MENTOR, Ohio — STERIS Corp. reported higher operating profits and a modest increase in revenue for its fiscal third quarter over the year-ago quarter.
However, the maker of infection protection, decontamination and life science technologies also said its future profits are unclear because it has been unable to resolve problems the U.S. Food and Drug Administration has with its System 1 sterilizer.
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On Dec. 3, the FDA warned that the chemical sterilizer for medical instruments no longer had the administration’s approval as safe and effective because STERIS had significantly changed the device since its 1988 launch. STERIS has said changes made to System 1 through the years did not warrant new market approval, and the company complied with FDA requirements while making the changes.
Today, the FDA updated its safety alert, suggesting hospitals and other health care facilities replace their System 1s with alternatives within 18 months. In December, the administration said this transition should occur within six months, however, it now realizes the short transition period “may represent significant difficulties for some health care facilities, which could, in turn, adversely affect patient care,” according to today’s release.
“The uncertainty surrounding our System 1 product … continues to be a complicated matter and we have been in frequent communications with the FDA in the past several weeks,” Walt Rosebrough, president and chief executive of STERIS, told securities analysts during a Tuesday morning conference call.
“Our goal is to have a plan to assist health care facilities as they look to transition to acceptable alternatives to STERIS System 1,” Rosebrough said. “In the meantime, we continue to support current System 1 users by providing sterilant, accessories, parts and service.”
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Because of the uncertain market for System 1 supplies, parts and service — which typically account for 10 percent of STERIS revenue each year — the company declined to provide sales and income guidance for fiscal 2010, ending in March. “As soon as we have definitive results, we will provide more clarity for both our customers and you,” Rosebrough said.
System 1’s overall utility is making it tough for some hospitals to find comparable alternatives. “What makes it interesting and difficult, there is no single product that does all of what System 1 does in the field,” Rosebrough said. “That’s what makes it a challenge.”
A year ago, STERIS asked the FDA to approve a kind of System 1.5. “While we are focused to assist customers as they look to transition from System 1, we continue to remain engaged with the agency on our next-generation System 1 product currently under 510(k) review by the FDA,” he said.
The company’s net income rose 44 percent to $41 million, or 69 cents a diluted share, in the quarter ended Dec. 31 from $28.6 million, or 48 cents a diluted share, a year ago. The year-ago quarter included $12.3 million in pretax restructuring costs, which subtracted from profit, as well as pre-tax income of $7.9 million from benefit policy changes.
Operating income — without the restructuring costs — rose 18 percent to $59.4 million in the just-ended quarter from $50.2 million. Revenue rose 3 percent to $327.8 million from $319.5 million a year ago.
“While top-line growth was modest, we believe we are seeing continued improvement in hospital capital spending patterns,” Rosebrough told analysts. “In particular, we are seeing project orders in our Health care segment rebound from first-half levels and continue to hear positive feedback from our sales organization about the level of activity from our hospital customers.”
The company’s operating income margin rose 240 basis points to 18.1 percent of revenue during the recent quarter, Mike Tokich, chief financial officer for STERIS, told analysts during the conference call. The profit margin expansion came from some lower raw materials prices and continuing efforts to improve operating efficiencies offset by the negative effects of a strengthening U.S. dollar, Tokich said.
The operating income margin for the quarter “also negatively impacted by $1.7 million as a result of our decisions within our Isomedix segment to consolidate a facility in the southwest and exit the [electron-beam] materials modifications business,” he said. Isomedix uses radiation to provide contract sterilization services to drug and medical device makers, as well as consumer and industrial products companies.
Health care consumable sales rose 10 percent during the quarter from a year ago, “driven, in part, by our hand-cleaning lines as a direct result of H1N1 preparedness, and growth in new products, specifically our Prolystica Ultra Concentrate chemistries,” Tokich said. Meanwhile health care equipment sales fell 2 percent. “Strong growth, once again, came from our new products, including V-pro 1, Reliance Vision washer and OR integration,” he said.
STERIS’ backlog for health care equipment at the end of the third quarter was a record $134.4 million, Tokich said.
For the nine months ended Dec. 31, net income rose 19 percent to $98.6 million, or $1.66 a diluted share, from $82.9 million, or $1.39 a diluted share, in the same period a year ago. Revenue fell 3 percent to $925.6 million from $954.2 million in that time.
STERIS shares rose 13 percent to $29.53 Tuesday on the New York Stock Exchange.
