STERIS: System 1E transition more slow, costly than expected

Sterilization products maker STERIS (NYSE:STE) is experiencing a more slow and costly transition to a new version of its flagship sterilization system than the company expected.

The company had earlier projected between 5,000 and 8,000 sales on the year of its new System 1E, a liquid chemical sterilizing system used by hospitals, surgical centers and other healthcare facilities to sterilize heat-sensitive medical instruments.

But now the company expects to sell just 5,000 units on the year, CEO Walt Rosebrough said in a conference call with analysts to discuss the Mentor, Ohio, company’s second-quarter earnings.

The primary reason for the more-modest projection is because the FDA has yet to clear an accessory part for the System 1E device. That part, called a biological indicator, isn’t necessary to operate the System 1E, though many customers prefer to use it. The part indicates the presence of biological materials on medical equipment.

Also impacting the System 1E was a problem with a sensor on the unit that wasn’t as durable as anticipated, leading STERIS to replace the part, Rosebrough said.

Rosebrough’s admission that the System 1E transition is taking longer and becoming more expensive than anticipated is a sharp contrast to the tone he struck during STERIS’ first-quarter earnings call. He said at the time that the transition was “moving along as expected.”

So far this year, STERIS has shipped 3,100 units of the System 1E.

STERIS has been battling issues related to its System 1 device since December 2009, when the U.S. Food and Drug Administration issued a safety alert warning that the device could be harmful to patients. The System 1 has been recalled and STERIS is hoping to transition customers to the replacement System 1E.

In the second quarter, the company’s profits fell 17 percent to $30 million, or 50 cents per diluted share. The company blamed lower margins and restructuring costs for the decline.

However, revenues grew 10 percent for the quarter to $343 million on increased volume and better pricing.

The company maintained its full-year guidance of earnings per diluted share in the range of $2.25 to $2.45.