FPH manufactures devices used in the treatment of respiratory and sleep apnoea disorders. It is expanding its medical device range with the aim of improving care and outcomes for patients in an increasing range of applications.
Morningstar said FPH had a strong competitive position in respiratory and acute care (RAC), along with its ability to churn out innovative new products.
Morningstar assigned a narrow competitive advantage to FPH.
"We expect revenue to grow by double digits in constant currency terms and earnings to exceed revenue growth as favourable product mix and cost savings deliver operating leverage."
The research note was bullish on RAC’s long-term prospects and Morningstar said the RAC business could expand at a double-digit rate.
The business enjoyed good pricing power as a result of the company’s more than 70% global market share. The core invasive ventilation product, used in ventilating patients who were under intensive care, was growing at up to 7% a year.
However, the biggest opportunity lay in new applications such as non-invasive ventilation, oxygen therapy, humidity therapy and surgical humidification, the research note said.
The total addressable market for non-invasive ventilation and oxygen therapy was estimated at 40 million patients. FPH remained the clear market leader in those new applications which were growing at rates of more than 20% a year and delivering better margins because of a recurring stream of high-margin consumables revenue.
The obstructive sleep apnoea (OSA) business also had exciting growth prospects, exemplified by the small number of patients (fewer than 10million) currently being treated, compared with the up to 60million patients affected.
Increasing diagnosis rates, better diagnostic and treatment devices, and improving awareness of the condition were contributing to market growth, estimated to be 6% to 8% a year, Morningstar said.
The advent of at-home sleep testing was expected to drive growth rates into the 10% to 15% range in the medium term because of lower lead times and substantial cost savings to patients and insurance companies.
"This will encourage patients who would otherwise have shied away from sleep labs to test themselves at home using an automatic continuous positive airway device."
Manufacturers such as FPH would also benefit from selling higher-margin premium products which were mainly used for at-home sleep testing, the research note said.
In the OSA business, FPH faced tough competition from Philips Electronics and ResMed. Philips pioneered the industry and had established marketing and distribution capabilities. Also, its products were synonymous with sleep apnoea treatment in the United States. FPH faced challenges when educating physicians about its products.
Competitors had demonstrated a willingness to compete on price by blanketing the market with free samples.
"FPH must stay ahead of the pack on innovation to prevent price erosion from substantially damaging returns. In comparison with OSA, competition in RAC remains benign."
FPH was focused on introducing at least two new OSA masks every year and one new flow generator every three to four years to ensure the company outpaced market growth.
In the longer-term, FPH’s OSA market share was expected to remain in the 8% to 9% range, with a higher share of masks than flow generators.
In RAC, the company would remain a clear market leader, Morningstar said.
THE BULLS SAY
• The respiratory and acute care business will continue to deliver strong constant-currency growth with improved margins.
• A significant boost in at-home sleep apnoea testing may open up the market to patients who have previously balked at costly and uncomfortable testing in a sleep lab.
• A steady rise in premium products and cost savings from moving a greater portion of production to Mexico would likely deliver higher gross margins.
THE BEARS SAY
• FPH’s ability to sell products relies largely on the willingness of third parties to pay for treatment.
• FPH invests significantly in research and development. If it is unable to successfully introduce new products into the market, sales, margins and market share may suffer.
