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ResMed (RMD) Rallies as Philips Falters on Mass Product Recall

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Shares of ResMed RMD rose 6% to reach $231.70 after the company’s peer in the field of sleep apnea devices, Koninklijke Philips PHG issued recall notification for a series of its sleep and respiratory care devices. Many of the analysts think that Philips being in a tight spot will lead to a shift in customer demand toward ResMed competitive products.

Shares of Philips dropped nearly 4% following the announcement.

More About the News

Philips yesterday noted that its recall notification was to voluntarily withdraw specific Philips Bi-Level Positive Airway Pressure (Bi-Level PAP), Continuous Positive Airway Pressure (CPAP) and mechanical ventilator devices. This voluntary recall decision was to address identified potential health risks related to the polyester-based polyurethane (PE-PUR) sound abatement foam component in these devices.

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According to Philips, majority of the affected devices, which are within the advised five-year service life fall under the first-generation DreamStation product family. The company noted that to date it has produced millions of Bi-Level PAP, CPAP and mechanical ventilator devices using the PE-PUR sound abatement foam.

Per a Reuters report, Philips chief executive Frans van Houten noted that between 3 million and 4 million devices would be targeted in the recall. Company spokesman Steve Klink said about 80% of the affected devices were CPAP machines and the other 20% of affected devices were ventilators.

ResMed to Enjoy Strong Peer Position

According to The Street report, Needham analyst Mike Matson noted that the repairs of these devices will likely take at least several months. In this period, some patients using the Philips ventilators might shift to ResMed. He also stated that users with insurance coverage can substitute a ResMed device for their Royal Philips device, if that device is older than five years.

In this regard, we note that the sleep and respiratory care of ResMed includes Device, and Masks and other. Devices include CPAP, variable positive airway pressure (VPAP) and AutoSet systems for the titration and treatment of SDB. The Masks and others portfolio consists of different masks for sleep-disordered breathing (SDB) treatments like AirFit F20 in the full-face category and the AirFit N20, AirFit N30i, AirTouch N20 etc.

Our Take

We note that Philips Respironics DreamStation directly competes with the ResMed AirSense 10. ResMed recently started a limited controlled product launch of the AirSense 11 flow generator in certain parts of the United States. The full U.S. launch is expected in late 2021, which might receive bigger market acceptance capitalizing on its current competitive position.

Share Price Performance of RMD

In the past three months, ResMed has outperformed its industry. The stock has gained 23.8% against 1.9% dip of the industry.

Currently, the company carries a Zacks Rank #3 (Hold).

A few better-ranked stocks from the broader medical space are Envista Holdings Corporation NVST and IDEXX Laboratories, Inc. IDXX, each carrying a Zacks Rank #2 (Buy). You can see the complete list of Zacks #1 Rank (Strong Buy) stocks here.

Envista Holdings has an estimated long-term earnings growth rate of 26%.

IDEXX Laboratories has a projected long-term earnings growth rate of 20%.

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