D

AT Company Profitability

Businesses engaged in the manufacture of AT products operate in the market with different levels of experience, sophistication, and profitability. The economic returns captured by AT companies are affected by many variables, including basic operating modes. For instance, some companies manufacture or distribute AT products as a supporting activity of an overall marketing strategy for their core business–such as medical products. Other firms focus on AT products as their principle source of income.

The equation for determining profitability becomes more complicated when one considers that some AT firms enter the market with little awareness of the roles that regulatory and reimbursement agencies play in healthcare. These companies face a steeper learning curve than their established competitors. Still other enterprises operate on the fringes of the market, working in a development capacity supporting other AT product companies — and often doing so without a finely honed marketing strategy for their design concepts or products.

To gain a better understanding of the economic health of the industry, survey respondents were asked to provide net income data (net profits after accounting for all expenses) related to sales of AT goods and services. Nearly 50 percent of survey respondents – including small, medium and large firms – attribute 90 percent or more of their net income to AT business activities.

At a macro level, data show that overall profitability for the industry grew respectably over three years. Net income reported by survey participants rose from $134.5 million in 1997 to $162.2 million in 1999. Much of this growth, as measured in sales revenue gains, is concentrated in 10 percent of the AT companies — mostly large- and medium-size firms. Big losses posted by a few AT enterprises, however, limited growth in net income for large companies as a group.

Enterprise-level data indicate that net AT income as percent of sales revenue can vary significantly from company to company. Firms posting high net income can generate it on relatively low-volume, high-price goods such as advanced wheelchairs — or on simpler products with low production costs and high profit margins. Similarly, when market demand supports volume production, earnings on low-profit AT products can make their manufacture attractive.

The levels of profitability achieved by AT companies vary across enterprise size as well as by the goods produced. Large companies, for example, are not necessarily the most profitable, survey data show. Medium-size companies, on average, are more profitable in terms of the percent of sales revenues retained as net income.

As a group, surveyed firms deriving 90 percent or more of net income from sales of assistive technology saw earnings grow approximately 30 percent between 1997 and 1999. This growth was largely concentrated in a group of slightly more than 200 companies. In 1999, global sales for these firms totaled $2.626 billion compared to overall sales of $2.87 billion for all AT companies operating in the United States that participated in the survey.

Seventeen companies that obtained 50 to 89 percent of their net income from sales of AT products and services had 1999 sales of $97.3 million. Another 81 firms that collected less than 50 percent of net income from AT products posted sales of $153 million.

At 17 percent, average net earnings as a percent of revenues was greatest in 1999 for companies that derived 50 to 89 percent of net income from AT product sales. Companies attributing 49 percent or less of their of net earnings to AT sales had average net income of 13.6 percent. Average net earnings on AT sales was smallest — five percent — for firms that generate 90 to 100 percent of net income from AT industry-related businesses.

Survey data provide no definitive explanation for why average net income is significantly lower (on a percentage basis) for companies that are heavily dependent on AT sales as their prime source of revenue. A number of factors may contribute to this situation.

In the case of smaller AT companies, their operating margins can be slimmer in some instances because of lower sales volume and revenue. In addition, those smaller companies that have a weak understanding of healthcare industry and regulatory pricing policies may have lower sales and could incur larger than necessary overhead costs.

Looking at the AT industry from another vantage point, survey findings demonstrate that being bigger does not necessarily translate into higher profitability (see Table 7)as measured by net income on sales. In 1999, AT companies with sales revenues of $60 million and higher posted sales revenues of $1.975 billion. Of that amount, an estimated $51.4 million -- or about 2.8 percent — was captured as net income.

In contrast, medium- and small-size companies participating in BIS’ survey, on average, appear to have significantly higher levels of net income as a percent of sales revenue. In the case of medium-size AT firms (those with 1999 sales revenues of $10 million or more, but less than $60 million), average net income was 13 percent on sales revenues of $526.5 million. Small companies — those with sales revenue below $10 million — achieved average net income of 13.1 percent on their operations. As a group, small firms generated $374.4 million in sales revenue.

The data provided by survey participants do not explain why larger companies, which would presumably benefit from greater economies of scale in manufac-turing and distribution, have lower net income (on a percentage basis) than that achieved by small- and medium-size AT companies. One explanation for these differences in net income is that larger firms produce goods for which there are multiple suppliers and significant competition. In addition, some high-cost products, such as automated wheel chairs, may have low profit margins. Clearly, large losses reported by some firms depressed average earnings for this sector. Even after accounting for this, average net income for the group trailed that of medium- and small-size companies.

Small- and medium-size firms score high net profits on a percentage basis for a number of reasons. Some firms focus on producing special products for which they can earn a high profit margin. In addition, these firms may not incur the overhead charges that larger firms can incur as a consequence of their scale.