Zhitong Finance learned that Philips (PHG.US) set aside 982 million euros ($1.1 billion) to help resolve US claims relating to the recall of medical devices for sleep apnea, which fell far short of analysts' expectations, and the company's stock price in Amsterdam soared. Philips surged 37% in the Amsterdam stock market. The Dutch medical device manufacturer said the settlement is expected to resolve US claims over sleep therapy equipment issues that have plagued the company for the past three years. The company said on Monday that the funds will be used to pay anticipated expenses in US health monitoring class action lawsuits and individual personal injury claims. As of press release, Philips shares surged nearly 35% in the US stock market.
The manufacturer has been dealing with sleep therapy device failures for some time. The company began the recall in June 2021 due to the bursting of the noise-canceling foam inside the machine used to treat sleep apnea, causing health issues. The US Food and Drug Administration (FDA) has classified this fault as a level 1 issue, the most serious type of problem. Jefferies analysts said, “The negative impact is far milder than people feared and will mark the end of uncertainty in litigation.”
Analysts had anticipated that the latest settlement would cost more. Bloomberg analyst Holly from has predicted that Philips could pay $2 billion to $4.5 billion to resolve personal injury claims related to ventilators. According to calculations, the total cost of currently recalling sleep ventilators is about 5 billion US dollars.
As part of the problem, after reaching an agreement with the FDA in January of this year, Philips was also ordered to suspend sales of these devices in the US. Furthermore, the company is under investigation by the US Department of Justice and has not made any financial preparations for this.
Philips' CEO Roy Jakobs said in an interview that the settlement “covers all claims in the US, even those that may arise in the next 6 months.” But Jakobs points out that doesn't mean everything is solved — he was referring to the US Department of Justice investigation, which he said was “the last remaining part of the package of actions” in the sleep ventilator recall. Jakobs said that since the investigation is still ongoing, Philips cannot provide compensation reserves for the Department of Justice's investigation, nor can it “speculate” on the investigation results.
Following the recall of sleep ventilators, the company has strengthened patient safety checks on all products to pre-emptively address other possible issues. This has led to additional recalls of other products, including some MRI devices and ventilators. Prior to Monday's news release, the company had lost more than half of its market value since initiating a sleep ventilator recall.
Affected by the decline in sales in the Chinese market, the Amsterdam-based medical technology company's comparable order volume fell 3.8% in the first quarter. The company reported an adjusted EBITDA of €388 million, which is largely in line with analysts' average expectations of €383 million. Philips Q1's revenue was 4.1 billion euros, with comparable sales growth of 2.4%.
Philips reiterated its confidence in achieving its 2025 plan, but acknowledged that uncertainties remained. Philips anticipates a 3-5% increase in comparable sales for the full year of 2024, with an adjusted EBITA margin of 11-11.5%; free cash flow is expected to increase to 91.1 billion euros in 2024, including product liability claims from insurance companies and remaining payments related to financial loss settlements; and personal injury and medical custody litigation settlements are expected in 2025.