Philips draws a line under its sleep nightmare

Philips’ new chief executive does not officially take over until Saturday, and to give him a relatively clean slate the company has finally dealt decisively with the massive issue that has been dogging it for more than a year. 

Today the Dutch group said it would write down the value of its sleep and respiratory care business by €1.3bn ($1.3bn), following three major device recalls and thousands of reports to the FDA suggesting that its sleep apnoea devices might have contributed to a death or serious injury. The stock is down 12% today, and 68% since the first recall last June.

And the woes don’t stop there. Philips also issued a profit warning, blaming “more significant than anticipated” supply chain problems. Its third-quarter operating profit will come in at around €210m, it said, a sharp drop from the €512m seen a year earlier. 

Philips will report earnings on October 24, by which time Roy Jakobs will have assumed control of the business from the current chief executive, Frans Van Houten. 

In June 2021 Philips voluntarily withdrew some of its ventilators, bi-level positive airway pressure and continuous positive airway pressure machines. The FDA issued a safety alert about the devices the same month, and in July designated the recall class 1, the most serious kind.

The problem was with the polyester-based polyurethane foam used to make the devices quieter. It was found to be liable to breaking down, forming potentially toxic particles that could be ingested or inhaled by the user. The foam was also suspected of producing potentially dangerous gas as it degraded. 

A further disaster hit in November, when a replacement silicone-based foam failed a safety test for the release of volatile chemicals. A second major recall occurred in June of this year. 

By July 31, 2022 the FDA had received more than 69,000 reports of dangerous events, including 168 reports of deaths, associated with the breakdown or suspected breakdown of the polyurethane foam. All in all Philips promised to replace or repair some 5.5 million sleep apnoea machines, a process that had been hampered by supply chain problems.

Sleep no more

The impairment on the sleep care business incorporated the group’s “best estimate” of the likely upshot of a settlement proposed by the US Department of Justice on behalf of the FDA, following the inspection of some of Philips Respironics’ facilities in the US in 2021. The agreement is still being negotiated.

To help mitigate the loss of value of the sleep franchise the company says it is “accelerating productivity initiatives”, details on which will come at the end of the month. It has already decided to shift the focus of its R&D activities to “fewer and better resourced projects”.

Philips has long been one of medtech’s biggest spenders on in-house research as a proportion of its sales, particularly since Mr Van Houten oversaw its transition to a pure-play device company. 

The graph below shows consensus forecast sales for the top-five developers of respiratory technologies, pre-dating today’s news. However, any investors hoping that Philips’ competitors in this space might benefit from the company’s catastrophe are in for a disappointment; shares in Resmed and Fisher & Paykel are down slightly, and Medtronic’s stock is flat.