It's fitting that ResMed specializes in equipment to treat
sleep disorders, because the company has had to convince
investors not to lose sleep over the potential impact of Medicare
cuts to its gear.
) is a major supplier of durable medical equipment (DME) to treat
obstructive sleep apnea.
Sleep apnea occurs when the airway is at least partly blocked
for several seconds during sleep.
The company's airflow generator equipment is based on
continuous positive air pressure (CPAP) therapy. The gear is
designed to deliver pressurized air through a nasal mask. This
prevents the collapse of the upper airway during sleep.
Starting in July, the Centers for Medicare & Medicaid
Services will institute a second round of reimbursement cuts for
CPAP devices as well as masks and accessories used in the
treatment of sleep apnea.
The cuts are the result of a process in which distributors of
CPAP equipment and masks put in competitive bids for Medicare's
business. The first round of competitive bidding involved about
10% of the U.S. population. The second round added about 56% more
The Round 2 bidding results will lead to a 47% reimbursement
reduction for CPAP equipment and masks. This means distributors
will receive 47% less from Medicare than they did before.
The CMS estimates that competitive bidding will save the
Medicare Part B Trust Fund $25.7 billion and Medicare
beneficiaries $17.1 billion between 2013 and 2022.
One result of the cuts is that sleep apnea equipment makers
like ResMed and Philips Respironics, a subsidiary ofPhilips (
), might face pressure to lower their own prices to Medicare
Wall Street's initial reaction was negative. When the Round 2
cuts were announced on Jan. 31, ResMed's stock price fell 6.5% to
43.80. One concern was that the cuts were larger than expected,
"Clearly the quantum of the reimbursement adjustment to the
CPAP segment was a surprise, with initial expectations of a cut
of about 30% to 35%," JPMorgan analyst Steven Wheen noted in a
report following the CMS announcement.
There was also concern about the possibility that payers and
insurers, which account for about 80% of U.S. CPAP volumes, might
use the cuts as leverage to negotiate lower reimbursement rates
Despite those concerns, most analysts downplay the impact on
DME manufacturers in general and ResMed in particular.
"Remember that Medicare is only about 20% to 25% of ResMed's
U.S. business," said David Clair, analyst at Piper Jaffray. "I
expect there to be some pushback in the DME channel, and probably
some pricing pressure. I think it will be manageable,
JPMorgan's Wheen points out that ResMed has plenty of other
growth areas it can fall back on.
"We expect the pricing impact will be more than offset by the
increasing global awareness of obstructive sleep apnea, the
volume and margin effect stimulated by Home Sleep Testing in the
U.S., the pipeline of new product releases -- particularly masks
-- and the ongoing buyback (of ResMed shares)," Wheen noted.
He also says ResMed's status as a leading supplier of CPAP
equipment should give it an edge over smaller, lesser known
"The ability of a distributor to be profitable has just gotten
harder, leaving very little latitude for them to experiment with
unknown manufacturers," Wheen said.
Renewed confidence in ResMed is reflected in its recently
rising stock price, which currently trades near 44.
"When everyone did a back-of-envelope analysis, they got more
comfortable with the Medicare reductions, which is why the stock
price has been doing well," Clair said. "And (ResMed) has been
putting up solid results."
Financially, ResMed has strung together five straight quarters
of double-digit earnings growth. It logged profit of 54 cents a
share during its fiscal second quarter, which ended in December.
That was up 23% from the prior year and 3 cents above Wall Street
Q2 revenue climbed 13% to $376.5 million, topping views for
$363.8 million. Revenue in the Americas grew 16% to $211.8
million, while revenue elsewhere climbed 10%. Gross margin
widened to 61.8% from 59.7% a year earlier.
During a conference call with analysts, Don Darkin, president
of ResMed's SDB Strategic Business Unit, offered a bullish
assessment of the company's pipeline of new products.
"(ResMed has) a number of offerings in all segments coming
through this calendar year," Darkin said.
That includes new masks scheduled to be launched toward the
end of 2013.
ResMed is slated to report fiscal Q3 results April 25.
Analysts surveyed by Thomson Reuters expect earnings of 57 cents
a share vs. 46 cents the previous year.
Meanwhile, ResMed has taken recent steps to protect its
intellectual property. On March 28, it filed parallel lawsuits in
the International Trade Commission (
) and in U.S. federal court to stop the infringement of
The company filed the actions against Taiwanese manufacturer
Apex Medical and its U.S. distributor, Medical Depot, doing
business as Drive Medical Design and Manufacturing.
ResMed alleges that multiple ResMed patents are infringed by
Apex products. ResMed is asking the ITC to stop the importation
and sales of these products in the U.S. It is asking the U.S.
federal court to stop the infringement and award damages against
In a statement, David Pendarvis, ResMed's global general
counsel and chief administrative officer, said the company has
spent more than two decades generating "significant advances in
innovative products" for sleep-disordered breathing therapy.
"We invest over $100 million in research and development each
year to fuel these advances," Pendarvis said. "Other companies
should not be allowed to infringe ResMed's intellectual property
by using our technology."
In another recent development, Michael Farrell March 1
succeeded his father, Peter Farrell, as ResMed's chief executive.
Michael Farrell previously served as the president of the
company's Americas business unit.