Roy Davidson, 9 November 2017

Stock Comment - ResMed RMD

RMD develops, manufactures and markets medical equipment for the treatment of sleep-disordered breathing – in particular continuous positive airway pressure equipment for the treatment of obstructive sleep apnea.

Continuous positive airway pressure (CPAP) is the mostly-widely used treatment for obstructive sleep apnoea (OSA). CPAP treatment involves wearing a mask over the nose or face, connected to a small, low-pressure pump, called a flow generator, which blows air into the airway, acting as an air splint to keep the airway open. OSA affects approximately 4% of the population and a large proportion of cases remain undiagnosed. OSA is prevalent in people who are obese, in particular obese males over 40, and has been linked with co-morbidities like cardiovascular disease, stroke and diabetes. RMD is the leader in this market. Its largest competitor is Philips Respironics, with Fisher & Paykel Healthcare the third largest player.

The launch of new products has been a strong driver of earnings growth. RMD’s last OSA treatment device, the Airsense 10 flow generator, has resulted in strong sales results over the last several quarters due to its improved compliance data transfer (wireless rather than requiring a USB stick to be sent to the company for analysis). In the coming year, we expect new mask releases will enable RMD to take back lost market share in this high margin category. Increased diagnosis of OSA sufferers supports overall market growth while the uptake of home sleep testing in the US market simplifies and shortens the process of diagnosis of OSA, removing a previous roadblock.

RMD has recently moved into several other promising areas, the most notable of which is connected health software solutions, through the acquisition of Brightree, a US based company. It remains early days, but RMD has the leading software in the OSA market and can look to grow on this competitive advantage to deliver enhanced services for patients.

RMD is the market leader and consistent strong results over a number of years provide confidence in the capability of RMD’s research and development team to deliver new devices and masks. The success of RMD Airsense 10 flow generators, which have much more data capability than previous generations, provides an opportunity to leverage a large installed base (easier resupply, more sticky customers), while RMD continues to investigate opportunities in adjacent markets.

Risks to RMD include; 1) increased competition, 2) regulatory change, and 3) reputational damage.