(Bloomberg) — Shares of Koninklijke Philips NV rose a record after a lower-than-expected settlement over U.S. claims related to defective sleep apnea devices, raising hopes that the manufacturer has put behind the concerns that have plagued it over the past three years. have been chasing for years.
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The stock rose as much as 47% in Amsterdam after the statement, adding nearly $9 billion to the medical device maker's market value in one day. Philips' market valuation still remains 35% lower than before the start of the issuance, prompting the company to swap its CEO and cut 10,000 positions to cut costs.
The Dutch company set aside 982 million euros to cover expected costs for a class action lawsuit over medical monitoring and individual personal injury claims in the US, far less than analysts' forecasts of as much as $4.5 billion. The deal is expected to draw a line under US claims over the defective sleep therapy devices that have weighed on the stock since June 2021.
“This is much milder than feared and will mark the end of litigation uncertainty,” Jefferies analysts said.
The manufacturer began recalling the sleep therapy devices due to concerns about disintegrating noise-canceling foam in the machines that patients inhaled. The U.S. Food and Drug Administration has labeled the error a Class 1 problem, the most serious type.
Analysts had expected higher costs for the latest settlements. Bloomberg Intelligence analyst Holly Froum had estimated likely payments at between $2 billion and $4.5 billion to settle personal injury claims related to the devices. According to Bloomberg calculations, the total cost of the sleep apnea recall is now about $5 billion.
Philips claims that use of the defective devices will not result in “any noticeable harm” to patients. Still, the FDA has said it does not believe the analysis is sufficient to fully assess the risks to users and has requested additional testing from Philips. The company is still conducting toxicology testing on the device.
The devices are designed to force extra air through the throat to treat obstructive apnea – a condition that disrupts restful sleep and can cause fatal heart problems.
Users have claimed that inhaling the foam after it has decomposed poses a risk of cancer. FDA officials said in January that they had received 561 reports of deaths possibly linked to defective machines.
Philips was also ordered to suspend sales of the devices in the US, following an agreement with the US Food and Drug Administration in January. In addition, the company is under investigation by the US Department of Justice and has not yet made any financial provisions for this.
The settlement “covers all claims in the US, even those that would come in over the next six months,” Philips CEO Roy Jakobs said in an interview with Bloomberg Television. “That doesn't mean everything has been resolved,” Jakobs said, referring to the DOJ investigation, which he said is “one of the last remaining pieces of the whole chain of actions” in the sleep apnea recall.
Jakobs said Philips cannot make provisions for the DOJ investigation as that investigation is ongoing and the company cannot “speculate” on the outcome.
Prior to Monday's news, the company has lost more than half of its market value since the sleep apnea recall began.
The surprising news could prompt some short sellers to hedge their negative bets on Philips shares on Monday. Loaned shares, 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 increased patient safety checks for all its products following the sleep apnea recall to preemptively address other potential issues. This has resulted in additional recalls of other products, including some MRI machines and ventilators.
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Philips also faced a large-scale anti-graft campaign in China's healthcare sector last summer, in line with Beijing's increasing focus on local and state-led sourcing in medical technologies. Authorities across the country imposed strict domestic product requirements for many categories of devices.
“The market in China continues to be affected by the industry-wide anti-corruption measures initiated by the government and subdued consumer demand,” Philips said in the statement.
During the first quarter, comparable order intake fell 3.8%, driven by declines in China. Philips reported adjusted earnings before interest, taxes and depreciation of €388 million, in line with the average estimate in a Bloomberg survey of analysts.
–With help from Tom Mackenzie, Sarah Jacob and Lisa Pham.
(Updates market response in second paragraph)
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