Dutch health technology company Philips (PHG.AS) reported much better than expected first-quarter results on Monday, resulting in a 13% jump in its shares. The company also announced that it had set aside 575 million euros ($631 million) related to lawsuits over its recall of respiratory devices.
Philips announced the global recall of millions of respirators used to treat sleep apnea in June 2021 over concerns that foam used in the machines could become toxic. The recall has resulted in Philips’ market value dropping by around 70% since then, with investors worried about the costs of a string of U.S. class-action lawsuits launched by patients who claim to have suffered economic losses due to the use of the device.
Philips’ CEO Roy Jakobs expressed his satisfaction with the provision for the settlement that the company expects to reach in the current quarter. “We are happy we can solve this case,” he said. “We will continue to work on finding solutions for the other cases.” However, analysts warned that much remained unclear regarding the total costs of the recall.
Philips still has to settle with the U.S. Food and Drug Administration (FDA) and is also facing lawsuits from individual patients over health problems they claim were caused by the devices. “The more significant medical litigation risk and the consent decree impact remain,” ING analysts said in a note. “Overall, we believe this is a positive update, but it also underlines that litigation impact and market uncertainty are not out of the way.”
Philips said the outcomes of negotiations with the FDA and the other lawsuits were still too uncertain about making a provision. The company, however, reported an almost 50% jump in first-quarter core profit to 359 million euros, with comparable sales up 6% from a year earlier.
The strong first-quarter results are a relief for Philips, as they demonstrate the resilience of its business despite the recall of its respiratory devices. The company’s comparable sales growth was driven by its Personal Health and Connected Care divisions, which recorded double-digit increases. The Personal Health division benefited from strong demand for oral healthcare and personal care products. In contrast, the Connected Care division saw a rebounding demand for hospital ventilators and patient monitoring systems.
Philips’ Chief Financial Officer, Abhijit Bhattacharya, said that the company’s strong performance in the first quarter was due to its “portfolio of innovative solutions,” which enabled it to capitalize on the opportunities arising from the ongoing pandemic. “Our teams have done an excellent job of adapting to the challenges of the COVID-19 environment,” he added.
Philips expects to deliver a low-to-mid-single-digit comparable sales growth for 2021, assuming no significant COVID-19-related disruptions. The company also aims to improve its operating margin by around 60 basis points compared to last year.
In conclusion, Philips’ strong first-quarter results and the provision made for settling lawsuits related to the recall of respiratory devices have relieved investors. However, the uncertainties surrounding the outcomes of negotiations with the FDA and other lawsuits mean that the impact of litigation and market uncertainty cannot be ruled out entirely.