Investors respond perversely to F&P Healthcare’s record profit and booming sales – but staff will benefit from the cheering result

Auckland-based medical equipment manufacturer Fisher & Paykel Healthcare has posted a record full-year result, as the pandemic drove unprecedented demand for its products.

Its net profit for the year to March rocketed 82%  to $524m, as sales increased by more than half to $1.97bn.

It  is proving  one of the  country’s  most successful business enterprises.

But even  its  founders, including  the  legendary Sir  Woolf  Fisher,  would have been astonished  at its  latest  remarkable  performance.

Led  by  its  outstanding CEO, Lewis Gradon, the  company’s  latest result  was driven by an 87% increase in sales of its hospital products, including its Optiflow and Aviro systems, which have proven to be effective in treating people who have Covid-19.

Sales of its hospital hardware and consumables  continued to track Covid-19 hospitalisation surges in countries around the world.

The pandemic had also accelerated the company’s expansion into different global markets, with significant growth in the North America, Europe, Asia Pacific regions.

The strength of the result saw the company look to reward all of its staff with a profit-sharing bonus of $29m.

Gradon said the decision was about recognising the incredible contributions of its staff throughout an extraordinary year.

The company’s 2021 annual report said it had 5833 full time staff and 1083 part time.

The company also committed $20m to establish the Fisher & Paykel Healthcare Foundation to fund research and programmes that improve access to healthcare, promote opportunities in science and support environmental protection initiatives.

So  how  did  the  market  react to what was a  remarkable  achievement?

Perversely.

Almost  in a  flash  the market saw nearly  $2.5bn wiped  off  the capitalisation of  what has been  the  top valued stock  on the NZX.

Later  in  the  day  some  shrewd  investors  could  not resist   buying    the  devalued  shares.  We would not be  surprised   if  some of  its  own  workers,  anticipating  a  slice of  that bonus,  did  so?

Fisher & Paykel  has  always   been  a  leader  in  its  field,  but  particularly  in  R&D,  with  7%  of  revenue  spent  in that  area.

The year was not without its challenges, however, as FPH’s profit margins decreased slightly because of increased freight costs.

Revenue from its homecare product group increased only a modest 2% on the previous year to $466m,  with pandemic-related restrictions disrupting sales at  sleep clinics and use of its obstructive sleep apnea products.

FPH did not provide a guidance for the current financial year but indicated the momentum gained in the past year was unlikely to be sustained.

This is because it assumed that the global vaccine rollout would likely reduce Covid-19 related hospitalisations, it was unsure if it could maintain the level of sales growth it had seen in FY21, and freight costs were likely to remain high.

FPH’s board declared a final dividend of 22 cents per share, a 42% increase on the year before.

As  one  observer  noted, it’s worth remembering that this year’s incredible surge in earnings for the company actually follows a year that also generated a record profit, with revenues boosted then by the start of the pandemic.

With the company’s earnings being so affected by the track of the virus, F&P Healthcare is declining to provide any profit guidance for its 2022 financial year now under way.

“We expect our Hospital and Homecare revenue for FY22 to be impacted by the number of COVID-19 related hospitalisations around the world,” Gradon said.

“There is a wide range of scenarios for both the timing of a ‘return to normal’ and to what extent a return to normal includes COVID-19 endemic hospitalisations. It is unclear at this stage when and if other respiratory hospitalisations and surgical procedures will return to pre-Covid levels, or whether countries will increase their investment in healthcare infrastructure.”

Analysts  will  be  puzzling  over  the market response to F&P  Healthcare’s result.

It’s  possible  some  investors  were  confused   by  the  “observations”  offered  by  the  company.

Among them:

Given the wide range of scenarios and uncertainties, the company makes the following observations in relation to the 2022 financial year:

• A global vaccine rollout during FY22 is likely to reduce global hospitalisations requiring respiratory support for COVID-19 compared to FY21.
• Achieving similar Hospital consumable volume in FY22 compared to FY21 with reduced respiratory hospitalisations and reduced invasive ventilation will require a change of clinical practice towards utilisation of nasal high flow therapy for general respiratory support.
• Hospital hardware revenue maintaining a pre COVID-19 level in FY22, after 337% Hospital hardware growth in FY21, requires ongoing intensive care ventilator sales by global ventilator manufacturers, and/or an ongoing change in clinical practice to provide nasal high flow therapy for respiratory support, or localised COVID-19 surges.
• Local COVID-19 related hospitalisation surges in FY21 have tended to result in increased hardware sales and increased utilisation of existing hardware. If there are further local hospitalisation surges during FY22, a similar trend would favourably impact the company’s Hospital hardware and consumable sales and continue to build the installed base.
• OSA mask sales growth is impacted by diagnosis rates and access to healthcare professionals and providers to demonstrate the company’s new mask ranges.
• Our customers’ stocking and de-stocking choices in response to the pandemic are likely to vary over time.
• In gross margin, freight costs are likely to remain elevated, and air freight a higher proportion of freight. The company also expects to retain its COVID-19 safety practices on its manufacturing sites.
• The company will continue advancing manufacturing capacity and facilities and hold higher levels of inventory to ensure any surge demand can be met.
• The company expects to continue growing its investment in R&D and SG&A as longer-term projects are accelerated and sales support is provided for the growing installed base of nasal high flow systems.

In the financial year so far, hospital revenue continues to remain variable with higher volumes of hospital hardware and consumables to locations with hospitalisation surges and an ongoing shift towards Optiflow nasal high flow therapy. OSA shows signs of recovery after a slower fourth quarter.

The company made the following longer-term observations:

• The pre COVID-19 trend towards more usage of nasal high flow therapy for general respiratory support is expected to continue, but the company has no basis for a prediction or forecast of the rate at which this will continue. The company does not expect all hardware placed in response to COVID-19 to be immediately transitioned to general respiratory support in an environment where COVID-19 hospitalisations are reducing.
• Extensive pandemic-related medical practitioner familiarity, and throughout-hospital acquisition of our hardware devices substantially reduces the barriers to hospitals utilising nasal high flow therapy for a broader and more extensive range of patients requiring respiratory support.
• Growth in the output of peer reviewed clinical data and clinical practice guidelines over time supporting nasal high flow therapy for use in more general patient populations facilitates a change in clinical practice.
• Growth in Home respiratory support has historically tracked hospital usage of nasal high flow. This trend was present in FY21 and may have included treatment of COVID-19 patients.

Let’s  see what  the  market  makes  of that when  it is  fully  digested.

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