Philips May Deal With Recall Fallout for 7 More Years, CEO Says

Royal Philips NV may have to deal with the consequences of a costly recall of sleep apnea devices for another seven years, according to its chief executive officer.

(Bloomberg) — Royal Philips NV may have to deal with the consequences of a costly recall of sleep apnea devices for another seven years, according to its chief executive officer.

The Dutch maker of medical gear is currently negotiating a consent decree with the US Food and Drug Administration and faces lawsuits from users of the machines over disintegrating noise-dampening foam inside them, and the health complications caused by the problem.

“When we have the consent decree, then the timeline will be clarified, but it normally takes five to seven years,” Philips CEO Roy Jakobs said in an interview with Bloomberg News in London. “It is hard to put a timeline on the litigation,” he said.

Philips already set aside about €1 billion ($1.1 billion) for the recall of some 5.5 million devices, and earlier this month agreed to pay at least $479 million to resolve some of the litigation. But Philips is still facing class-action and potentially thousands of individual lawsuits in the matter.

The company is being investigated by the US Department of Justice and remains in discussions with the FDA regarding the proposed consent decree, which may force it to cease some US operations until it completes corrective actions. Philips has not yet made any financial provisions for these matters. 

Jakobs, who took over last October, said the first part of the recall is nearly complete, with 99% of the devices replaced. Lawyers for consumers contend Philips officials knew about the foam problems for a 13-year period beginning in 2008, but didn’t recall the machines until 2021. 

Read more: Philips $479 Million Deal’s a Start in Billion-Dollar CPAP Suits

The devices are designed to force extra air down the throat to treat obstructive apnea — an ailment that interferes with proper sleep and can cause fatal heart problems. FDA officials have said they received 385 reports of deaths possibly linked to malfunctioning machines.

The reports of deaths “are alleged, every single one is being investigated and being dealt with in the appropriate manner,” Jakobs said. “We have done our own testing where the testing shows that no appreciable harm is done,” he said. 

The shares have fallen by more than half since Philips initiated one of the medical technology industry’s biggest recalls in June 2021.

Counting the Cost

Holly Froum, a Bloomberg Intelligence analyst who has followed the sleep-apnea litigation, said Philips may be forced to pay between $2 billion and $4.5 billion to settle personal-injury claims tied to the devices. Citigroup estimated Philips could face around €5 billion in exposure. Jakobs refused to “speculate” on the total cost of the recall. 

He got a vote of confidence for his turnaround plans in August when the Agnelli family’s Exor NV announced the purchase of a 15% stake in Philips for about €2.6 billion. The Italian investment group controls sports carmaker Ferrari, Juventus Football Club and has investments in a range of other auto, tech, health, luxury and financial companies.

Philips in July raised its sales guidance for the full financial year, though a drop in new orders during the second quarter took the shine off the outlook. The company aims to generate up to €900 million in cash this year and raise that to €1.2 billion next year, Jakobs said.

Meantime, Philips has no plans to retrench from China, which accounts for about 15% of its revenue, Jakobs told Bloomberg Television in a separate interview. 

“China remains an important part of the future of Philips,” he said, adding that the maker of medical equipment is making sure it has the right supply-chain setup to serve customers in each region.

Trade tensions and Russia’s invasion of Ukraine have prompted some western governments and companies to curb reliance on Chinese materials and manufacturing. 

–With assistance from April Roach and Jacqueline Simmons.

(Updates with a separate interview with the CEO throughout)

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