The Philips Electronics product recall event looks set to take another twist as ResMed considers raising product prices. If the company can effect this, forecast earnings may increase.
It’s time for RMD to join the price rise party. Third-party manufacturers have not hesitated to increase prices on low end and poor quality devices, up to 80% above RMD prices. Any suggestion that RMD could be accused of profiteering from the recall event by raising prices has emphatically disappeared and the company now has a green light to do so.
The low feature ‘CheapPAP’ devices that have proliferated since the recall commenced have surged in price from US$350 in October 2021 to around US$500 including a US$50 freight surcharge! The DME’s (durable medical equipment) are not enamoured with these devices but have little choice in a supply-constrained market.
The third-party manufacturers are now shifting significant volumes. Perversely, this has left the high quality RMD devices at the cheap end of the market and with insufficient volume to sell.
There is a significant backlog of patients that is driving the unusually high demand for PAP devices which could be at 130% of a normal year.
The situation is exaggerated by rampant inflation in healthcare generally as all costs are pushed higher.
We estimate a price increase of US$15 per PAP device would lift RMD FY23f earnings per share by about 9% on a like-for-like basis. This would likely be diluted slightly by higher cost of goods inflation. The revenue opportunity from the recall event is already approximately US$200-250 million for FY22f.
We still think Philips will be out of the market until the end of CY22.
Investment view
Prices for sleep apnoea therapy devices have been in decline for more than 20 years as volumes grew. The Philips product recall event has opened the door for RMD to gain significant market share and retain it, but until recently, lifting prices was not part of the formula.
In a supply-constrained market with inflation pushing up all costs and low-end manufacturers already hiking prices significantly, RMD should have no inhibition to lift its own prices. Doing so will add meaningfully to FY23f earnings and we think consensus forecasts have yet to factor this in.
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.
