Philips bets on high-tech healthcare spending revival

Philips, Europe’s largest electronics manufacturer, is doubling down on research and development investment in high-tech systems for the healthcare industry, even though sales of such equipment have fallen over the past year.

The investment by the Dutch group amounts to a major bet that hospitals in wealthy countries will reverse their recent trend of reining in capital expenditures on pricey new machinery.

Both the promise and the risks of this wager on high-tech medicine were highlighted last week, when Philips announced that the US Food and Drug Administration had approved its new low-dose X-ray imaging system.

The system, called AlluraClarity, is part of a class of new imaging machines that can be used during operations to guide surgeons inside patients’ bodies, allowing them to carry out less invasive procedures.

Other such integrated imaging systems for low-invasive procedures use ultrasound or MRI scanning techniques rather than X-rays. Imaging systems brought Philips €3.8bn in sales in 2012, out of total healthcare revenues of €10bn.

Philips has raised spending on R&D in high-growth medical sectors such as imaging systems by more than 60 per cent since 2009. Development of such technology helped drive the group’s overall spending on medical research to €803m last year, nearly twice as much as it spent on research for lighting – even though it is the world’s largest lighting company.

Gene Saragnese, chief executive of Philips’ imaging systems division, called image-guided, minimally invasive surgery “a transformation in the delivery of healthcare that is rapidly accelerating around the globe.”

Frans van Houten, chief executive, said the slowdown was due to “temporary” reductions in hospital capital expenditures, caused in part by the introduction of a 2.3 per cent tax on medical devices in the US this year.

But the overarching causes of slow medical device spending growth are government austerity policies in Europe and healthcare reform in the US. And health economists say that much of the slowdown may be structural rather than temporary.

For the past three years, US healthcare spending has grown only as fast as overall gross domestic product, according to the Altarum Institute, a health industry think tank. The same was true of orders for durable medical equipment.

In Europe, meanwhile, health expenditures have actually fallen as a share of GDP since 2009.

Philips’ sales of imaging devices in Asia have grown solidly. But the best-performing categories in Asia have been the “value” segment of cheaper and lower-tech systems, which Philips builds at a new plant in Suzhou, China.

Such value systems, which account for about 20 per cent of imaging sales, are not where the company sees its real future. In a conference call with analysts in April, Mr van Houten described the value systems as “defending our flanks,” while the “main strategic thrust” was in the more sophisticated new machines for integrating imaging with minimally invasive surgery.

With Europe still in the doldrums, hopes for a pick up in the top-end imaging systems rest largely on the US. And there, Philips is handicapped by low market share.

“North America is a big question mark for them,” said Hans Slob, an analyst at Rabobank. “If they are not able to improve order intake there, it will be hard for them to show good performance.”