F&P Healthcare lights up market, as its hefty R&D programme spurs fresh growth

Few listed companies on the NZ sharemarket can report a 60% decline in net profit, yet find investors reacting by bidding up the shareprice 13% in initial trading.  Yet that was the achievement of Fisher and Paykel Healthcare this week.

The company lit up the market, reporting revenue of nearly $700m for the half-year to September, most of it earned abroad and  ahead of guidance. It expects second half revenue for the 2023 financial year will be higher than in the first half. Net profit after tax for the first half was $95.9m, a 57% decline from the prior comparable period, or a 65% decline in constant currency.

F&P Healthcare experienced a surge in demand for its products during the pandemic, selling 10 years’ worth of devices in two years. However demand has now slowed as hospitals are overstocked and fewer patients are requiring treatment, which has seen profit retreat closer to pre-pandemic levels.

Undoubtedly one of the reasons for F&P Heathcare’s success  is its dynamic R&D programme, on which it is  spending $84m. CEO Lewis Gradon said it had been pleasing  to see a strong reception for the new Evora Full mask, which the company began selling into the US in April. “Initial feedback from clinicians and end users has been positive, and this provides added momentum for the team working hard on a robust product pipeline.”

Gradon is one of NZ’s outstanding business leaders, steering the  company on its  upward path. He reported the company reached a number of infrastructure milestones over the half to support continued growth. This includes an agreement to purchase a 105-hectare site for an additional campus in Karaka, Auckland.

Like other companies, F&P Healthcare has had to battle the “triple squeeze” of rising inflation, scarce and expensive talent, and global supply challenges.

Gradon  told the market while revenue was down 23% on the first half of the prior year (or 27% in constant currency), this was a 21% increase on the comparable pre-pandemic period, being the first half of the 2020 financial year ($570.9 million).

In the Hospital product group, which includes humidification products used in respiratory, acute and surgical care, revenue for the first half was $438.7m. This marks a decline of 35% on the prior comparable period, or 37% in constant currency. It represents an increase of 24% on the first half of the 2020 financial year. Of total Hospital product group revenue, 87% was from the sale of consumables and 13% was from the sale of hardware.

“Customer stock levels of hospital consumables continued to reflect purchases of considerable amounts during the prior half, in preparation for an Omicron hospitalisation wave which proved less severe than originally anticipated,” Gradon said.

“Through the first half, there are positive signs that our hospital customers are working through their excess inventory holdings, and total group sales of our hospital consumables have increased sequentially on a month-by-month basis since May. This trend has continued in the second half to date.

“While we believe the number of hospitals which continue to be overstocked is declining, ultimately, these stocking dynamics are short term, and the fundamentals of our sales strategy remain the same. Our teams are committed to helping improve clinical practice and ensuring the hardware our customers have purchased during the pandemic is used to benefit a broader range of patients requiring respiratory support.”

In the Homecare product group, which includes products used in the treatment of obstructive sleep apnea (OSA) and respiratory support in the home, revenue was $249.9m , a 10% increase over the prior comparable period, or 4% in constant currency. OSA masks and accessories revenue increased 16% on the prior comparable period, or 10% in constant currency.

Gross margin was 59.8%, down from 63.1% in the prior period and below the company’s long-term target of 65%. Although global freight rates are seeing prices soften, legs in and out of NZ lag this trend, which continues to weigh on margin. The company has also been impacted by manufacturing inefficiencies, as it carefully balances demand fluctuations while managing manufacturing throughput and higher rates of sickness-related absenteeism in the manufacturing workforce.

“Our second half will be impacted by a number of factors, including:
• The rate of COVID-19 hospitalisations and the related intensity of respiratory support required;
• The severity and duration of a Northern Hemisphere flu season;
• The magnitude of RSV (respiratory syncytial virus) hospitalisation surges currently experienced in some regions; and
• The impact of ongoing hospital staffing challenges on the surgical procedure backlogs in many countries”.

 Gradon  said the company expected second half revenue for the 2023 financial year will be higher than in the first half.

“In our Hospital product group, pre-COVID-19 seasonal patterns have typically resulted in higher sales of hospital consumables in the second half compared to the first half.

The company is now targeting constant currency operating expense growth of approximately 8% for the full year.

“We remain committed to sustainable, profitable growth,” said Gradon. “Our confidence in the future is unchanged, evidenced by the significant level of investment in new product development, our global sales force and our infrastructure.”

 As Point of Order sees it, F&P Healthcare is  an exemplar of business of which the rest of NZ can be proud.   

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