Wall Street remains skeptical of Philips HealthTech refocus after Volcano buy

Investors sent Royal Philips ($PHG) down 5% after it disclosed its 2014 earnings report. Analysts on the call clearly remained unconvinced that the $1.2 billion acquisition of catheter-based imaging company Volcano announced in mid-December would help the company. It's in the midst of making the transition to being solely focused on HealthTech, a combination of healthcare and consumer businesses.

As part of this, Philips is selling off its lighting business and has already separated it off in its financial reporting as discontinued operations. The company expects to receive bids for its combined Lumileds and Automotive lighting businesses by the end of the first quarter and complete a transaction during the first half.

Philips is off 17% over the last year, as the company has struggled to find a new path for itself. But investors haven't exactly taken to the moves Philips has made thus far.

François van Houten

François van Houten, Philips' chairman and CEO, worked hard to justify the Volcano acquisition. Volcano itself was struggling with flat revenue growth and had been unable to jumpstart its business in recent years. It had grown from a startup into a public company with a 2006 IPO.

Van Houten is hoping that combining Volcano's offerings with Philips' will offer an expanded reach for both product lines. "With the Volcano smart catheters, we combine that with our image-guided, hybrid-operating suite and we really get closer to cardiologists, interventionists every day," he said.

He expects that the broader reach of Philips will enable better, long-term supplier deals with hospitals that will include the Volcano products. Van Houten said Philips signed 6 multi-year hospital projects during the fourth quarter; he sees these as part of a larger move toward a partnership business model with large hospital systems. He's also counting on Philips massive sales force reach, as well as cost-synergies to make the deal pay off.

The Volcano deal is expected to close during the first quarter.

Healthcare is Philips' biggest business. In 2014, its healthcare sales declined 2% to €9.2 billion. Sales overall for the year declined 1% to €21.4 billion.

For the fourth quarter, healthcare sales were down 3% to €2.85 billion. Equipment orders slowed in the mid single-digits, with the exception of Western Europe. In addition, Philips resumed shipments of Brilliance iCT systems from its Cleveland factory in January after it passed a third-party audit.

But the rebound has been--and will continue to be--slower than previously anticipated. Although Philips is ramping up ex-U.S. production facilities, it doesn't expect global CT system production and shipment volume to return to 2013 levels until the end of 2015.

- here is the release (PDF)

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