The share price of medical device company, ResMed (ASX:RMD), has struggled this calendar year due to supply chain issues and tumbling equity markets. While it can’t do anything about the markets, at the recent Macquarie conference its CFO, Brett Sandercock, explained how the company is making its supply chain more robust in order to capture longer-term market share.
On the recent downgrade of incremental ventilator sales from $300-350 million to $200-250 million for FY22 due to a competitor recall
The downgrade reflects “decommitment” on purchase orders from components from key suppliers earlier in the year, and forced ResMed to recalibrate what sales going into the fourth quarter. The approximate $100 million downgrade reflects around 3 per cent to group revenue.
There have been other component shortages, but these have been more manageable. Overall electronic components are in short supply (mainly the 3G / 4G cellular chips allowing cloud connectivity).
Additional work required to source components
ResMed has been working to source additional supply and suppliers, which includes improving supply of existing parts, validating new parts from existing suppliers, and validating new parts from new suppliers.
The company is working on a number of streams which are all progressing and will come through at various stages over the remainder of 2022.
While there are other supplies and alternatives, a significant decommit means RMD can’t make up that volume elsewhere.
On the potential scope to ramp up more aggressively into FY23
The company expects Q4 to be at a similar level to Q3. Going into FY23, the company expects to make improvements through the quarter, and expects supply to improve over that period as well.
There are a number of actions taken to shore up supply – while there is no silver bullet, the company is seeking to add resilience to its supply chain.
While the de-commits are significant – there are other things being done, and the company is thinking outside of the box for solutions (e.g. launch of Airsense 10 card to cloud – which bypasses the need for a communications module)
RMD is looking to leverage the strength of its balance sheet and longer-term demand profile to secure commitments from suppliers (e.g. healthcare being less cyclical).
Will prepayments for future components result in working capital build?
A component of prepayments will add to working capital, as well as additional build in inventories. e.g. an increase of around $200 million in June, driven by a doubling in raw materials.
For example, RMD may need 100 components, of which it has 98.
The CFO also noted the change in how companies were thinking about supply chains, from “just-in-time” pre-COVID, to supply chain resilience. RMD expects to structurally carry more inventory to deal with the volatility around supply chains with inventory to flatten out at a higher level.
Will the card to cloud solution for Airsense 10 be more manual? Which markets do you expect to target? Will it be material to the company?
RMD is seeking to maximise the number of devices it can put to market, with Card to Cloud a part of the solution. The data is stored in a USB card which can be downloaded to use into workflows.
RMD will launch in select markets, especially those less heavy users of communications.
The product will form part of portfolio of devices to try and meet unprecedented demand at least into FY23. The CFO expects it could potentially be a meaningful part of sales, but it will need to monitor demand for product.
The CFO alluded to some guiding principles in this time of shortage in allocating demand:
Backlog of sleep apnea customers
The CFO noted a significant backlog that will need be worked through which is expected to be multi-quarter in duration.
On RMD masks and accessories (re-supply)
The CFO noted it has the biggest market share for masks.
While there is some propensity to stick with the one manufacturer (e.g., RMD Mask + device and vice versa), the recall of Phillip’s ventilators impacts ResMed’s ability to sell more masks (the masks are interchangeable).
The Montgomery Funds owns shares in ResMed. This article was prepared 26 May 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade ResMed you should seek financial advice.