News & Analysis

Drama at Philips. Shares slide

Andrew Saks, Thursday, 13 January 2022

Actually, business is booming for medical device manufacturers driven by the geopolitical occurrances of the past two years, so why is Philips in trouble and the share price has plunged by up to 14%?

The medical device maker had to issue a profit warning. A major driver is a huge recall of faulty medical devices.

What happened?

More than 5 million medical devices, mainly ventilators and machines that help patients sleep, contain a sound-deadening foam. These are the very devices that are so important now in the pandemic. This foam can degrade and may then be inhaled by patients. The effect can be caused by factors such as cleaning with certain agents, heat or high humidity.

Philips also reports severe problems in the supply chain. Allegedly, there are not enough components and freight capacity to meet the demand for the electronics company's sought-after products.

Philips CEO Frans van Houten addressed investors in an analyst call. He sees worsening problems in the global supply chain across the product portfolio and reports that many hospitals have postponed the purchase of new equipment for now.

Philips calculates that the recall will cost a total of EUR 725 million. Even the Dutch industry leader is not going to take this lying down. As a result, Philips expects sales of only EUR 4.9 billion for Q4 2021, which is EUR 350 million less than originally planned and almost 40% less than in the same quarter last year. For the full year 2021, this means a sales target of EUR 17.2 billion, which is 1% less than in 2020. The factors already mentioned are said to have cost 5% of the sales performance.

As always with such gigantic recalls, there is a fear that the lawyers will get into position and cover the company with costly lawsuits. Especially the legal system in the USA is notorious for being very expensive.

What particularly annoys the analysts is once again the salami tactic. While at first only newer devices were supposedly affected, the recall was extended to older devices as well.

If we take experiences such as the Volkswagen diesel emissions scandal as a benchmark, it shows how difficult it is to find the bottom of such a movement, but in the long term otherwise healthy companies often recover. In the short term, we expect a rollercoaster ride with many opportunities and risks.

 

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