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Philips Reaches Agreement With FDA on Ventilator Recall — 2nd Update

By Elena Vardon

 

Royal Philips reached an agreement with the U.S. Food and Drug Administration on the terms of a settlement linked to recall of its Respironics ventilators used to treat sleep apnea.

The Dutch health-technology group on Monday said it booked a 363 million-euro ($394 million) provision in the fourth quarter of 2023 for remediation activities, inventory write-downs and contract provisions related to the so-called consent decree. For 2024, costs from this are expected to represent 1% of total sales, which is estimated to amount to between EUR180 million to EUR200 million from remediation work and disgorgement payments, it added.

In 2021, Philips issued a recall of its breathing-aid machines following reports that an internal sound-dampening foam could degrade, spurring concerns that it could release harmful gases or particles into the lungs of users.

The consent decree it agreed upon with the FDA will be submitted to the relevant U.S. court for approval once finalized, and more details on the multi-year plan will become available then, Philips said.

"The decree will provide Philips Respironics with a roadmap of defined actions, milestones, and deliverables to demonstrate compliance with regulatory requirements and to restore the business," it said. The company is committed to complying with the decree, it added.

Until the requirements are met, the company won't sell new CPAP or BiPAP sleep therapy devices or other respiratory care devices in the country but will continue to service existing sleep and respiratory care devices as well as supply accessories, consumables, and replacement parts, it said.

UBS analysts estimate this represents an around EUR400 million sales headwind for the company. However, the ban on devices but not on consumables after the agreement provides much-needed clarity, Citi analysts wrote to clients.

Outside of the U.S., Philips will continue selling its range of products, including new devices, subject to certain requirements, the group added.

"The consent decree reached with the FDA is very punitive in our view," ING analyst Marc Hesselink said in a note, adding that given that it will Philips take several years to meet the requirements, it will be difficult for the group to recover its U.S. Respironics market position.

While the industry throughput times for consent decrees is five to seven years on average, "for Philips, that will be determined by what will be published later in terms of what we will have to comply to and then how fast we can work through remediation activities," Chief Executive Roy Jakobs said in a call with journalists.

"We are committed to the future of the Sleep and Respiratory Care business," Jakobs added, noting it is an attractive market with huge demand.

Shares in Amsterdam were down 6.2% to EUR19.74 at 1018 GMT, also weighed down by what Citi called a "mixed" fourth-quarter print, released alongside the awaited update on the consent decree. The stock is up 33% over the last 12 months.

For the three months ended Dec. 31, the Amsterdam-listed group reported EUR5.06 billion in sales--40% of which came from its North American geographic area--representing 3% in comparable growth excluding provisions related to the settlement or a 1% decline including them. Estimates taken from a company-compiled consensus had seen EUR5.33 billion in sales with 2.6% comparable sales growth. Adjusted earnings before interest, taxes and appreciation margin was 12.5% for the quarter, excluding provisions, and 12.9% including, against views of a 12.6% margin.

For 2023 as a whole and excluding provisions, Philips reported comparable sales growth of 7% and an adjusted Ebita margin of 10.5%, with both metrics coming in within its upgraded guided range for the year.

For 2024, it expects comparable sales growth of between 3% and 5%, with an adjusted Ebita margin in the 11% to 11.5% range--figures which roughly capture the mid-point of analyst estimates which pencil in 4.0% growth and a margin of 11.1% for the year.

Philips backed its financial outlook for 2023 to 2025 of mid-single-digit comparable sales growth and low-teens adjusted Ebitda margin, adding that its free cash flow target of EUR1.4 billion to EUR1.6 billion takes into account the consent decree but excludes continuing litigation and the Department of Justice investigation into the handling of the recall.

 

Write to Elena Vardon at elena.vardon@wsj.com

 

(END) Dow Jones Newswires

January 29, 2024 05:52 ET (10:52 GMT)

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