More than a year ago – in the last days of 2020 – said CEO Frans van Houten to the Telegraph Which “Philips on the right path”. The company was in “very good shape”, Van Houten thought that the healthcare technology group could “grow by 5 to 6 percent in the coming years”.
But the year that followed was one of major crises. In June, Philips had to report that its sleep apnea devices pose health risks, such as headaches or breathing problems. The company launched a massive recall to repair or replace more than five million machines. The American health watchdog FDA delved into Philips documents and came up with example after example of internal signals since 2015 of problems with the sleep apnea devices. Had the company been asleep?
Philips was also plagued by shortages of electronic components such as chips and problems in freight transport. The stock market value fell from 45 billion euros in the spring, to less than 25 billion now.
On Monday, it turned out that annual turnover amounted to 17.2 billion euros, one percent lower than a year earlier. The profit was 612 million euros, a year earlier almost one billion. Philips is also setting aside 74 million to recall two other products, but the company does not want to make any statements about that now.
So why the optimism last winter? Frans van Houten, CEO since 2011, knew nothing about the problems with the sleep apnea devices, it turns out on Monday in conversation with NRC. Van Houten: “It only arrived on my desk in the first quarter of 2021.”
You weren’t overly optimistic at the end of 2020, you just didn’t know it when you gave that interview?
“New. If you don’t count the problems within this department, we would have grown 5 to 6 percent this year.”
Didn’t think it was very late to hear about these machine problems?
“Of course you would like to be informed sooner about such serious matters. But this is by the unit in the American Pittsburgh not recognized as serious business soon enough, otherwise they would have taken measures. It is clear that we are going to look at our internal management processes to see how such signals do come up.”
What was it like for you to lead Philips in this turbulent year?
“It was an intense year. We went from crisis to crisis. First, the sleep apnea devices came to our attention. Then everything came over us. We had to take measures to help consumers, but also to conduct good research into the risks. On top of that came the problem in the supply chains. I have had no shortage of challenges.”
The risk of the sleep apnea devices is in the sound-damping plastic foam (polyester polyurethane). People with sleep apnea use a device that blows air into their lungs at night to prevent annoying breathing stops. In a small percentage of the devices, the foam was found to crumble and drift to the nasal mask, for example. In total, devices are repaired or replaced in one hundred and thirty countries, in the Netherlands this is about one hundred thousand devices.
Nearly two hundred Dutch people have reported to two legal aid insurers and a law firm, because they wonder whether their health problems are due to the wandering foam.
Some of the users of your devices are concerned. For example, people have headaches, a woman has lung cancer. What would you like to say to these people?
“I understand people are concerned. I empathize with them. It’s a technical story, I don’t know if everyone understands it completely. When we announced the recall, we had limited information. In consultation with the FDA, we havereasonable worst case scenario‘ worked.
“Last December, reassuring research results from us came out. We were able to determine that the volatile substances [gassen] released from the foam are well within safety standards. That should be a great relief to many people. Then there is still the risk of the foam coming loose. We are now investigating this further. We do know that this is only released in a small percentage of our devices. In principle, patients can take a good look themselves in the mask and the tube to see if they see such particles floating around.”
Are those particles always visible to the naked eye?
“Those particles are visible. What is also visible is dirt. Not everyone cleans their product properly. It could also be dirt, rather than particles coming out of the foam. “You just mentioned that people have headaches, someone with cancer. A study has just been done by Canadian researchers on 6,000 patients, 1,200 of whom were using Philips apnea devices. That’s a comparative study with multiple devices, and it shows that our device doesn’t cause cancer. Headaches and cancer can be caused by many things other than this device. Anyway, that is difficult to explain to a patient who is worried. That is why we are also keen to quickly complete our own research into the small particles.”
Philips previously reported that the company was alarmed by a significant increase in complaints in 2020. Still, it is remarkable that the FDA released a report last fall with a hefty list of internal signals that had been there since 2015 about crumbling foam. How are you looking at this now?
“Whoever looks retrospectively always gets a different picture than a mechanic who sees one or two cases of which the cause is not yet known. At the time, it was not seen that there was a correlation between problems with the products in different countries. There are certainly lessons to be learned in making sure we have better contact with our patients to hear what’s going on. We want to apply that lesson to all of Philips.
“The FDA has also placed an emphasis on risk management. Don’t just focus on what goes right, but also think about what could go wrong. We did, but not well enough to pick up on the signals at an early stage.”
The management of the factory in Pittsburgh – responsible for the sleeping machines – has since been replaced, Van Houten later confirmed through his spokesperson. There is now a team he has more confidence in.
Investors have reacted strongly: the stock market value lost 45 percent in one year. Is that an overreaction?
“There are those statements that ‘the market is always right’. I can’t judge the market. At the same time, I was shocked by the enormous response. I like to remind people that our sleep and ventilation business is less than 10 percent of Philips in sales. We are talking about a relatively small part of the company. A lot of things are going well. So yes, it sometimes feels like an overreaction.”
725 million has been set aside for the recall, but that does not include legal fees. Major lawsuits are being rigged in the US, Canada, Israel and Australia. When do you expect an estimate of the costs involved? That could turn out to be a significant amount.
“It is far too early to make a statement about that. First we need to get all the facts straight. And those lawsuits have yet to get underway. That will all happen during the course of this year. I expect that we will not be able to say anything meaningful about the risk for Philips until next year.”
Do you feel pressure on your own position?
“I always tell myself: concentrate on your work. Make sure you come up with results. That’s important to me. I’m intrinsically motivated to make sure we get through this. I am convinced that Philips is a very good company and that we will work through this setback. And then people just have to judge that.”
Is that a ‘no’ to the question of whether you feel pressured in your position?
“I deliberately did not answer that question in black and white.”
When you presented the annual figures, you said you expected headwinds in the short term, but recovery in the second half of the year. Why?
“We expect supply chain and electronic component shortages to diminish over the course of the year. That is based on what our suppliers say. We increased our order book last year and we are slowly working our way through the shortages. We expect to be able to deliver more in the second half.”
The WHO thinks the pandemic is almost over in Europe. We are entering a new phase, it seems. Will Philips benefit from this?
“Philips will benefit if hospitals regain time and space to install equipment, for example. But I think it’s a dangerous statement from the WHO. The world is not Europe, the world is the world. For example, I think we should be concerned about China’s ‘zero Covid policy’. The western world has become accustomed to Covid-19, has built up a certain amount of immunity. No one knows how the policy will turn out in China. Global supply chains often depend on China. If a port there goes into lockdown because of an Omikron infection, we have a problem with deliveries in Europe. Europe may no longer have a pandemic, but it may well have the consequences of a pandemic. So let’s not crow about victory just yet. ”