Nov 29, 2008

Business - Can Olympus Keep Its Medical Video Camera Edge?

Arlene Weintraub

Olympus can't do anything about today's financial and economic turmoil, which is dashing sales of digital cameras. But the company has managed to take charge of a fast-growing market that the average shutterbug probably doesn't even know it's in: medical video cameras.

Olympus was the first company to incorporate high-definition television signals into cameras known as "videoscopes," which surgeons snake through patients' bodies to search for stomach tumors, perform colonoscopies, or assist in removing diseased gall bladders. HDTV sharpened the quality of the images doctors could generate and turned Olympus into the No. 1 player in the $2.5 billion gastrointestinal endoscopy market, with 70% of global sales. (Japan's Pentax and Fuji vie for second and third place.)

But with competition on the rise and hospital budgets weighed down by the struggling economy, Olympus must persuade customers that its $20,995 surgical cameras are still worth the premium price. "These devices have to enable them to do more procedures, and to do them more efficiently," argues F. Mark Gumz, chief executive of Olympus Corp. of the Americas, who has been calling hospital CEOs personally to try to assess how far their spending might fall. "It's a concern—there will be significant financial stress on hospitals."

Virtually no one would have expected Olympus to dominate a market by employing HDTV, one of today's hottest consumer-electronics inventions. The Tokyo-based company has spent much of its 89-year history trailing behind far more popular camera makers, such as Kodak, Canon, and Fuji. In 2005, when Olympus introduced its first surgical cameras with HDTV, its medical equipment venture began to outrun its consumer business. In fiscal 2008, which ended in March, Olympus' surgery sales grew 29%, pushing the company's total medical sales up to $3.4 billion, or 31% of Olympus' $10.8 billion in annual sales.

Surgeon Appeal
Olympus' HDTV endeavor was fueled by technological persistence and a dash of foresight. Several years ago, the company's scientists were looking for ways to improve its surgical cameras. The company already had custom-designed and manufactured image-sensor chips, giving it a head start on HDTV. Even though the broadcast industry hadn't fully embraced high-def yet, Olympus executives predicted the lifelike images would appeal to surgeons. After hearing the pitch for the product, executives in Tokyo in 2002 committed to adding HDTV to equipment in the U.S. "We wanted to produce images that were comparable to what the human eye would see," says Frank Filiciotto, executive director of marketing for Olympus America.

To get that effect, Olympus' scientists combined HDTV with a technology called narrow band imaging, which filters out obscuring colors. The technologies work together to magnify fine structures like capillaries—the tiniest blood vessels in the body—letting surgeons easily detect abnormal tissues, such as those that might be precancerous. Then Olympus put the technology in a 6-mm diameter camera at the end of a flexible scope, which can turn corners in the body and produce images from almost every angle.

A version of the scope is now being widely adopted for a new type of surgery that's rapidly gaining in popularity. The surgery, known as laparoendoscopic single site, or LESS, allows complicated work such as gall bladder operations to be done in the abdomen through one tiny, nearly invisible incision in the belly button. The Olympus camera has become the tool of choice because of its crystal clear images and a flexible tip that allows it to see around corners, says Dr. Alex Rosemurgy, professor of surgery at the University of South Florida. "Now we can operate and leave no scar," he says. (Rosemurgy has no financial relationship with Olympus.)

Despite successes on the medical side, investors still think of Olympus as a consumer-focused business, and that's not a flattering angle these days. Since September, Olympus shares, which trade on the Tokyo Stock Exchange, have dropped 54%, while the Nikkei 225 index has lost 37%. Citing the "difficult environment" Olympus faces in consumer products, Credit Suisse analyst Kunihiko Kanno wrote recently that investors would be wise "to focus on Olympus for its medical business." He expects Olympus' medical sales to grow 13% next year and to be further fueled by the company's recent $1.9 billion acquisition of Gyrus, a British endoscope maker.

Growing Competition
Persuading hospitals that LESS is more won't be easy in today's recessionary times, however. The market for surgical video cameras is fiercely competitive, and an increasing number of Olympus' rivals are incorporating HDTV into their products. U.S. medical devices giant Stryker introduced its first HDTV product last December. And Stryker sells not only surgical video equipment but devices such as artificial hips and knees, as well. That gives Stryker leverage with hospital purchasers.

Furthermore, Olympus' HDTV equipment costs about 10% more than the non-HDTV cameras sold by its competitors. The cost issue is a palpable marketing challenge for all players. "The real issue for hospitals is that if they transition their cameras to HDTV, their monitors and image capture devices must also be replaced," says Brady Shirley, president of Stryker's endoscopy division, in an e-mail. "Transitioning to HDTV becomes more expensive because of the need to also purchase the other products."

CEO Gumz's latest worry is that patients may be delaying elective surgeries because they can't afford them. So far, he says, the decline has been limited mostly to cosmetic surgeries. "We'll continue to monitor this," he says. "I hope people don't put off these procedures." But he's quick to add with an apologetic tone, "I'm not an economist."

Weintraub is the Science Editor for BusinessWeek in New York .

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