The incremental revenue opportunity that fell into ResMed’s lap due to a competitor product recall has been badly spoiled.
The global shortage of electronic components has left RMD unable to completely fill the demand void created by rival Philips Electronics (PHG) being sidelined by its product recall. In effect, RMD has ‘pulled a hammy’ with the racetrack all to itself.
Perversely, the supply shortage will not have been resolved when PHG eventually returns to the market. RMD’s failure to ramp up supply in the short term will drive an even larger shortage in the medium term.
The backlog of untreated patients is already more than 25% of a normal year of supply. In addition, most durable medical equipment suppliers are reporting little rePAP activity which is normally about 10% of demand. Total PAP demand could easily be 130% of a normal year. Both major manufacturers (RMD and PHG) are likely to see healthy sales feeding the backlog. As a kicker, the market is now conditioned to expect higher prices, even for full feature products.
Considering all this, RMD has now lowered its target of incremental sales from US$300-350 million to US$200-250 million. We estimate PHG will remain out of the market until the end of CY22.
RMD’s 3Q22 result was well below consensus estimates with revenue of US$864.5 million an increase of 12.5% (+14% on constant currency basis). EBIT of US$253 million increased 4.6% and net profit of US$193.3 million (+1.5%) allowed an unchanged dividend of US42cps.
Investment view
The idea that RMD can increase its manufacturing to satisfy the unmet demand for flow generators during PHG’s recall event remains intact.
The execution of this opportunity has come unstuck due to the global chip shortage and RMD management concedes it has little to no ability to forecast the supply of critical components. RMD’s manufacturing push is effectively being scuttled by the lack of chips. There are some workaround possibilities such as using alternative chips which requires some re-engineering of products.
Whatever market share RMD can grab from PHG during the recall window of opportunity will mostly be retained, but the quantum of gain now looks to be less significant than previously thought.
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.
