(Bloomberg) — Shares of Royal Philips NV rose a record after a settlement over U.S. claims related to faulty sleep apnea machines fell short of expectations, boosting hopes that the maker will address concerns that have dogged it in recent times persecuted for three years.
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The shares rose 37% in Amsterdam after it was announced that the medical device maker was valued at just over 27 billion euros ($28.9 billion). Philips’ market valuation is still 40% below what it was before the issuance began, when the company replaced its chief executive and cut 10,000 jobs to cut costs.
The Dutch company set aside 982 million euros to cover the expected costs of a medical monitoring class action and individual personal injury lawsuits in the United States, much less than analyst forecasts of up to $4.5 billion. The deal is expected to put an end to US allegations of faulty sleep therapy devices that have weighed on the stock since June 2021.
“This is much milder than feared and should mark the end of litigation uncertainty,” Jefferies analysts said.
The manufacturer began recalling the sleep therapy devices because it was concerned that the noise-cancelling foam in the devices that patients were inhaling was dissolving. The U.S. Food and Drug Administration has classified the bug as a Class 1 problem, the most serious type.
Analysts had expected higher costs for the latest settlements. Holly Froum, an analyst at Bloomberg Intelligence, had estimated likely payments at $2 billion to $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 around $5 billion.
Philips claims that use of the faulty devices will cause “no significant harm” to patients. Still, the FDA has said it is not convinced the analysis is sufficient to fully assess the risks to users and has asked Philips for additional testing. The company is still conducting toxicology testing related to the device.
The devices are designed to force extra air into the back of the throat to treat obstructive apnea – a condition that interferes with proper sleep and can cause fatal heart problems.
Users have claimed that inhaling the foam after it breaks down poses a cancer risk. FDA officials said in January that they had received 561 reports of deaths that may have been caused by faulty machines.
As part of these issues, 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 arrangements in this regard.
The settlement “covers all claims in the U.S., including those that would still be received in the next six months,” Philips CEO Roy Jakobs said in an interview with Bloomberg Television. “That doesn’t mean everything is settled,” Jakobs said, referring to the U.S. Department of Justice investigation, which he said is “one of the last remaining pieces of the full series of actions” in the sleep apnea recall.
Jakobs said Philips could not oversee the DOJ investigation because the investigation is ongoing and they cannot “speculate” on the outcome.
Before Monday’s news, the company had lost more than half of its market value since the sleep apnea recall began.
The surprising news could prompt a number of short sellers to cover their negative bets on Philips shares on Monday. Borrowed shares, an indication of short interest, accounted for about 4.9% of the company’s float as of April 25, according to data from S&P Global Market Intelligence.
The company has increased patient safety controls for all of its products following the sleep apnea recall to preemptively address other potential issues. This has led to further recalls of other products, including some MRI machines and ventilators.
Philips was also hit by a sweeping anti-corruption campaign in China’s healthcare sector last summer, in line with Beijing’s increasing focus on local and government procurement of medical technologies. Authorities across the country have implemented strict domestic product requirements for many device categories.
“The market in China continues to be impacted by the government’s industry-wide anti-corruption measures and subdued consumer demand,” Philips said in the statement.
In the first quarter, comparable orders fell 3.8% due to declines in China. Adjusted earnings before interest, taxes, depreciation and amortization were 388 million euros, in line with the average estimate in a Bloomberg analyst survey of 383 million euros.
Read more: Philips warns of faulty ventilators and increasing safety problems
– With support from Tom Mackenzie, Sarah Jacob and Lisa Pham.
(Updates with details throughout)
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