Consent Decree Curtails Philips' Sleep and Respiratory Growth for Several Years

Equity Analyst

Javier Correonero

Philips is a one-stop shop for imaging-related devices with an established footprint in many hospitals, which positions it to benefit from long-term healthcare trends like the transition to noninvasive or minimally invasive procedures and increased hospital demand for efficiencies. Through several divestitures and acquisitions, Philips has transformed itself from an industrial medical conglomerate into a healthcare company and primary supplier across hospitals, which facilitates the introduction of new products and the displacement of smaller suppliers with more depth in a single product line but lack of breadth. In many of its underlying markets, the company operates in an oligopoly where significant market share is controlled by a few players. Several of Philips' products require proprietary software or service; this provides stability to cash flows and helps to lock in customers. In addition, the company has carried out several divestments and acquisitions, which we believe has reinforced its positioning.

We believe the company has room to improve its margins through improved operations management and cost efficiencies. Philips has made inroads here with a manufacturing footprint consolidation, moving from 50 factories to less than 35 in five years. In diagnosis and treatment, Philips has a large installed base built during many decades, which we believe has potential for improved service retention rates through remote monitoring, product sophistication, and risk-sharing agreements. In connected care, Philips had a significant product recall on its sleep apnea installed base in 2021, which we believe will result in a permanent loss of market share against ResMed. We see a long-term conversion pathway in toothbrushes from manual to electric, as a large percentage of the population still brushes manually, which will lead to continued growth. We believe the monitoring market will be a long-term beneficiary of COVID-19 as hospitals realize the need for efficiencies in patient management when hospital occupancy is high.

Business Strategy & Outlook

We believe Philips holds a narrow moat rating supported by switching costs and intangible assets. Many of Philips' products perform critical medical functions that require a significant amount of practitioners' and technicians' training time, so the rationale for an equipment or service change is low. Philips products are also supported by patents and proprietary technology supported by a long research and development history in imaging technologies.

In its diagnosis and treatment division, Philips holds a narrow moat due to switching costs and intangible assets. In our opinion, diagnostic imaging (MR/CT/X-ray) is Philips’ moatiest subsegment within D&T. The critical nature of imaging devices makes hospitals reluctant to change suppliers. Imaging devices play a critical role in early disease detection; therefore hospitals seek equipment suppliers with a record and reputation for reliable and durable equipment. Service attachment rates for OEMs of imaging equipment are high for the same reason: minimizing equipment failures with hospitals preferring to rely on OEMs for equipment maintenance. The high cost of some imaging systems (an MR machine can cost up to EUR 8 million and a CT scanner up to EUR 2 million) requires hospitals to maximize utilization rates and reduce downtime, as a prolonged interruption can have implications for hospital profitability and waiting times. An MR/CT machine typically lasts 10 years, but its life can be prolonged with some refurbishing to delay capital outlays, a service Philips also offers.

Philips' long-standing relationships with medical professionals increases hospitals' and practitioners’ loyalty. The company assists and advises hospitals in matters such as technical training on how to operate imaging machines, on-site support, how to achieve cost and time efficiencies and runs long-term partnerships with many of them. These relationships result in switching costs, as relations become sticky and changing equipment would require a significant amount of money and time in retraining personnel. Many imaging systems come with incorporated proprietary software, so changing suppliers implies retraining doctors in a new interface with which they might feel less comfortable during an intervention.

Transition toward value-based care together with hospital purchasing alliances have been affecting the prices of imaging devices for more than 10 years. Some of the procedures related to Philips machines experienced reimbursement declines of 40%-50% from 2008 to 2014 and have stabilized since. Philips' imaging devices have experienced 1%-2% annual price deflation for many years, but we believe price pressures are partially eased by the critical nature of these machines, a high cost of failure and switching costs. Medical imaging equipment is an oligopoly where Siemens, General Electric, and Philips have 70% market share worldwide, so there aren't many suppliers that hospitals can turn to.

Philips is one of the market leaders in ultrasound systems. Even though the ultrasound market has lower barriers to entry and less potential for service revenue compared with MR and CT, Philips has carved out a strong position in the higher end of the market, with leading technology supporting good margins. The company is expanding to the lower end of the market, where GE leads. Although switching costs are lower than in MR/CT/X-ray (machines are less complex), Philips has built a strong brand, maintaining a leading position based on innovation. Notwithstanding its brand reputation, pricing pressure from Asian and Western players has been increasing.

In image-guided therapy, Philips is present throughout the value chain for blood vessel devices, with solutions aimed at both diagnostics and treatment. Philips' IGT portfolio includes strong technology with well-established products in many of the world’s leading hospitals. Although switching costs for many of Philips IGT procedures are low, practitioners hold the upper hand over the hospital administrators. Physicians can be brand-loyal due to their perceptions of clinical risk when switching suppliers. In IGT, Philips also sells C-arms for cardiac interventions, where we suspect reliance on the company for service and software is high.

We believe the monitoring and analytics division holds a wide moat supported by switching costs. Philips systems are deeply embedded in hospital workflows and changing them would take time, in addition to possible disruptions in hospital operations. Thanks to these systems, doctors can access patient data at any location, get automatic updates on a patient's status and get real-time alarms in case something unexpected happens. This allows hospitals to gain efficiencies by reducing duplicities and personnel costs and freeing up doctors' and nurses' time from redundant activities. In an environment where hospital reimbursement is being pressured (moving from fee for service to bundled payments), gaining efficiencies will be fundamental, and the number of hospitals that rely on these systems will remain high. We believe hospitals' reliance on these systems is also demonstrated by their acceptance of annual price increases by Philips.

There are different submarkets in the patient monitoring market. Philips is the leader in the multiparameter vital signs monitoring market by selling monitors, wearable biosensors, and real-time monitoring solutions. Philips' main focus is on ICUs, although it is expanding to lower-acuity areas. Philips monitors provide doctors with the vital signs, waveforms, and other parameters from the patient in real time. This data is then sent to Philips' patient information center, which allows doctors to monitor all the patients in real time under the same screen, sends copies to the electronic medical record, stores the data, and provides alarms and regular updates on the status of patients. Philips also sells portable systems that allow hospitals to shift the patient from intensive care units to normal wards without switching off the patient monitor systems, avoiding the loss of data. GE is one of Philips' main competitors in the U.S., where Philips has 50% market share compared with GE's 15%. Nihon Kohden (Japan) and Mindray (China) compete in this same market, although their main geographical areas are different. Mindray provides the hardware but is weaker on software, where the switching costs are higher.

In the sleep and respiratory care division, Philips sells devices to treat diseases such as obstructive sleep apnea or chronic obstructive pulmonary disease. We assign a narrow moat to this division supported by a strong brand and switching costs. In the OSA market, Philips and ResMed operate a duopoly, with Philips being number two. OSA is a serious disease, which consists of the respiratory tracts being blocked while you rest and over the long term can cause strokes, atrial fibrillation, or heart failure. Philips' masks benefit from being connected devices, which give patient feedback and encourages patient compliance, reduce reimbursement risk, and allow practitioners to monitor patient data. In the COPD market, Philips sells medical ventilators, oxygen devices, nebulizers, and others. Some of these products carry out extremely critical functions during the treatment of a respiratory disease. Ventilators, for example, are invasive products that need a very careful application as they replace the lung function and a failure could cause death. Professionals in this field have years of training and experience, so changing equipment would require a big amount of time and retraining, resulting in high switching costs for hospitals. Overall, we believe practitioners prefer to stay with established brands, which they know and that can assure a safe treatment and peace of mind.

In its personal health division, Philips competes in the electric toothbrush, men’s grooming, and personal beauty markets. While Philips is positioned in the more resilient high-end part of these markets and has good brand recognition, we don’t believe its returns are protected by a moat.

In the electric toothbrush market, Philips competes mainly with Oral-B products from Procter & Gamble. Both companies hold the number-one and number-two market positions in different geographies. Philips is the leader in the U.S. market whereas P&G is the leader in Western Europe. The potential for growth and further penetration in this market is high (only 20% of the world’s population uses electric toothbrushes), but capital and intellectual property barriers to entry are low. Therefore, we see potential for competitive disruptions in this market within our 10-year narrow moat time frame.

We believe the competitive dynamics to be similar in the personal beauty subsegment, where Philips competes in the male grooming and women's hair removal markets. Once again, P&G is Philips' main competitor with its Braun brand. Philips' product portfolio is focused on the electric and hybrid hair removal subsegments. While the higher-end electric shaving market is more resilient than the manual shaving one and shows certain brand loyalty, it requires continued marketing and R&D spending to keep sales up, and we don’t have full certainty that the competitive landscape will be the same in 10 years.

Narrow

Economic Moat

Royal Philips

Koninklijke Philips NV is a technology company, which engages in the healthcare, lighting, and consumer well-being markets. It operates through the following segments: Diagnosis and Treatment businesses; Connected Care businesses; Personal Health businesses; and Other. The Diagnosis and Treatment businesses segment consists systems, smart devices, software and services, powered by AI-enabled informatics-that support precision diagnoses and minimally invasive procedures in therapeutic areas such as cardiology, peripheral vascular, neurology, surgery, and oncology. The Connected Care businesses segment consists Hospital Patient Monitoring, Emergency Care, Sleep & Respiratory Care and Connected Care Informatics. The Personal Health businesses segment consists of Oral Healthcare, Personal Care,Mother and Child Care. The Other segment reports on the items Innovation & Strategy, IP Royalties, Central costs, and other small items. The company was founded by Anton Frederik Philips and Gerard Leonard Frederik Philips in 1891 and is headquartered in Amsterdam, the Netherlands.

Earnings data Q3 2020

Earnings data Q4 2020

Earnings data Q1 2021

Earnings data Q2 2021

Earnings data Q3 2021

Earnings data Q4 2021

Earnings data Q1 2022

Earnings data Q2 2022

Earnings data Q3 2022

Earnings data Q4 2022

Earnings data Q1 2023

Earnings data Q2 2023

Earnings data Q3 2023

Earnings data Q4 2023

Earnings data Q1 2024

Earnings data Q2 2024

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Koninklijke Philips NV is a technology company, which engages in the healthcare, lighting, and consumer well-being markets. It operates through the following segments: Diagnosis and Treatment; Connected Care; Personal Health; and Other. The Diagnosis and Treatment segment consists of systems, smart devices, software, and services, powered by AI-enabled solutions that support precision diagnoses and minimally invasive treatment in therapeutic areas such as cardiology, peripheral vascular, neurology, surgery, and oncology. The Connected Care segment focuses on Hospital Patient Monitoring, Sleep and Respiratory Care, and Enterprise Informatics. The Personal Health segment represents Oral Healthcare business unit, Personal Care business unit, and Mother and Child Care business unit. The Other segment is involved on the Innovation and Strategy, IP Royalties, Central costs, and other small items. The company was founded by Anton Frederik Philips and Gerard Leonard Frederik Philips in 1891 and is headquartered in Amsterdam, the Netherlands.

Philips expands its remote clinical collaboration offering based on the Reacts platform

Philips’ General Meeting of Shareholders approves dividend proposal

New data reconfirms long-term safety profile of the Philips Stellarex low-dose Drug-Coated Balloon

Philips completes cancellation of 3.8 million shares

Philips and Leeds Teaching Hospitals NHS Trust to set new standards for specialist integrated cardiac care

Philips receives FDA premarket approval for its HeartStart FR3 and HeartStart FRx automated external defibrillators

Philips announces collaboration with American Telemedicine Association to further commitment to telehealth

Philips and MD Anderson collaborate to facilitate personalized oncology treatments and clinical trial matching based on genomic markers

Spire

Unitil

The S&P 500’s annual earnings per share increased about 7.2% every year over the past five years through Dec.

A Trio of Stocks Growing Earnings Fast

Ford Motor Company

ResMed

Amid the pandemic crisis, the ventilator industry gains on contributions from companies across various sectors.

Ventilator Industry Pumps Up Amid Coronavirus: 3 Stocks in Focus

Philips Lumify handheld ultrasound solution launched in Japan to enable powerful diagnostics at the bedside

FDA issues Emergency Use Authorization for Philips’ new acute care patient monitoring solutions for hospital-based remote monitoring

Philips Foundation publishes its 2019 Annual Report

Masimo

Masimo and Philips licensing agreement brings Masimo NomoLine® Capnography and O3® Regional Oximetry to select Philips patient monitors

Philips launches next generation wearable biosensor for early patient deterioration detection, including clinical surveillance for COVID-19

Philips launches HealthSuite Clinical Trial Accelerator to help life science organizations run more flexible, patient-centric clinical trials

Philips receives FDA clearance for the use of its ultrasound portfolio to manage COVID-19-related lung and cardiac complications

Philips to convene Extraordinary General Meeting of Shareholders

Philips first of its kind ultrasound solution for pediatric assessment provides a gentler approach to imaging children

FDA lifts injunction on manufacture and distribution of Philips’ defibrillators in the US

Philips: Strong Earnings Report Reveals Clear Pathway For Growth

Koninklijke Philips N.V. (PHG) CEO Frans van Houten on Q1 2020 Results - Earnings Call Transcript

Koninklijke Philips' (PHG) Q1 results reflect the impact of COVID-19 pandemic despite robust performances in the Diagnosis & Treatment and Connected Care businesses.

Koninklijke Philips' (PHG) Q1 Earnings Down on Coronavirus Impact

Here at Zacks, our focus is on the proven Zacks Rank system, which emphasizes earnings estimates and estimate revisions to find great stocks. Nevertheless, we are always paying attention to the latest value, growth, and momentum trends to underscore strong picks.

Should Value Investors Buy Royal Philips (PHG) Stock?

Philips teams with University of Kentucky's UK HealthCare to power state’s only eICU Clinical Command Center

News for Royal Philips Stock (PHG)