Market share is likely to remain ResMed while Philips struggles to replace its recalled device. Yet will supply chain constraints limit the benefits?

-Supply chain constraints should be apparent in the second and third quarters
ResMed consider additional freight to offset the higher costs
-A market share is likely to remain even if Philips returns to the device market

Despite the potential benefit of the Philips recall, there are short-term supply constraints that could limit the growth of ResMed ((RMD)). Or is the company just conservative with advice?

The forecasts for fiscal year 22 are unchanged, at 300-350 million US dollars additional revenue from the recall, reflecting an expectation of component shortages before the situation improves in the fourth quarter. Jarden thinks that must be a conservative estimate, as it implies a drop in device sales over the next two quarters, if an increase in fourth-quarter sales occurs while the constraints are lifted.

Additionally, supply chain constraints were not so evident in the first quarter, but management reports that this will become evident in the second and third quarters. Above all, Jarden emphasizes management has not noted a substantial increase in the price of chips.

ResMed estimates 80-90 million US dollars additional revenue related to the Philips recall was generated in the first quarter. Management says fewer patient setups have taken place as a result of the recall and this has reduced overall mask sales in the United States. Jarden suspects that the recall may have meant some patients were without a device and unable to stay on treatment.

Management also stressed that the volume of patients is expected to improve, especially in healthcare facilities. Total device revenue increased 31% in the quarter amid a recovery in new patient numbers and increased demand resulting from the recall of Philips and the launch of AirSense 11.

Overall, AirSense 11 and AirSense 10 are being sold in parallel to meet increased demand following the recall. Macquarie notes that new patient diagnoses ranged from 75% to over 100% of pre-pandemic levels depending on geography. This was facilitated by the deployment of vaccines.

The company registered US $ 4 million of ventilator sales in the first quarter and expects minimal revenue from pandemic-related demand in the future. Inventories have increased, which Jarden says is a positive sign because ResMed tries to meet the demand for devices.

Freight disruption is a problem the broker expects to correct. ResMed considers a surcharge to help offset the cost of freight, and notes that smaller competitors have already moved in this direction.

Morgans concludes, despite pressure on margins and supply constraints limiting earnings from the recall, underlying fundamentals are improving and this underpins a strong outlook.

Supply Chain

Despite the opportunity presented by the Philips product recall, management has consistently warned that supply chain issues will limit sales growth. Still, Morgan Stanley considers that the pressures on the supply chain are not enough to have a substantial impact on the outlook.

That said, the broker acknowledges, without any indication, that gross margins are likely to be low. Gross margins of 57.2% were lower than most expectations due to higher costs.

Macquarie notes that freight / transportation costs contributed 50% of the gross margin decline in the quarter and that an unfavorable change in the mix did the rest, as device sales took over. higher margin masks.

As the supply chain returns to normal, Jarden expects gross margin leverage to generate 26% net profit growth in FY22, noting that with the recent addition Singapore manufacturing capacity, ResMed now has sufficient excess capacity in terms of in-house manufacturing to meet the current demand created by the Philips recall.

Citi suspects the company of not providing margin guidance due to volatility and higher component costs, with shortages likely to continue. Either way, the broker thinks there might be some benefit to orientation as it only includes devices. It is also possible ResMed could secure some components to increase production faster than expected.

Macquarie note, on October 1st, ResMed acquired Ectosense, a cloud-connected home sleep apnea testing technology from Belgium which has helped increase rates of diagnosis.

Market share

Citi assumes 450 million US dollars in additional sales following the recall, made up of US $ 350 million in devices and $ 100 million in the masks, but believes that the market share gains resulting from the recall are already built into the stock.

The broker forecasts 19% revenue growth for fiscal 22 and expects ResMed will be net cash by the end of the third quarter. Longer term, beyond FY24, Macquarie assumes ResMed retains 25% of the share of Philips devices, which underpins its valuation.

Additionally, Citi says it may take Philips longer to complete the recall, leaving the company longer as the sole device supplier. Philips is unlikely to be able to supply new patients until at least the end of fiscal year 22.

In fiscal year 23, the broker expects ResMed will retain around half of the additional sales made in FY22 and a permanent market share gain of 10%. Philips expects to repair or replace affected devices within 12 months of regulatory approval, implying a date of approximately September 2022. In the meantime, Philips sells masks and accessories but no devices.

Morgan Stanley believes that the advantage ResMed listed for FY 22 is likely to be prudent and assesses the stock to approach fair value – if the potential risk for FY 23 when Philips returns is ignored. Still, the broker expects ResMed the valuation of the premium is likely to be maintained.

Ord minnett agrees the company will retain market share, but when Philips returns in FY 23 this will present headwinds to growth while Jarden sees a great opportunity to retain shares, especially if ResMed can capture new patients entering the system.

Jarden, not one of the seven brokers monitored daily on the FNArena database, has an overweight rating and $ 39.64 target. The database has two purchase ratings and four retention ratings. The consensus goal is $ 39.10, suggesting an increase of 11.4% compared to the last share price. Targets range from $ 36 (Ord minnett) To $ 44 (Swiss credit).

See also, Will ResMed Are the market share gains lasting? to August 24, 2021.

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