What happened
Shares in medical technology company Koninklijke Philips Electronics (PHG -0.84%) slumped more than 15% in early trading on Wednesday. The move comes after a disappointing update on its fourth quarter of 2021.
The company (also known as Royal Philips) now expects fourth-quarter sales to be 4.9 billion euros ($5.6 billion), 350 million euros lower than management's previous expectations. It put the miss down to a combination of supply chain shortages (principally electronic components and freight capacity) and postponements of customer equipment installations.
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The supply chain issues are hardly news. Still, it's disappointing to see them have a bigger impact than management predicted in October. Moreover, the push-outs of customer installations due to hospitals struggling with "site readiness" and the resurgence of COVID-19 cases are a concern. It suggests key competitors in medical imaging like Siemens Healthineers and General Electric could also have had such issues in the quarter.
Separately, management announced that group restructuring and acquisition-related charges would be 420 million euros in the quarter, compared to a previous estimate of 105 million euros. The increase is largely down to an increase of 225 million euros in provisions for a product recall.
So what
The news is obviously disappointing, but it's important to keep some perspective here. During the analyst call, chief financial officer Abhijit Bhattacharya said 85% of the lost revenue in the quarter came from health systems, with personal health solutions making up the remaining 15%. With health systems revenue seen as less easily replaced, Bhattacharya believes that most of the lost demand will come back in the coming quarters.
But CEO Frans van Houten also said that elective procedures would be more negatively affected in January than in December, and that's likely to have a knock-on effect on demand for healthcare products.
Now what
Whichever way you look at it, the update from the healthcare company is disappointing. The increase in product recall provisions is a company-specific issue, but the postponement of health systems installations is an early sign of the negative impact of the omicron variant on the economy. Still, wiping 15% off a company's market cap for issues that will, hopefully, prove temporary seems a bit of an overreaction in the long-term scheme of things.
