Ventilator demand, stemming from the outbreak of covid-19 at the start of 2020, almost vanished by the second quarter of FY21, yet ResMed ((RMD)) managed to beat most forecasts, generating strong sales in its traditional category of masks and accessories.
Therefore, brokers expect the next six months will be challenging in terms of revenue and earnings growth, as the contribution from heightened ventilator demand is cycled while, regardless of a lower diagnostic rate for the sleep business, mask and accessory re-supply growth should remain robust.
UBS believes ResMed can continue to penetrate the large addressable patient population that encompasses the spectrum of respiratory disease. The broker was pleased with the recovery in sleep therapy sales in some regions, considering the resurgence of coronavirus infections.
This suggests sleep laboratories and physicians are adjusting their practices to ensure patients are still being treated for obstructive sleep apnoea (OSA). While Goldman Sachs does not expect a material change in this dynamic in coming quarters, a normal seasonal slowdown in the third quarter is highlighted.
Channel checks have indicated only a modest sequential recovery in new OSA diagnoses and management has confirmed that in-patient rates are still down materially in most markets.
Market share appears to be improving in both masks and devices, as growth was still strong despite the number of patients being down around -10-30%. The company attributes the performance to device replacement – as patients at home are more easily reached – as well as market share gains.
The apparent lift in utilisation helped mask and accessories growth and Ord Minnett assesses this is a permanent change, supported by the connected care approach.
Citi expects patient growth will be slower in the next six months as fewer OSA patients are diagnosed, with more normal industry growth in FY22 as the covid-19 vaccine is rolled out. Upside risks include a profit contribution from Propeller Health and increased penetration of the COPD (chronic obstructive pulmonary disease) market.
Wilsons notes the decision to exit the oxygen category in favour of high-flow therapy is a reminder that the opportunity in home care and COPD is several years away from becoming a material driver of earnings.
Home Sleep Testing
Meanwhile, the strength in devices in the second quarter has indicated unusually material contributions from hardware upgrades/replacements for existing customers, as well as the growing prominence of home sleep testing.
Goldman Sachs believes home testing could be an increasingly interesting dynamic to monitor, as this has potential to improve the company’s longer-term penetration story by reducing the barriers to adoption.
Software-as-a-service (SAAS) growth was subdued at 6% as long-term post-acute settings were diverted by the pandemic. Goldman Sachs believes the segment is hindered by challenges from the virus, particularly relating to MatrixCare customer growth via nursing facilities.
Challenges
Ord Minnett continues to believe the period ahead will be challenging as a result of the ongoing pandemic and consolidation of US durable medical equipment businesses will mean a return to historical price pressures.
On the other hand, a stable reimbursement environment, favourable macro trends and resilient demand for masks/accessories from the large installed base all point to a robust earnings outlook, Morgans asserts.
Macquarie is more subdued in its assessment, although acknowledges the recovery shaping up in the base business for OSA patient diagnosis over the near-term, while reinvestment risks have largely been removed.
Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, has a Neutral rating and $29.10 target and remains positive on the longer-term fundamentals, although expects volatile trading over the next six months.
Relative to the sector and history, valuation remains a challenge for the broker and the growth profile is considered well reflected in the stock price. Hence there is more attractive risk/reward elsewhere.
Wilsons, also not one of the seven, retains an Overweight rating and $30.50 target and believes the negligible benefit from ventilators in the second quarter indicates a clear picture of market share gains. Moreover, ResMed’s ability to extract growth from a diminished patient pool signals the growth rate should accelerate once industry conditions normalise.
Morgan Stanley assesses outperformance over the year to date has been encapsulated in the share price, suspecting the uplift from ventilator sales peaked in the fourth quarter of FY20 and the positive revisions to earnings per share have largely played out.
That said, the company is expected to emerge in a good position from the pandemic given its connected care and cloud-based strategies. Software investments will also underpin long-term growth, and could be enhanced by accelerated adoption of remote patient monitoring programs.
FNArena’s database has three Buy ratings, three Hold and one Sell (Ord Minnett). The consensus target is $28.08, suggesting 6.8% upside to the last share price. Targets range from $25.20 (Ord Minnett) to $30.09 (Morgans).
