Australia | May 03 2021
This story features RESMED INC, and other companies. For more info SHARE ANALYSIS: RMD
Over the short term ResMed could find it difficult to surmount obstacles created by the pandemic while there is general agreement on an eventual return to growth
-Turnaround in new patient diagnoses critical to outlook
-AirSense 11 could trigger a resupply cycle in FY22
-Stronger medium-term growth expected
By Eva Brocklehurst
The commencement of the coronavirus pandemic a year ago significantly boosted ventilator sales and ResMed ((RMD)) is now cycling the impact. There were around $35m in ventilator sales that did not occur in the March quarter this year and there were lower new patient numbers in most markets.
Mask and accessory sales were up 4%, supported by US mask growth of 7%, while devices contracted -10%. Most of the latter drag came from outside the US, which was down just -2%, and stemmed from the second and third waves of the pandemic.
Moreover, gross margins declined, affected by elevated freight costs and the move to a new manufacturing site in Singapore. The company has also indicated that in the US, new patient diagnosis is around -10-20% lower than usual for a March quarter.
Goldman Sachs believes evidence this shortfall is narrowing is the critical factor that will drive a sustained performance of the company shares, while assuming trends continue to improve through the northern summer as vaccines are rolled out further.
On the other hand, the broker suspects the shortfall in mask growth may now be symptomatic of a cumulative deficit in diagnoses throughout the past 12 months. Therefore it may be some time before this returns to the quarterly average growth of 14% the market has become accustomed to see.
Revenue is expected to grow as hospitals gradually return to normal levels, although the company acknowledges growth in the first half of FY22 will be unlikely to rebound strongly because of a continuation of the pandemic outside of the US.
Over the longer term Goldman Sachs is positive about ResMed as it is a leader in an attractive market and the pricing outlook is the best in years. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, has a Neutral rating and $28.40 target.
Macquarie also anticipates the recovery in new patient growth is likely to be gradual yet considers ResMed leveraged to improved activity. The balance sheet is favourable and this provides flexibility for capital management and/or growth initiatives. Still, with the stock trading at 35.2x on revised FY22 estimates Macquarie sticks with a Neutral rating.
Citi downgrades to Neutral from Buy while acknowledging the company is performing well in a difficult environment, while Wilsons, also not one of the seven, downgrades to Market Weight, with a target of $28.50.
Although the core sleep business is strong and there are plans for new products, Wilsons believes the "connected care" strategy, intended to drive device growth in conjunction with software solutions, has become contentious again.
The broker contends the devices industry is weak following the pandemic and lacks clarity now that oxygen has been discontinued for high-flow cannula use and, in remodelling flow generator sales, downgrades estimates for the short term.
Several obstacles prevented growth occurring in the quarter including seasonality, tough comparables and negligible ventilator sales for covid-19 use, yet Morgans assesses the headwinds are more cyclical than structural and an upgrade cycle is imminent as management has signalled the new AirSense 11 will be commercialised by the end of 2021.
A limited launch of AirSense 11 has commenced in some states of the US and a broader commercial launch is expected later in this year. The company advises the launch in the US will be widespread by the end of 2021 and staggered subsequently to other countries.
Ord Minnett suspects customers may postpone orders ahead of the launch and this could weigh on sales in the short term but anticipates stronger growth in FY23 and beyond. The company could also benefit from Philips' inability to supply many markets, pending the approval of its new device outside the US. This leads the broker to upgrade to Hold from Lighten.
Given the success of the AirSense 10 largely stemmed from the cost advantage it offered distributors, Ord Minnett is optimistic the new device will support market share gains and higher margins as volumes ramp up.
Credit Suisse believes the main differentiator in the latest product is its improved software, noting Philips has recently launched its Dream Station 2 which does not have the issues that triggered a recall of Dream Station 1.
With two new devices in the market, Credit Suisse believes the industry will enter a resupply cycle in FY22, aiding device growth, and ResMed will have the opportunity to gain market share given the recall.
While the broker acknowledges the results missed expectations in the March quarter, and the outlook is tough for the fourth quarter, with the launch of AirSense 11 stronger earnings growth is likely into FY22-23.
In contrast, Wilsons believes the market has already factored in the launch of the AirSense 11 and this is unlikely to deliver the market share gains anywhere near the scale that its predecessor, AirSense 10, achieved.
The broker believes ResMed's respiratory care strategy is key to any potential re-rating, pointing out the industry faces ongoing funding reforms. Admissions are trending towards higher acuity cases which makes device-driven connected care cost savings difficult to realise and other chronic disease costs may be more pressing. Hence, Wilsons considers the company's device strategy less convincing.
Beyond the pandemic Citi, on the other hand, believes upside risk exists through accelerated market growth from a return of prior patients and market share gains from the new AirSense 11 device as well as a profit contribution from Propeller Health and increased penetration of the COPD (chronic obstructive pulmonary disease) market.
ResMed can continue to gain market share at the expense of both Philips and Fisher and Paykel Healthcare ((FPH)), in the broker's view, while new patient growth will recover as vaccines are rolled out and allow for more normal conditions.
A significant unmet need still exists as a relatively small percentage of potential OSA (obstructive sleep apnoea) patients have been diagnosed globally. Citi highlights anecdotal evidence pointing to a recovery in devices sales as home testing for sleep apnoea rises. Masks resupply should also remain strong because of higher respiratory hygiene awareness.
FNArena's database has three Buy ratings and four Hold. The consensus target is $28.01, signalling 11.9% upside to the last share price. Targets range from $26.50 (Ord Minnett ) to $29.14 (Morgans).
See also, Growth For ResMed Despite Challenges on February 1, 2021.
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