Australia | Nov 29 2019
Fisher & Paykel Healthcare experienced a jump in device sales during the first half but brokers remain concerned about the high price of the stock.
-Will new mask quality/features be enough to drive an improvement in US market share
-Decline in gross profit margins of around -50 basis points expected in FY20
-Launch of Vitera in the US a key catalyst for mask growth in 2020
By Eva Brocklehurst
Nasal high-flow therapy performed strongly for Fisher & Paykel Healthcare ((FPH)) in the first half of FY20. The company has lifted FY20 expectations for a third time this year, Wilsons notes, albeit for low-quality reasons such as FX and R&D grants.
Full-year guidance is for operating revenue of NZ$1.19bn and net profit of NZ$255-265m, which Credit Suisse assesses has absorbed a modest adverse impact from a higher assumed NZD/USD rate.
Macquarie believes the results provide a platform for the company's revenue outlook over the medium term but notes valuation multiples are priced ahead of Australasian healthcare peers, and elevated versus historical levels.
Moreover, risks remain significant and temper the view. The broker awaits feedback from the US market and new releases in early 2020, noting this is a high-quality business and the market is capitalising market-leading growth opportunities across both hospital and homecare.
UBS agrees that the stock is trading well above global peers on an EPS (earnings per share) growth-adjusted basis. New applications for consumables were robust in the first half, with a growth rate of 23% on a constant currency basis.
A jump in device sales was underpinned by tenders, which is a reflection of the company's dominance of humidification, UBS asserts, and less about large Airvo orders for OptiFlow use outside of the intensive care unit.
Wilsons finds a couple of characteristics of the business at odds with the valuation. The sleep business within the Homecare division faces structural challenges, given competitor activity ahead of a new round of US reimbursement reform. The broker is also not convinced the new mask quality/features are enough to drive an improvement in market share in the US.
The company still expects a decline in gross profit margins of -50 basis points in FY20 on the back of additional depreciation and start-up costs, associated with the commissioning of the second manufacturing facility in Mexico.
Macquarie was expecting a more pronounced impact on margins in the first half and suspects margins will remain relatively static over FY20. Headwinds to margins include the start-up of the Auckland manufacturing facilities in FY21. Management has highlighted an additional $20m in capital expenditure as it improves capacity in both Mexico and New Zealand.
UBS suspects US durable medical equipment suppliers are likely to ask for price relief in the next round of the competitive bidding program. Reimbursement rates are due to be released in mid 2020 with implementation in January 2021. Based on the round 2 experience this could result in a modest increase in manufacturer price discounts, towards the upper end of the -3-5% historical level.
UBS assesses this would be slightly worse for Fisher & Paykel, given its heavy skew towards masks. The broker calculates a -3% change in US OSA (obstructive sleep apnoea) mask prices for the company would equate to a -60 basis points change in gross margin.
The hospital division delivered revenue growth of 17%, supported by demand for nasal high-flow therapy. There was also an extended flu season in the US that underpinned sales. Normalising for the extended flu season and the sales of hardware, Credit Suisse estimates the hospital division delivered 14% growth.
Wilsons believes this segment is in excellent shape, although management has provided a conservative message regarding gross margins, which seems inconsistent with how the product mix should develop. Divisional revenue grew 19% to NZ$353m.
Homecare operating revenue declined -1% because of declining sales in legacy OSA masks. This was partly offset by sales from the new Vitera full-face mask in Australasia, Canada and Europe, where the product has been well received.
The launch of Vitera in the US in late October is now expected to offset a further deterioration in legacy mask sales in the second half. Macquarie was surprised by OSA mask results in the first half, expecting a larger contraction, but believes the US launch is a positive sign for a return to growth in market share, albeit it is early days.
UBS notes homecare growth remains well below system growth and, while in the long-term myAirflow for home treatment of COPD (chronic obstructive pulmonary disorder) is critical, supportive US clinical trial results and reimbursement are probably more than three years away.
Wilsons points out mask re-supply programs facilitated by competitors are limiting sales for Fisher & Paykel, although new patient commencements appear positive. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, maintains a Market Weight rating with an A$18.69 target. The database has three Sell ratings and one Hold (Macquarie).
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