and CEO. "This dramatic trend reinforces what we have said for some time-that healthcare providers see scan time as one of the most important criteria in their decision about the type of PET scanner to purchase."

LSO is the company's proprietary scintillation crystal, credited by CTI executives with helping to accelerate exams and produce better images. Other PET scanners, including some made by CTI, use different scintillation crystals, such as BGO (bismuth germinate).

Q1 margins on equipment were higher than usual because of the increased demand for LSO detectors, which allowed manufacturing efficiencies, Douglass said, as well as incremental margins earned by CTI Services on direct sales of scanners. Margins are expected to shrink in the coming quarters, however, from the 46% achieved in Q1 to a more sustainable 42% to 43%. This will affect net revenues, Douglass said.

The company, which went public June 21 but has been operating since 1983, reported that revenues in Q1 2003 rose 27% over Q1 2002, jumping from $47.6 million to $60.6 million. It earned net income of $3.4 million.

Revenues in Q1 were split among CPS Innovations, which supplies outside vendors with PET scanners ($31.9 million); CTI Services, which sells PET equipment directly to end users ($12.1 million); and PETNET, a network of cyclotrons that supplies sites with FDG ($16.1 million).

Douglass and CFO David Gill credited the sales strategy of CTI for its strong showing in Q1 and its future expectations. CTI sells directly to end users as well as through partners Siemens and Hitachi.

Revenues should rise 50% to about $80 million in Q2. The two executives are maintaining their earlier strategy for the fiscal year, predicting the company will generate revenues between $344 million and $365 million.

"We have made substantial investments in building our sales force in CTI Services and in an outside contract sales force in PETNET for physician referrals, as well as in R&D," Douglass said. "So we have some substantial front-loading that should be compensated in the third and fourth quarters, which are the shipment-heavy quarters on the capital equipment side of the business."

To promote direct sales, the company bundles its Reveal PET or PET/CT scanner with a service contract, marketing assistance to help drive PET volume at customer sites, and an FDG supply contract through its PETNET pharmaceutical business unit, which operates a network of 36 cyclotron-based centers across the U.S. All of the bookings in the U.S. were for these bundled packages. The company shipped three cyclotrons in Q1 2003, one of them to a PETNET site.

"By packaging these services to sell with capital equipment, we lock in a base of recurring revenue at the point of sale and develop a long-term relationship with the customer that will aid them in their success as a provider and lead to further sales of products and services in the future," Douglass said. "This strategy of being a partner with our customers is gaining recognition in the marketplace, and, based on our early success, we believe we are taking market share."

In Q1, five PET and PET/CT scanners were shipped to end users as the result of direct sales efforts, and 25 orders (21 in the U.S.) were booked. Fifteen of the orders were for radiology, seven were for oncology, and three for nuclear medicine.

About 62% of domestic orders will be financed as leases through finance company DVI. Most are scheduled for delivery in the third and fourth quarter. Douglass noted that the number booked in Q1 was more than the entire number of units sold directly by CTI Services last fiscal year. The company also received 31 orders for scanners from Siemens and Hitachi.

More than 88% of the direct sales by CTI Services are to diagnostic imaging centers and oncology practices, as well as mobile PET providers. Remaining sales are to hospitals.

"We are targeting the efforts of CTI Services on the outpatient imaging center market, which we believe has the potential for more dynamic growth than the traditional hospital radiology market," Douglass said.

CPS Innovations, a joint venture between Siemens and CTI Molecular Imaging, supplies PET scanners for relabeling by Siemens and Hitachi. In Q1, CPS Innovations shipped 28 scanners, an increase of 40% compared with the same period a year ago. Orders also grew with an increasing demand for LSO-based detectors. In Q1, 90% of orders at CPS were for systems with LSO-based detectors, and of these, 40% were for PET/CT scanners.

Siemens sells PET scanners and PET/CT components supplied by CPS primarily to hospitals, where the company's distribution channels are strongest. Figuring these sales into the mix along with those made by Hitachi, scanners made by CTI are about evenly distributed among hospitals, imaging centers, and mobile PET services, Douglass said.

As of Dec. 31, the company had $150 million in backlogs for PET and PET/CT scanners ($71 million), cyclotrons ($23 million), and service and support contracts ($56 million), according to Douglass. A major driver of scanner sales is oncology. Reimbursements put in place by Medicare and third-party payers starting about a year and a half ago have been buoyed by reimbursement that began last year for breast cancer. This indication has grown steadily over the past several months and now accounts for about 10% of all PET procedures, according to Douglass.

PETNET growth continued as the number of FDG doses delivered in Q1 exceeded by 66% those delivered in Q1 of the previous year. The network will add six pharmacies in fiscal year 2003. One was added in Q1 (bringing the total to 36). Another is scheduled for Q2, with two more expected in each of the following two quarters.