Philips’ chief plays down litigation risk over faulty component

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Royal Philips NV updates

The head of Royal Philips has played down the litigation risk over the discovery of a defective component in some of the medical technology company’s sleep and respiratory devices.

The fault has shaved almost €10bn off the Dutch group’s market capitalisation as shares have plunged more than 20 per cent since April, when the defective part was discovered. Shares fell a further 4 per cent to €39.06 on Monday.

Although investors feared hefty litigation charges would follow a string of impairments totalling €500m, Frans van Houten, chief executive, said only 10 patients had reported mild health issues.

The issues stem from foam used in its devices that may degrade and risk exposing patients to harmful particles and toxic chemicals.

“None of them have reported serious health issues. We should not get carried away on the risk of litigation,” he told the Financial Times. It was “way too early to come to any assessment” on estimates of the sums involved in any potential settlements.

Scott Bardo, an analyst at Berenberg, said the issue was “unlikely to descend into the next Bayer Monsanto”, referring to a settlement of up to $10.9bn over the potential carcinogenic effects of the German giant’s herbicide product.

Several consumer class action lawsuits have been launched in the US and Canada, while some law firms have announced possible actions on behalf of investors against the group concerning potential violations of securities law.

Analysts at Citi said recent product liability-related settlements in medical technology were lower than the fall in the share price would suggest, citing the €3bn-€3.5bn settlements for ruptured breast implants with an alleged potential cancer risk.

“Discount to the sector is too deep as litigation concerns overshadow improving fundamentals and significant margin potential,” the analysts said.

The fall in the share price made it an opportune time for the company to announce on Monday a stock buyback programme worth €1.5bn over a three-year period.

The comments came as company sales in the three months to the end of June jumped 9 per cent to €4.2bn due to the return of elective procedures at hospitals after slumping a year earlier when the pandemic’s first wave peaked.

However, a consecutive quarter with a provision of €250m to cover repair and replacements for the faulty component caused income from continuing operations to fall by two-thirds to €65m. The company is waiting for regulators to approve the deployment of replacements.

The company has spent the past decade transforming itself from a consumer electronics conglomerate to a medical technology business.

In March, it announced the sale of its domestic appliance unit for €3.7bn to Chinese investment fund Hillhouse Capital, putting it in line for a windfall in the third quarter.

Philips bought two companies called BioTelemetry and Capsule Technologies for approximately €3bn in the first quarter to help it expand in medical tech.

The group hopes to return annual revenues to €23bn by 2025, the level it was in 2011 before it sold off its lighting, appliances and consumer electronics businesses.

Van Houten said the semiconductor shortage, which poses a risk to its third-quarter performance, was yet to improve.

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