Sleepless nights for rivals after Philips warning

Company News

by Glenn Dyer

A warning for Resmed and Fisher and Paykel Healthcare (FPH) from their big Dutch rival Philips, now a health technology company and not into lighting and bulbs.

Philips competes with Resmed and FPH in the sleep and respiratory sectors – the latter was a boom business in 2020 and 2021 with the Covid pandemic and lockdowns and demand for ventilators of all types.

This week Philips sprang a surprise by warning that its third-quarter core profit would drop around 60%, and it flagged a charge of 1.3 billion euros ($US1.26 billion) on the value of its plagued sleep and respiratory care business.

That news saw Philips shares fall to their lowest level in more than a decade and are down more than 55% in the year to date.

That’s the big area of interest for investors in Resmed and FPH but it shouldn’t be of any great concern because the impairment is specific to Philips.

In the update, Philips said its comparable sales fell around 5% in the third quarter, as supply chain problems remained bigger and longer than the company had forecast.

This was expected to have pushed adjusted earnings before interest, taxes and amortisation (EBITA) down to 210 million euros, or around 5% of sales, Philips said.

That is well under the adjusted EBITA of 512 million euros in the third quarter of 2021.

The impairment on the sleep care business was the result of a consent decree proposed by the US Food and Drug Administration to solve the problems that led to a worldwide recall of respiratory machines, which has lopped around 28 billion euros off Philips’ market value in the past 15 months.

That was after Philips last year shocked investors by recalling 5.5 million ventilators used to treat sleep apnoea, over worries that foam used in the machines could become toxic.

A spokesman for Philips said the impairment was a “best estimate” of the consequences that measures imposed by the FDA could have on the value of the business, while talks with the US supervisor were still ongoing.

Philips also slashed its outlook for the fourth quarter, as it now expects a “mid-single-digit” comparable sales decline while it previously forecast an improvement towards the end of the year.

“This weakness will also spill into 2023 where consensus on adjusted EBITA probably also needs to come down by at least 10%,” ING analyst Marc Hesselink said in a note.

“Next step will be the 2025 targets which became very challenging especially now that the Sleep & Respiratory care business is not expected to fully recover post the recall.”

Philips blamed the weak operating performance this quarter on expected supply chain problems and slowing economic growth around the globe.

CEO Frans Van Houten leaves the company today (Friday) to be replaced by Roy Jakobs, whose appointment was supported by shareholders at a meeting on September 30. Philips in August had unexpectedly announced Van Houten’s departure

Philips also said it was taking a number of steps to counter the “headwinds,” including enhancing the productivity of its R&D operations by “shifting the focus to fewer and better resourced projects in the innovation pipeline.”

The company said it expects to record a noncash charge of 165 million euros ($160 million) in connection with the initiative modest revamp.

Philips will publish its full third-quarter results on October 24. Resmed’s third quarter are due around the end of this month and FPH’s interim is due out in late November.

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