Image credit: Philips Healthcare RSNA 2019, Philips News Center
Philips Healthcare released its fourth-quarter results on Tuesday, including the sales figures for its Diagnosis and Treatment (D&T) business unit. This unit encompasses the Group’s portfolio of medical imaging platforms, image-guided therapy solutions as well as healthcare informatics. Its financial statements show that sales continued to grow during the fourth quarter despite a strong comparable result in Q4 2018. During the fourth-quarter, nominal sales revenue from the D&T segment reached €2,582 million, compared with €2,345 million in Q4 2018, an increase of +10.1% year-on-year. The full-year cumulative nominal sales revenue reached €8,484 million, compared with €7,726 million in 2018, an increase of +9.8% year-on-year. When adjusting nominal sales revenue for portfolio changes and currency movements, annualised comparable sales growth was approximately 5% year-on-year. The company is due to publish its full annual report on 25/02/2020. The sales growth during 2019 was predominately driven by increased sales of image-guided therapy solutions as well as ultrasound imaging systems, although all segments delivered growth. Annualised sales growth from these segments was in the high-single-digit to the double-digit range, with the diagnostic imaging (DI) segment delivering weaker growth in the low-to-mid-single-digit range.
Image-Guided Therapy Segment
The image-guided therapy portfolio encompasses the companies range of interventional x-ray imaging systems, including the Zenition series of mobile c-arm systems as well as the Allura series of surgical x-ray systems. The portfolio also represents the recent acquisitions of Volcano and EPD solutions. These acquisitions added specialist catheters for intravascular ultrasound (IVUS) and fractional flow reserve (FFR) to the product line-up as well as a proprietary cardiac imaging and navigation system; a diagnostic and treatment tool for cardiac arrhythmias. The quarterly year-on-year comparable growth figures for the segment are as follows:
- 2019 Q4: high-single-digit growth (Philips results)
- 2019 Q3: high-single-digit growth (Philips results)
- 2019 Q2: double-digit sales growth (Philips results)
- 2019 Q1: double-digit sales growth (Philips results)
The ultrasound portfolio consists of the companies range of ultrasound imaging platforms across diagnosis, treatment planning and guidance for cardiology, general imaging, women’s health and point-of-care clinical applications. It also includes its proprietary software capabilities embedded onto ultrasound platforms, such as QLAB, a specialist quantification tool for cardiac analysis. The quarterly year-on-year comparable growth figures for the segment are as follows:
- 2019 Q4: mid-single-digit sales growth (Philips results)
- 2019 Q3: double-digit sales growth (Philips results)
- 2019 Q2: high-single-digit sales growth (Philips results)
- 2019 Q1: mid-single-digit sales growth (Analyst estimate)
Diagnostic Imaging Segment
The diagnostic imaging portfolio consists of the companies range of medical imaging platforms including magnetic resonance (MRI), computed tomography (CT), advanced molecular and diagnostic x-ray for general radiography and fluoroscopy. It also includes integrated clinical solutions, encompassing radiation oncology treatment planning, disease-specific oncology solutions as well as x-ray dose management. The quarterly year-on-year comparable growth figures for the segment are as follows:
- 2019 Q4: low-single-digit growth (Philips results)
- 2019 Q3: high-single-digit growth (Philips results)
- 2019 Q2: flat growth (Philips results)
- 2019 Q1: mid-single-digit decline (Philips results)
From a product perspective, Philips has recently launched a new series of CT platforms, the CT 6000 iCT and CT 5000 ingenuity, which feature advanced workflow benefits and enhanced cybersecurity from various hardware and software enhancements. Alongside these platform releases, Philips introduced an industry-first tube for life guarantee, which not only benefits customers but also helps Philips meet its sustainability goals such as achieving completely closed-loops for all major medical systems by 2025. This completed it’s the latest refresh of its CT product portfolio. Despite these product releases, Philips has struggled to break away from a mid-single-digit sales growth for its DI segment and analysts participating in the Q4 earnings call raised whether the recent weaker sales growth during Q4 should be cause for concern. Frans Van Houten commented that from his perspective the slower growth during the fourth quarter was “more incidental rather than structural” and that his forward-looking expectation is that growth will improve for the DI segment. He also highlighted that there has been strong interest from radiologists for Philips artificial intelligence solutions which is likely to encourage new equipment sales.
Sales results by geographic region
Sales results varied significantly by geographic region, with higher growth rates from growthgeographies and lower growth rates from mature geographies. Overall annual sales growth from mature markets, which includes North America, Europe and Japan, was flat year-on-year. Growth occurred from North America and Western Europe although this was offset by declines in other mature markets such as Japan. Philips reported that the phasing of sales surrounding the implementation of consumption tax negatively impacted its sales results from this market. Growth geographies include markets such as China, Latin America and Russia which grew by double-digits for the full-year. The D&T business has achieved double-digit growth from health systems in China for several years now, driven predominately by the demand from hospitals for premium solutions. This growth continued during the fourth quarter where a number of large contracts were won. This included signing an agreement with Xi’ an International Medical Group. Within the Q4 earnings call Q&A, Frans addressed the quotas for 2020 and commented that “in the general diagnostic imaging market, we don’t expect sudden peaks or troughs in demand” and that these quotas are potentially more meaningly for niche areas of business, such as radiotherapy.
US-China trade tariffs
While the US-China trade tensions have eased somewhat, the impact of tariffs remains significant. For the full year, the gross impact on Group profitability from tariff-related actions was more than €100 million, resulting in a net impact after compensating actions of approximately €70 million. Despite this, the D&T segment achieved improved profitability thanks to its strong sales growth which offset the negative impact of tariffs. Abhijit Bhattacharya commented that the Group expects to shoulder a similar impact from trade tariffs during 2020 and acknowledge that despite continuing to implement countermeasures “the mitigation of these trade tariffs has proven to be more arduous and time-consuming than originally assumed”. While it is unclear what the exact impact of tariffs have been on Philips sales growth, it is clear that the ongoing US-China trade tensions are anticipated to dampen profit margins.
Coronavirus in China
Frans recently attended the 2020 World Economic Forum in Davos and shared a few of his observations during the Q4 earnings call. One of his observations was that while the atmosphere was slightly more optimistic relative to January 2019, significant geopolitical risks remain and one new risk emerged; the risks that the Coronavirus presents. The situation is fluid and developing, however, as of writing, Philips reports that its manufacturing and production operations within China are operating BAU. That said, this week represents the Chinese New Year and a large proportion of the Chinese workforce is taking time out to celebrate. The Chinese Government has suggested that this holiday period should be extended for another week in order to restrict the virus from spreading further. The primary concern is that if the Coronavirus is not contained quickly and is a prolonged pubic health risk, then supply chains could be adversely impacted by the contagion. Frans noted that the business is working with supply chain experts in order to map out supply chain scenarios and backup scenarios so the company is as prepared as possible.
Separation of domestic appliances business
In other areas of the business, Philips announced that it is reviewing the ownership options for its domestic appliances business as it continues to focus on personal health and healthcare as its core business. Frans commented that “it is not a strategic fit for our future, as we chose to further sharpen the focus along the health continuum and invest in our consumer health and professional healthcare-related businesses”. Philips will being the disentanglement process and expects this to completed within the coming 12-18 months. It appears that Philips intends to fully dispose of this business although it is keeping all options open on the best pathway forward. This may include the potential for an IPO, trade sale, joint venture and continued income from licensing.
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