How Philips CEO Got Over a $1.1 Billion CPAP Recall

So dramatic and reputational was the disaster for Philips – perhaps best known for its Norelco electric shavers, electric toothbrushes and irons – that CEO Roy Jakobs created a new leadership role – chief executive for patient safety and quality – reporting directly to l.

Jakobs cannot afford to risk another disaster like this. As Philips integrates AI into more of its products, such as MRI machines, it must have the full trust of its hospital customers and the public.

“It should have been clear from the moment I took over that safety was my No. 1 priority,” Jakobs said. wealth at the Philips headquarters in Amsterdam.

It’s not that Philips didn’t already prioritize safety, insists Jakobs, 50. But the people overseeing safety tended to be further down the hierarchy, and the function tended to appear in every business unit.

“His role is both hands-on and messaging for everyone in the company,” Jakobs says of his new direct management report, Steve De Baca. The CEO is also working to change the culture so that product issues can be addressed more openly. Philips has established regular forums between staff and senior staff where processes and product performance are closely scrutinized. And there are also more introspective strategies, such as setting aside time for all 70,000 employees to step back and think about how their day-to-day activities trickle down to patient safety. Jakobs also tries to avoid overcorrections where the company would aim for a 100% failure rate, which would prevent many new product launches.

The idea is to remind people of their role in the company’s safety record and to foster a sense of responsibility. Ultimately, he wants to make sure that safety is “a debatable topic, an open topic.”

A history of technological innovation

Jakobs’ vision for the Philips of the future is rooted in the company’s long tradition of innovating to enter newer categories and then abandoning the original innovation when it is no longer very profitable.

The company began as a light bulb manufacturer in 1891, but reinvented itself in the 21st century as a health technology company. Philips’ corporate museum in Eindhoven, a 75-minute train ride south of Amsterdam and home to most of the company’s technological talent, shows how Philips played a role in the development of many of the electronic components that we use them and how quickly it adapted to the market. changing needs. His early expertise in lighting later led to a major breakthrough – the creation of X-ray tubes, which was the cornerstone of his health technology business.

Other inventions followed: radios and gramophones in the 1920s and 30s, UV light that kills bacteria, televisions. Philips pioneered the rotary electric shaver, Philishave, in 1939 and invented CDs in partnership with Sony

Philips thrived for decades as a sprawling conglomerate, but the model began to fail in 2011. Philips was losing a lot of money on consumer electronics like TVs, which offered thin profit margins.

So Philips began a years-long effort to divest businesses to focus directly on healthcare or health-care-adjacent businesses where profit margins are higher. (Some of its big healthcare rivals, such as GE, Siemens and Olympus, were similarly big players in other industries before focusing on healthcare as their core business.)

The company’s core light bulb business was spun off into a separate company called Signify in 2018, one of several successful spin-offs. Another is chipmaker ASML and its highly successful semiconductor business NXP.

The pivot to health care went a step further until the respirator disaster of 2021. That year, the US Food and Drug Administration received thousands of consumer complaints that the foam components in CPAPs, BiPAPS and ventilators sold in the US under the brand Philips Respironics between 2008 and 2021 were degrading into debris and smoke. That potentially toxic material was getting into patients’ lungs, and many consumers sued Philips. The FDA said about 500 deaths have been linked to the devices. Philips voluntarily recalled the appliances in 2021.

The fallout led to the departure of former Philips CEO Franz van Houten, who left in 2022 and was replaced by Jakobs. Jakobs, with Philips since 2010, led the recall effort and was favored by the board for his determination and deep knowledge of respirators. According to its agreement with the FDA, Philips no longer sells its sleep therapy devices or respiratory devices in the US (but does so elsewhere). However, Philips sells accessories in the US and still maintains its devices there.

Under the terms of the April 2024 settlement, Philips did not admit fault or liability and says it has fixed most of the machines. She claims that subsequent tests by five independent labs showed there was “no appreciable harm” to patients from using the devices, disputing the FDA’s findings.

At its peak, Philips stock fell 70% due to the recall. Shares have started to recover and have nearly doubled since October 2022, when Jakobs became CEO, but remain well below pre-recall levels.

Health technology as a “Trojan horse”

Part of Jakobs’ turnaround plan is to make Philips even more focused, nimble and lean, and to pursue innovation in areas where it has an advantage. One of his first moves was to announce a major restructuring plan that involved cutting 10,000 jobs, or 13 percent of the workforce, a cut that helped the company afford its large settlement payments.

Philips currently makes nearly half of its revenue from diagnostic and treatment products such as X-ray and MRI machines, and about 28 percent from what it calls connected care, which includes the machines involved in the recalls. Get an extra 20% off the personal health division, which includes everything from breast pumps, electric toothbrushes and shavers.

However, health technology is undeniably Philips’ Trojan horse, and Jakobs sees Philips’ AI as a way to outperform rivals. Consider the growing needs of harassed doctors and nurses. Philips is integrating AI into its diagnostic machines, such as MRI and ultrasound machines, to make detecting health problems faster and easier as the technology can handle massive volumes of patient data that will only grow. Jakobs also expects AI to speed up image analysis and data transfer from MRI machines, which will reduce the administrative burden on healthcare workers. This, he says, will reduce employee burnout and improve the patient experience.

“You can do things you couldn’t do before. There is not a single product in Philips that does not have AI,” says Jakobs.

And so, Jakobs believes he has found the right path for Philips into the next era. “We can think about solving our customers’ problems by bringing the latest technology to hand,” he says. “We want to be much more focused because there is a big societal problem in the world in healthcare with an aging population, chronic disease and massive demand. It’s one of the few areas where you see demand far outstripping supply.”