UPDATE: Oct. 29, 2021: ResMed CEO Mick Farrell late Thursday said the company still expects Philips' recall will result in as much as $350 million in sales of its sleep apnea and ventilator devices over the next 12 months. However, the exec warned that unprecedented supply chain challenges are hampering its efforts to meet "extremely high" demand for the products.

Farrell told investors during a first-quarter fiscal year 2022 earnings call that ResMed is dealing with a "perfect storm" of challenges including "a competitor recall that's tenfold higher than any in the industry to date" and pandemic-related supply chain constraints. The CEO acknowledged that the company is not able to meet the surging demand from the Philips recall.

"We are facing the challenge of providing the volume for our own No.1 market share position and also trying to meet as much of their No. 2 market share position as possible around the world," Farrell said. "Supply bottlenecks continue to restrict our access to critical electronic components, especially semiconductor chips, that ultimately limit our net production output."

In addition to component shortages, ResMed is also struggling with air and sea transportation bottlenecks that "makes providing steady and smooth flow of products to the market very difficult," according to Farrell.

Despite the challenges, ResMed reported $80 million to $90 million in incremental device revenue in the September quarter attributed to the Philips recall.

William Blair analysts in a Thursday note contend the incremental $300 million to $350 million fiscal 2022 benefit from the Philips recall that ResMed had previously guided is "achievable and beatable" though more likely in the second half or fourth quarter of the year. 

"Still, annualizing this quarter’s benefit would lead us to the high end of management’s guidance range without assuming any improvement in supply," the analysts wrote.   

Dive Brief:

• ResMed has forecast the recall at its competitor Philips will add up to $350 million to its sales of sleep apnea and ventilator devices over the next 12 months.
• Demand for the devices "surged dramatically" after Philips began its recall, ResMed said, sparking a scramble for the components needed to scale up capacity. ResMed expects supply constraints to gradually ease over the coming quarters.
• The impact of Philips' quality issues, first disclosed one month into the quarter, is already evident in ResMed's results. ResMed estimated Philips' troubles added $60 million to $70 million to sales in the quarter, helping it to blast past analyst expectations.

Dive Insight:

A race that could have lasting consequences for the sleep apnea market is underway. In one lane, Philips is rushing to repair and replace devices affected by risks associated with its sound abatement foam before customers move to rival products. In the other lane, ResMed is pushing to increase output of its rival devices to enable as many people as possible to switch before Philips offers them new or repaired products. 

The top and bottom end of analyst estimates of the opportunity have spanned from $100 million to $405 million. ResMed estimates it has already generated up to $70 million in incremental revenue, helping it to beat Jefferies' recently raised estimate for the quarter by $113 million, and is targeting a further $300 million to $350 million over the next four quarters.

ResMed's forecast is based on its analysis of the availability of parts, notably electronic components. Talking to investors on a quarterly results conference call, CEO Mick Farrell said ResMed has capacity and the recall has created demand, but the global shortage of semiconductors is constraining how quickly it can manufacture devices. 

"ResMed will not be able to fill the entire supply gap that has been created by this situation. It's supply chain constrained, not demand constrained. We expect to be in a somewhat supply chain constrained environment throughout fiscal year 2022," Farrell said. Supply is predicted to be more constrained in the first half of ResMed's fiscal 2022, which began last month, than the second half.

Analysts at Jefferies see upside to the $350 million target, which they estimate represents half of the devices recalled by Philips, if the supply situation improves. ResMed is competing with consumer technology companies, automobile manufacturers and every other business that uses semiconductors for the components.

Philips is likely in a similar situation, with Farrell noting that "there is demand from our competitor out there trying to cover their recall amount as well as catch up with the patients that need urgent replacements." Farrell said there is some overlap between the supply chains but ResMed is mainly fighting for components with companies in other industries. 

Baird analysts took a more skeptical view of ResMed's ambitions. 

"Clearly ResMed will aspire to outperform. But…if it's just excess devices for a year with no lift for consumables, might stock already have that built in?," Baird's Mike Polark wrote.

On the supply constraints, Polark noted the potential for other companies to step in.

"There is unsatisfied demand in all parts of the globe. The mindset is capture as much of the opportunity as possible although there will be room for others to fill the massive void."

The ability of Philips and ResMed to overcome the constraints could shape the market for years to come. ResMed sees the recall as an opportunity to capture customers for the long term. Farrell said some customers stuck with "the old devices from an American brand that was bought by the Dutch company for a long time" and will now get a chance to try an alternative. If ResMed wins them over, it could permanently increase its market share. 

Based on a survey, analysts at Jefferies estimate "the average overall total share shift will be 20% 2-years post recall." ResMed shied away from quantifying the long-term opportunity, both in terms of share gain and the incremental growth that could result from selling masks to new customers.

A Philips spokesperson said in an emailed statement the recall affects 3-4 million devices, the majority of which are DreamStation products used to treat sleep apnea.