Philips Healthcare, Diagnosis & Treatment, Q4 2020, Sales Results

Image credit: Philips Healthcare RSNA 2019, Philips News Center

On January 26th, Philips Healthcare published its financial results for Q4 2020. These show that Group sales continued to grow and profitability significantly strengthened during the quarter, a positive result following a challenging start to the year. The group sales revenue reached €6.00 billion, compared with €5.96 billion in Q4 2019, an increase of approximately 1% year-on-year. When adjusting this sales performance for portfolio changes and currency movements, comparable sales increased by approximately 7% year-on-year. This took cumulative 2020 sales revenue to €19.54 billion, compared with €19.48 billion during 2019, a marginal increase of +0.3% year-on-year. When adjusting this sales performance for portfolio changes and currency movements, comparable sales increased by approximately 3% year-on-year.

Philips Healthcare Q4 Earnings Report

The sales growth during the quarter was led by the Connected Care segment which reported +17% sales growth year-on-year, driven by strong demand for patient monitors and respiratory care. This was supported by a return to growth for the D&T segment as well as continued growth from the Personal Health segment, resulting in a year-on-year increase of +0.7%.

The Diagnosis and Treatment Segment

The D&T segment encompasses the Group’s portfolio of medical imaging platforms, image-guided therapy solutions (IGT) as well as healthcare informatics. During the fourth quarter sales revenue from the D&T business reached €2.46 billion, compared with €2.58 billion in Q4 2019, a decrease of approximately -5% year-on-year. When adjusting this sales performance for portfolio changes and currency movements, comparable sales were approximately +1% higher year-on-year. Overall, this took cumulative 2020 sales revenue to €8.18 billion, compared with €8.49 billion during 2019, a decrease of approximately -4% year-on-year. When adjusting this sales performance for portfolio changes and currency movements, comparable sales were approximately -2% lower year-on-year.

Sales growth during the quarter was driven by strong service sales growth as well as a return to growth for diagnostic imaging equipment. Service sales grew by approximately +6%, relative to Q4 2019. The recurring revenue from services represent around 45% of the total sales from the D&T business and have had somewhat of a stabilising effect where equipment demand has dropped off. Comparable order intake returned to growth during the quarter and was approximately +3% higher, relative to Q4 2019. This is compared with -5% in Q3 2020 and -20% decline in Q2 2020. The return to growth was driven by higher orders for diagnostic imaging and ultrasound solutions, partially offset by lower orders for image-guided therapy solutions. Although both sales revenue and orders grew, profitability deteriorated during the quarter. The adjusted EBITDA margin declined to 14% of sales, compared with 16.3% in Q4 2019. This was driven by an unfavourable product mix as well as lower growth from the cardiac ultrasound and image-guided therapy portfolios. Higher profits from sales growth were offset by planned higher spending on investments and advertising.

Strategic Partnerships and Collaborations

During the fourth quarter, Philips reported a total of 25 new long-term strategic partnerships with hospitals in the United States, Europe and Asia. Strategic partnerships and collaborations are anticipated to be an increasing source of sales growth and reoccurring revenues for the company as well as helping customers achieve their clinical and operational goals. Some of the partnerships relevant to the D&T segment include:

  • On January 25th, Philips announced a 5-year strategic partnership with Rennes University Hospital, one of the top hospitals in France with four sites and more than 1,800 beds. The partnership will see Philips deliver new medical technologies and provide management and maintenance services for the hospital’s diagnostic and interventional imaging modalities (MRI, CT, and image-guided therapy) as well as patient monitoring.
  • On January 25th, Philips announced a 5-year alliance with the Vithas Group, Spain’s second-largest private healthcare group. The alliance will see Philips deliver the latest diagnostic imaging and minimally-invasive intervention technology and; Vithas will become a ‘reference technology partner’ for Philips in Spain.
  • On January 14th, Philips announced a partnership with Merck to develop digitally-led personalised fertility treatment which will encompass AI-enabled ultrasound diagnostics.
  • On December 17th, Philips announced a collaboration with InSightec to expand access to MR-guided focused ultrasound for incision-less neurosurgery. By developing compatibility between Philips’ advanced MR systems and the Exablate Neuro platform from InSightec, the two companies will support expanded access to MR-guided focused ultrasound for the treatment of essential tremor and other neurological disorders.
  • On October 15th, Philips and Mandaya Royal Hospital Puri sign seven-year partnership agreement to provide patient-centred care. Opening in early 2021, the hospital is expected to receive over a thousand patients each day and is intended to be a national referral hospital for the entire Indonesian archipelago.

The Diagnostic Imaging Segment

During Q4, comparable sales revenue growth was a positive high-single-digit e.g. +8%. This resulted in annual comparable sales growth of a low-single-digit e.g. +2.5%.

Sales growth during the quarter was driven by higher sales of computed tomography and diagnostic x-ray equipment to customers based across Europe and Asia. Sales for these solutions grew by a double-digit e.g +10%. In addition to strong sales revenue growth within these segments, comparable orders for the diagnostic imaging segment grew by a mid-single-digit e.g +5%. From a product perspective, Philips is trading on it’s “refreshed” CT product portfolio which includes the CT 6000 iCT and the CT 5000 ingenuity platforms. During the Q4 earnings call Frans commented: “On the CT side, I’m really pleased to see that from a reputation point of view and a competitive point of view, we are fully accepted now. So the Cleveland era is behind us. We see market share gains ranging from the United States to China, where we are performing very well with our CT portfolio.

The Image-Guided Therapy (IGT) Segment

During Q4, comparable sales growth was a negative mid-single-digit e.g. -5%. This resulted in annual comparable sales growth of a high-single-digit decline e.g. -8%.

The sales contraction during the quarter was predominately driven by a push-out of installations within the United States, driven by lower elective procedure volumes due to the Coronavirus pandemic. Elective procedures recovered to almost pre-COVID levels during October and November, however, declined to 80% of pre-COVID levels during in December. The expectation is for procedure volumes to gradually recover again during Q1 2021 although “remain a risk”. Elective procedures have a direct correlation with the Philips device business and therefore equipment demand is still vulnerable to a worsening of the Coronavirus pandemic. During the Q4 earnings call Frans commented: “I don’t think that materially, the risk has changed” and “we should take some encouragement that at this time, procedures are only 20% to 30% down, while back in April 2020, they were 70% down. So hospitals are much better able to cope with the pandemic than before. And I would also expect a quick rebound of elective procedures the moment, let’s say, regions go from red to orange kind of risk status. Therefore, the IGT business may take longer to show strength during the first quarter.” Abhijit added, “we have good confidence that when the pandemic does abate, IGT will come back strongly”.

During the fourth quarter, comparable orders declined by a mid-single-digit e.g. -6%, indicating potentially some continued softness of demand in the short-term.

The IGT portfolio encompasses the companies range of interventional x-ray imaging systems, which includes the Zenition series of mobile c-arm systems as well as the Aziron and Allura series of surgical IGT systems. During Q3 2020, Philips launched it’s next-generation Aziron IGT platform which is an iteration of its existing platform which has been used in over 2m procedures globally. The Azurion’s upgrades are reportedly “several years ahead of the competition according to customers” and are allowing Philips to successfully differentiate its solution as gain market share. The IGT 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 Ultrasound Imaging Segment

During Q4, comparable sales growth was a negative mid-single-digit e.g. -5%. This resulted in annual comparable sales growth of a high-single-digit decline e.g. -8%.

The sales contraction during the quarter was predominately driven by a push-out of installations within the United States due to the Coronavirus pandemic. Philips remains the market leader within cardiovascular ultrasound although throughout 2020 general imaging and cardiovascular ultrasound has been a lower priority for healthcare providers. There was a noticeable sales mix shift to point-of-care and portable solutions which can be easily placed within reach of COVID-19 patients. In particular, orders for the Philips Lumify and CX50 products were strong. The Lumify handheld ultrasound device became ‘instrumental’ for doctors during the pandemic. The expectation is that demand for general imaging and cardiovascular system will recover during 2021, supported by the introduction of various enabled tools. For example, the companies partnership with LeQuest enables online interactive training in ultrasound allowing for a more confident diagnosis for both experienced and less trained sonographers.

Although sales were lower during the fourth quarter and for FY2020, comparable orders grew during the fourth quarter by a high-single-digit e.g. +8%.

Diagnosis and Treatment Sales by Geography

From a geographical perspective, comparable sales growth during the quarter varied significantly by geographic region. Sales performance was driven by higher sales from “growth geographies” which was partially offset by lower sales from “mature geographies”. Sales were higher across China, Europe (Central, Eastern and Western) and central Asia. Sales were lower across North America, the Middle East and Turkey.

2020 v 2019Q1Q2Q3Q4
Growthlow-single (+)mid-single (+)mid-single (+)mid-single (+)
Chinamid-single (+)double (+)mid-single (+)double (+)
Maturelow-single (+)double (-)high-single (-)low-single (-)
North Americamid-single (+)double (-)high-single (-)mid-single (-)
Western Europelow single (+)double (-)low-single (+)low-single (+)
Other maturemid-single (-)Flat (-)Not reportedNot reported
Comparable sales growth digits by region, as reported by Philips Healthcare

US-China trade tariffs

The US-China trade tensions continue to have a significant gross impact on the Philips business, although these have somewhat eased thanks to tariff reliefs related to supporting the global battle against Coronavirus as well as mitigating actions taken by Philips. The company has mitigated the gross impact from tariffs to approximately €25m, down from approximately €65m. During the Q4 earnings call, Frans commented: “If tariffs are rolled back, then that should be a net positive for us. However, I don’t see that happening anytime soon. So it’s an area to continue to watch. And we have now made the changes to the supply chain to mitigate some of this.”

Forward guidance for 2021

In 2021, the business expects to continue to experience uncertainty related to the Coronavirus pandemic. At a Group level, the company expects to achieve a low-single-digit comparable sales revenue growth e.g. +2.5% as well as an adjusted EBITDA margin improvement of 60-80 basis points. For the Diagnosis & Treatment segment, the company expects to achieve annualised sales growth in the 5% to 6% range. Given the weaker performance during the first half of 2020, the expectation is that the first half of 2021 will result in a stronger performance. In previous investor discussions Frans has reiterated that despite the impact of Coronavirus, the overall growth profile and growth potential of Philips Healthcare remains in-tact post-pandemic. During the Q4 earnings call, he commented: “I feel quite encouraged about how hospitals are looking at the future. We have seen no cancellation of orders, only some postponements” … “the 7% order intake in the fourth quarter is also a sign of confidence in the future” … “the order book that we have is very high partly because of the delays in installations in 2020 and partly because of the new orders” … “we expect a strong start of the year, a strong first quarter, strong second-quarter“.

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