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Philips to Buy Spectranetics, Eyes Image Business Growth

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Maintaining its buyout spree, Koninklijke Philips N.V. (PHG - Free Report) recently announced a definitive merger agreement to take over U.S.-based medical devices maker, Spectranetics Corporation , for €1.9 billion ($2.16 billion). Philips believes that this acquisition will boost its stronghold in the image-guided therapy market, which is valued at over €6 billion.

Over the past two years, Philips has successfully morphed into a healthcare technology provider. To expand its presence in the domain, the company is increasingly turning to bolt-on acquisitions. The recent buyout marks the company’s fourth acquisition in the calendar year. The others include deals to buy Australian Pharmacy Sleep Services, Respiratory Technologies and Electrical Geodesics.

A Premium Price Offer

The Spectranetics acquisition, which has already got the nod from the board, is expected to close by the end of third-quarter 2017. Amsterdam-based Philips has offered to pay $38.50 per share for the deal, which represents a 26.6% premium on Spectranetics’ closing share price on Tuesday.  The transaction, which is to be paid in cash upon completion, includes Spectranetics’ cash and debt.

Following the merger agreement, the transaction is subject to fulfillment of customary closing conditions, including certain regulatory clearances. Philips plans to finance the acquisition through a combination of cash on hand and the issuance of debt.

Spectranetics’ Growth Prospects

Spectranetics is considered to be a premium provider of vascular intervention and lead management solutions. The company is currently witnessing solid prospects in its end markets. It is growing double digits and expects 2017 sales to lie in the band of $293–$306 million. Post the completion of the transaction, more than 900 of the company’s employees will be absorbed in Philips’ Image-Guided Therapy Business.

Drug-coated balloons procedure is one of the fastest growing ones in peripheral vascular diagnostics, and Spectranetics enjoys a dominant position in this space. As a matter of fact, the company’s Stellarex drug-coated balloon has acted as one of its major profit churners in recent times and has already earned a CE-mark. It is currently inching toward premarket approval in the U.S., after it clears the review process from FDA.

Boosting the Image-Guided Therapy Business

Shares of Philips have returned 21.4% in the last six months, outperforming the Zacks categorized Electronic-Miscellaneous Products industry’s average gain of 13.4%. The Zacks Rank #2 (Buy) company’s Healthcare Informatics Solutions & Services margins have been improving constantly. It is transforming from a hardware-oriented to a software-driven business, which is a higher margin model with a stream of recurring revenues.

Philips expects Spectranetics' stellar projected revenue growth to prove accretive to its top line, adjusted earnings and EBITDA margin by 2018. Further, Spectranetics is expected to unlock further synergies for Philips’ recurring revenue stream. Leveraging on the synergistic therapy device portfolio, Philips has plans to roll out multiple innovative products going forward. This is likely to fortify Philips’ Image-Guided Therapy business and help it expand into therapy devices.

Moreover, Philips believes that based on the combined strength of their portfolios, therapy devices sales can reach the €1 billion mark by 2020. The Image-Guided Therapy Business, which had garnered sales of €1.9 billion in 2016, is expected to act as one of the major catalysts for the company in the days ahead. Philips has set a target of high single-digit sales growth and high-teens adjusted EBITA margin for this business in the medium-term.

Encouragingly, the consensus analyst community is favoring the stock. The Zacks Consensus Estimate for full-year 2017 earnings has edged up from $1.56 to $1.57, supported by one upward estimate revision versus zero downward.

Other Stocks to Consider

Other top-ranked stocks in the broader sector include Applied Materials, Inc. (AMAT - Free Report) and Applied Optoelectronics, Inc. (AAOI - Free Report) . Both stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

With four back-to-back beats, Applied Materials has an average positive surprise of 3.4% for the trailing four quarters.

Applied Optoelectronics has a whopping average earnings surprise of 118.3% for the trailing four quarters, with three back-to-back beats.

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