Market ‘underestimating’ value of F&P as force in healthcare
Fisher & Paykel has experienced extraordinary demand for its breathing aids since the start of Covid-19. But investors are now trying to read the pandemic trajectory, writes Tina Morrison.
Fisher & Paykel Healthcare’s fortunes boomed during Covid-19, pushing its value above $20 billion, but its shares have fallen from those lofty heights as investors anticipate demand for its breathing aids will slow as the pandemic wanes.
But some are betting that the medical device maker now has so many of its breathing aids being used throughout hospitals around the world that its profits will continue to track higher than before Covid-19 as they are put to use for other patients.
Fisher & Paykel has experienced unprecedented demand for its Airvo devices and Optiflow consumable products during the pandemic as hospital clinicians turned to nasal high-flow therapy as a front-line treatment for Covid-19 patients.
Demand for its products tracked surges in the virus and managing director Lewis Gradon has said that the company’s biggest achievement was ramping up production to cope with demand, which spurred it to bring forward plans to increase its manufacturing capacity to cope.
Since those heady days, the share price has pulled back from a peak of over $37 in 2020 to its current level of $29.50, shaving about $3b off its market capitalisation. Over the last year, the stock has shed about 12 per cent.
Fisher Funds senior portfolio manager Sam Dickie notes the share price had a really strong run in 2020 after it became obvious that nasal high-flow therapy was going to be the standard of care for treating Covid-19 globally.
But since then, investors have been trying to gauge what profits will look like after the pandemic wanes.
‘‘The market has been really desperate to price the end of the pandemic and the end of the supernormal profits that the company is earning,’’ Dickie says.
While there is going to be a transition period as demand for the company’s products find a new base, Dickie thinks analysts may be underestimating the longer-term positive impact of the pandemic on Fisher & Paykel’s future sales.
He notes that the company has expanded to new countries, new hospitals and new areas within hospitals during the pandemic as the use of its products spread beyond intensive care units and into wards and emergency departments much more than in the past.
‘‘When you use it intensively for two years during a crisis and see how well it works, then you will get confidence that this product is not going to backfire on you,’’ he says. ‘‘That’s more powerful than years of clinical data.’’
He doubts hospitals will leave their newly acquired Airvo machines sitting in a cupboard gathering dust.
Keeping the machines in use is important for Fisher & Paykel because about 80 per cent of its revenue is generated from consumables and accessories which connect to machines and have to be replaced regularly.
Dickie says analysts forecasts out over the next two years, when Covid-19 will hopefully have subsided, are not reflecting ongoing demand from the higher base level of devices.
In November last year, Fisher & Paykel’s Gradon told investors that its profits in the first half of the financial year to the end of September continued to be ‘‘very strong’’ following ‘‘extraordinary demand’’ during the initial surges of Covid-19 in the same period in 2020.
Sales of its hospital products now make up about three-quarters of revenue, compared with about 60 per cent of sales pre-Covid. The company
has shied away from providing firm guidance for the remainder of the financial year to the end of March, given the continuing uncertainties around Covid-19.
Hospital hardware revenue was not expected to continue at an elevated level in the second half, it said. And while consumable revenue in the second half would probably decline from its peak in the same period a year earlier, it may rise from the first half due to continuing endemic Covid-19 hospitalisations, surgical activity returning to normal, and the ongoing adoption of nasal high flow for uses other than Covid-19, it said.
Dickie acknowledges that it is a tricky area to forecast, even more so as hospital clinicians are busier than normal and less available to share data. However, he says early signs are starting to emerge that utilisation of the Airvo machines remains firm even as Covid-19 hospitalisations wane.
Craigs Investment Partners head of research Stephen Ridgewell, who has been recognised as the country’s top research analyst for four years in a row, says Fisher & Paykel has achieved a 60 per cent increase in its installed base of devices since the start of the pandemic, but the key question is whether the company can convert those to treat nonCovid patients.
‘‘We believe that most of the devices that have been sold to hospitals will be used by them postpandemic, particularly F&P’s high-flow devices, for non-Covid patients,’’ Ridgewell says. ‘‘This reflects that prior to the pandemic that penetration of high flow in hospitals was still very low [for nonCovid patients].’’
While he thinks the switch will happen, Ridgewell warns that it may take some time and is unlikely to be a smooth process.
It does seem that the company is gaining some traction, noting in its November update that device demand was significantly above pre-pandemic levels in Europe even as Covid hospitalisation rates declined, he says.
Fisher & Paykel has not only experienced a boom financially during the pandemic, but has enhanced its corporate reputation as well, refraining from raising prices even though it faced higher freight costs, and rewarding the commitment of its staff with special bonus payments.
It is the biggest Kiwi company listed on the NZX, and Craigs Investment Partners also ranks it as one of the highest quality. In 2020, Fisher & Paykel was awarded Company of the Year in the Deloitte Top 200 Awards for its outstanding response to the Covid-19 pandemic in ramping up production quickly to meet demand and deliver products to the market at a crucial time, and Gradon was named chief executive of the year. Dickie says Fisher Funds has a slightly overweight position in the stock, and is pretty positive about its long-term prospects.
‘‘There’s going to be a transition period out of Covid, we’re respectful of that,’’ he says.
‘‘But they’ve come through this with flying colours and stood themselves in very good stead and saved lives in the process. There’s quality everywhere you look.’’