As the challenges continue to stack up against Philips amid the still-expanding Class I recall of many of its respiratory devices, competitor ResMed’s biggest issue is figuring out just how to fill the lucrative vacuum left by the recall.
It seems to be doing well so far: In the second quarter of its 2022 fiscal year, which ended Dec. 31, ResMed reported a 12% surge in revenue compared to the previous year—attributing much of that growth to what CEO Mick Farrell described as the “seemingly infinite demand” resulting from the recall, according to a transcript of the company’s Thursday earnings call.
Total revenue for the quarter reached just under $895 million, compared to $800 million for the same period of fiscal year 2021. Much of that gap was filled by ResMed’s work to pick up the slack left by Philips’ ongoing struggles, with Farrell estimating that its response to the recall generated between $45 million and $55 million in incremental device revenue for the quarter.
That brings ResMed’s incremental earnings since the start of the recall last June to somewhere between $125 million and $145 million, he said, a number that’s expected to swell to between $300 million and $350 million for the full first year after the recall.
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Those winnings will continue to pour in throughout the company’s next fiscal year—since Philips recently said it expects to wrap up the repair-and-replace program for its recalled devices by the end of 2022—even as global supply issues slow down production of ResMed’s respiratory devices.
“While we are working hard to increase device output, we will not be able to meet all the expected demand resulting from our competitor’s recall, primarily because of significant and ongoing supply constraints for electronic components,” Farrell said. “We are operating in a very dynamic supply chain environment.”
Still, those constraints are expected to ease around mid-calendar year 2022 and continue to roll back throughout ResMed’s fiscal year 2023, allowing it to aggressively ramp up its efforts to meet that surging demand in the final months of Philips’ repair-and-replace program.
“With almost infinite demand, you never quite catch up to that, but we’re going to get faster and faster and grow more year on year as we go throughout the calendar year,” he said.
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Philips launched the recall in June 2021 after identifying the potentially harmful effects of the long-term erosion of the sound-muffling foam used in some of its CPAP and BiPAP machines and other respiratory devices. In 2021 alone, the recall knocked back the company’s net income by about $812 million.
After initially including about 3 million to 4 million devices in the recall, the program was recently expanded to include a total of about 5.2 million devices distributed worldwide—all of which now need to be repaired, if possible, or otherwise replaced. So far, Philips said this week, it has manufactured 1.5 million repair kits, half of which have already been sent to customers.
Even once Philips is back on track, however, ResMed is predicting that the approximately 18-month setback will alter the competitors’ dynamic for many years to come.
“The share that we’re taking this year will be a long-term sustainable share,” Farrell said, describing ResMed’s strategy of continuing to work closely with new customers even after the devices have been purchased and set up.
“When our competitor comes back, they’re going to have to go after the low-priced people first that don’t have all that digital end-to-end,” he added. “When they try to come after us, we're going to be so far ahead with 18 months’ worth of digital health innovation and all the work that we’re doing to partner with physicians, patients and providers. I look forward to it. We were winning this football game before we got the penalty kick.”