Earlier this year, Dutch medical device maker Royal Philips reached a $1.1 billion deal to settle thousands of claims stemming from a recall in 2021 of millions of its breathing machines like CPAPs and hospital ventilators, a crisis that dealt the 133-year-old technology company the biggest blow in its modern history.
So dramatic and reputation-damaging was the debacle for Philips—perhaps best known for its Norelco electric razors, electric toothbrushes, and irons—that CEO Roy Jakobs created a new C-suite role—chief patient safety and quality officer—that reports directly to him.
Jakobs can ill afford risking a disaster like this one again. As Philips integrates AI into more of its products like MRI machines, it needs to have the full trust of its hospital customers and the public.
"It had to be crystal clear from the moment I took charge that for me, safety was the No. 1 priority," Jakobs told Fortune at Philips’s headquarters in Amsterdam.
It's not that Philips wasn't already prioritizing safety, Jakobs, 50, insists. But people overseeing safety tended to be lower in the hierarchy and the function tended to reside in each business unit.
"His role is as much of a practical thing as it is a message to everybody in the company," says Jakobs of his new c-suite direct report, Steve C de Baca. The CEO also is working to change the culture so that problems with products can be addressed more openly. Philips has set up regular forums between staff and top brass in which process and product performance are closely reviewed. And there are also more introspective strategies, such as allotting time for all 70,000 employees to step away and think about how their day-to-day activities trickle down to patient safety. Jakobs is also trying to avoid overcorrections where the company would aim for a 100% no-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 foster a sense of accountability. Ultimately, he wants to make sure safety is "a discussable topic, an open topic."
A history of tech innovation
Jakobs's vision for the Philips of the future is rooted in the company's long tradition of innovating to enter newer categories and then shedding the initial innovation when it's no longer highly profitable.
The company started out as a light bulb maker in 1891, but has reinvented itself in the 21st century as a health tech company. Philips's corporate museum in Eindhoven, a 75-minute train ride south of Amsterdam and where the bulk of the company's tech talent resides, shows how Philips has played a role in developing many of the electronics we use and how quickly it has adapted to the market's changing needs. Its early expertise in lighting later led to a big breakthrough—the creation of X-ray tubes, which was the cornerstone of its health tech business.
Other inventions followed: radios and gramophones in the 1920s and 30s, bacteria-killing UV light, televisions. Philips pioneered rotary electric razor, the Philishave, in 1939, and invented CDs in partnership with Sony
Philips thrived for decades as a sprawling conglomerate, but the model started to fail in 2011. Philips was losing a ton of money on consumer electronics like TVs, which offered tiny profit margins.
So Philips began a years-long effort to shed businesses to focus squarely on health care or health care adjacent businesses, where profit margins are bigger. (Some of its big health care rivals like GE, Siemens and Olympus were similarly big players in other industrial areas before zeroing in on health care as their main business.)
The company's foundational lightbulb business was spun out into a separate company called Signify in 2018, one of a number of successful spin-offs. Others include chipmaker ASML and NXP, a highly successful semiconductor business.
The pivot to health care had been going swimmingly until the 2021 breathing machine debacle. That year the U.S. Food and Drug Administration received thousands of consumer complaints that the foam components in CPAPs, BiPAPS, and ventilators sold in the U.S. under the Philips Respironics brand between 2008 and 2021 were degrading into debris and fumes. That potentially toxic material was shooting into patients’ lungs and many consumers sued Philips. The FDA said that some 500 deaths were associated with the machines. Philips voluntarily recalled the machines in 2021.
The fallout led to the departure of Philips's previous CEO, Franz van Houten, who left in 2022 and was replaced by Jakobs. Jakobs, with Philips since 2010, had been leading the recall efforts and was favored by the board for his decisiveness and deep knowledge of the respiratory machines. Under its agreement with the FDA, Philips no longer sells its sleep therapy or respiratory machines in the U.S. (but does so elsewhere). However, Philips does sell accessories in the U.S. and still services its machines there.
Under the terms of the April 2024 settlement, Philips did not admit fault or liability and says it has remediated most machines. It claims that later testing from five independent labs showed that there was "no appreciable harm" to patients from use of the devices, disputing the FDA's findings.
At its nadir, Philips stock had fallen 70% because of the recall. Shares have begun to rebound and have almost doubled since October 2022 when Jakobs became CEO but remain well below pre-recall levels.
Health tech as a 'Trojan Horse'
Part of Jakobs's turnaround plan is to make Philips even more focused, nimble and lean, and to chase innovation in areas where it has an edge. One of his first moves was to announce a big restructuring plan that involved slashing 10,000 jobs, or 13% of its workforce, a reduction that helped the company afford the hefty settlement payouts.
Nowadays, Philips gets almost half of its revenue from diagnostic and treatment products such as X-ray and MRI machines, and some 28% from what it calls connected care that includes the machines involved in the recalls. It gets another 20% from its personal health division that encompasses everything from breast pumps, electric toothbrushes, and razors.
Health tech, however, is indisputably Philips' trojan horse, and Jakobs sees Philips’s AI as a way to edge out rivals. Take the growing needs of harried doctors and nurses. Philips is integrating AI into its diagnostic machines like MRI and ultrasound machines to make detection of health issues faster and easier since the technology can handle massive patient data volumes that will only grow. Jakobs also expects AI to speed up analysis of images and the transfer of data from MRI machines, which will lessen the administrative load on health care workers. That, he says, will lower employee burnout and improve patient experience.
"You can do things you could not do before. There is no single product in Philips that does not have AI," Jakobs says.
And so Jakobs thinks he has found the right lane for Philips in its next era. "We can think about solving problems for our customers by bringing the latest technology to bear," he says. "We want to be much more focused because there is a big societal issue in the world in health care, with an aging population, chronic diseases and massive demand. It's one of the few areas where you see demand strongly outpacing supply."
