Fisher & Paykel Healthcare (ASX:FPH)

Lewis Gradon
MD & CEO
Market Cap (AUD): 9.02B
Sector: Health Care
Last Trade (AUD): 15.69 -0.03 (-0.19%)
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1. About

Fisher & Paykel entered the respiratory care market in 1971 with the development of a unique respiratory humidifier system for use in critical care. The Company offers a broad range of products and systems for use in respiratory and acute care and in the treatment of obstructive sleep apnea (OSA).

2. Business model

 

The Group operates in following divisions:[1]

 

Divisions

Revenue (NZ$M)

% of Revenue

% of Profit (Before Int,  Tax, Dep & Amort)

Profit drivers[2]

New Zealand

$757.5

77.2%

92.1%

  • 12% growth in net profit after tax to a record NZ$190.2 M. 14% growth in Hospital operating revenue, 13% growth in constant currency
  • Revenue growth of 22% in constant currency for consumables used in non-invasive ventilation, Optiflow nasal high flow therapy and surgical applications, accounting for 57% of Hospital consumables revenue
  • 4% growth in Homecare operating revenue, 4% growth in constant currency. 87% of the company’s revenue was generated from recurring items, such as consumables and accessories

North America

$448.0

45.7%

3.6%

Europe

$282.2

28.8%

3.7%

Asia Pacific

$164.2

16.7%

3.9%

Elimination

($671.1)

(68.4%)

(3.2%)

3. Strategy

 

Objectives for the 2019 financial year[3]

New Zealand

Monitor Key Gender Metrics

– Monthly Internal Fill Rate for vacancies by Gender

– Monthly Labour Turnover by Gender

– Quarterly Pay Gap Metric

– Quarterly Gender Promotion Metric

– Quarterly Learning & Development Programme Attendance

– Quarterly Applicant Tracking Metrics by Gender

 

Rest of the World

• Evaluate all roles in Mexico using Hay Evaluation Methodology

• Monitor Key Gender Metrics

– Monthly Labour Turnover by Gender

– Quarterly Pay Gap Metric

4. Markets

 

The Group operates in the following industries:[4]

 

Industry

Industry Revenue

Growth Rate

Medical and Surgical Equipment Manufacturing (Australia)

$4 Billion (2018)

6.0% (annual 13-18)

Medical and Scientific Equipment Wholesaling (Australia)

$17 Billion (2018

3.0% (annual 13-18)

Pharmaceuticals & Medicine

Manufacturing (Global)

$1 Trillion (2017)

2.1% (annual 12-17)

Medical Supplies

Wholesaling ( America)

$192 Billion (2017)

1.7% (annual 12-17)

5. Competition

 

Major competitors Include:[5]

 

  • Maquet Holding BV & Co KG
  • Masimo Corporation (NASDAQ: MASI)
  • RESMED/IDR UNRESTR (ASX: RMD)
  • Smiths Medical

6. History

 

1934[6]   

Fisher & Paykel commenced business as an importer of refrigerators and washing machines

 

1938   

Started manufacturing white-ware appliances

 

1960   

Started manufacturing products using in-house technology

 

2001   

Fisher & Paykel Industries Limited was renamed Fisher & Paykel Healthcare Corporation Limited

Listed on New Zealand Stock Exchange, Australia Stock Exchange and NASDAQ

  

2003   

NASDAQ listing terminated

  

2004   

Introduced new masks for obstructive sleep apnea (OSA) treatment

  

2007   

FPH introduced new auto pressure setting flow generator for use in the treatment of OS

  

2012   

FPH and Carefusion renethe Companyd exclusive distribution agreement for U.S. hospital market

  

2013   

Prime Minister of New Zealand, opened FPH new building in Auckland

  

2014   

Fisher & Paykel Healthcare lifted earning guidance, announced Mexico manufacturing expansion  

  

2015   

Fisher & Paykel Healthcare upgraded earnings guidance

  

2016   

Fisher & Paykel Healthcare filing Patent Infringement proceedings against Resmed

  

2017   

Withdrawal of US ITC complaint against Fisher & Paykel Healthcare

 

2018   

New research shows significant benefits for COPD patients in the home using Fisher & Paykel healthcare’s Myairvo

7. Team

 

Board of Directors[7]

 

Tony Carter – Chairman

Lewis Gradon – Managing Director & Chief Executive Officer

Michael Daniell

Pip Greenwood

Geraldine McBride

Donal O'Dwyer

Scott St John

Neville Mitchell – Non-Executive Director [8]

 

Management Team

 

Lewis Gradon – Managing Director & Chief Executive Officer

Paul Shearer – Senior Vice President, Sales & Marketing

Andrea Blackie – Acting Chief Financial Officer

Debra Lumsden – Vice President Human Resources & Privacy Officer

Andrew Somervell – Vice President, Products & Technology

Winston Fong – Vice President, Surgical Technologies

Brian Schultz – Vice President, Quality & Regulatory Affairs

Jonti Rhodes – General Manager, Supply Chain

Nicholas Fourie – Vice President, Information & Communication Technology


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8. Financials

 

2019 Half Year Results Presentation

 

Financial Year 2017/2018 (ended 31 March):[9]

 

Divisions

Revenue (NZ$M)

% Change

Profit (Before Tax) (NZ$M)

% Change

New Zealand

$757.5

3.5%

$246.7

3.7%

North America

$448.0

4.8%

$9.6

5.5%

Europe

$282.2

14.8%

$9.8

46.3%

Asia Pacific

$164.2

19.9%

$10.4

60.0%

Elimination

($671.1)

(3.6%)

($8.7)

(60.1%)

Total

$980.8

9.7%

$267.8

12.3%

9. Risk

 

Major risks include:[10]

 

Financial Risk Management

 

Market risk

Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar, Euro, British pound, Australian dollar, Japanese yen, Canadian dollar and Mexican peso. Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. The purpose of the Group’s foreign currency risk management activities is to protect the Group from exchange rate volatility with respect to New Zealand dollar net cash movements resulting from the sale of products in foreign currencies to foreign customers, and the purchase of raw materials in foreign currencies from foreign and domestic suppliers. The Group enters into foreign currency option contracts and forward foreign currency contracts within policy parameters to manage the risk associated with anticipated sales or costs. The terms of the foreign currency option contracts and the forward foreign currency contracts generally do not exceed five years. However, with Board approval, the foreign currency option contracts and the forward foreign currency contracts may have terms of up to ten years.

Foreign exchange contracts and options in relation to sales are designated at the Group level as hedges of foreign exchange risk on specific forecast foreign currency denominated sales.

Major capital expenditure in foreign currency may be hedged with forward exchange contracts and options and may be designated as hedges. Balance sheet foreign exchange risk arising from net assets held by the Group may be hedged either by debt in the relevant currency, foreign currency swaps or by foreign currency option contracts and forward foreign currency contracts

 

Price risk

The Group has no material exposure to price risk.

 

Interest rate risk

The Group’s main interest rate risk arises from floating rate borrowings drawn under bank debt facilities. When deemed appropriate, the Group manages floating interest rate risk by using floating-to-fixed interest rate swaps and interest rate options. Interest rate swaps have the economic effect of converting borrowings from floating to fixed rates. Interest rate options give the right, but not the obligation, to enter into an interest rate swap at a fixed rate at a future date. Under the Group Treasury policy, the mix between economically fixed and floating debt is reviewed on a regular basis. Interest rate swaps and options are accounted for as cash flow hedges.

 

Credit risk

The Group incurs credit risk in respect of trade receivables, financial instruments, cash and cash equivalents and short-term investments in the normal course of business. The maximum exposure to credit risk is represented by the carrying value of these financial assets. Credit risk is managed on a Group basis with no significant concentration of credit risk. The Group has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. There is no significant trade receivable balances relating to customers who have previously defaulted on amounts due to the Group. Derivative counterparties, cash transactions, cash at banks and short-term investments are limited to high credit quality financial institutions. The Group has policies that limit the amount of credit exposure to any one financial institution according to the credit rating of the financial institution concerned. Over 97% of cash and short-term investments (2017: 95%) is held with counterparties with a credit rating of Standard and Poors’ A- and above. The Group’s exposure to credit risk from derivative financial instruments is limited because it does not expect non-performance of the obligation contained therein due to the credit rating of the financial institutions concerned. The Group does not require collateral or other security to support derivative financial instruments.

 

Capital risk

The main objective of capital risk management is to ensure the Group operates as a going concern, meets debts as they fall due, maintains an appropriate capital structure, and manages the cost of capital. Group capital comprises all components of equity. To maintain or alter the capital structure the Group has the ability to review the size of the dividends paid to shareholders, return capital or issue new shares, reduce or increase debt or sell assets. There are a number of external bank covenants in place relating to debt facilities. These covenants are calculated monthly and reported to the banks semi-annually. The principal covenants relating to capital management are the interest cover ratio, the net tangible assets minimum requirement, and total tangible assets ratio. The consequences of a breach of these covenants would depend on the nature of the breach but could range from an instigation of an event of review to a demand for repayment. There have been no breaches of these covenants or events of review for the current or prior period.

 

The Company face a wide range of internal and external sources of uncertainty, both positive and negative, that may affect its ability to achieve its objectives. Risk to its success can be grouped into five categories: (1) Strategic, (2) Operational, (3) Compliance, (4) Financial, and (5) Reputational. Some examples of each type of risk are included below.

 

Strategic

  • Inability to continue to innovate
  • Reduction in business viability (changing technology, market access issues, healthcare reform)
  • Freedom to operate
  • Commercialisation and protection of Intellectual Property

 

Operational

  • Disruption to product supply
  • Physical damage to key manufacturing centres
  • Loss of critical systems for a prolonged period of time
  • People and physical capacity requirements cannot keep up with growth

 

Compliance

  • Product Quality / Safety issues including violation of FDA and other Health Authority regulations
  • Employee Health & Safety
  • Selling and promotion of its products
  • Protection of personal data
  • Local Tax and other laws
  • Intellectual Property Infringement

 

Financial

  • Foreign exchange volatility
  • Reporting requirements
  • Performance does not meet market expectations or FPH guidance

 

Reputational

  • Significant product quality issue
  • Product recall
  • Breach of anti-trust laws
  • Ethical labour concerns

References

  1. ^ Annual Report 2018, P. 67 https://www.listcorp.com/asx/fph/fisher-and-paykel-healthcare/news/fisher-and-amp-paykel-healthcare-reports-record-full-year-result-1893775.html
  2. ^ Annual Report 2018, P. Front Page
    https://www.listcorp.com/asx/fph/fisher-and-paykel-healthcare/news/fisher-and-amp-paykel-healthcare-reports-record-full-year-result-1893775.html
  3. ^ Annual Report 2018, P. Front Page, 83
    https://www.listcorp.com/asx/fph/fisher-and-paykel-healthcare/news/fisher-and-amp-paykel-healthcare-reports-record-full-year-result-1893775.html
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=262
    http://www.ibisworld.com.au/industry/default.aspx?indid=353
    http://www.ibisworld.com/industry/global/global-pharmaceuticals-medicine-manufacturing.html
    http://www.ibisworld.com/industry/default.aspx?indid=930
  5. ^ http://www.pharmaceutical-business-review.com/companies/fisher_paykel_healthcare_corporation_limited
  6. ^ https://www.fphcare.co.nz/about-us/history/
    http://www.asx.com.au/asxpdf/20140218/pdf/42ms8jpbqv1ygx.pdf
    http://www.asx.com.au/asxpdf/20150827/pdf/430vq9dghmpcqs.pdf
    https://www.listcorp.com/asx/fph/fisher-and-paykel-healthcare/news/fph-file-patent-infringement-proceedings-against-resmed-1382755.html
    https://www.listcorp.com/asx/fph/fisher-and-paykel-healthcare/news/withdrawal-of-us-itc-complaint-against-fph-1597463.html
    https://www.listcorp.com/asx/fph/fisher-and-paykel-healthcare/news/new-research-on-copd-patients-in-home-using-fph-myairvo-1866724.html
  7. ^ https://www.fphcare.com.au/its-company/about-us/board-of-directors/
    https://www.fphcare.com.au/its-company/about-us/executive-management-team/
  8. ^ https://www.listcorp.com/asx/fph/fisher-and-paykel-healthcare/news/neville-mitchell-appointed-to-fph-board-2010735.html
  9. ^ Annual Report 2018, P. 67 https://www.listcorp.com/asx/fph/fisher-and-paykel-healthcare/news/fisher-and-amp-paykel-healthcare-reports-record-full-year-result-1893775.html
  10. ^ Annual Report 2018, P.68-71, 84
    https://www.listcorp.com/asx/fph/fisher-and-paykel-healthcare/news/fisher-and-amp-paykel-healthcare-reports-record-full-year-result-1893775.html