Infection prevention and decontamination technologies maker STERIS Corp. (NYSE: STE) has returned to quarterly profitability, a sign that an end to the struggles surrounding its flagship sterilization technology may be in sigh.
But a 1 percent decline in sales — as well as regulatory delays involving its replacement technology — indicate that the Mentor, Ohio-based company isn’t completely in the clear.
STERIS reported second-quarter profits of $35.7 million, or 59 cents per diluted share. That’s up about 11 percent compared to last year’s second quarter. It’s also a big improvement over last quarter when it lost $45 million because it set aside $110 million to cover a rebate program in a bid to hold onto customers of its System 1 sterilization technology.
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System 1 is a liquid chemical sterilizing system used by hospitals, surgical centers and other healthcare facilities to sterilize heat-sensitive medical instruments. A Dec. 3 FDA safety alert about System 1 cast a pall of financial uncertainty over STERIS, whose reliance on supply, accessory and service sales for the sterilizer led it to suspend its earnings guidance early this year. The company hopes to transition customers to a new version of the sterilization product, called System 1E.
STERIS’ latest quarterly earnings beat Wall Street’s expectations of 54 cents per share. The company raised the lower end of its full-year guidance to $2.15 per share from $2. The upper end is $2.30.
Revenues dropped 1 percent to $312 million, below the consensus analysts’ estimate of $323 million. However, operating profit rose to 17.6 percent of revenues from 15.9 percent in last year’s second quarter, an increase that drew praise from several analysts during a conference call with STERIS executives.
One point of concern for analysts was that while System 1E received regulatory clearance for sale about six months ago, the company hasn’t begun shipping the new device. The reason for the lag in shipping is STERIS is waiting for regulatory clearance of two accessory parts, CEO Walt Rosebrough said.
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STERIS originally had expected to ship System 1E in the “September-October” time frame, but that’s now been pushed back, though Rosebrough didn’t say until when. “We’re a little behind,” he said. “We don’t see that as an issue, per se.”
Due to regulatory uncertainty, STERIS hasn’t given customers a shipping date for System 1E.
The company has taken more than 1,000 orders for the new product and provided an additional 7,000 quotes. STERIS has produced about 2,000 of the units so far, and expects to manufacture between 4,000 and 6,000 by the end of the year.
Rosebrough said the sales cycle has taken longer than expected, and chalked it up to questions customers have about the new device and their own sterilization needs. “In retrospect, we probably should have been a little more cognizant of that,” he said.
The biggest difference between the two sterilization systems is System 1E is restricted to sterilizing heat-sensitive devices, largely endoscopes made with materials or adhesives that degrade when heated, while System 1 can be used to sterilize both devices that are heat sensitive and those that aren’t. System 1E, which technically is known as a “sterilant processing system,” likely will be able to process about 80 percent of the devices that System 1 can.
In response to analyst’s question about when STERIS could expect a return to “normal,” Rosebrough said, “We expect the bulk of this transition to be complete by August of next year.”
A Dec. 3 FDA safety alert about System 1 cast a pall of financial uncertainty over the Mentor, Ohio, technology maker, whose reliance on supply, accessory and service sales for the sterilizer (it no longer sells the sterilizer itself) led it to suspend its earnings guidance early this year.
