Copyright 2006 Gannett Company, Inc.
All Rights Reserved
By MICHELLE KESSLER
USA TODAY
SAN JOSE, Calif. — Nedra Demers lay on her kitchen floor, bleeding.
The 87-year-old resident of Lebanon, N.H., had fallen and badly cut her arm. She lived alone, and no neighbors were nearby.
But Demers was wearing a medical-alert necklace. She pushed a button on the device, wirelessly connecting to a call center that sent an ambulance — and called her daughter.
“By the time they loaded me on the gurney, my daughter was coming through the door,” Demers says. “It was so quick.” Fourteen stitches later, she came home.
The U.S. company behind the device, Lifeline Systems, was founded in 1974 by two doctors. But this year it was acquired by a 115-year-old European company best known for its television sets: Royal Philips Electronics.
Philips and Lifeline may seem an unlikely pair. But the acquisition is a key part of CEO Gerard Kleisterlee’s plan to keep Philips profitable as many of its core markets mature. He wants to reduce Philips’ dependence on electronics — and increase its share of the health care market.
Electronics is a crowded, competitive and relatively mature business. It’s growing, but not as fast as it once did. After all, in many parts of the world even low-income households have at least one television set.
Meanwhile medical equipment spending is soaring. That’s because baby boomers are aging, and developing nations such as India and China are quickly increasing the quality of their health care systems, says medical analyst Vaishnavi Ananthanarayanan at Frost & Sullivan. Health care “is one of the most booming fields in the world today,” she says.
Kleisterlee sees it as an opportunity for Philips to keep growing as it ages. “People are getting older. We want to live longer,” he says. “It’s big business.”
Spending spree
Philips sells everything from DVD players to Norelco-brand razors, but it got its start as a little-known light bulb maker in Amsterdam. Philips’ second major product category, released in 1918, was one of the first X-ray machines. Philips has made medical equipment ever since, with a focus on pricey gear for hospitals such as magnetic resonance imaging (MRI) machines.
But when Kleisterlee took the CEO job in 2001, the medical division was in trouble. It accounted for 8% of Philips’ revenue — but less than 2% of its net income. The division was too big to be nimble, but not broad enough to compete with giants such as General Electric and Siemens, Kleisterlee says.
He faced a choice. “It was either sell the X-ray business or acquire other (product lines),” he says. “With this portfolio, where are you going to go?”
For two years, Kleisterlee has been on an acquisition spree, spending more than $1 billion on medical companies such as Witt Biomedical and Stentor.
He boosted budgets: The medical division recorded operating expenses of about $7 billion in 2005, about twice what it spent in 2000.
And he introduced products for consumers. One is a home defibrillator — a device used to shock a stopped heart — that sells on Amazon.com for $1,185. Another is Motiva, a system that allows patients to send weight, blood pressure and other medical information to doctors using their television with a special set-top box.
Kleisterlee hopes Philips can use its consumer electronics expertise to design user-friendly medical products for doctors and patients. The investment is still new, but it’s already reaping benefits. Medical systems accounted for about 21% of Philips revenue in 2005.
At the same time, Kleisterlee is divesting some of Philips traditional businesses. He sold off its electronics component arm and holdings in a liquid crystal display (LCD) venture and a business-consulting unit.
The timing is right for such moves, Ananthanarayanan says. The health care industry is consolidating, with giants such as Johnson & Johnson becoming even bigger through acquisitions.
Michaela Drapes, an industry analysts with Hoover’s, agrees. Unlike smaller rivals, Philips has the money to invest into developing complex devices, she says. “I think their strategy is pretty sound. They’re not the kind of company that is going to rush into something on a whim,” she says.
Paying for pricey treatments
But the plan is not without risk.
Rising health care costs “are probably unsustainable,” says economist Paul Ginsburg at the Center for Studying Health System Change, a research group. Eventually, health care budgets will have to be trimmed — which means fewer dollars for pricey equipment, he says.
There are already worrisome signs. Many insurers are reluctant to pay for some treatments using one of Philips’ major product lines, positron emission tomography (PET) scanners. PET scans are designed to help detect cancer and other diseases, but their success rate for some is debatable — and they cost about $2,000 per scan.
Kleisterlee admits that his products are expensive. But he says they will eventually cut medical costs by helping patients detect diseases earlier.
That’s not necessarily true, Ginsburg says. “Early detection means lots of negative tests and some false positive tests. They all waste resources,” he says.
And there are also concerns about profit margins as Philips pours millions into new products. “This is now the third quarter for us where (the medical division) has fallen short of expectations,” Morgan Stanley equity analyst Ben Uglow said in a research note last month.
Home care ahead
Still, Kleisterlee says it’s inevitable that patients will someday monitor their health and check in with doctors without leaving home. And he wants Philips at the forefront of that trend. He’s working on a test program to put emergency defibrillators in Wal-Mart stores, in case a customer has a heart attack. And he’s trying to persuade the retail giant to sell them, too.
Philips’ diverse portfolio, including its still-dominant electronics arm, “allows us to have a different perspective on things,” he says. New medical products are based on “everything Philips has learned before,” he says.