By Emma Koehn
The past two years for sleep treatments maker ResMed reads more like a movie script than a report from an Australian Securities Exchange-listed company.
A global pandemic hits, disrupting its sleep treatments business. Then, staff find themselves at the centre of a major coronavirus crisis response, as ResMed ventilators are shipped to desperate hospitals around the world, generating hundreds of millions of dollars in new revenue.
Credit: Kathleen Adele
As those COVID-19 tailwinds fade, a major recall of a competitor’s technology positions ResMed once again in a period of extraordinary demand for its products.
The company has spent the past two years showing how valuable Australian-developed intellectual property can be. Even so, the company’s shares are down 12.3 per cent for the year.
After two years of huge events outside of management’s control, can ResMed still grow in less intense circumstances?
How it started: Founded by Peter Farrell in 1989, the company rolled out technology originally developed at the University of Sydney. Its shares were trading at just 88¢ when they listed on the ASX in 1999.
How it’s going: Peter Farrell’s son Mick is now chief executive of the US$31.7 billion ($47 billion) market cap business, which is based in San Diego. The company’s shares, which also trade on the Nasdaq exchange in the US, were changing hands this week on the ASX for about $32 – a return of more than 4000 per cent since the 1990s.
Industry: Medical technology.
Main products: Continuous positive airway pressure (CPAP) machines for treating sleep apnoea, ventilators and digital health software.
Key figures: Peter C. Farrell, Mick Farrell.
The bull case: The business posted a 5 per cent jump in net profit in the last quarter, coming in at $US179 million ($265 million), after a period of strong demand for its sleep treatments products.
The global recall of certain CPAP sleep apnoea devices manufactured by competitor Philips has dragged on for more than a year, and given ResMed an opportunity to snap up market share. Mick Farrell told this masthead earlier in the year that he is confident of keeping those new customers.
‘The acquisition [of Medifox Dan] give ResMed potential expansion opportunities that we have not included in our forecasts.’
RBC Capital Markets analyst Craig Wong-Pan
In June, the company announced a $US1 billion acquisition of German company Medifox Dan, which makes software for nursing homes and to help with outpatient care. ResMed has a range of software products that track and improve patients’ sleep and has been trying to expand revenue into this space for years.
RBC Capital Markets analyst Craig Wong-Pan says that while it looks like ResMed paid “full price” for Medifox Dan, the deal gives the company a growth opportunity in Germany and other European markets.
“The acquisition does give ResMed a number of operational synergies and potential expansion opportunities that we have not included in our forecasts, which could make the acquisition more appealing and value enhancing,” he said in a research note to clients.
The bigger question for ResMed in the next 12 months is whether sales of sleep treatment devices continue to grow in an uninterrupted way, after significant disruptions during the pandemic.
Wilson Advisory analysts point out that the success of an acquisition like Medifox Dan depends on how well it helps ResMed sell its core products.
“Medifox is modestly accretive in its own right, but the valuation only makes sense when the deal logic leads to incremental medical device sales in these settings,” analyst Shane Storey wrote in a note to clients last month.
The bear case: Over the past year, supply chain challenges have put the brakes on ResMed’s growth.
A shortage of semiconductor chips has constrained production and meant that the company cannot fully meet demand for its products. While its most recent quarterly update showed revenue and profit growth, it fell short of analysts’ expectations.
J.P Morgan’s equities team is “overweight” on the stock, observing that while there are supply chain risks, ResMed is not alone in facing these challenges.
“ResMed is as affected as industry peers, and we retain the view that it is best placed over the long term,” analyst David Low said.
Morningstar analysts point out that while ResMed has weathered challenging conditions over the past two years, it is hard to predict what new risks might be on the horizon.
“The extent to which ResMed stands to benefit in the near term from the launch of a new flagship product, new sleep apnoea diagnosis rates recovering to pre-coronavirus levels, and Philips’ voluntary product recall, is harder to predict,” analyst Shane Ponraj wrote in a report last month.
Investors will have a stronger idea of how the company is performing at its earnings release next month.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.