Philips – increased sleep apnoea machine recall & Q4 2021 earnings analysis

The specialist said there are still “many unanswered questions” related to the saga, including whether recalled equipment needs to be repaired or replaced. Neither options are, however, likely to help Philips meet its completion date, with the specialist citing a number of reasons. First, they said Philips has “no capacity to replace that many units in that window”, having manufactured 1.5 million devices last year. It also faces headwinds from ongoing supply chain issues and semiconductor shortages, which are likely to further affect production capacity. 

 Repairing faulty units would be the lesser of two evils, according to the specialist, given the vast majority of recalled devices are the “easier” to repair CPAP machines. However, Philips has yet to start repairing any of them, making such an operation a “logistical nightmare”. The specialist also questioned the cost of adding another 1 million ventilators to the recall list, telling us it could be more than double Philips’ initial USD 200m estimate. 

Internally, the ramifications of the recall have seen a number of senior managers leave Philips’ sleep and respiratory division. The specialist expects the division’s sizeable sales team to reduce over the next 9-12 months, as it is no longer “sustainable”. While the specialist doesn’t think Philips could divest its healthcare business because “virtually all of their business is now healthcare”, they do believe it would be open to selling the division if it could find a suitor. 

The damage to Philips’ reputation has also been “incredibly profound”, with many physicians “angry” over its handling of the recall. Many would like to shift away from its CPAP devices, according to the specialist, but “the reality is there really aren’t other suppliers” to fill the void. ResMed was once touted as a viable alternative, but it has yet to reach out to Philips’ customers in a “positive manner”. 

It leaves the possibility that while ResMed and a few smaller companies may gain market share in the short term, it will be “easy” for Philips to regain that share in the future – something the specialist said could take 4-5 years. 

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