Fisher & Paykel Healthcare is facing the inevitable flipside of its twoyear COVID windfall. Hospital hardware sales, which surged during the pandemic, are now in rapid decline. The company is investing heavily in sales capability to take advantage of the newly installed base of equipment, but it may take until FY24f before the benefits emerge. FPH has shied away from giving guidance for FY23f, understandably.
The hospital hardware bonanza is over. FPH CEO Lewis Gradon said:
“Over the last two financial years we have supplied $880 million of hospital hardware, the equivalent of approximately 10 years’ hardware sales prior to COVID-19.”
Hardware sales in FY22 were down -41.2% in constant currency terms (CC) compared to the previous year. Consequently, hospital segment operating revenue fell -19% (CC) over the year.
We think hardware sales will bottom out sometime in 1H23f with COVID on the wane and hospitals destocking.
Operating costs will rise in FY23f. FPH said it may spend about 13% more on operating costs in FY23f as it seeks to capitalise on the large new installed base of hardware. The company is rebuilding its sales force for this purpose, and they will not go into battle empty-handed.
R&D spend of $154 million has produced new products. The sales force will arm themselves with a number of new products in high flow nasal therapy for use in anaesthesia and hospital wards. The importance of supplementing the installed hardware base with new products is crucial to lift the utilisation of the hardware which is at 60-70% of pre-COVID levels. FPH is expecting clinicians to increase their use of the equipment as more data supports humification and HFNO therapy and familiarity rises. This will be a challenge and an opportunity.
Investment view
Consensus forecasts may not have grasped the depth of FY23f EBIT as the increase in operating costs begins to bite. FY23f is beginning to shape up like a sabbatical for earnings after the halcyon days of the pandemic. The company hasq avoided providing guidance for FY23f signaling that the inflection point is uncertain.
The share price has fallen 40% so far this year and may spend some time in the sin bin. We anticipate a much more settled business in FY24f as the opportunity to build on greater hospital incumbency arises.
Until the evidence of an inflection point appears, we maintain our Sell recommendation.
Risks to investment view
The slowdown in sales may not be as steep as we expect, and the company may cope with rising coqsts better than anticipated. A recurrence of COVID as a new variant night also keep hospitalisations higher than expected.
Recommendation
We have retained our Sell recommendation.
