Resmed’s golden opportunity to have the global flow generator market virtually to itself for an extended period is facing some supply chain issues. But these are temporary and recoverable so that any share price weakness will be an opportunity for investors.
We understand that November orders from durable medical equipment (DME) customers were either unfilled or only partly filled. The December ordering process has been deferred as devices are stranded on ships with little visibility on delivery dates. There is a growing risk that shipping delays will push deliveries (and invoicing) into January 2022, thereby creating a disappointing December quarter report.
We also understand that RMD has ramped up airfreight deliveries, but the sheer scale of the logistics required means that planes alone cannot ensure deliveries will arrive on time, nor satisfy the large volume of orders. While DME’s are reportedly paying a US$50 airfreight surcharge for the few other device manufacturers currently supplying the US, the products are inferior to RMD.
The Philips recall has increased the importance of the two business areas into which the investment market has little insight – ventilation and national DMEs. Ventilation products are high value, low volume product where channel checks do not easily capture subtle shifts in the market. The DME national customers have become more important during the recall and insight into their activities is not transparent. Changes in either of these aspects can have important impacts on RMD’s quarterly activity that is not widely understood.
Investment view
The supply chain issue has occurred at a time when RMD is facing a momentous opportunity to win significant global market share in respiratory products while its main competitor, Philips Respironics, is sidelined due to a product recall. RMD’s big opportunity rests on two factors – the length of time it has to ramp up production while Philips is out of action, and by how much can it lift production to fill any unmet demand.
As we noted from the recent 1Q22 sales update, there is nothing to distract from the opportunity in front of RMD including logistics issues. The only real risk to the outlook is if RMD fails to lift its manufacturing capacity and seize the market share opportunity.
RMD has other growth areas including the recent launch of its Airsense 11 platform with a new range of devices to increase patient engagement with greater connectivity and two-way communication.
Additionally, the partnership with US giant CVC Pharmacy to diagnose and treat patients with obstructive sleep apnea (OSA) is worth watching.
We continue to see multiple catalysts and reasons to maintain our Buy recommendation on RMD.
