Dutch health company Philips came under fire when it was discovered that the insulating foam in its sleep apnea devices was not durable when washed with a certain type of product. This raised many health concerns for users as the machine may turn toxic.
While the U.S. Food and Drug Administration (FDA) pointed out that there had been complaints against the device from as early as 2015, the issue only gained momentum this past year during which the company worked to replace 3 million damaged devices. However, there are still over 5 million devices that need replacing.
Overall Phillips has predicted a loss of around 1.3 billion euros over these machines. Excluding the legal costs of dealing with angry patients claiming compensation, the company has already incurred a loss of around 720 million euros.
On top of this, the company also has to strike a settlement with the U.S. Department of Justice that is expected to take up a large chunk of subsidiary Respironics’ value. The department is not likely to recover from this loss anytime soon and this will make it extremely difficult to fulfill future targets set.
In addition to this, investors are also disgruntled, VEB, an interest group for private investors is also holding Philips liable for the damages that shareholders suffered which are estimated to be around 16 billion euros.
According to Frans van Houten, the outgoing CEO of Philips,” Since we are in the early days of negotiation not much can be said about the consent decree with the FDA.”
This is also not the end of the company’s financial struggles, problems with supply chains are also expected to impact sales adversely and the operating profit has also taken a hit. Comparable sales are estimated to drop by around 5% from the same time last year and core profit from the third quarter is expected to decline by 60%. Philips will be publishing the official quarterly results by Oct. 24.
Although there were some improvements in the supply chain issues earlier in the year, the supply shortages have only gotten worse recently which will impact sales in 2022. Earnings from the third quarter have already fallen to 210 million euros from the 510 million euros it was last year. Fourth quarter sales are also expected to fall to the mid-single digit.
Marc Hesselink, an ING analyst has predicted that the shockwaves of these losses will be felt well into 2023 as well, and adjusted earnings before interest, taxes, and amortization (EBITA) will also have to come down by 10% minimum.
Company shares have also hit an all-time low since 2012, and the company’s market value fell by 28 billion euros in the past year or so. The value of shares fell by 9% to around 14 euros, the lowest it had been in a decade.
Amidst all this, changes have been announced in the leadership of the company. After Van Houten’s unexpected departure, Roy Jakobs will be stepping in as the newly elected Chief Executive Officer.
