FDA Approves Philips Scanners

In the face of high competition, the Dutch company Royal Philips Electronics NV (PHG - Analyst Report) got approval from the U.S. Food and Drug Administration (FDA) to sell a combination scanner that performs both positron emission tomography (PET) and magnetic resonance imaging. The scanner is expected to accelerate imaging time for cancer patients, as PET identifies cancer cells as it absorbs chemical tracers.

The magnetic resonance imaging will be helpful to identify the surrounding tissue. In addition, the magnetic imaging is also capable of scanning bone and combining systems in order to improve the diagnosis of cancer and cardiovascular diseases. The big advantage of this machine is that these diagnoses can be done at much lower radiation levels than X-rays.

In addition, the new scanner is expected to deliver with quality and accurate diagnosis for patients. The new machine is designed in a way that revolves the patient table between each modality to scan a patient, to enable the system to perform both MR and hybrid PET/MR studies individually.

This flexibility eliminates the need to invest in multiple scanners and also brings down the throughput time. Patient comfort is also enhanced, since the patient can remain on the same table for both tests.

The approval is a big win for Philips as it expects the machine to take market share from General Electric Company (GE - Analyst Report). GE Healthcare has a 13% share of the U.S. hospital information systems market, followed by Siemens (SI - Analyst Report) which has an 11% share. The hospital information systems market is the largest in the U.S. valuing at $4.7 billion and has a growth rate of 10% per anum.

The permission to sell the PET/MR scanner culminates a multi-million-euro development phase spanning seven years for Phillips. The company already has 13 orders for this machine outside the U.S.

Management at Philips believes that this growth and expansion into the healthcare segment, which is one of the dynamic sectors, will give a big cushion to the company as it diversifies away from the struggling consumer electronics and lightning businesses.

According to Philips, the diagnostic imaging market is worth €16 billion-euro ($21 billion) globally, with a projected growth rate of 3% to 5% a year. Philips has already installed five of these scanners worldwide and has orders worth €30 million euros.

Philips’ Healthcare segment (comprising 34% of the company’s revenue in fiscal 2010) is the second largest manufacturer of medical diagnostic equipment, which includes X-ray, ultrasound, magnetic resonance, medical information technology (IT), nuclear medicine, patient monitoring, information management and resuscitation products, as well as a comprehensive range of services.

We maintain an Underperform rating on the shares of Philips. The company’s reported earnings over the last couple of quarters have come on lower revenues, primarily due to lower license revenues and a decline at the Lifestyle Entertainment segment. The net cash flow also declined significantly compared to the prior year, attributable to higher working capital outflow related to higher vendor payments.

However, with the implementation of Accelerate and the new approval for marketing its scanners in the U.S., the company expects to improve its performance through better growth and earnings. Philips currently has a Zacks #4 Rank, which implies a short-term Sell rating.

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