Australia | Oct 28 2019
While ResMed has recovered its lead in the sleep disorder market, several brokers suspect stellar growth rates may taper.
-Exceptionally strong first quarter unlikely to be repeated
-US Medicare changes underpin medical device business
-To soon to know when Propeller Health will be profitable
By Eva Brocklehurst
Brokers continue to laud the prospects for sleep disorder specialist ResMed ((RMD)), which has sustained strong revenue growth in the first quarter. Masks grew 19% and, outside of the US, recorded the best quarterly growth since 2011, while devices were cycling high comparables but still grew 8%.
The overall sleep business grew 11%. ResMed continues to gain market share at the expense of both Phillips and Fisher & Paykel Healthcare ((FPH)). Ord Minnett suggests the company has re-established a leading position in masks after a period where it was challenged. It is also the undisputed leader in devices with the AirSense range.
Credit Suisse agrees the company is benefiting from having the broadest product portfolio. Both the breadth of its product portfolio and continued re-supply should enable consistent strong growth in mask sales. Moreover, the company is best placed in devices because of its AirView data platform.
Morgans suspects the exceptionally strong first quarter is unlikely to be repeated but the company should maintain good momentum across its core business and the evolving connected-care offering. Saturation is unlikely to occur in the market in the short to medium term, UBS agrees, as recent mask launches appear to be adding to overall category growth.
The main downside issue for Ord Minnett is the likelihood that sales will slow because of lower market growth. The broker remains hopeful the software business can provide a boost, although warns a prolonged period of uncertainty created by the latest round of competitive bidding may weigh on sentiment.
Management has expressed confidence growth will lift to double digits and the broker considers this achievable in light of the recent collaboration with Cerner, which should open up the prospect of a large number of new customers in need of an out-of-hospital solution.
The outcome of 2021 competitive bidding is the key downside risk, in Citi's view. In contrast with the company's goal for double-digit growth the broker forecasts high single-digit revenue growth in FY21 and beyond. ResMed has guided for an FY20 gross margin of 59.5%. Morgan Stanley differs from the market in that less gross margin pressure is envisaged as US re-imbursement is stable.
One of the issues for Citi is the role price is playing and whether the market may be, temporarily, growing faster than usual. The launch of four new masks in the last 12 months probably explains some of the market share gains, in the broker's view.
It is also possible that as public discussion around sleep and obstructive sleep apnoea becomes more mainstream and products improve, previously-diagnosed patients could return to the system and growth rates accelerate, although this is not the broker's base case.
Credit Suisse expects US device sales to grow above market, at 9% in FY20, supported by a growing trend towards in-home sleep testing. As the company has increased its investment in data, the broker is upbeat about the ability of this to be directed towards improving the quality of care in the home setting and increasing the penetration rate within the sleep and chronic obstructive pulmonary disease (COPD) markets.
ResMed has an enduring advantage in its medical device business and customers will find incentives to prefer those devices that share treatment data, Wilsons believes. This supports the company's strategy and provides potential upside to forecasts, driven by US Medicare changes that necessitate the implementation of enterprise software in the skilled nursing sector and among home care providers.
UBS suspects, with key providers now covered, such as nursing homes, hospices and durable medical equipment (DME) providers, that a period of consolidation in this area is more likely. Morgan Stanley on the other hand anticipates a recovery in devices once FY20 has passed and a high-growth period has been lapped.
Citi points out that the impact of new mask launches has diminished over time, largely because of the rising share of masks being sold through re-supply programs, particularly in the US. The broker estimates the 70-80% are sold in the US are dispatched through a re-supply program.
Hence, there are few incentives for DME providers to sell new masks to existing customers, and manufacturers are competing for the just the 20-30% of the US market that is not on the re-supply chain.
The broker finds it too soon to assess when Propeller Health will become profitable. ResMed is expected to publish results from studies to prove the value of Propeller Health to payors and pharmaceutical companies. Macquarie, too, notes the company has highlighted a large COPD comparison sponsored by Novartis featuring Propeller Health that is expected to start in January 2020. This will compare Propeller Health plus COPD standard of care to COPD on its own.
Morgan Stanley envisages upside in the COPD market from both portable oxygen concentrators and Propeller Health and long duration growth is being supported by a large installed base, stable US reimbursement and the connected care strategy.
Macquarie, on the other hand, while assuming robust growth over the rest of FY20, believes the risk/reward profile is skewed to the downside. The broker believes the share price is ascribing limited risk in relation to reimbursement/regulatory changes and/or the impact of competing technologies over the medium to longer term.
Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, has an Overweight rating and $23.15 target. The database has four Buy ratings, two Hold and one Sell (Macquarie). The consensus target is $20.54, suggesting -2.8% downside to the last share price.
See also Connected Care Working Well For ResMed on July 29, 2019.
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