Q&A: Philips on what's next after the first year of HealthTech

Royal Philips ($PHG) started out in 1891 as a light bulb company. In 1918, the year World War I ended, the company started to diversify with the introduction of the medical X-ray tube. For almost a century after that, it built itself into a massive Dutch conglomerate that spanned lighting, medical imaging and grew into consumer electronics.

But as revenue growth waned in recent years, it became clear that its sprawling empire would need to be shaped and refocused. In a dramatic move in September 2014, Philips declared that it would depart from its lighting business origins. Instead, the company would focus entirely on bringing together its consumer and healthcare businesses under the umbrella of HealthTech to be funded by proceeds derived from separating out its lighting businesses.

Philips CEO Frans van Houten

A rather unlikely corporate executive, Philips chairman and CEO Frans van Houten, declared the new direction and has been working for more than a year to execute upon it. He had grown up within the company, having been there almost 30 years largely in consumer electronics-oriented roles such as CEO of Philips Semiconductors and co-CEO of the Consumer Electronics division.

He remains in the midst of reorienting the company, a process that is slated to reach a major milestone in the first half of next year with the separation of Philips Lighting, but that will continue for a few years more. Wall Street has stayed skeptical of the new focus, but seems to be becoming gradually accustomed to the idea as the company becomes the turf of med tech, and not industrial conglomerate, analysts.

Still, Philips remains off by almost 10% since it first announced the HealthTech refocus, although it retains an impressive girth of more than $25 billion. The company's valuation peaked at the beginning of 2014 with a subsequent steep decline, but that has swung to a bit of a rebound in recent months. Wall Street is waiting until the separation of the lighting businesses is a done deal, van Houten argues, before it will give Philips credit for the potential of its new HealthTech vision.

FierceMedicalDevices talked one-on-one with Philips' van Houten about what he's done with the HealthTech revamp so far and his expectations for the company--as well as for the healthcare industry itself--moving forward.

Q: We can start with a little bit of background on what initially drove the commitment to HealthTech. How do you think the response has been to that shift in strategy?

A: We are an innovation company, and innovation companies should focus on unmet needs. We look at the world and we see an aging population with more growing disease, and a staggering cost of care. We felt that it's a big opportunity to innovate further there, and then we realized that our professional healthcare business and consumer business are actually the key to delivering care in a better way.

We are creating what we call a health continuum, whereby health professionals and consumers will engage on their health journey in a more continuous manner, instead of waiting for acute episodes where disease may hit the patient.

Then it also dawned on us that we need to have a much more integrated way of working between our consumer health and wellness businesses and professional healthcare businesses, and start to exchanging insights in how to engage consumers/patients on their health journey and involving the care providers.

The consequence of that realization is that the lighting business really didn't have that much to do with that, so we decided to separate lighting out and make that independent, and also learn to use the proceeds of the lighting sale to beef up on our health programs.

We are now one year into that strategy and we have gotten a very good reception. It correlates totally with where accountable care is going, where accountable care in the U.S. is, let's say, pushing care providers to look at population health, to look at preventative and chronic disease management and avoiding unnecessary re-admissions.

We have, within the strategy, a number of focus areas. One is our version of population health and care coordination in health, if you like. Secondly, we're making progress on the definitive diagnosis suite linking analytics to image acquisition, both for radiology, pathology. Then the third area of attention is what we call the minimally invasive treatment, areas where we have the examples of our Volcano acquisition that makes us the strongest player in the cath lab. Another example is what we do with Elektra for image-guided radiotherapy.

Q: How has the Wall Street response been so far and what do you think investors are really going to be looking for in the next year or two?

A: The first reaction of Wall Street has been one of guarded optimism. People say, "Well, you first need to get the lighting deal done and execute on that." Secondly, we see a gradual shift of the analysts that cover us. Historically we have been covered by industrial analysts.

We are now where the main banks put a med tech analyst on us. I was recently at the UBS Conference in London and also at the Morgan Stanley Conference in New York, and once the med tech investors are looking at us more deeply, they believe that there is unlocked value creation that's possible, post the lighting separation.

Q: In terms of the ongoing strategy with M&A and partnership, what are your expectations for that sort of activity? Moving forward, what are the criteria that you're looking for when you are doing a deal?

A: We acquired Volcano a year ago, and then we bought Blue Jay Consultancy for consultancy around the emergency room in the United States.

We would look to do more acquisitions over the next couple of years, and basically to strengthen our core businesses in diagnostics, minimally invasive treatment, population health, personal health. These are obvious areas given where we are active today, and I would see that as enhancing scale and maybe fill in some gaps in the adjacencies.

Q: When you're evaluating a potential deal, is it really innovation-driven, or is revenue an important part of the mix, or how are you looking at those?

A: I think we make a distinction between two categories. One is more techno, the higher gross technology acquisition such as Volcano, where we are very complementary in technologies and we believe that there is a lot still to be brought to the market in terms of new technologies. But I also can see scale-enhancing transactions where opportunities would be, let's say, more upfront.

Q: What do you find that your hospital customers are really looking for right now, and what are they particularly excited about, and what are they maybe a little bit more reserved about in terms of moving forward with the application of some of the technologies that we're talking about?

A: The larger trend is, of course, that we see a lot of consolidation in the field of IDNs [integrated delivery networks]. And as consolidation happens, foremost on the priority list is cost productivity.

I think that corresponds to a general slowness in capital equipment. However, we see heightened interest in the software applications in analytics, in workflow management, in reducing variance of diagnostics, and, for example, variance of radiology across an IDN.

Q: In terms of the patient perspective, what's your sense of how patients are reacting to some of this massive influx of data about themselves and the ability to track those sort of things, and share those sort of things? Do you think that it's being viewed by consumers as universally positive, or do you think it's going to be a little bit of back and forth there as well?

A: I'd say that the bigger trend we see is that consumers will be, first of all, faced with higher deductibles and therefore more own accountability for healthcare expense. Secondly, they are learning and becoming accustomed with smart devices around them as a matter of course.

This is ubiquitous. It's the smart phone, it's the gadgets, that may not all be medical grade yet, but it sets the scene of what is the new normal. Like you entrust your financial health to the cloud, you can entrust your physical health to be supported by cloud applications.

In terms of some of those consumer products, do you feel that Philips has a particularly interesting position given consumer background?

You need to influence their lifestyle, their behavior, how they eat, how the move, what they do, what their medicine compliance is, whether they're using their respiratory treatment well. All of that.

Philips gives population health a real tangible meaning, because we've reached to the consumer, and the large IDNs who now need to move from waiting for the patient to get acute or episodic care, and they need to move into accountable care, actually need to start understanding patient and consumer behavior, and then they need to find a way to reach these people outside of their hospital premises and remotely.

This is where Philips brings deep knowledge of both the consumer as well as the clinical insight from our healthcare practice together, and together we can then evolve and bridge these worlds that historically have been very separate.

Q: In terms of ramping up revenue growth, what are the businesses with some of the fastest revenue growth now, and how do you expect to be able to capitalize on this?

A: We have seen close to mid-single digit growth across the board for Philips in HealthTech. We expect that over the next years that will edge up a bit as we are beyond the [manufacturing] issues that we had in Cleveland and as new innovations start coming to market such as our HealthSuite cloud platform, where we expect more growth to come from over the coming years.

Of course, as we are fully then concentrated on HealthTech and we have lighting behind us, some of the acquisitions will also boost our growth profile.

Areas that have delivered us growth are, for example, in diagnostics. I've mentioned pathology. In patient care, and certainly as we shift patient care outside of the hospital into the community, we expect to grow there. Then, in the area of image-guided therapy, mostly in the cardiology and the oncology space, I think we should be able to see nice growth.

Q: It seems that mobile technology is allowing some rural technologies to leapfrog perhaps some of the existing first-world technology. Is that your sense as well, and do you expect to see more of that?

A: Yeah. I absolutely agree with that. The mobile technology comes together with new business models that have far lower thresholds of production, and cloud-based techniques can make it also much simpler to use. Because in this case, the interpretation of the image can be done remotely from the image acquisition by the nurse.

Miniaturization and mobility makes for much lower power consumption, therefore again allowing it to be used in a rural area, maybe powered by a small solar panel. The price point is different, so absolutely I see that.

Q: In terms of the longer term vision that you have for Philips, can you give me a sense of where you would like to see the company, a decade from now?

A: In 5 or 10 years, the repositioning to a health technology company should be complete. I would like the majority of our revenue to come from solutions, rather than from just product, where there's a much higher proportion of recurring revenues and it's where we can be seen really as a partner to the health systems.

We have a stated objective of touching the lives of 3 billion people by 2025.

-- Stacy Lawrence (email | Twitter)