Specialist
Former executive at Phillips NV.
Agenda
- Key drivers of Philips' (AMS: PHIA) missed Q4 2021 earnings, including recall costs and supply chain challenges
- Recent increase of sleep apnoea and mechanical ventilator machines recalled, from around four million to 5.2 million globally
- Philips’ repair and replacement programme – potential timeframes according to repair-replacement split
- Short- and long-term reputational impact of recall, including Philips' future market position vs competitors such as ResMed (NYSE: RMD)
- 2022 outlook – restructuring potential, including possibility of homecare spin-off to mitigate liability and costs from device recall
Questions
1.
Philips’ comparable sales fell 10% YoY to around EUR 4.9bn in its Q4 2021 results. There are a few relevant factors here, such as ventilator recall, supply chain issues and the consequent postponement of equipment installation and delayed revenue recognition. This eventually amounted to an impact of approximately 5pp on Philips’ full year comparable sales. How do you interpret these earnings?
2.
You said the sleep device recall is a significant ongoing headwind for Philips. Could you give an update on this recall? Devices added earlier in 2022 took the number from around 3-4 million to 5.2 million. What devices were included and what was the reason for that 1.2 million increase?
3.
How significant could the extra 1.2 million recalled devices be? What will the extra costs be? Do you think Philips’ estimate of around EUR 220m is fair?
4.
What key cost buckets should we be aware of within overall cost? The EUR 220m alluded to was just for the 1.2 million-device increase, but what leads you to believe the overall cost could be twice that?
5.
Do you think Philips could potentially face double the extra costs it’s quoted so far?
6.
Philips has delayed its repair and replacement programme for new sleep and respiratory care customers to Q4 2022, and claims it’s manufactured about 1.5 million kit devices for the programme since September. Do you expect the company to meet the Q4 2022 deadline given the supply headwinds?
7.
You mentioned Philips sells 1.2-1.5 million devices per year, and according to rough calculations, its global shipments of OSA [obstructive sleep apnoea] devices were below 1.5 million units per year pre-recall. Is that the right ballpark number?
8.
How can Philips finish the recall of 5.2 million units in 12 months from September 2021, especially given the official repair-replacement split which perhaps favours the latter? There’s also the semiconductor shortage, preventing significant production ramp-up.
9.
What might the time frame be if the majority of Philips’ programme is replaced vs repaired? Is Q4 2024-25 reasonable?
10.
How much shorter might the time frame be if Philips were able to repair most of the devices? I understand that doesn’t seem likely.
11.
Which devices can be repaired? Do any have to be replaced?
12.
Do you have a sense of the percentage of the 5.2 million recalled devices that are CPAP [continuous positive airway pressure], high-acuity devices?
13.
How likely is it that the 80% of devices you think could be repaired actually will be? Might they be replaced instead?
14.
Philips is quoting Q4 2022 for completion of the repair and replacement programme, but we’re now in February and the repair process hasn’t started yet. You said Q4 2022 is possible, but Q1-Q2 2023 is more likely. Would you agree that getting 80% of the devices repaired by Q4 2022 is optimistic?
15.
The repair process is very logistically complex. How has Philips managed the recall so far? How is it handling its physician relationships and how is the company perceived on the ground?
16.
You mentioned some physicians only have one supplier, which could be detrimental in the short term if their supplier is Philips. If smaller players can make some ground within this market in the long term, do you think there will be a physician shift towards having more than one supplier? Will this have a long-term impact?
17.
How much CPAP device market share did Respironics have pre-recall? How has the recall shifted its market share, and has that helped players such as ResMed at all?
18.
Do you think smaller players could take some market share if they were to make ground in the market? What kind of share would it be? You said ResMed doesn’t have the capacity to meet market demand.
19.
Are the reimbursement dynamics and negative pricing environment putting a dampener on device innovation? Are the devices becoming increasingly commoditised? Are there any differentiated features, perhaps related to comfort or quality, that could help players gain share and price at a premium?
20.
Could you compare the quality and use of ResMed’s CPAPs, BiPAP [bilevel positive airway pressure] devices and non-invasive ventilators with Philips’? Previous specialists have said [see Philips Recall Customer Assessment – Further FDA Questions & Future Recall Potential – 01 Dec 2021] they’re fairly interchangeable and the patient wouldn’t necessarily notice if they switched from one to another, with the biggest difference likely being between the non-invasive ventilators.
21.
How are marketing strategies evolving to convince doctors to switch who they prescribe? What are those dynamics if the devices are fairly interchangeable?
22.
How likely are customers to return to Philips after switching to ResMed due to the recall and end supplies, particularly in the short-to-medium term?
23.
What is Philips’ ventilator market share and how do you think that will shift due to the recall?
24.
What is the life cycle of the rent devices for home dealers, which can be used multiple times? How long until Philips will have the opportunity to replace them?
25.
You said Trilogy is the preferred ventilator in the market. How sustainable is that competitive advantage and how likely is it that a competitor will start innovating at Philips’ level?
26.
What are your overall thoughts on the recall and the damage’s significance for Philips? What key aspects should investors pay attention to as the suit progresses?
27.
Philips’ sales force is one of its big assets, but there will be a reduction in the sales force if devices can’t be sold. What sort of reduction will that be? Does that put Philips on the back foot when the devices are ready to be sold and will it slow the company’s return to market dominance?
28.
How would you describe Philips’ culture? There have been management shifts on the sleep and respiratory side, and you mentioned ahead of this Interview that attrition will be an issue. Could there be shifts in more senior management as the legal case progresses? What are your thoughts on CEO Frans van Houten’s future?
29.
Which of Philips’ business units are most directly impacted by the supply chain issues, elective surgery postponements and delayed revenue recognition? Has diagnosis and treatment been the most significantly impacted?
30.
Are supply chain issues or deferred elective surgeries having the most significant impact? Do you think that will change in 2022?
31.
Philips has said it will provide a mid-term roadmap in summer 2022. What should we have in mind for the company in the medium-to-long term, especially given such significant headwinds in the short term?
32.
What do you expect in Philips’ future? Large conglomerates such as GE, Johnson & Johnson and GlaxoSmithKline have spun off their healthcare businesses. Do you think there might be a similar split at Philips, particularly if large payouts are needed for the ventilator recall? You mentioned the potential spin-off of its homecare segment.
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