The return to the CPAP market of Philips Electronics following its recall events has become subordinate to the huge backlog across the industry. ResMed has a two year run, aided by the Phillips lapse, to fill the backlog.
CPAP market shortfall. It has become more apparent that underlying demand growth, combined with the backlog from the pandemic and the Philips recall, that the global CPAP market will be undersupplied until 2025.
Commentary from the major manufacturers has cast more light on the volume and sales shortfall that elucidates the opportunity ahead for RMD in the next few years.
The timing of Philips’ Electronics return to the market is becoming less important although it still affords an opportunity for RMD to capture market share that will be mostly retained. RMD has already significantly stepped up its manufacturing volume and will be aided by the Dec/Jan launch of its Airsense 11 device with an alternative manufacturers’ communication chip. This will give RMD a dual supply chain enabling a lift in total production to more effectively address the backlog through higher volumes.
Consensus estimates appear to be distracted by the timing of the Philips restart and not fully aware of the larger supply shortage or the duration of the catch-up.
Investment view
Our thesis on RMD has evolved to capture the larger and longer market shortfall of CPAP devices in addition to the opportunity provided by the Philips recall.
There are a range of factors that could change the outlook including a low diagnosis rate of sleep apnea, and a smaller uptake of CPAP amongst diagnosed patients.
In our view, consensus earnings estimates are inadequately accounting for the extended two-year sales growth opportunity ahead of RMD. If announcements surrounding the return of Philips to the market cause a negative share price reaction for RMD, we would view this as an even stronger buying opportunity.
In the short term, RMD is well positioned for the September quarter having significantly lifted hardware volumes via engineering solutions. Mask sales have also been strong due to the latest product recall on Philips. Customers have stocked up on consumables as a precaution.
Risks To Investment View
The key risks to RMD earnings are from a change in demand, pricing, and costs. There is clinical risk, competition, technical innovation and change of practice factors to be considered.
Recommendation
We have retained our Buy recommendation.
