- Sterigenics’ $408 million ethylene oxide (EtO) sterilization settlement resolves its “most problematic overhang” and leaves it with “likely manageable” legal matters, analysts at KeyBanc Capital Markets wrote in a research note.
- The contract device sterilizer reached an agreement with all but three of the 882 claimants in the Cook County, Illinois, case earlier this year. Multiple legal cases remain, but the KeyBanc analysts said investor focus has likely shifted toward execution and the company’s fundamentals.
- One question now is how the proposed changes to EtO regulations will alter the market. The management team at Sotera Health, Sterigenics’ parent company, said “the standards seem achievable given current investments into upgrading facilities,” the analysts wrote.
Potential links between emissions of EtO and health problems among people living near facilities led to hundreds of lawsuits against medical device sterilizers including Sterigenics and Becton Dickinson. The lawsuits resulted in Sterigenics’ $408 million settlement in Illinois earlier this year.
In a note to investors published in late August, the KeyBanc analysts said they were encouraged by the settlement. Sterigenics still faces lawsuits in Illinois from three plaintiffs who rejected the settlement, plus cases brought by six people diagnosed after the statute of limitations expired. Outside Illinois, the company is contending with around 300 personal injury cases in Georgia and litigation in New Mexico.
While hundreds of cases are ongoing, the analysts see the Georgia lawsuits as less of a threat, noting major differences, compared to Illinois, “in potential outcomes given state caps on punitive damages ... and a higher threshold to prove causation.” The cap for such cases is $250,000, according to the analysts, and that is informing the view that the biggest financial hit may now be behind Sterigenics.
“While investors cannot rule out additional adverse outcomes, the cases in Cook County appeared most material for [Sotera],” the analysts wrote. “It could eventually see several cash inflows tied to insurance coverage of its legal fees in Illinois where it was initially awarded ~$75M in a recent verdict.”
Sterigenics is working through the legal challenges while preparing for a regulatory environment that puts tighter restrictions on EtO emissions. According to the analysts, Sterigenics and Steris each control around one-third of the contract sterilization market. With Sterigenics leading in EtO sterilization, while Steris has the edge in gamma and electron beam services, the impact of the rules will vary.
Work is underway to prepare Sterigenics for the new rules. “Management communicated that the standards seem achievable given current investments into upgrading facilities; there does seem to be some pushback in the industry around the timeline of implementation after the rule is finalized,” the analysts wrote.
A recent consent decree requires the Environmental Protection Agency to adopt a final rule on commercial sterilization standards by March 1. The draft rule includes an 18-month transition period.