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Is F&P Healthcare Overvalued?

Australia | Nov 27 2018

Brokers consider Fisher & Paykel Healthcare is overvalued, as litigation and competitive headwinds buffet the business.

-Frequency of product releases key to maintaining clinician engagement, revenue
-Return to growth in hardware sales expected once the F&P950 product is launched
-News flow regarding several lawsuits expected in coming months


By Eva Brocklehurst

Risks continue to mount for Fisher & Paykel Healthcare ((FPH)) and several brokers question whether the share price is taking all the variables into account. The company's first half result revealed strong headline growth, although a soft comparable was being cycled. Net profit was up 2.5% and marginally ahead of guidance.

Softer sales of ICU equipment to hospitals were noted, attributed to hospitals awaiting the release of the F&P950 product. Macquarie expects this will affect revenue growth in a positive way in FY20/21 when the system is released in Europe/US.

Hospital division revenue growth was up 11%, supported by new applications, largely Optiflow. Revenue growth in obstructive sleep apnoea (OSA) masks was soft, at just 2%. Macquarie blames this on a competitive market and competitor releases and asserts that the frequency of product releases remains key to maintaining clinician engagement and revenue growth.

Citi considers the stock overvalued at 32x FY20 price/earnings estimates. Still, results are being driven by high quality growth from the hospital division and the broker continues to expand revenue growth of over 20% from Optiflow, where there is an opportunity for further penetration of the high-flow nasal oxygen to new hospital sites.

The opportunity stems from the clinical efficacy of Optiflow and the ease of administration for medical practitioners.The rest of the hospital legacy business remains low growth and mature and, while hardware sales were flat in the first half, the broker expects a return to growth once the F&P950 product is launched.

UBS, too, believes the stock is expensive against the backdrop of potential risks. There are litigation costs and smaller tailwinds from the New Zealand dollar. In addition, the broker anticipates revenue risk from a mild flu season in the second half.

UBS envisages risks to FY20 consensus expectations because of delays to the OSA masks and margin pressure from new manufacturing facilities and IT systems and suspects the share price is ignoring the earnings risk. Wilsons considers the valuation highly sensitive to the maintenance of a 20% growth rate in new applications over the longer term.

While assessing the business favourably the broker, not one of the eight monitored daily on the FNArena database, waits for a better entry point to the stock and maintains a Hold rating with a $13 target. The database has four Sell ratings and one Hold (Deutsche Bank).

Competitive Issues

A manufacturing delay has resulted in the new OSA mask range being deferred, but the company expects to have a new mask available early in 2019 and subsequently release the rest of the range over the year.

Investors have been awaiting these new masks, as ResMed and Philips (Respironics) have shorter average mask release cycles. Moreover, the product cycle is becoming increasingly important, Macquarie suggests, given the lawsuits involving the company.

Citi notes plans to launch two new products before the end of 2018 have been shelved. While the OSA mask business enjoyed a strong performance over recent years as new models were introduced, the broker suspects this outperformance has come to an end in the first half, with ResMed and Respironics gaining market share. Both Deutsche Bank and Citi expect ResMed to continue to take share into FY20.

UBS also believes material gains in F&P Healthcare's market share in OSA masks are unlikely in the near future. Constant currency gross margin expansion has reduced to 22 basis points in the first half, from 146 basis points in the second half.

The upfront costs of new Mexican manufacturing facilities are also likely to depress margins until throughput expands, expected in the second half of FY20. Wilsons does not believe there will be a major impact from the manufacturing delay, although agrees a mild flu season in the second half of FY19 could produce another weak half for hospital sales.


The company has provided further details on the various lawsuits occupying its attention. Macquarie notes a recent German court decision favoured ResMed but this decision does not affect the sale of supply of F&P Healthcare products. The infringement relates to strap design not the respiratory interface. A final decision will be made by the European Patent Office, expected in June/July 2019.

Litigation is ongoing in a number of markets, including the US, UK, Europe, Australia and New Zealand relating to masks, flow generators, heated tubing and humidifier water chambers. Macquarie expects the news to flow regarding these lawsuits in coming months.

Citi expects hospital growth to continue in the mid-to-long term, notwithstanding the litigation from ResMed and the related expenses. The broker does point out that ResMed remains fairly confident of its position in these cases. Litigation costs are expected to rise to NZ$20-30m over FY19, with the company having already spent NZ$7.7m. The company has guided to revenue of NZ$1.07bn in FY19.

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