Sat. Jan 22nd, 2022

Shares in Philips tumbled more than 10 percent on Wednesday after the Dutch medical equipment supplier issued a profit warning and announced an extension of a recall of faulty medical devices.

Millions of medical devices that contain a faulty component are being recalled with thousands of patients fearing that they may be harmed by inhaling particles of toxic chemicals.

The recall of the devices used to help people with breathing problems sleep, in addition to the supply chain disruption, hit earnings hard, causing shares in Europe to fall by 14 per cent to € 29.06 by lunchtime.

“We have faced significantly sharpened global supply chain issues across our businesses, in addition to customers’ delays in hospital equipment installations,” said Frans van Houten, CEO.

The company now expects to repair and replace 5.2 million devices, including those commonly used by patients with sleep apnea, after a recall to older medical devices was extended. It issued a voluntary recall of about 3.5 million products in April.

The total cost of the recall, together with group restructuring costs, will increase to € 420 million, € 315 million above previous guidance, Philips said.

Problems have been detected in foam used in its medical devices that can degrade patients and expose them to toxic chemicals.

Earnings before interest, taxes and amortization fell to € 650 million in the last quarter of 2021 – a decrease of almost 25 percent compared to the same quarter in 2020.

Sales of € 4.9 billion for the last quarter of last year were also € 350m lower than expected. Comparable sales for the full year will be 5 percentage points lower, the group said.

Fears of costly litigation and the cost of repeal have contributed to a drop in market capitalization of more than € 18 billion since April 2021.

Lisa Clive, an analyst at Bernstein, said the extension of the recall is a “management credibility issue” and that it is “a bit sloppy” to extend it to older devices after he previously said only recent devices have been affected .

In December, Philips said tests had found that long-term health consequences “are not typically expected”.

However, demand for Philips’ products remains strong, with an “all-time high order book”, van Houten said.

“As long as they handle the recall well and get the sleep business back on track by the end of 2022, it will have been a very painful 18 months, but manageable,” Clive said.

Clive warned in December against further challenges Philips would receive a warning letter from the U.S. Food and Drug Administration, though she added that costs were “more than priced in” for that outcome. Litigation costs can in the worst case rise to € 2.6 billion.

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