Sleep therapy business ResMed expanded its product portfolio and took market share in the first half. Most brokers are confident growth will remain robust over the balance of FY20.

-Growth likely to be robust over FY20 but tough comparables will emerge in FY21
-ResMed being insulated from brand switching as automated re-supply gains popularity
-The outcome of US competitive bidding is the main risk in 2020
 

ResMed Inc ((RMD)) remains on a strong footing as 2020 gets underway, continuing to expand market share and generating growth in its first half result above trend. Citi considers the business outlook "excellent" and anticipates, with market penetration at less than 20%, strong growth rates can continue for a decade.

The company has gained market share at the expense of both Philips and Fisher & Paykel Healthcare ((FPH)) and the pricing environment remains benign. The broker expects competitors will launch new masks but the impact could be more muted, given the increasingly large share now being sold under re-supply arrangements.

Despite competitors signalling an intention to "fight back" in 2020, Ord Minnett envisages little risk that the company's market dominance will be challenged. Nevertheless, growth will inevitably slow as acquisitions are cycled and comparables become harder to beat.

Macquarie, too, assumes growth will remain robust over the balance of FY20 but considers the risk/reward profile is skewed to the downside as tough comparables in the remainder of FY20 and into FY21 will emerge.

ResMed is a beneficiary of a broad product portfolio, having launched five new masks in the past 18 months and, regardless of of whether tough comparables are being recycled, Credit Suisse believes, with the latest mask being launched in January and rising re-supply, double-digit growth is likely into FY21.

Mask growth was 19% in the US and 11% in the rest of the world in the December quarter and US device growth was 9.1%. Credit Suisse forecast 16% growth in US masks in FY20 and 10% in FY21.

Automated Supply

Fewer customers going to the durable medical equipment (DME) supplier shops to get a new mask signals there will be less switching of brands. Citi also notes ResMed has reinforced its position by acquiring SnapWorx, which provides patient contact management and workflow optimisation for the sleep apnoea re-supply market.

Wilsons agrees the company is being insulated from brand switching, as there has been no apparent impact from competitor launches of masks in the US, and broader customer participation in automated re-supply remains key.

The broker also notes automated re-supply solutions are gaining popularity which is creating structural changes in the channel and favouring ResMed. This could make medical device businesses more resilient when they face the next round of US competitive bidding reimbursement changes.

With the increased investment in data platforms, Credit Suisse is upbeat on the company's ability to improve the quality of care to patients in the home setting as well as improve the penetration rate within the sleep and COPD (chronic obstructive pulmonary disorder) markets.

ResMed has made progress with Propeller, including several pilots with pharmacies in the delivery of respiratory medicine and has noted for the first time Propeller contributed 1% to global mask sales.

An end-to-end approach can deliver a large competitive advantage if COPD therapy decisions can be integrated with out-of-hospital software, Wilsons suggests. This could then make it more difficult for alternative therapies to break into the COPD home-care channel.

The most important new opportunities are in the respiratory care division, UBS suggests, and how these modes of therapy are integrated in COPD could be important in terms of capturing more patients and maintaining retention rates as well as lowering the costs of delivering care.

Moreover, while the path to higher profitability in software-as-a-service is not yet clear, albeit it has merit, the performance in core sleep therapy mitigates the risk associated with the expansion of connected care, the broker adds. As key providers are now covered, such as nursing homes, hospices and DME suppliers, UBS believes a period of consolidation in the COPD division is now more likely.

The broker downgrades to Neutral from Buy, based on the recent performance of the share price, assessing robust growth is captured in the valuation. US re-supply is showing no signs of slowing down and, moreover, with the success of Brightree saturation is not expected to occur in the short to medium term.

Recent mask launches appear to be adding to overall category growth for ResMed,  UBS adds, judging by the shift in market share. That said, increased frequency of supply, particularly in the US, is contingent on US Medicare and commercial insurers maintaining current reimbursement methodologies.

Competitive Bidding

The outcome of US competitive bidding is the main risk in 2020. However, there is another six months until new Medicare contracts are announced and 12 months until new reimbursement rates come into effect.

The market does expect a modest re-setting of average selling prices, particularly in some mask and ventilator categories. Citi points out around 15% of the company's total revenue will be affected by new prices, which should be known from July.

Another consideration is how the price changes will be allocated between manufacturers and DME suppliers. The company's leading position in the flow generator market makes it well positioned in this regard, with Wilsons assessing connectivity for medical devices will again be the theme.

Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, has an Overweight rating and $28.32 target. The database has three Buy ratings, three Hold and one Sell (Macquarie). The consensus target is $24.26, suggesting 1.2% upside to the last share price.

FNArena is proud about its track record and past achievements: Ten Years On

All material published by FN Arena is the copyright of the publisher, unless otherwise stated. Reproduction in whole or in part is not permitted without written permission of the publisher.

© 2020 Acquisdata Pty Ltd., source FN Arena