Royal Philips NV shares soared by a record after a lower-than-expected settlement on US claims linked to faulty sleep apnea devices, stoking hopes the manufacturer has moved past concerns that have dogged it for the past three years.
The stock surged 37% in Amsterdam following the statement to value the medical equipment maker at just over €27 billion ($28.9 billion). Philips’ market valuation still remains 40% below than before the start of the issues, which has seen the company swap out its chief executive officer and cut 10,000 positions to save costs.
The Dutch company set aside €982 million to cover the expected expense for a medical monitoring class-action lawsuit and individual personal injury claims in the US, much less than analyst predictions of as much as $4.5 billion. The deal is expected to draw a line under the US claims over the faulty sleep therapy devices that has weighed on the stock since June 2021.
“This is much milder than feared and shall mark the end of litigation uncertainty,” Jefferies analysts said.
The manufacturer started recalling the sleep therapy devices over concerns of disintegrating noise-cancelling foam inside the machines that patients inhaled. The US Food and Drug Administration has labeled the fault a Class 1 issue, the most serious type.
Analysts had expected a larger cost for the latest settlements. Bloomberg Intelligence analyst Holly Froum had put the likely payments between $2 billion and $4.5 billion to settle personal-injury claims tied to the devices. The total costs for the sleep apnea recall are now around $5 billion, according to Bloomberg calculations.
Philips claims the use of the faulty devices doesn’t result in “any appreciable harm” to patients. Still, the FDA has said it doesn’t believe that the analysis is adequate to fully evaluate the risks posed to users and asked for additional testing from Philips. The company is still conducting the toxicology tests related to the device.
The devices are designed to force extra air down the throat to treat obstructive apnea — an ailment that interferes with proper sleep and can cause fatal heart problems.
Users have alleged that inhaling the foam after it disintegrates poses a cancer risk. FDA officials said in January that they received 561 reports of deaths possibly linked to malfunctioning machines.
As part of the issues, Philips was also ordered to suspend sales of the devices in the US after an agreement with the US Food and Drug Administration in January. In addition, the company is being investigated by the US Department of Justice and has not yet made any financial provisions for that matter.
The settlement “covers all the claims in the US, even the ones that would come in still over the next six months,” Philips CEO Roy Jakobs says in an interview with Bloomberg Television. “That doesn’t mean that everything is resolved,” Jakobs said, referring to the DOJ investigation which he says is “one of the last remaining pieces of the whole suite of actions” in the sleep apnea recall.
Jakobs said Philips cannot provision for the DOJ probe as that investigation is ongoing and cannot “speculate” on the outcome.
Prior to Monday’s news, the company has lost more than half of its market value since the initiation of the sleep apnea recall.
The surprise news might be prompting a number of short sellers to cover their negative bets on Philips stock on Monday. Shares out on loan, an indication of short interest, represented about 4.9% of the company’s free float as of April 25, according to data from S&P Global Market Intelligence.
The company has stepped up patient safety checks across all of its products after the sleep apnea recall to preemptively address other possible issues. This has resulted in additional recalls of other products including some MRI devices and ventilators.
Philips also took a hit from a sweeping anti-graft campaign across China’s health-care sector last summer, in line with Beijing’s increasing focus on local and state-oriented procurement in medical technologies. Authorities across the country included strict domestic product requirements for many categories of device.
“The market in China continues to be impacted by the industry-wide anti-corruption measures initiated by the government and by subdued consumer demand,” Philips said in the statement.
During the first quarter, comparable order intake fell 3.8% in the first quarter driven by declines in China. It reported adjusted earnings before interest, taxes and amortization of €388 million, in line with the average estimate of €383 million in a Bloomberg survey of analysts.
