Koninklijke Philips N.V. (PHIA) Earnings Call Transcript & Summary

Today, we are providing an update on the extensive test and research program launched in June 2021, for the Respironics field safety notice for specific CPAP, BiPAP and mechanical ventilator devices. I've asked Roy Jakobs to join me here and provide some important context on the repair and replacement program, which we also refer to as the remediation program. Roy is a member of our Executive Committee, and he leads the Philips Connected Care businesses that include Philips Respironics. Roy oversees the remediation program and other aspects of the field action. Let me emphasize just how important patient safety and quality are to Philips. Improving the health and well-being of people is at the heart of our company purpose. We pride ourselves on the fact that people all over the world use our products, services and solutions to live healthier lives and to care for patients. I know how important these sleep apnea devices are to patients and how they improve their lives. I'm personally deeply sorry for the concern and inconvenience experienced by patients, clinicians and caregivers. We have worked hard to fix the problems that have surfaced. This has been a very complex effort, and we are making good progress, but the process is taking a significant amount of time. We know that patients and their clinicians and caregivers have 2 burning questions: What are the potential health risks associated with the use of affected devices; and two, when will my affected device be repaired or replaced? I will start by talking about the possible health risks. At the time the field safety notice was issued, we relied on limited safety and risk data. We use the best information at the time available to assess, communicate and act on possible health risks. In evaluating data and the toxicological risk assessment, we assumed a reasonable worst-case scenario for the possible health risks. The initial concern related to the possible degradation of foam components, which might release particulates and cause chemical emission. Since then, working with third parties, we have launched a comprehensive test and research program to much better understand the possible health risks. While the tests are ongoing, we have obtained some encouraging results. As we highlighted in our update late last year, the emission of chemicals for first-generation DreamStation devices were below established limits. Most importantly, exposure to the level of VOCs identified to date is not anticipated to result in long-term health consequences for patients. It is important to note that the tested devices were not exposed to ozone cleaning, which is in line with the instructions for use. Multiple tests of new and used DreamStation 1 devices for particulate emissions found the devices to be below established limits for particulate matter emissions. Test results also suggest that foam degradation did not contribute to elevated levels of respirable particles in the tested devices. We also performed visual assessments of used DreamStation 1 devices to judge visible degradation of foam components. These findings confirm that foam degradation occurs in a low percentage of the devices, and that actually ozone cleaning significantly exacerbates foam degradation. Beyond sharing these results, we continue to advise patients using affected CPAP, BiPAP devices to talk to their physicians about suitable treatment for their condition, which may or may not include continued use of the devices. Together with their physicians, patients should determine if the benefits of continuing therapy with the devices outweigh possible risks. As the remediation program continues, we will provide regular updates for patients and health care providers, including repair and replacement efforts and, of course, further test results. We will also provide updates on relevant third-party assessments, such as Canadian and French studies that actually indicate that Philips Respironics CPAP devices are not associated with increased cancer risk. The remediation program will continue at full speed. Roy will go into this in more detail. We are working hard to overcome serious challenges to device production and delivery, not in the least caused by component and freight capacity shortages in the world. And while we cannot provide exact delivery dates, we are committed to completing over 90% of the production and shipments to our customers in 2022.

Thank you, Frans. Hello, everyone. First, I want to say how passionate I am about what Philips does and how we help improve the health and well-being of patients. That's also why I feel so much for patients and caregivers who are affected by the recall. I know that this has been a very worrying and frustrating time, particularly for patients who rely on these devices for their health and quality of life. Apart from the possible health risks that Frans discussed, I know that patients really want to know, when will my device be replaced? Why can't you tell me now? And why is it taking so long? I would like to spend the next few minutes giving some context to help address and answer those questions. Let me start with why the repair and replace program is taking so long to complete. The answer is twofold. First, the huge scale of the recall to produce and deliver more than 5.5 million devices; secondly, doing that with a constrained and volatile supply and logistics capacity in the world. Let's look at scale first. We have more than 5.5 million patients from over 100 countries who need a replacement. Before the recall, we shipped approximately 1 million devices per year. This means we need to do almost 5 to 6x this volume, and we need to do it as soon as possible. To do so, we have tripled our production capacity and mobilized more than 1,000 people working on the recall day in and day out. We started to work with the regulatory authorities to get the recall program and the devices approved for release. And we now have approvals for the majority of units, and we're able to start shipments towards the end of 2021. And to date, we have produced over 2.6 million devices. Next, ramping up production capacity, we are very much dependent on the supply of materials to make the devices, and many of these come from China. We are also very much dependent on the current global shortage in logistics capacity. This combination means that we only have 4 weeks outlook on materials for production and thus for shipping to patients. This not only impacts the speed of production and delivery, but moreover, limits our ability to predict with accuracy when we can deliver to whom. And as a result, we can only communicate about when a patient gets a device at best a few weeks before it is delivered. And this is not what a patient expects. I know that. But it is the best we can do in the current global circumstances. We are, of course, going all out to maximize the speed at which we can deliver. Let me now address the question of why patients have been frustrated at times by the communications in relation to the recall. I understand that the patients want to know first and foremost when they will receive their device. I explained why we only have 4 weeks planning confirmation. And whilst we're doing everything we can to be as proactive and transparent in our communication, this drives a short window in which the patient receives confirmation when his or her device will be remediated. It means that patients experience long waiting times, and they do not get much advanced notice before their devices are delivered. And I fully and completely understand how frustrating this is. Furthermore, it's important to understand the role of various parties involved in the provision of care for sleep and respiratory patients. Philips is not directly engaging with patients as medical device producer. The direct contact is between the patient and his or her physician and home or hospital care providers. In short, how does it work? For treatment of sleep or respiratory conditions, the patients needs to consult his or her physician. The physician diagnose the condition and prescribe the therapy, which often includes a device. This device is produced by a manufacturer, like us, and in most cases, delivered to the patient by a third party, a home care provider, a durable medical equipment manufacturer or distributor. This means that in most cases, the patient is in direct contact with their care providers, the DME or the distributors and not with the manufacturer of the device. As device manufacturer, Respironics updates hospital and home care providers with information as it becomes available. However, other than confirming delivery dates a few weeks in advance, they can also not provide more specificity in view of the capacity and supply constraints that I mentioned. Of course, Philips has an important role to inform all involved parties about the overall findings and progress of the recall. We have been doing this comprehensively through various online and offline channels since the start of the recall. We know how important these devices are to patients, and we are working extremely hard to get to them as quickly as we can. It's Philips' #1 priority, and I have a dedicated team of over 1,000 colleagues fully focused on this, supported by many more across the company. Thank you for listening. And now I hand back to Frans.

Thank you, Roy. I now want to talk to you about the journey that we run at Philips, to elevate quality and patient safety. We are dedicated to serving our customers and patients and delivering the highest standards that they deserve. This focus on quality for Philips as a leading health technology company is not new. In recent years, we have materially improved our quality systems. Building on these improvements, we are reinforcing focus on patient safety across Philips to ensure that the whole company learns from this experience. To this end, we have launched an enterprise-wide initiative to advance patient safety and quality, which is built on 3 core pillars. Firstly, we are focused on further unifying and centralizing our business processes and systems to ensure that we are driving a patient-centric and quality culture mindset throughout the company at all times. Secondly, we are simplifying and standardizing processes and critical ways of working, including standardized metrics for external benchmarking and for measuring and ensuring success. Finally, we are pruning our product portfolio to focus and thereby reduce complexity, simplifying the processes to ensure that our products and services and solutions meet customer expectations at all times. We will be giving you more details in July 2022 about the changes that we have made and the results that we have observed. Let me conclude with thanking our customers, our suppliers and our partners for their continued support, and a word of special thanks to our employees for their fantastic contribution through a year of often difficult working circumstances. I thank you for your time.

Hello. I'm Jan Bennik, technical Product Manager, and I have been working in research and development for more than 13 years. I head up the polyester polyurethane sound abatement foam test and research program that Philips Respironics is conducting together with certified test laboratories and qualified third-party experts. We launched this extensive test and research program in June 2021, following the Respironics field safety notice for specific CPAP, BiPAP and mechanical ventilator devices. Today, we have provided an update on the results to date. I will discuss these results in more detail in a moment. But first, I wanted to take some time to give an overview of the issue, what we have been doing and why. As a reminder, we issued the field safety notice because of concerns that polyester polyurethane sound abatement foam in these devices might degrade and emit volatile organic compounds, VOCs, and/or particulates. The foam is used solely to reduce noise levels in the device. When we launched the field safety notice, we were relying on an initial and limited set of data. At the time, while we did not have data across all device platforms, and we anticipated conducting more extensive and comprehensive analysis, we assumed the worst-case scenario for the possible health risk out of an abundance of caution. Once we issued the field safety notice, we immediately retained outside experts and started a comprehensive test and research program to better understand and scope the possible health risks. This has been a huge team effort working together with 535 test laboratories in U.S. and in Europe as well as with other qualified third-party experts. We have been doing this in consultation with the relevant competent authorities. We focused the test and research program on the devices affected by the field safety notice, which are the so-called CPAP, BiPAP and mechanical ventilator devices. 95% of the registered devices are CPAP and BiPAP devices, which are used to treat sleep apnea. In addition, the field safety notice impacted an older generation of mechanical ventilator devices. The devices are divided into 5 product categories based on how the air flows through the device as well as the amount and the shape of the foam in the air path: The first generation DreamStation CPAP and BiPAP devices, or DreamStation 1; the DreamStation Go; the System One CPAP and BiPAP devices; the Trilogy 100 and Trilogy 200 mechanical ventilators; and finally, the OmniLab ventilator and the A-series mechanical ventilator. To put the overall testing into a bit more context, the largest categories are DreamStation 1 and System One, which are 68% and 26%, respectively, of the affected devices. So let's now look at what we've tested for and why. As indicated earlier, our initial concern was with the emission of certain chemicals, so-called VOCs, and the possible emission of particulates, which could be released if the foam had degraded. Together with the certified testing laboratories, we studied the characteristics of the foam and the operation of the devices in detail. We evaluated pristine foam in unused new devices as well as lab-aged foam and foam and devices that had been used in the field. To assess whether and how often the foam actually degrades, we are also conducting visual inspections of returned devices. Moreover, we are doing extensive analysis of the properties and the chemical composition of the degraded foam and the associated toxicological assessment of the degraded foam. As I explained earlier, we are running comprehensive testing by product category. And for each product category, we are investigating 3 types of situations: New devices; devices with lab-aged foam; and used devices. We're also testing the impact of repeated ozone cleaning on VOC emission and foam degradation. In addition, we are doing multiple repeat tests to assure confidence in the results. We're talking about hundreds of tests to date, including biocompatibility testing according to the relevant ISO standards. For these types of testing, the ISO 18562 and ISO 10993 standards apply. Based on these standards, we needed to develop test protocols for each of the product categories and situations. VOC testing according to the ISO 18562-3 was performed on the devices to: Firstly, quantify VOC emissions from devices; and secondly, assess the toxicological risk associated with exposure to the quantified concentrations of those VOCs. Particular matter testing according to ISO 18562-2 was performed on the devices to: Firstly, quantify the particular matter emitted from the devices; and secondly, assess whether the concentration detected is less than the threshold provided in the standard. Additional testing is being performed in accordance with ISO 10993 to facilitate a toxicological risk assessment of degraded foam particulates, which is only relevant if they can potentially reach the patients, which I will come to in a minute. This testing includes: Firstly, chemical characterization, that is what chemicals may potentially extract or leach from the foam and have direct contact with the body tissues and fluids; secondly, in vitro assessment, that is test performed in a test tube; and thirdly, in vivo assessment, that is preclinical testing. So what we're looking at is the chemical composition of the foam, assessing each compound that we detect and see if they meet the established limits. The time taken to test and analyze the data per product category and situation is substantial and impacts throughput time for each test. The complexity of the test results also add to the throughput time. We're talking about hundreds of tests, and each with the throughput time of many months. We can, of course, do many test in parallel, but the testing capacity, even using 5 international laboratories, is finite. So some of the tests are taking place sequentially, and that is why it's taking time, which adds even more time. To date, we have inspected more than 60,000 returned DreamStation 1 devices from the U.S. and Canada. For every returned device, we assess whether the foam shows any sign of degradation, including shrinking of the foam volume. We also assess whether device was exposed to ozone cleaning, which is an unapproved cleaning method. The sample of returned/used DreamStation 1 devices from the U.S. and Canada, including devices for which the users reported no use of ozone cleaning, devices for which the user reported use of ozone cleaning and devices for which it was unknown whether the ozone cleaning was used. Let me take you through some of these findings. Looking at the prevalence of foam degradation, 0.5% of the devices with self-reported no ozone use showed foam degradation. This means that 99.5% of the devices did not show significant degradation. Importantly, only degraded foam could result in emission of particulates. And when we consider the impact of repeated ozone cleaning, devices with self-reported ozone use were 14x more likely to have visible foam degradation than those with self-reported no ozone use. 7% showed form degradation. We also see the degraded foam becomes sticky and shrinks as the structure changes from a foam to a viscous liquid material. Foam volume reduction is indicative of degradation, but not necessarily of the formation of degraded foam particulates. And finally, there is an accumulation of degraded foam within the air path inside the device. This observation suggests that even when polyester polyurethane particulates are formed by degradation, they're unlikely to accumulate within the air path and may not be directly emitted from the device. We inspected around 2,000 devices from Europe, where the penetration of ozone cleaning products is very low. It was assessed that none of the devices showed significant degradation. Now let me turn to the ISO 18562-3 testing for VOCs, and ISO 18562-2 for particulate matter emissions. As we previously provided in our update on December 23, 2021, exposure to the level of VOCs identified to date for the first-generation DreamStation devices is not anticipated to result in long-term health consequences for patients based on ISO 18562-3 testing and evaluation of new, lab-aged and used devices. New devices and used devices, including used devices with visible foam degradation, were tested and were all found to be compliant with ISO 18562-2 allowable limits for particulate matter emissions. Tested particulate emissions of used devices with degradation were not statistically different than particulate matter emissions without degradation, suggesting that degradation did not contribute to appreciable elevated levels of respirable particles in the devices tested. Other devices that are being tested include DreamStation Go and System One. As indicated, these devices each have a different air path design compared to DreamStation 1, but they contain the same polyester polyurethane foam. New DreamStation Go and System One devices passed VOC and particulate matter testing. Further devices include Trilogy 100 and 200, and OmniLab ventilator and A-series mechanical ventilators. New Trilogy 100 and 200 and OmniLab devices passed VOC and particulate matter testing. Used OmniLab devices passed VOC testing, and particulate matter testing is ongoing. As mentioned earlier, additional testing is being performed in accordance with ISO 10993 to facilitate a toxicological risk assessment of degraded foam particulates, which is relevant if they can potentially reach the patient, as well as testing to assess the impact of repeated ozone cleaning on foam degradation and VOC emissions. This is ongoing, and we intend to provide regular updates. Since June 2021, we have been managing one of the largest and most complex field safety notices in the medical technology industry, and have learned an enormous amount along the way. Our further testing is ongoing. And as you've heard from Roy Jakobs, we're also forging ahead with the repair and replacement program. To date, Philips Respironics has produced more than 2.6 million replacement devices and repair kits. I hope you found this information useful. As you can tell, it is a complex, highly labor-intensive and lengthy process, but one that my colleagues and I are focused on getting right and ensuring patients and the physicians that they have the information to hand. Thank you for listening. And if you would like to learn more, you can find more information at philips.com/src-update.