CTI reduces earnings view; stock dips 17.6% ; CEO reports solid sales, plans for future growth

CTI Molecular Imaging reported solid sales of its medical equipment Tuesday, but the Knoxville company said it has had to cut prices “in some strategic cases” because of increased competition.

As a result, company officials said they expect earnings of 19 to 21 cents per share in the current quarter, down from an expected 28 cents.

Investors reacted quickly to the news, which was released in a third-quarter conference call with analysts.

CTI shares fell 12 percent in heavy trading before the 80-minute call concluded Tuesday morning and ended the day at a 52-week low of $13.09, down $2.79 or 17.6 percent.

Two investment analysts downgraded CTI’s stock following the report — Bank of America from buy to neutral and First Albany from strong buy to neutral.

CTI manufactures positron emission tomography — or PET — scanners that cost from $800,000 to more than $2 million apiece. The scanners use radioactive drugs to map a patient’s metabolic system and reveal tumors or other medical problems.

The company also has sites around the country where the short- lived radiopharmaceuticals are manufactured for quick distribution.

It emphasizes a “total solution” approach to medical imaging, including marketing PET scanners and educating doctors about their use.

The marketing aims to increase awareness among physicians and patients who may be more familiar with CT scans and MRIs. CTI also offers site planning and installation assistance, recruitment of operators, and training for doctors and operators.

Chairman and chief executive Terry Douglass said that “in some strategic cases,” CTI has reduced the price of its machines for the sake of securing a longer-term revenue stream.

“It is critically important for CTI to build a strong direct presence in the market now to cement customer relationships so that over time we are well positioned to sell additional products and services and to sell future upgrades,” Douglass told analysts.

For instance, officials said, they believe it makes sense for the company to discount sales to high-profile clients such as the University of California at San Francisco who can serve as references down the road.

Also, Douglass said, “For every Total Solutions booking, we can expect $3 million to $4 million in recurring revenue over the subsequent five-year period.”

He expects more than 100 direct scanner orders this year.

“We want to gain as much business as we can,” Douglass told analysts. “On the other hand, we recognize the need to … maximize margins on the initial sale as well, so we’re working both parts of that.”

Douglass said CTI has about 25 to 30 percent of the scanner market through its direct distribution effort, in which CTI-branded scanners are sold by the company’s in-house sales force.

When CTI-made scanners sold by other distributors such as Siemens and Hitachi are included, CTI claims more than 50 percent of the scanner market.

Its competitors include GE Medical Systems and Philips Medical Systems.

Analysts asked for details about how competition in scanner sales is pinching CTI’s margins and sought reassurance that the profitability of other CTI businesses won’t be similarly eroded.

Thomas Hook, president of CTI’s PETNet Pharmaceuticals division, said customers who buy a scanner are under contractual obligations to purchase other products.

Hook said CTI’s products and services are unique.

“We’re very confident that we know how to significantly turn this gross margin decline around,” Douglass said. “We made some conscious decisions to go after strategic orders that we knew would impact the margin. If you take out three or four of the orders, we can pretty much account for the total decline in the margin.”

In the first three quarters of the fiscal year, the company booked 74 scanner orders directly, compared to 13 for the same period last year.

“We’ve got the best products. We’ve got the best sales force. … We’ve booked a lot of business, so the competition is largely coming from the people that have inferior products, do not have a dedicated approach towards PET, and therefore they’re forced to discount,” said David Gill, chief financial officer, “and those two would be largely GE and Philips.”

Douglass said CTI has “very significant” cost savings coming online from a new workstation, a new scanner product, and efforts to lower the cost of CT scanners (for use in PET/CT scanners) from Siemens, which has an ownership stake in CTI.

“All of you should be able to expect that margins will improve significantly for us during next year,” Douglass told analysts.

“What really excites me about what’s going on is the fact that we’re continuing our six-year history of growth above 40 percent per year on top line and 70 percent per year on bottom-line,” he added. “We’re a growth company, and the growth is going to continue.”

Business editor David Keim may be reached at 865-342-6311.

CTI BY THE NUMBERS

* Net revenue: $99.2 million for the third quarter, up 44 percent from third-quarter 2002

* Net income: $7.5 million, up from a net loss of $2.3 million in third-quarter 2002

* Earnings per share: 16 cents for the third quarter

* Guidance: Expected fourth-quarter EPS of 19 to 21 cents, below analyst consensus of 28 cents

* 52-week high: $28.63 in October

* 52-week low: $13.09 on Tuesday

Sources: CTI Molecular Imaging; the Associated Press; Yahoo! Finance