Australia | Mar 30 2022
ResMed struggles to realise the benefit promised by a major competitor recall and heightened demand amid a global shortage of semiconductor chips necessary for device production.
-ResMed has changed its tune on recovery of semiconductor chip supply in latest market update
-The company should be the major beneficiary of a competitor recall amid elevated demand
-Commentary leaves room for a downgrade to US$300-350m full year benefit guidance
By Danielle Austin
The potential benefit for ResMed ((RMD)) from a competitor recall has been a dangling carrot for investors for close to a year, but the company’s ability to meaningfully increase its supply of semiconductor chips is crucial to delivering on expectations. With Philips announcing a recall of its Respironics CPAP machines last June amid elevated global demand for CPAP devices to manage a 30% rise in sleep apnoea diagnoses, ResMed found itself perfectly placed to take advantage of heightened demand and limited competitor supply, but a global shortage of semiconductor chips has impacted on the company’s expected benefit.
The chip shortage has impacted ResMed’s ability to deliver devices to the market, and while market analysts largely continue to see potential for ResMed to benefit substantially from competitor and industry conditions, the payoff has become a waiting game for investors.
Sizeable market share gains remain ResMed’s for the taking if the company can secure an improved supply of chips. The company previously suggested it had obtained an improved outlook on chip supply with its second quarter results, but more recent updates have suggested this may have been optimistic.
Market experts anticipate the Russia-Ukraine conflict could further tighten the already short supply of chips, with Ukraine a large exporter of the neon gas required for manufacture.
Moves to improve supply leave market wanting
Steps were taken by ResMed to secure a de-risked chip supply, with the company pursuing the validation and verification of new suppliers. Company commentary from the second quarter result implied headwind was being made in securing new supplies, with the company suggesting quarter-on-quarter supply improvements could be expected through to the end of the financial year and extending into FY23.
In its most recent commentary the company has now suggested third quarter supply will be similar to that of the second quarter, and while some improvement continues to be anticipated for the final quarter of the financial year, it is likely minimal. A trend of chip suppliers rescinding on supply commitments, some paid for, extends further than ResMed and continues to impact medical device and electronics companies globally. Market analysts expect this line of commentary from the company allows room for ResMed to downgrade its previous expected full year benefit from Philips’ recall of US$300-350m.
The company has expanded its manufacturing capacity to address heightened global demand through the addition of a new plant in Singapore, but additional capacity has made little impact on the company’s device output without access to the necessary chips.
Extended impacts of recall offer further room for benefit
Philips, arguably ResMed’s biggest competitor, first announced the recall of its Respironics treatment in June 2021, and while the company initially guided to impacts of the recall extending to December 2022 it would appear impacts will spread beyond that.