Philips lowers 2020 outlook as HHS nixes ventilator contract

Dive Brief:

Philips announced Monday that it received a "partial termination" notice from the Department of Health and Human Services and will not deliver 30,700 remaining ventilators to the U.S. Strategic National Stockpile. As a result, the company has reduced its 2020 earnings outlook.
The Dutch medtech was awarded a $646.7 million HHS contract in April to produce 43,000 bundled EV300 ventilator configurations through December. However, after completing deliveries this month of a total of just 12,300 of the breathing systems, the agency has pulled the plug on the rest of the procurement.
The decision by HHS to terminate the remaining contractual deliveries comes a month after a Democrat-led House subcommittee report found the Trump administration overpaid for the Philips ventilators by as much as $500 million in taxpayer funds, money the panel said could have been spent on much-needed personal protective equipment and medical supplies in response to the COVID-19 pandemic.

Dive Insight:

Philips’ ventilator contract was one of more than half a dozen contracts HHS awarded in April intended to provide a total of more than 187,000 ventilators to the Strategic National Stockpile by the end of the year. Those companies included GM, General Electric, Hamilton, Hill-Rom, Medtronic, ResMed, Vyaire and Zoll.

However, with a total value of $646.7 million for 43,000 ventilators, the Dutch medtech's deal was the largest by far in terms of dollar value and quantity. Hamilton's $552 million contract for 25,574 ventilators was the second largest by dollar amount and GM’s $489.4 million contract for 30,000 ventilators was the third largest.

The House Subcommittee on Economic and Consumer Policy in late July accused senior Trump administration officials of negotiating a deal that with Philips that paid the company nearly five times the price set under a previous Obama administration agreement for nearly identical ventilators.

At the time, Philips denied raising prices to benefit from the COVID-19 crisis and said it did not "recognize" the conclusions in the subcommittee's report. However, Rep. Raja Krishnamoorthi, D-Ill., chair of the subcommittee, subsequently wrote a letter to the Office of Inspector General requesting it immediately open an investigation into the $646.7 million ventilator procurement contract negotiated between Philips and HHS.

No reason was given by Philips on Monday for the HHS decision to terminate the contract for the remaining 30,700 ventilators. CEO Frans van Houten said in a statement the company is "disappointed" by the termination, especially given its fourfold ventilator production expansion with "substantial" investments and the hiring of hundreds of new employees. However, van Houten maintained that Philips has "delivered" on its commitments to the agency by providing a total of 12,300 ventilators by the end of August.

During last month's second quarter earnings call, Philips predicted a return to growth in the back half of the year due in part to demand for ventilators. But van Houten noted Monday the loss of the remaining HHS orders for 30,700 ventilators will impact Philips’ financial performance. "For the full year 2020, we now expect to deliver modest comparable sales growth with an Adjusted EBITA margin of around the level of last year."

Still, van Houten added, "While we continue to see uncertainty and volatility related to the impact of COVID-19 across the world, our order book remains solid," and said the company continues to expect to return to growth and improved profitability in the second half of the year, beginning in the third quarter.