Will ResMed’s Market Share Gains Last?

This story features RESMED INC. For more info SHARE ANALYSIS: RMD

Notwithstanding the difficulties in satisfying a surge in demand for sleep apnoea devices, ResMed should win market share. The main question is how much?

-Minimal revenue from pandemic-related demand expected going forward
-Substantial market opportunity from Philips recall but will it last?
-Despite the potential, is ResMed too expensive?
 

By Eva Brocklehurst

Demand stemming from the pandemic helped swell sleep apnoea device/mask growth for ResMed ((RMD)) in FY21, yet minimal guidance was provided and management highlighted the difficulties in satisfying demand.

Adding the opportunity from the Philips DreamStation recall provides for a strengthened outlook. Or does it? Ordinarily, a competitor recall would provide a temporary benefit, yet Wilsons points out this time it could be different.

A decision to scale up manufacturing is often difficult to justify, knowing the competitor is likely to rectify its problems within 12-18 months. In this case ResMed has already undertaken a material scaling up, to supply ventilators through the first acute phase of the pandemic.

Management has confirmed spare capacity is now available and more is being constructed, while a high level of commitment is being secured from component suppliers.

Minimal revenue from pandemic-related demand is expected going forward and the company has also flagged continued growth in home-based care, while positive trends have now started to emerge in skilled nursing facilities that were previously affected by the pandemic.

Citi foresees the underlying sleep apnoea market will return to normal growth as sleep laboratories re-open following increases in vaccination rates, and expects earnings growth of 20% in FY22 and net profit growth of 21%.

Sleep patient flows recovered in FY21 although the gross margin contracted to 57.3% in the fourth quarter on an unfavourable mix and higher costs as manufacturing remained challenged. The company recorded US$20m in ventilator sales in the June quarter, primarily ensuing from demand in India. Yet this compares to US$125m in the prior corresponding quarter.

Morgan Stanley is puzzled by the reporting of a US$60m recall benefit despite management flagging a shortage of devices in the market, unless there was a selling down of existing inventory. The broker expects gross margins will remain depressed amid elevated freight costs and component pricing along with the product mix skewed towards devices.

Jarden, not one of the seven stockbrokers monitored daily on the FNArena database, believes the margin affect will progressively become muted as contract renegotiations provide ResMed with the ability to claw back component price increases and elevated freight costs. Jarden has an Overweight rating and $38.23 target.

While ResMed is constrained by chip shortages, which will weigh on its ability to step up production in the short term, growth should still come through the second half, Credit Suisse assesses. In FY22, the broker expects US device growth of 37% and for the rest of the world 14%.

Market Share

As a result of the recall by Philips, ResMed expects US$300-350m in incremental device sales. This is over and above prior forecasts for a recovery in FY22 and market share gains from the launch of AirSense 11. It also does not include incremental masks/accessories revenue.

Macquarie finds substantial opportunities exist in the short-medium term associated with the Philips recall and calculates incremental device revenue of US$350-500m in FY22/FY23. This implies 35-50% of the Philips device revenue. Longer-term, Macquarie assumes ResMed can retain 30% of Philips' share, or a 9% overall market share.

Nevertheless, annual CPAP (continuous positive airway pressure) sales for Philips of US$780m mean ResMed can satisfy less than half the incremental demand while that company is on the sidelines for the next 12 months.

Morgan Stanley assumes the FY22 benefit of US$350m actually will be realised as US$200m in FY23 and US$135m in FY24, highlighting expanded capacity at Philips and the likely remediation of the recall by June 2022.

Wilsons anticipates Philips will direct the majority of DreamStation2 production to existing patients and ResMed could be gifted as much share as it can supply. Moreover, this is coinciding with the launch of ResMed's new flow generator platform, AirSense 11. Prior to the recall, Wilsons had a neutral view on AirSense 11 and doubted it could deliver market share gains of the scale that AirSense 10 achieved.

Credit Suisse believes there will be a multi-year opportunity for ResMed noting new patients are likely to be set up with a ResMed mask if they are on a ResMed device.

The sustainability of market share gains is difficult to assess, Morgans suggests, given the uncertainties surrounding the response by Philips and the potential for reputation or quality issues to linger. There are also questions around ResMed's ability to fully benefit from pent-up demand.

Citi makes a more definitive statement, assuming ResMed will make a permanent 10% gain in market share from FY23. That said, the broker considers the gains are already priced into the stock.

Valuation

The company announced a dividend of US$0.42 signalling cash flow and liquidity provide flexibility for further capital allocation and reinvestment in R&D.

Morgan Stanley believes the stock is looking expensive and there is better risk/reward elsewhere yet acknowledges ResMed is operating in an industry where around 30% of the market is affected by the product recall by a competitor and, with a long record of execution, suspects the premium valuation will be maintained.

Ord Minnett, too, considers the boost from the recall largely priced into the stock although agrees AirSense 11 will ensure a significant portion of market share is held even after Philips returns to full competitive capacity.

Wilsons, not one of the seven, is more upbeat and upgrades to Overweight with a target of $43.50, sensing a permanent structural shift in market share as Philips will be rectifying its problems and leaving the new patient market segment uncontested.

Ultimately, the broker considers ResMed will drive sales growth in medical devices and software sales for long-term post-acute settings, sustaining or even extending a re-rating.

FNArena's database has two Buy ratings and four Hold. The consensus target is $37.49, signalling -1.5% downside to the last share price. Targets range from $33.90 (Morgan Stanley) to $41.34 (Morgans).

See also, Opportunity For ResMed Following Phillips Recall on June 16, 2021.

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