Philips Faces Years-Long Respironics Sales Halt After FDA Consent Decree Agreement

Philips, after a year and a half of discussions with the Department of Justice (DOJ) on behalf of FDA, today announced the company and FDA has agreed to a consent decree related to the 2021 Respironics CPAP and BiPAP machine recall that uncovered millions of ventilators and sleep apnea machines used sound abatement foam that could degrade and emit toxic particles into the airway.

The decree, according to the company’s Q4 and Annual Results 2023 release, will outline “a roadmap of defined actions, milestones, and deliverables to demonstrate compliance with regulatory requirements and to restore the business.”

As part of the multi-year agreement, Philips set aside a €363 million ($394 million) provision in Q423 for remediation activities, inventory write-downs, and contract provisions. Additionally, in 2024, costs related to the decree are expected to represent 1% of total sales, an estimated €180 million to €200 million from remediation work and disgorgement payments.

Currently, specific details related to the consent decree have not been released as it is being finalized and submitted to a relevant US court for approval. However, it was disclosed that until decree requirements are met, the company will not sell any new Respironics devices in the US. Philips will continue to service sleep and respiratory devices already in the US marketplace along with supply accessories like patient interfaces, consumables like patient circuits, and replacement parts including repair kits.

Company CEO Roy Jakobs, while declining to discuss conditions Philips will have to meet, said that generally an agreement such as this in the medical equipment industry on average takes between five to seven years to comply. However, he noted, in a call with journalists, that “for Philips, that will be determined by what will be published later in terms of what we will have to comply to and then how fast we can work through remediation activities.”

Outside of the US, Respironics devices will continue to be sold, “subject to certain requirements,” according to Philips. Sales outside of the US only recently restarted after the 2021 recall.

UBS analysts estimate that the agreement will represent an around €400 million sales headwind for the company. Additionally, an analyst from ING termed the decree as “very punitive”, adding that the time need to meet outlined requirements could further widen the gap between Philips and other leaders in the market that have thrived in the company’s absence, like ResMed.

Even after the consent decree requirements are met, Philips still faces numerous legal cases brought on by patients. In September 2023, Philips reached its first class-action settlement stemming from the recall, only covering economic loss claims. Hundreds of additional personal injury and wrongful death claims, as well as requests for medical monitoring, are still in litigation. In Q123, the company had already set aside €575 million to cover the estimated costs for the final settlement.

The agreement also supports ResMed’s meaningful share in the market — the company gained roughly half of Philips previous market position during the recall. After the decree announcement, Philips shares were down 8.3% at 14:05 in Amsterdam. On the other hand, ResMed’s shares rose nearly 2% in early US trading.

“Given ResMed's now meaningful share in the market, the company is primarily focused on accelerating market growth through demand generation, better products/diagnostics, and software to improve adherence and utilization,” according to William Blair analyst Margaret Kaczor Andrew, CFA. “We view this as the most meaningful opportunity for growth to come with the right investments.”

The announcement comes only a week after the Government Accountability Office accepted a request from two prominent senators urging the watchdog to probe FDA’s handling of medical device recalls. The request for an inquiry into the agency was prompted by reports from ProPublica and the Pittsburgh Post-Gazette which detailed FDAs proposed mishandling of the Respironics recall.