EUR 850.00 For Business Accounts Only

Morningstar | Atrium Medical Subsidiary Creates Further Headache for Getinge Shareholders; Reducing FVE. See Updated Analyst Note from 15 Oct 2018

On Oct. 14 no-moat Getinge announced it is taking a sizable litigation reserve to account for expected expenses associated with ongoing lawsuits related to the firm's surgical mesh product used in hernia repair procedures. We’re reducing our fair value estimate to SEK 94 per share from SEK 98 to account for the reduction in expected cash flows over the next few years.

Specifically, the company is booking a SEK 1.8 billion reserve that management believes is sufficient to cover legal expenses and potential plaintiff awards. Management disclosed that it has roughly 900 pending cases that it expects will ultimately be resolved between now and 2020 and suggested Getinge is a relatively minor player in this market. The product segment in question accounts for roughly $15 million in annual sales, or approximately SEK 135 million. Its C-Qure brand mesh products were initially approved by the Food and Drug Administration in 2006 and were acquired by Getinge in its 2011 purchase of Atrium Medical.

At first blush, the market reaction to the news appears to be discounting more bearish assumptions than we think are currently warranted. Looking at prior settlements from competing firms, it appears these types of situations are typically settled at a rate near $50,000 per case. Management's current estimates imply a rate closer to $220,000 per case, and the market's reaction implies approximately $550,000. History has shown that initial estimates of case count and ultimate settlement amounts generally undershoot the final tally, and Getinge management has a particularly poor track record when it comes to making cost reserve assumptions. As a result, we're including another SEK 1.0 billion provision in our model to be taken next year to add some conservatism to management's numbers. Our total SEK 2.8 billion reserve assumption implies a cost of roughly $340,000 per disclosed case or would allow for nearly 6,000 cases at an average settlement amount closer to $50,000.