Two stunning healthcare stocks (hint: it's not CSL)

Edited Transcript

James Marlay

You had the option to pick one stock, but you wanted to talk about ResMed and Fisher & Paykel Health. Why are these companies interesting?

Ben Clark

I thought it would be interesting to compare and contrast these two companies. Fisher & Paykel just had its AGM and unusually at its last result, it didn't give guidance for the year. The market is in the dark as to how Fisher & Paykel is tracking given it has been such a good long-term performer. There is some crossover in these businesses, they both have interests in the sleep market and in the ventilator market. It is very topical now because there is strong demand. Sleep was a terrible place to be last year, and that area is starting to see an acceleration this year. There are some big things happening within the industry. I thought I would talk about whether these companies are going to be winners, losers, or are they going to tread water?

James Marlay

Can you give us the elevator pitch on each of these companies?

Ben Clark

ResMed is the global leader in sleep apnea treatment, particularly for its CPAP breathing machines. It sells a lot of consumables that are linked to these machines. It has a fast-growing Software as a Service (SaaS) business, which is helping physicians and patients to connect through a cloud-based platform. The company is run out of San Diego and was originally an Australian company. It has been a great success story and still run by Mick Farrell, the founder's son, who has done an extraordinary job growing this business. We see it growing into a much larger addressable market in an attractive industry.

If we look at Fisher & Paykel Healthcare as an alternative, it was spun out of Fisher & Paykel Appliances. It was a small medical unit that was started internally and then it grew under its own steam at incredible levels. It became a global specialist in respiratory devices, machines and technology. It's an area of medicine which has been under-appreciated and under-penetrated. The company has progressed in leaps and bounds since it was spun out of Fisher & Paykel Appliances. It is now one of the largest companies on the New Zealand stock exchange and it is dual listed on the Australian Stock Exchange. It has an innovative culture and has been very well run over many years.

James Marlay

How did the recent updates compare to your expectations?

Ben Clark

ResMed has had a strong quarter. The stock is dual listed on the New York Stock Exchange and therefore reports quarterly sales numbers. Their result came in firmly ahead of the market's expectations at about 14% revenue growth for the last quarter. The big news is what's going to happen over the next 12 months as Phillips, which is the second largest player globally and the key competitor to ResMed, announced a global product recall of their key CPAP device.

What this means for ResMed is there a suddenly scramble amongst Phillip's patients for ResMed machines. Mick Farrell suggested that ResMed could increase their sales over the next year, as a result of this recall by 300 to 350 million US dollars over the 12 months. The thing he really spent some time on (and this isn't just ResMed, this is virtually every company that I've been listening to to-date in the reporting season) is that supply chains are still in a state of chaos. They are having to provide allocations of orders rather than filling the complete orders. They cannot keep up with the demand. 

The sales success for ResMed is going to be driven by their supply chain.

We think the $350 million that they have suggested is going to be conservative. ResMed are very good operators and we think they will run that supply chain a lot harder than they've given the market guidance for. This period could see ResMed take a meaningful and potentially semi-permanent increase in market share. Once patients go into ResMed's ecosystem, it's fairly hard to leave.

James Marlay

And what about the Fisher & Paykel update?

Ben Clark

Fisher & Paykel is going through an interesting time. Being one of the largest manufacturers of ventilators and respiratory devices globally, they’ve had an incredible year. I think their profit grew about 72% last financial year. They didn't give any guidance for the year ahead because there are so many moving parts with COVID. It is near impossible to predict where they are going to end up for the year. The AGM that they held today is more meaningful because we received a decent trading update. 

My overarching comments on it would be that the predicted fall in sales that all analysts had baked into their numbers has occurred, but it hasn't been nearly as bad as the market was expecting.

Hardware sales were down bout 4%. Interestingly, there was a big drop off in the Western markets but there was a big kick up in other markets, which includes places like India. This is quite good news and suggests that sales have held up well. We know that Delta is now roaring throughout the world and ICU units in many countries across the world are seeing elevated patient numbers unfortunately back on ventilators. My read is that this year of consolidation is probably not going to be as bad as the market thought.

The company is playing down the current sales volumes, however, I think they are being conservative and this might be a better year than expected.

James Marlay

What are the most important things that you think investors now need to be thinking about with each of these companies?

Ben Clark

Looking at ResMed, one thing I always tend to think occurs during earning season is investors underestimate good news. They don't look as far forward on what this could mean for ResMed. 

I think this is potentially a lot more meaningful and although the share prices run very hard, I think the market could be underestimating how good this period could be for ResMed. 

Not just on the short-term sales for the next 12 months, but this could be a nasty hit to the competitor.

Since the quarterly ResMed also announced they're launching their new CPAP machine, the S11. The lifecycle of these machines tends to be five or six years and the new release looks meaningfully better than the past device. I think you're going to see the patients being able to go out and get diagnosed and get treated in America in particular, without worrying about dying from COVID. You are going to see Philip's patients scrambling to move on to ResMed machines. And you're going to see existing ResMed patients wanting to upgrade to the new machines. The key to how good this is going to be over the next two or three years is how well they can manage that supply chain. Can they make hay while the sun is shining?

James Marlay

If we were to switch over to Fisher & Paykel, what's the one thing you think investors really need to focus on and follow with that company?

Ben Clark

Fisher & Paykel is more of a hold at the moment. There is still a year or two where the company has to grow into its PE and we have to go through this period of earnings consolidation. Don't underestimate that one of the hardest things for Fisher & Paykel is to get those upfront hardware sales of their products into hospitals. Once they're in the hospitals they create an income stream for the business. A lot of physicians are now more familiar with these devices. It takes years for that to normally happen and COVID has created this massive pull through in recognition of the brand and the technology that Fisher & Paykel has been very aggressively investing in for the last decade.

Again, don't underestimate the long-term and what COVID has created for Fisher & Paykel. But it wouldn't surprise me if over the next 12 to 18 months, the stock continues to range trade. We own it and I think it remains a good opportunity looking five years out.

James Marlay

If you had to choose between ResMed and Fisher & Paykel, which one would you choose today and why?

Ben Clark

I choose ResMed today, James. It has earnings momentum that the market is currently underappreciating. I think that they're being conservative in terms of the guidance that they've given the market. 

I think the market will come to the view that ResMed’s 50, 55% market share could go to 80% - if they can keep up with the demand.

What could happen in the next 12 months is a decade changing proposition. I think the market might be underestimating how big this could be for the company.

James Marlay