ResMed’s manufacturing capacity can now ramp to full speed after side-stepping the choke point of 4G chip supply. Allocations have doubled, but buyers will still want more.
RMD has made its June 2022 allocations to US DMEs (durable medical equipment companies) and has doubled the post-recall quota.
About half of these machines will be the full function AirSense 11 which uses a 4G chip for communication, while the balance will be the non-communicating CTC (card to cloud) AirSense 10.
The latter appears to be in plentiful supply, which suggests it was the 4G chip that was the real choke point of the manufacturing process.
RMD now has the ability to ramp up its manufacturing volume independently of incremental 4G chip supply.
We expect that the CTC AS10 will remain on sale until RMD receives approval, potentially by December, for its re-engineered AS11 using an alternate 4G chip supply. At this point, RMD will then have a dual supply chain.
Investment view
A backlog of care and a competitor product recall has combined with a shortage of product to hand RMD a unique opportunity. Price increases and big demand will drive 1H23f earnings much higher. RMD will also capitalise on the market share opportunity presented by the absence of Philips Electronics product.
The volume of ‘old’ AS10 devices will create a pocket of less functional devices in the installed base for about five years, but eventually these will be upgraded.
RMD ideally would have dismissed this approach as it requires DMEs to re-start the antiquated system of data card retrieval. But the extraordinarily high volumes of cheap and poor quality CPAP devices that are selling for higher prices indicates the desperation of clinicians and patients to get their hands on that proverbial second bowl of soup.
RMD has already put through price increases of 3-6% for most US products, including masks and accessories. This will help to offset rising cost of goods inflation.
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.
