Philips’ chief defends faulty component used in 10m products
The boss of Philips has said there was “no mistake in the design” of respiratory devices subject to a vast product recall, as he acknowledged that millions more machines with the same faulty part have been in use beyond those summoned back for replacement by the manufacturer.
The Dutch group is in the process of recalling approximately 3.5m devices primarily used to assist the breathing of patients suffering from sleep apnoea, after detecting a faulty component in April.
The devices use a foam that can degrade and become toxic, putting investors on edge for a worst-case scenario of costly litigation reaching into billions of euros if the fault is linked to cancer. Thousands of patients believe they may have been harmed by inhaling particles or toxic chemicals.
But Frans van Houten, chief executive, told the Financial Times on Monday that the company had used the polyurethane foam in its respiratory devices for decades — meaning more than 10m had used the foam — arguing these met regulations at the time of production.
“We’ve been designing and producing ventilators for 10 to 20 years and we have been using this kind of foam forever. It was fully qualified by the rules, regulations and standards at the time,” he said.
The devices are being tested to establish what compounds they release under what conditions, the toxicity of those compounds and whether they cause cancer.
Philips is only replacing devices still in use within their lifetime, which is about five years in the US and longer elsewhere, at an estimated cost of €500m.
A wave of class action suits have already been launched against the company in the US.
Philips said it was “unable to reliably estimate” any legal liabilities.
However a wider pool of affected devices could increase the number of litigants should tests reveal that they cause patient harm.
Van Houten’s comments came as the group trimmed its annual outlook for sales growth to low-single-digits and a “modest” profit margin improvement, citing the device recall as well as a host of supply chain snags from semiconductor shortages to shipping bottlenecks.
Sales slipped 7.6 per cent to €4.2bn in the third quarter compared with a year earlier, with “intensified” supply chain pressures expected to spill over into 2022, Van Houten said.
Shares in Philips were down 2 per cent in lunchtime trading. They have slumped about a quarter since April, shaving about €10bn off the Dutch group’s market capitalisation.
Philips cited a complaint rate of 0.03 per cent of users based on 2020 data at the time of the recall but a larger number have been received since the recall, the group said.
“People will respond to that [the recall] and say ‘I want to put in my own complaint’. We’ve had a few thousand more than originally,” Van Houten said.
He said he had the full backing of the board: “The products were approved by the regulators. There was no mistake in the design of the product.” He added that “the patient suffers and we very much feel for that. Apologies are due to patients”.
The group has so far produced 750,000 repair and replacement kits, of which a third have reached users, but supply chain issues mean that millions of devices cannot be replaced quickly.
Scott Bardo, an analyst at Berenberg, said he was hoping that the third-party test results of the devices due in the fourth quarter should ease investor fears around litigation.
“We are expecting an update from Philips’ infield studies in the coming weeks and believe that this could be represent a positive asymmetric trigger for the stock,” he said.