Australia | Aug 07 2020
Has demand for ventilators stemming from the pandemic run its course? The main issue for ResMed in the near term is whether a reduction in ventilator sales will be countered by a recovery in its sleep business.
-Stock outperformance suggests much upside is factored in
-Re-supply sales in the US remain robust and policy favourable
-Long-term drivers of demand for OSA masks intact
By Eva Brocklehurst
As the coronavirus pandemic took hold, the flurry of demand elevated sales of ventilators for ResMed ((RMD)) but this was countered by a sharp drop in sales from its core sleep (OSA) business.
Demand from the pandemic has now run its course, several brokers assert, so the focus is on servicing the traditional OSA market. However, depressed economic conditions are likely to mean sales will grow at a slow rate. The company also expects ventilator benefits will be significantly lower in FY21. The issue is the extent to which ventilators and OSA sales balance out over the months ahead.
Pandemic-related ventilator sales contributed US$125m to the fourth quarter but this was partially offset by double-digit declines in sleep apnoea diagnosis. Cost growth was slower in the fourth quarter and this offset the weaker revenue although ResMed was able to deliver 9% top-line growth and 40% growth in earnings per share.
Morgan Stanley expects the company will emerge from the pandemic in a stronger position but this has been encapsulated by the more than 40% outperformance in the stock in the year to date. Hence, the broker downgrades to Equal-weight.
Nevertheless, the company will remain a beneficiary from its connected care and cloud-based strategies. Strong demand for ventilators has meant a tripling of production capacity while mask and re-supply sales associated with OSA have been strong in the US.
Wilsons' modelling suggests the balance between excess ventilator demand and sleep volume deficits may continue favourably at the sales line over the next three quarters before becoming normalised in the fourth quarter of FY21.
Yet, compared to management's commentary in mid-June the main detraction, in Goldman Sachs' view, is confirmation that in-patient sleep laboratories are still operating at around -30% below pre-pandemic capacity.
The broker now forecasts a mismatch in the second and third quarters, when the recovery in OSA will not compensate enough for the loss of ventilator demand, and does not envisage sustainable tailwinds from the pandemic beyond the first quarter of FY21.
That said, the foundation for revenue is coming from re-supply programs and the broker emphasises OSA dynamics are robust. Around 80% of US mask growth is generated by existing patients and this has proven resilient.
Citi believes it is worth taking a closer look at the role ResMed and peers have played in supplying the world with ventilators during the pandemic. ResMed increased ventilator production by 350% in the second half but, of course, with the disruptions to people's lives the underlying OSA business was negatively affected.
Over time, Citi believes ResMed can continue to gain market share at the expense of competitors and the pricing environment is benign, while industry growth is expected to return in FY22.
Beyond this pandemic, competitive bidding in the US remains a downside risk but the broker envisages upside includes accelerated market growth from the return of previous OSA patients, a profit contribution from Propeller Health and increased penetration in the COPD (chronic obstructive pulmonary disease) market.
Long-term prospects could be enhanced, Morgan Stanley acknowledges, by the accelerated adoption of remote patient monitoring programs. Through channel checks with US-based CPAP (continuous positive airway pressure) suppliers, the broker assesses demand was strong at the beginning of the year but from April it started to slow.
Still, re-supply to existing patients should continue where they are able to be serviced remotely and receive items through the mail. This suggests that mask sales are more insulated from the slowdown in new patients compared with devices. Moreover, US policy remains favourable in terms of ensuring the financial and operational viability of long-term post-acute health care settings.
Credit Suisse does not forecast CPAP sales returning to pre-pandemic levels until the third quarter of FY21 as further lockdowns are likely in some markets over the next six months.
The broker concludes that despite the business being well-placed to benefit from any behavioural shift after the pandemic, and potentially greater demand for home health care, a protracted recovery in OSA diagnosis, reimbursement pressure and potential for oversupply of ventilators keeps it on a Neutral footing.