Brokers Divided Over ResMed’s SaaS Acquisition

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Following ResMed’s purchase of Medifox Dan, brokers remain upbeat though some question the benefits of SaaS acquisitions to date.

-ResMed acquires German SaaS company  
-Morgan Stanley underwhelmed by SaaS benefits to date
-Brokers remain generally Buy-rated
-Rollout of new system to counter chip shortages

By Mark Woodruff

Medical device and software company ResMed ((RMD)) has made its third large purchase in the software-as-a-service (SaaS) space in the last six years, and the first outside the US.

The US$1bn acquisition of Medifox Dan, a German SaaS solutions provider, offers similar solutions to those of MatrixCare and Brightree in the US, which were acquired in April 2016 and November 2018, respectively.

The aim of all three acquisitions in the connected care space is to integrate medical devices with enterprise software to reduce the cost of healthcare delivery.

The newly acquired software and data solutions extend across three out-of-hospital care verticals: Home Health, Skilled Nursing and Outpatient Therapy. According to Wilsons, the German market is under-penetrated and Medifox Dan is a leader in key categories.

Morgans believes the new company will complement ResMed’s existing offering and provide a more comprehensive software platform, as well as providing a springboard for additional growth opportunities across the EU. Meanwhile, some brokers question the benefits of the SaaS acquisitions to date.

While management anticipates the latest transaction will be earnings accretive, brokers generally retain their existing 12-month target prices.

The company also addressed recent constraints imposed by a shortage of 3G/4G communication chips. To negate the need for these chips, ResMed is now rolling out the Card-to-Cloud (C2C) system (which lacks remote monitoring) until shortages ease and the company can return to supplying 100% connected devices.

The company acknowledged it had previously over-estimated the extent to which it could capitalise near-term from the absence of major competitor Philips in the market.

At the end of April, management revised down guidance for the FY22 revenue tailwind from Philips’ product recall to US$200-250m from US$300-350m. Thanks to CRC, the timing issue around supply of chips is now less relevant/impactful, explains Goldman Sachs, and the company reaffirmed the -US$100m deficit will be made up in FY23.

Motivation for the Medifox Dan acquisition

The recent Digital Healthcare Act in Germany recognises the need for technology to bridge the gap between the skilled labour shortage and an ageing population, explains Credit Suisse.

As a result, a fast-track process has been introduced for rapid approval, testing, and reimbursement of digital health apps for regular care.

While the broker expects few synergies from blending the new acquisition with ResMed’s sleep business, the similarity of Medifox Dan with the previous MatrixCare purchase provides the opportunity for economies of scale in the design of software solutions and data analytics. Importantly, it also creates the opportunity to expand the SaaS platform outside the US.

Nonetheless, as for the MatrixCare deal, Citi estimates the new transaction will dilute the return on invested capital (ROIC) metric. Moreover, the analyst believes the acquisition of MatrixCare has not been successful.

Morgan Stanley also expresses reservations when comparing the high purchase price relative to prior SaaS acquisitions. The broker also notes that while ResMed has a long track record of execution in the core sleep business, the overall EPS benefits of SaaS to-date are not convincing.

Meanwhile, Wilsons feels the valuation multiple for the recent purchase will only makes sense when incremental medical device sales eventuate.

More positively, Macquarie remains upbeat on overall earnings growth for ResMed over the medium-longer term and retains its Outperform rating.

Add-rated Morgans increases its FY23-24 earnings estimates for the company by up to 1% after including the Medifox Dan acquisition, though also takes the opportunity to lower the FY22 earnings forecast by -2.7% on ongoing supply-chain constraints.

The FNArena database has five Buy (or equivalent) broker ratings and one Equal-weight rating. The average target price of $35.06 suggests 20.7% upside to the latest share price.

For those brokers not updated daily in the FNArena database, Goldman Sachs and Jarden are Buy-rated (or equivalent) and Wilsons retains its Equal-weight rating. The average target price set by the three is $33.36.

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