The stellar share price run of RESMED/IDR UNRESTR (ASX: RMD), or ResMed, could be severely tested in the new financial year as the latest US Medicare report could lead to falling sales of its sleep disorder treatment devices.
Any turnaround in the stock would mark a dramatic change in fortune for the company after its share price surged 39% in FY18 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up "only" 7%. This makes ResMed is one of best performing blue-chips stocks on our market.
ResMed isn't the only star performer in the medical device space. Hearing device maker Cochlear Limited (ASX: COH) and disinfection equipment maker Nanosonics Ltd. (ASX: NAN) have also outperformed with gains of over 20%, although the gap between the two and ResMed could soon close.
Some experts believe its golden run will continue well into the new financial year given its solid growth profile but Macquarie Group Ltd (ASX: MQG) has cast doubt on this after the US Office of Inspector General (OIG) released its findings on Medicare claims for replacement positive airways pressure (PAP) devices.
The OIG, which is part of the US Department of Health and Human Services, found that most claims for PAP devices were non-compliant.
"Based on a random sample of 110 claims submitted in CY14/15 (of ~7.3mn claims in total), the OIG found that majority of payments did not satisfy Medicare criteria (86 were found to be non-compliant)," said Macquarie.
"Further, the OIG concluded that 73 claims for replacement supplies were 'not reasonable or necessary' (with suppliers not having adequate documentation to request replacement supplies/a continuing need for replacement supplies)."
The non-compliance isn't due to fraud or anything that sinister though. It appears the problem is the lack of oversight from the Centres for Medicare and Medicaid Services (CMS) is to blame.
The OIG is recommending stricter reviews from CMS, which has been accepted, and that could spell bad news for ResMed.
"To the extent that increased CMS oversight identifies an element of re-supply that is not reasonable or necessary (resulting in a decline in replacement volumes), this would present downside risk to our mask/accessories forecasts which incorporate an assumption of on-going growth in re-supply per patient," added the broker.
"By way of sensitivity, an assumption of US mask/accessories volume growth of ~7% (in line with device growth assumptions but below our base case assumption of ~9%) would provide a DCF valuation of ~A$11.10, ~8% below our current valuation and ~22% below the current share price."
Macquarie has an "underperform" recommendation on the stock with a price target of $12.10 a share.
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