Resmed's 1Q22 update revealed the incremental flow generator sales benefit will skew towards the latter part of the year, but the company is still likely to make big market share gains while competitor Philips Respironics (PHG) is sidelined. RMD is possibly being deliberately conservative.
RMD's golden opportunity this year and next stems from its competitor's product recall on flow generators. PHG has left the door open for RMD to take some significant market share and permanently retain most of the gain. The game now becomes how quickly RMD can ramp up production to satisfy the demand.
RMD is currently facing difficult conditions in lifting manufacturing capacity due to well understood global supply chain issues. But the fact that RMD generated incremental flow generator sales of US$80-90 million, 6 months earlier than planned, with so little lead time demonstrates the potential for the rest of the 'recall' free hit period.
Management pointed to the supply chain issues as a reason to be cautious on the outlook, but this is fooling no-one.
RMD's challenge depends on two things, in our view. Firstly, how long does RMD have to ramp up production while PHG is out of the market? Secondly, by how much can RMD lift production by the end of the recall period to fill any unmet demand?
RMD's growth outlook does not solely depend on the market share grab in FGs. The launch of its Airsense 11 platform with a new range of devices will increase patient engagement with greater connectivity and two-way communication.
There is now also a newly announced partnership with CVS Pharmacy in the US to diagnose and treat patients with obstructive sleep apnea (OSA). With over 9,900 retail pharmacies around the country, CVS can become one of RMD's largest distributors by footprint and potentially expand the OSA pie by reaching more patients.
RMD's 1Q22 revenue increased 20.2% to US$904 million with a similar increase in operating income to US$261.9 million.
Investment view
In our view, RMD's nuanced guidance for the gradual pick up in flow generator sales weighted towards 4Q22f, is a conservative statement designed to manage customer and analyst expectations. We saw nothing from the 1Q22 sales update to distract from the big opportunity in front of RMD to make hay while the sun is shining.
The risks to our view include if RMD fails to ramp up its manufacturing capacity and/or seize the available market share opportunity. RMD itself is not immune from a product recall event.
The PHG recall and market share opportunity, together with the launch of the Airsense 11 platform and the CVS partnership provide ample reason to anticipate very good earnings growth from RMD in the next few years.
We continue to recommend RMD as a Buy.
