Philips is investing more than €100 million ($109 million) to ramp up production of ventilators and other devices seeing increased demand due to the COVID-19 pandemic.
In first quarter results posted Monday, Philips said comparable order intake jumped 23% as hospitals bought more diagnostic imaging and patient monitoring devices, as well as hospital ventilators.
The orders partly offset falling sales at other businesses, most notably the personal health unit. Philips withdrew its guidance in response to the headwinds but expects to return to growth in the second half of the year.
Philips’ portfolio subjects it to both big headwinds and tailwinds created by the pandemic, as was evident in first quarter results Philips shared Monday.
Demand for patient monitors and hospital ventilators, devices central to the treatment of COVID-19, drove orders at Philips’ connected care unit up significantly in the quarter, not to mention the order for 43,000 ventilators that the U.S. government placed after the first quarter had wrapped.
Philips has responded to the surge in orders by planning to spend more than €100 million “to meet urgent demand from our customers for ventilators, patient monitors and certain diagnostic modalities,” CFO Abhijit Bhattacharya told investors on the quarterly results conference call. The spending is intended to support work that Philips expects to drive a “significant increase in revenue in connected care.”
Even with the investment, Philips expects it to take the whole year to deliver orders placed in the first two quarters, and there remains a risk it will fail to convert the new business as planned. The risk and the lag between orders and deliveries is, in part, a reflection of the need for multiple component suppliers to scale up their own operations in line with Philips’ mushrooming order book.
“That is quite hard. We have gone to tier two, tier three suppliers in order to work with them collaboratively to help them sometimes to reopen if they were on a lockdown. We help them expedite logistically to get the components to our factories as fast as we can,” CEO Frans van Houten said.
Despite those efforts, Philips is yet to secure all the parts it needs to “realize the full revenue of connected care in the second quarter,” van Houten said. Philips is “increasingly confident” its suppliers will step up but there is still work to do.
Philips is scrambling to scale up capacity in some areas while contending with falling demand for other products. Sales in China suffered a double-digit decline in the quarter as the country shut down in response to COVID-19. The situation in China is now improving but demand in other parts of the world is trending down, leading Philips to brace investors for slumping sales in the second quarter.
Management expects the personal health unit to take the biggest hit. The diagnosis and treatment business is also tipped to suffer a “sizable high single digit decline” in the second quarter, having grown 2% in the first three months of the year. The forecast decline reflects falling sales across the image-guided therapy portfolio, which is being negatively affected by the deferral of elective procedures and equipment purchases.
Philips expects its business to return to growth in the second half of the year, reflecting an assumption that elective procedures will resume and other pandemic-related headwinds will ease. In the longer term, van Houten predicted the pandemic will fuel a “further step up of connected care in the broadest sense."