Demand for patient monitors and hospital ventilators doubled orders at Philips’ connected care unit in the second quarter, leading execs at the Dutch health technology company to predict a return to growth in the back half of the year.
In second quarter results posted Monday, Philips reported a 27% increase in orders across its business as demand for connected care devices and a related jump in bookings in the U.S. exceeding 60% offset weakness in other parts of the operation.
The headwinds won out in the second quarter, dragging Philips’ total sales down 6% despite double-digit connected care growth, but management expects changes including the return of elective procedures to tip the balance across the rest of the year.
COVID-19 is having significant, divergent effects on different parts of Philips’ business. As expected, sales in the diagnosis and treatment business fell 9% in the second quarter as hospitals deferred elective procedures and equipment installations. Image-guided therapy took the biggest hit, chalking up a double-digit decline. Sales at the consumer-facing personal health unit fell sharply, too.
The bleak picture was lightened by Philips’ connected care business. Sales at the unit increased 14% as COVID-19 drove increased demand for products sold by the respiratory care and monitoring subunits. Overall, Philips estimates COVID-19 had a negative impact on sales of 10 percentage points.
Those trends look to continue in some form in the second half of the year. Buoyed by events such as a $647 million HHS order for 43,000 ventilators, Philips’ connected care unit has grown its backlog. Philips expects 70% of its current companywide order book to convert into sales within 12 months.
In April, Philips CEO Frans van Houten flaggedthe risk that an inability to source parts during a time of soaring global demand and supply chain disruption would stop the company from converting orders as quickly as hoped. On Monday, van Houten said “it will take us many months to deliver that order book” but Philips is on track to hit its capacity targets.
Philips tripled ventilator production in the second quarter and expects to hit its targeted four-fold increase this month, thereby bringing weekly output up to 4,000 units per week. Van Houten said Philips also “significantly” increased production of patient monitors, although, as CFO Abhijit Bhattacharya explained, it will take longer for those orders to convert into sales.
“For ventilation, you ship boxes and you unpack them. Therefore, ready for first patient use is much quicker and the revenue recognition is much quicker. In monitoring, you need to ship the systems, you need to set them up within the hospital networks, hand them over. That takes a bit longer, so therefore you will see that bump up [in sales] in Q3,” Bhattacharya said on a call with investors.
If everything goes to plan, the conversion of connected care orders into sales will be complemented by an increasingly favorable operating environment for Philips’ personal health and diagnosis and treatment units. Like Johnson & Johnson, Philips sees signs that elective procedures will normalize, eliminating a headwind that slowed sales in the second quarter. Philips could also benefit from the resumption of equipment installations as hospitals lift restrictions imposed in response to COVID-19.
That turnaround in demand is well underway. Bhattacharya told investors elective procedures are now 10% below pre-COVID-19 levels, having slumped to 50% of normal levels at the start of the second quarter. Bhattacharya expects a slow recovery of demand in some areas but, with Philips free from significant order cancellations so far, the CFO expressed confidence in the turnaround.
Van Houten said second quarter results were “more or less in line with what we said in April.” Even so, Philips opted against providing specific full-year guidance in light of ongoing uncertainty about the impact of COVID-19.