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ResMed Gains Share In Core Sleep Market

Australia | May 06 2019

Sleep apnoea revenue partly offset weaker software-as-a-service revenue in the March quarter for ResMed, which is gaining share from the strong uptake of new products.

-Limited evidence Brightree has recovered after slowdown
-Path to higher profitability in software-as-a-service segment unclear
-Robust core business mitigating risks associated with broadening to connected care

 

By Eva Brocklehurst

Brokers were well pleased as ResMed ((RMD)) delivered a strong result from its core OSA (obstructive sleep apnoea) business in the March quarter and eased concerns that growth was slowing. Sleep apnoea revenue partly offset slightly lower software-as-a-service (SaaS) revenue. Operating profit increased 15% on a year ago and beat most estimates. This was largely because of lower-than-expected R&D and interest expenses.

Deutsche Bank notes the result also demonstrate the company is benefiting from fixed-cost leverage, with operating earnings (EBITDA) margin expansion of 106 basis points. Gross margin of 59.2% was ahead of Citi's estimates. The broker estimates the higher margin was also driven by the increased percentage of mask sales in the quarter. The broker is seeking some clarity about the impact of SaaS on gross margin going forward.

Mask sales rose across all major markets, attributed to both share gains and strong market dynamics. SaaS doubled its sales to $80m because of the contribution from recent acquisitions of MatrixCare and HEALTHCAREfirst.

The increased frequency of masks and accessory supply to each patient per year, particularly in the US, will be contingent on payers maintaining current reimbursement methodologies, UBS points out. The broker estimates resupply revenue growth of 9% across FY19-22.

Market Share

The company gained market share in masks on the strong uptake of its new products. The market appears to be growing faster than historical 8-9%, Citi observes, particularly outside of the US. The broker expects the three masks launched in the last 12 months will continue to drive growth in FY20. There was some share gains in devices, where sales grew 6%. Headwinds in Japan and France are expected to be offset by growth in other markets, particularly in Asia.

Ord Minnett is still cautious about fully extrapolating the positive trends, given the volatility of historical results. After the recent recovery in the share price, the broker notes only limited evidence that the Brightree franchise has recovered after a slowdown in the second quarter. Management reported revenue growth improved for Brightree but it appears some way off the double-digit target.

Citi considers ResMed an excellent business, although fairly valued. No break even date has been forecast for the Verily joint venture, which made a -US$7m loss in the quarter. The broker remains a little sceptical regarding the revenue model in this aspect of the business and looks forward to further clarity in time.

The company has commented that MOBI, the portable oxygen concentrator, has now been launched but sales are minimal and it will take time to have an impact on earnings. The impact of the patent litigation with F&P Healthcare ((FPH)), now ended, on the results was not disclosed but Citi suspects it would be helpful to FY20 now this has cleared.

UBS upgrades to Buy from Neutral after updating modelling assumptions. The results were well ahead of estimates and the broker acknowledges its prior conservatism on the sustainability of the company's US resupply growth appears misplaced.

Software-as-a-service

Resmed has generated over 10% in 12-month rolling average revenue growth in the past five quarters. While the path to higher profitability in the SaaS business remains less clear, UBS believes the ongoing robust core sleep therapy will mitigate the risks associated with the broadening of the business into connected care.

The connected care business is also expected to significantly improve, although this is highly contingent on future operating and capital expenditure requirements, either via additional M&A or within the current suite.

OSA therapy growth should still remain robust from an under-penetrated target base, and increasing installed base and re-supply growth. Diversification holds merit, UBS believes, and COPD (chronic obstructive pulmonary disease) may also bring additional revenue.

Morgans agrees the business is robust and is encouraged by commentary from management, which remains confident about driving sustainable, low double-digit growth over the medium term via its end-to-end solutions which are just starting to penetrate the US$1.5bn out-of-hospital market.

Macquarie on the other hand believes its forecasts adequately capture the positive trends resulting from increased penetration of the OSA population and improvements in masks and resupply, and the risk/reward profile is skewed to the downside.

As a stable pricing environment in the US continues – the next round of competitive bidding rates do not come into effect until 2021 – Credit Suisse forecasts continued strong growth in US masks and devices over the fourth quarter and FY20.

With the company's increased investment in its data platforms, the broker is also upbeat on the ability to use data to prove the quality of care for patients in the home setting and increased penetration rates within the sleep and COPD markets.

Wilsons, not one of the eight stockbrokers monitored daily on the FNArena database, considers the company's portfolio unique in terms of its reach across the US healthcare system, where relevant to chronic disease. The broker, not one of the eight monitored daily on the FNArena database, has a Buy rating and $18 target.

The database shows five Buy ratings, two Hold and one Sell (Macquarie). The consensus target is $16.45, suggesting 2.9% upside to the last share price. This compares with $15.08 ahead of the results.

See also, ResMed Judged Harshly As Costs Mount on January 30, 2019.

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