Fisher & Paykel Healthcare (ASX FPH) designs, manufactures and markets medical devices and accessories for use in respiratory care, acute care, and the treatment of obstructive sleep apnoea. The company is the leading global supplier of humidification solutions in the hospital ICU and is also a major player in the obstructive sleep apnoea space. Headquartered in New Zealand, the company generates more than 99% of its sales from international markets.
Currently sitting at a market cap of NZD$7.88B, the Fisher & Paykel Healthcare share price rose 26.6% YoY from $4 to $13 FY12-18, with its profit rising 25.7% YoY from NZD$64M to NZD$201M. More impressively, FY12-18 Fisher & Paykel Healthcare beat the S&P 500 Healthcare Index, S&P/ASX 200 Healthcare Sector Index and Dow Jones World Healthcare Stocks Index. It also managed to improve its gross profit margin (48.2% to 65.7%), EBITDA margin (14% to 32.5%) and net income margin (13.7% to 20.9%) FY12-18. Fisher & Paykel Healthcare is currently trading at a P/E ratio of 58.
Fisher & Paykel Healthcare (ASX FPH) – Share Price History
Fisher & Paykel Healthcare (ASX FPH) – Highlights of Financials
Source: MF & Co Asset Management Estimates and Bloomberg
Hospital vs Homecare. The company splits its product groups into hospital and homecare. As illustrated, F&P’s hospital/respiratory & acute care business accounts for 58% of revenue and offers devices for heated humidification, respiratory care, neonatal care, and surgical humidification. The home care group products take up 41% of total revenue, which include masks, flow generators, and data management tools used in a homecare setting. The revenue by geographic is also shown below, with North America taking up 47%, followed by Asia Pacific’s 30%, Europe’s 18%, and others.
FY18 Revenue by Product Group
Revenue by Geographies
Source: FPH FY18 Interim Report
Unconventional treatment lowers cost. Through its proprietary and patented devices, the company’s strategy is to increase the effectiveness and efficacy of treating COPD and in turn reduce the cost of care. FPH essentially believes that it offers a good treatment for COPD– chronic obstructive pulmonary disease, so people with light symptoms don’t need to go to the hospital and those with severe symptoms spend less time and money in ICU. As illustrated, there is a direct correlation between care intensity and cost when treating COPD. Through its medical devices (Optiflow, for example), F&P lowers the cost of customers by reducing the intensity of treatment (less labor) and length of stay in the hospital.
Lower Care Intensity = Lower Cost
Mean Annual COPD-related Medical, Pharmacy, and Total Costs by Care Intensity Cohort
FPH – Health economics of Optiflow
Source: FPH FY18 Annual Report
Prevalence of COPD and related cost. COPD is the fourth leading cause of death in the United States, as well as the fourth leading cause of disability. There are 6% of US adults that have been diagnosed with COPD (~15M people), and COPD prevalence is estimated at 4-10% worldwide (~400M people). More than $32 billion was spent on COPD-related patient in the U.S. in 2010, and this cost is expected to increase to $49 billion by 2020.
More clinical evidence for NHF. Given the high cost associated with COPD, there is a growing interest in developing therapies that could lower the rate of COPD hospitalization and the related burden imposed on health systems. As illustrated, it can be seen that Nasal High Flow (NHF), the therapies that are promoted by F&P’s devices, have seen a significant increase in publication since 2014.
Stronger evidence needed for F&P’s growth. However, many of these NHF studies only show non-inferiority of NHF to conventional therapies, instead of statistically significant superiority. Moreover, most of the NHF clinical evidence was found in an ICU setting, instead of outside of ICU, where there are much more addressable patients and much lower market penetration for F&P. Stronger clinical evidence is needed to persuade physicians into recognizing the NHF therapy and F&P’s brand name.
Source: FPH FY18 Interim Report
NHF market is very price-competitive. As illustrated, total national health expenditure in the U.S has expanded 6.8% YoY, while medical device spending has been a small and stable share of total national health expenditure for more than 25 years, at around 6%. However, medical device price only shows an 0.9% of YoY increase over 25 years, compared to 4.8% of CPI for medical care services, 4.5% of CPI for medical care and 2.7% of CPI.
It shows that the price of medical devices failed to catch up with inflation, and yet the medical device spending managed to grow at the same pace as total spending. A relatively low increase in price and yet larger volume of sale indicates that the medical device industry is highly price-competitive. This is further verified by F&P’s FY18 annual statement that although the gross margin increased by 22 bps (excluding currency’s favourable impact), it is partially offset by price decline, reflecting the high competitiveness in this industry.
Device expenditure as a percentage of national health expenditures, 1989-2013
US consumer prices and selected medical prices, 1989-2013
Strength and weakness
R&D investment. Fisher & Paykel typically invests 9-10% of revenues each year in R&D projects. In FY18 the company spent NZ$95m on R&D. At the end of FY18, the company had 186 registered patents in the US with 385 pending applications and 870 patents outside the US with 912 pending applications. Moreover, the average remaining life of F&P’s patent portfolio is 12 years.
Average remaining life of FPH patent portfolio (all countries): 12 years ( As at 31 March 2018 )
Source: FY18 FPH Interim Report
Currency exposure. Fisher and Paykel Healthcare (ASX FPH) generated over 99% of sales in foreign currencies but localized 46% of its cost in New Zealand, and hence it faces a currency mismatch. The group’s hedging policy is designed to smooth the impact of currency moves on the company’s net operating exposure and to take advantage of FX opportunities. Although this helps to offset the impact, on a year-by-year basis a strengthening of the $NZ relative to major revenue currencies would have a detrimental effect on its earnings.
Fisher & Paykel Healthcare (ASX FPH) – FY18 Sales by Currency
Source: FY18 FPH Interim Report
High but slowing revenue growth. As illustrated above, Fisher and Paykel Healthcare (ASX FPH) has experienced high growth across all income metrics, including revenue, gross profit, EBITDA and net income. Specifically, FY13-18 revenue reached compound growth of 13.7%, gross profit at 19.6%, EBITDA at 28.3% and net income at 21.2%, respectively.
However, YoY growth, as depicted as the grey lines in the graphs above, all peaked around 2016-2017, before dipping below 10% for all metrics. It shows that after high growth FY13-17, in FY18 F&P is facing obstacles in expanding hospital market outside of ICU and in the homecare setting.
Declining cost of sales brings higher net income margin. The high growth in net income is mostly attributed to the high growth of revenue (expansion of market) as well as the lowering cost of sales margin. FY12-18 operating income margin (green) and gross profit margin (blue) increased by 19%, the same percentage that cost of revenue margin (purple) declined. In other words, the decline in the cost of sales is the main reason for the improvement in gross profit and operating income.
This verifies our view that medical device market is extremely price-competitive, and F&P is improving its profit margin through effective cost control. However, with the cost of sales already down 19%, from 53% to 34% FY12-18, it is hard for F&P to continue cutting cost. Moreover, it can be seen that the rate of cost-cutting has been slowing since FY17, reflected in the cost of revenue margin line (purple) turning flat FY17-18.
Vapotherm, Inc. (NYSE VAPO) and ResMed Inc. (NYSE RMD) are listed direct competitors with Fisher and Paykel Healthcare (ASX FPH) in humidification device. Phillips Respironics (a subsidiary of Phillips) and Hudson (under Teleflex) are competitors, but humidification is not Phillips and Teleflex’s major business. Therefore, Vapotherm and ResMed are selected as peers.
- ResMed share price has higher growth. ResMed gained 68.92% in share price FY16-19, compared to F&P’s 58.95%.
- ResMed has higher revenue growth. F&P’s revenue increased 18% from NZD$877M to NZD$1.03B, while ResMed’s increased 23% from USD$1.97B to USD$2.4B. It shows that ResMed has more revenue as well as higher growth.
- Fisher & Paykel Healthcare has a higher gross profit margin. FPH’s gross profit margin exceeded ResMed since FY15. FPH’s gross profit margin currently sits at around 67% while ResMed’s margin stays at 58%. The medical device market is extremely price-competitive, and this is a considerable advantage of FPH against its competitors.
- P/Diluted EPS relationship reversed. ResMed’s P/E was higher than Fisher & Paykel Healthcare since FY18. However, with the lower than expected earnings report released by ResMed on 01/25/2019, ResMed’s P/E dropped from 50 to 30, before recovering slightly to 33. FPH P/E recently increased from 35 to 41. FPH earnings report is expected in May. FPH P/BV is 11x while ResMed’s P/BV is 7.5.
Share Price History
Relative Revenue Growth
Gross Profit Margin
P/Diluted EPS Before Extras
Price/Book Value (P/BV)
Fisher and Paykel Healthcare (ASX FPH) is a global leader in manufacturing medical devices related to sleep apnea, chronic obstructive pulmonary disease, and other respiratory conditions. FPH aims to provide products both at home and in hospitals to relieve COPD symptoms and reduce medical costs for patients. COPD is globally prevalent, and treatment in this field has high market potential, but FPH needs more clinical evidence to establish its brand outside of ICU. Moreover, the medical device market is highly price-competitive, and FPH sees decelerating revenue growth and decelerating cost reduction. Furthermore, the P/E relationship between FPH and ResMed recently reverts, with FPH’s P/E rising to 41 and ResMed’s declined to 33. FPH may be fairly valued at this point and faces a risk of a correction in the share price should the result in May be unfavourable. There is potential for the results to report unfavourably given its peers have also underperformed so the risk is currently to the upside.
This article was researched and co-written by Victor Leung.
Henry Fung is a Partner Managing Director and co-founder of MF & Co. Asset Management. He is a highly experienced equities, derivatives and financial markets professional with over 12 years of experience. Henry specialises in building trading algorithms & systems, quantitative & qualitative analytics across macroeconomic, fundamental and technical disciplines and currently runs the MFAM VPAC AU/US models portfolios. The management Partners and Adviser team have decades of experience between them, with experience from major Investment Banks and Brokers. Their Advisers are highly experienced, having dealt with some of the wealthiest clients in Australia.