For most medical device companies, the occasional warning letter from the Food & Drug Administration is just a minor annoyance, another part of doing business.
The FDA letters, which are published on the agency’s website, typically cite failures in record-keeping and manufacturing processes that are quickly corrected by companies and forgotten by everyone else.
But a recent FDA warning letter to home health products manufacturer Invacare Corp. (NYSE:IVC) that contained unsubstantiated reports of fires, entrapments and deaths caused by the company’s adjustable electric beds holds the potential to be much more harmful to the company than the typical warning letter. The key word there is “potential.”
“Most are resolved quietly without much attention, with no impact on the company or its stock. But every once in awhile you get a very tough warning letter.”
So will Invacare’s “egregious” warning letter exact any damage on the company in the short or long term? The short answer is: “It’s too early to tell.” The long answer begins with the lengthy title of a research note Goldman wrote to investors — “Invacare warning letter adds to uncertainty, but investors should not jump to conclusions” — and gets longer from there.
First, a little background. Though Invacare’s warning letter was released to the public earlier this month, the violations that it cites were uncovered in August during an inspection of a factory in Sanford, Florida. The FDA rapped Invacare on the knuckles for several record-keeping violations involving consumer complaints about the beds. Essentially, it cited the company for failing to adequately investigate (or at least document that it had) consumer complaints of fires and sparks from electric beds that in some cases allegedly resulted in patient deaths.
One complaint concerned a fire that started at the foot of a bed and resulted in a consumer’s death. Another involved an Invacare bariatric bed that caught fire, resulting in two patients being taken to the hospital and treated for smoke inhalation and chest pain. A third involved the “bed entrapment death” of an 11-year-old child, according to the warning letter.
An Invacare spokeswoman correctly pointed out that the complaints were just “allegations” that weren’t independently verified. CEO Gerald Blouch stressed that the warning letter didn’t say the company’s products are unsafe; rather, it was related to documentation.
“We take all FDA matters very seriously, and we intend to address all of the FDA’s concerns,” he said in a statement.
Invacare doesn’t break out its bed sales, but Goldman estimates that beds represent between 5 and 10 percent of total sales.
Market reaction wasn’t good, as Invacare’s stock lost as much as 9 percent of its value during trading in the first few days after the letter came to light on Jan. 4. But the stock has rebounded in recent days, and it’s only down 2 percent since that date, suggesting the market doesn’t see much to be concerned about.
But that certainly doesn’t mean the company is in the clear — especially if any of those consumer complaints turn into lawsuits.
“The elements are in place that it could be a significantly negative issue, but it won’t necessarily be,” Goldman said. “It depends on how they handle things and the facts of the situation.”
It’s possible that those facts could come out through an investigation, but that’s hard to say. Certainly, Invacare will look into the matter itself, but if its internal investigation finds that it’s at fault, how forthcoming would the company be with that information? The FDA could conduct its own investigation at some point down the line, or a lawsuit by one of the alleged victims could publicly shed light on the facts.
The key is to determine whether there’s a link between the reported deaths and problems with Invacare’s beds. “If a link is found, the questions become ‘What did Invacare know? When did they know it, and what did they do about it?’” Goldman said.
If a link is found, the hit to the company’s earnings could far exceed the 5 to 10 percent of sales that the beds comprise, due to negative publicity and litigation costs.
Conversely, if it turns out the allegations are false or exaggerated, the impact to Invacare could be “close to zero,” according to Goldman.
“We just don’t know if Invacare did anything wrong,” he said.