Steris (NYSE: STE) stock was downgraded today by Needham from buy to hold following the $363 million jury verdict against its primary competitor, Sterigenics, over ethylene oxide (EtO) emissions.
Needham analysts said they expect attorneys to target communities near EtO facilities with ads to find people willing to file more lawsuits against sterilization plant operators past and present.
The analysts believe Steris can manage any EtO legal liabilities due to the company’s size, diversification and balance sheet, but said investors are looking forward to Steris estimating and reserving cash for potential liabilities.
“Since breast and blood cancers are relatively common, we worry that attorneys could have success in finding additional people willing to file more lawsuits,” the analysts wrote. “We expect the risk of lawsuits and any news or company disclosures of additional lawsuits to weigh on STE shares given uncertainty around its potential legal liabilities.”
Medical Design & Outsourcing has reached out to Steris for comment and will update this story when more information is available.
How many EtO lawsuits does Steris face?
While Sterigenics and parent company Sotera Health (Nasdaq: SHC) face hundreds of lawsuits, only a few have been filed against Steris, the analysts said.
“There have been some lawsuits filed against an STE affiliate regarding a sterilization facility in Waukegan, Illinois, [but] STE has not owned or operated that facility for years,” the analysts said, citing Steris filings. “STE’s affiliate acquired the facility from Cosmed in 2005 and then subsequently sold it to Medline in 2008. Many of the plaintiffs are claiming that their exposure occurred outside the three years that STE’s affiliate operated the facility and as a result, STE has filed motions to dismiss these complaints.”
EtO gas is the most common sterilization method for medical devices for to its ability to permeate packaging at relatively low temperatures and kill bacteria and viruses that could cause life-threatening infections. But the FDA is working with the industry on safer ways to use EtO and alternative means of sterilization due to the toxic chemical’s cancer risk, particularly blood cancers and breast cancer.
Steris leaders have said their Applied Sterilization Technologies (AST) unit has been cautious on EtO emissions, an assertion the analyst said was supported by the EPA’s data. But they worry that the EPA’s current data does not reflect past practices, and there’s a risk that Steris could be found liable for EtO exposure in past decades.
The analysts also said that Sterigenics’ EtO troubles are unlikely to benefit Steris in the short term.
“First, we think it’s difficult for medical device companies to quickly switch sterilization facilities due to regulatory requirements,” they wrote. “And second, we think that STE is unlikely to have significant capacity to take on business from SHC unless it were to build additional sterilization facilities which would take considerable time.”
Concerns about capital equipment sales at Steris
Separately from the EtO liability, the Needham analysts said they have concerns about Steris and potential weakness in capital equipment revenue, which is about 21% of total revenue at Steris.
“We are concerned that deteriorating financial performance at hospitals due to higher interest rates, rising supply costs, and the staffing shortage could weigh on STE’s Healthcare capital business while higher interest rates and an economic slowdown could weigh on STE’s Life Sciences capital business,” the analysts wrote. “Despite our concerns, we note that STE has a very strong order backlog, which has continued to rise. … Given the strong backlog, we believe that STE would need to see orders start to be canceled before it would cause its growth to slow.”
Steris is the 26th largest medical device company in the world, according to our 2022 Medtech Big 100 ranking. The Mentor, Ohio-based sterilization and surgical products company reported nearly $4.59 billion in annual revenue and around 16,000 employees as of its most recent fiscal year.