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Philips CEO Wants to Be Near “Hotspots of Talent” to Take On GE, IBM

Xconomy Boston — 

Boston’s healthcare technology cluster is getting more crowded. Dutch healthtech giant Philips intends to plant an even bigger flag here, ramping up its local efforts to develop products like machine-learning software for healthcare, as other big firms like IBM and General Electric do the same.

Philips (NYSE: PHG) announced Thursday it plans to relocate its North American headquarters from Andover, MA, to Cambridge, MA. In 2020, the company intends to move into a 243,000-square-foot office space at the Cambridge Crossing development site (near the Lechmere MBTA stop). The office will have room for 2,000 employees, Philips spokesperson Silvie Casanova says.

Philips—which makes a variety of hospital equipment and software, as well as consumer products, like electric toothbrushes and shavers—intends to offer jobs at the new location to most of the 2,200 employees currently working in Andover. They include software developers, engineers, researchers, and sales and marketing workers, Casanova says. About 300 people, mostly who work on manufacturing ultrasound machines, will remain in Andover, located about 25 miles north of Cambridge. The new office will also house the 200-person research team currently working at an office located at 2 Canal Park in Cambridge, she says.

In an interview with Xconomy, Philips CEO Frans van Houten says the idea is to move the Massachusetts operations closer to more software talent, to startups, and to the company’s local university and hospital partners, such as MIT and Massachusetts General Hospital. It follows similar moves 127-year-old Philips has made to offices in downtown Pittsburgh and Nashville, he adds.

“As we are focusing on innovation for health, we have evaluated our real estate footprint and decided that, rather than being in more quiet areas, we ought to be at the hotspots of talent,” says van Houten (pictured above).

It’s a common refrain, as plenty of large, long-standing companies have similarly ditched the suburbs for the city in recent years. One of Philips’s main competitors, GE (NYSE: GE), cited some of the same reasons for relocating its headquarters from a sleepy Connecticut office park to Boston’s Seaport neighborhood, adjacent to downtown and bustling with startups.

In a couple years, Philips’s move will set up a cross-town rivalry with two of its major global competitors, GE and IBM. Although GE Healthcare—which, like Philips, makes CT scanners, ultrasound machines, and other medical devices—is based in Chicago, some of GE’s key development of artificial intelligence software for healthcare is being done in Boston with partners Boston Children’s Hospital and Partners HealthCare. IBM, meanwhile, has made Cambridge the home base for its Watson Health business, which develops healthcare A.I. software. (Deborah DiSanzo, IBM Watson Health’s general manager, was previously CEO of Philips Healthcare.)

Van Houten acknowledges Philips has stiff competition, including in the race to deliver on the promise that his company and many others see for A.I. applications in healthcare. But he sounds confident Philips is up to the challenge. He points out that Philips’s connected care and health informatics business generated more than $3.8 billion in revenue in fiscal 2016, the most recent year for which the company has posted total annual results. “That makes us a very respectable player in the informatics field,” he says.

And Philips is spending more than 9 percent of its annual revenues—or almost $2 billion—on research and development, with 60 percent of that being spent on software initiatives, van Houten says.

“We feel good about our programs,” he says. “We are very committed to the space.”

Since van Houten took the helm in 2011, he has worked to transform Philips from a collection of disparate divisions, products, and services into a more focused healthtech company. Philips sold its TV manufacturing business, and it has sold off most of its stake in its lighting business, van Houten says.

“We found that being a holding company with multiple divisions in completely different areas is a distraction,” van Houten says. “Also, frankly speaking, shareholders find it confusing” and customers question the company’s commitment to each business, he adds.

GE and Siemens, another Philips competitor with a diverse set of businesses, have faced similar questions, van Houten says. Siemens reportedly plans to spin out its healthtech business, Healthineers, and take it public. GE, whose stock price has dipped over the past year, is investing in its healthcare business, but has shed other divisions to simplify the overall company.

While Philips has exited some businesses, it has scooped up others. The company has acquired 14 healthcare-related companies since 2015, about half of them based in the U.S., van Houten says. The moves include the $1 billion purchase of San Diego-based Volcano and the acquisition of Colorado Springs, CO-based Spectranetics for an implied enterprise value of more than $2 billion.

Philips is now a roughly $20 billion healthtech-focused company, van Houten says. Investors like what they see: the company’s stock price has risen from below $25 at the beginning of 2016 to just over $40, as of this writing. But it has taken time to get others to notice the shift.

“Not everybody has realized that we are out of lighting and consumer electronics,” says van Houten, who attended the J.P. Morgan Healthcare conference in California earlier this week before flying to Massachusetts for Thursday’s announcement. “Now we see increased attention, as we’re more now seen as pure-play healthtech.” Thirteen of the 16 financial analysts that track Philips are focused on healthtech stocks, he notes.

Philips doubled down on healthcare because it’s a growing market with good profit margins, and there are plenty of opportunities to advance the industry, van Houten says.

“We have looked at the mega-trends in the world and believe that for a company with our DNA and commitment to innovation, health is the real challenge in the world,” he says. “There needs to be a lot invented.”

A.I. is an increasingly active area of R&D for Philips, and the company has already incorporated A.I. features into products for … Next Page »

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