Shaquille O'Neal, the burly retired NBA player, is on a new
team of sorts, and it's a big one: patients with obstructive
The syndrome is caused when a patient's upper airway closes
during sleep, causing him or her to stop breathing for seconds at
a stretch many times.
Apnea literally means "without breath."
O'Neal had never heard of sleep apnea, but his girlfriend had
and thought he had it. She urged him to get tested.
Once diagnosed with moderate sleep apnea at Harvard Medical
School's sleep-medicine unit last year, O'Neal was equipped with
a nasal mask connected to an air-flow generator, which gently
pushes oxygen though his nose into his lungs as he sleeps.
The gear was made byResMed (
), says its founder and chief executive, Peter Farrell. The San
Diego-based firm has been focused on sleep-disordered breathing
since its start in Australia in 1989.
ResMed is considered a leading supplier of sleep-apnea masks
and the bedside air-flow generators connected to them, along with
Philips Respironics, a unit ofPhilips Electronics (
), based in the Netherlands.
Men And Women
It's not just for men with snoring problems, as many people
think. About 40% of users are women, says Farrell.
"We sell about 200,000 devices a month and 700,000 masks every
month," he said. "We are putting lots and lots of patients on
Farrell says so many patients are using ResMed's masks and
machines that "we have given up collecting testimonials." (He
did, however, point to a third-party YouTube video of O'Neal and
his girlfriend talking about their experience with doctors at
Products from ResMed and Philips are thought to cover 80% of
the current worldwide sleep-disordered market, which is growing
6% to 8% annually.
Farrell says ResMed has 42% share to Philip's 38%.
Earnings in the quarter grew a lot faster than revenue, up 43%
from the earlier year to 50 cents a share. A lot of it had to do
with leverage, Farrell says: The top line is growing faster than
selling, general and administrative costs.
Analysts expect profit to grow 19% this fiscal year ending in
June, to $2.15 a share, and go up another 8% the next year.
On a constant-currency basis, ResMed is growing faster than
the overall market.
In the company's first fiscal quarter ending in September,
revenue grew 8% over the prior year to $339.7 million. On a
constant-currency basis, which excludes foreign exchange
translations, it jumped 12%.
"The (sleep-disorder) market is growing a lot faster than
other things in the medical-devices sector," said analyst Michael
Matson of Mizuho Securities.
He says ResMed's products "consistently are ranked the
highest" in terms of their quality, with the biggest lead in
"Their masks rate much higher than their competitors," he
said. "Their flow generators are rated slightly higher."
ResMed continuously puts out new and improved masks every
year. It spent $27.2 million in R&D in the last quarter.
ResMed's biggest sellers are full-face masks covering the nose
and mouth, followed by nasal masks, with the most popular a
"pillow" form that provides a seal around the nose but doesn't
"We think ResMed is unquestionably the strongest manufacturer
of masks," wrote JPMorgan analysts in a client note after
first-quarter result were released.
Earlier this year, through a French acquisition, ResMed
started selling dental devices that open airways by moving the
lower jaw forward. But they only work on a limited section of the
airway and aren't for everyone, Farrell says.
Revenue from the Americas, mostly the U.S., makes up 55% of
ResMed's total. Sales rose 15% in the last quarter to $194.4
million. Outside the Americas, revenue rose 9% to $145.4
After the U.S., the next largest single market is Germany,
which accounts for 14% of revenue, and France with 12%, Farrell
European sales overall have been weaker than other major
regions, however, while Asia-Pacific is its fastest growing
region, though from a smaller base.
Japan has been doing especially well as cardiologists treat
sleep disorders in heart patients.
About 25% of adults have some form of sleep-disordered
breathing, Farrell says. But the figures are much higher in those
with heart and lung ailments, hypertension and diabetes, he
One of the biggest revenue boosts has come from the growing
number of sleep tests done at home, a more convenient option than
an overnight stay in a sleep lab.
ResMed sells diagnostic equipment used in sleep labs and
in-home tests, but they're not the main revenue drivers, Matson
Rather, their impact is more indirect. The more people that
are diagnosed, the more people are put on continuous positive
airway pressure, or CPAP, therapy.
"Home testing is a lot cheaper than in labs and patients
prefer it," Matson said. "So a lot of insurance companies are
requiring home tests first."
On the flip side, new reimbursement pressures are coming from
Medicare, which accounts for about 20% of the U.S.
sleep-disordered treatment market, Matson says.
Medicare now requires distributors to competitively bid out
orders in 91 metro markets, up from nine previously, which in
effect covers about half of the U.S.
ResMed sells through distributors, who in turn bill Medicare
and other insurers.
"ResMed is one degree removed so the bidding is not directly
going to impact them, but it could squeeze their customers. So
the worry is that pricing gets hit," Matson said.
Product prices typically drop in the low-single digits every
year, Matson says. But as more premium products with extra
features are rolled out and sold, average selling prices may
actually go up, he adds.
Another potential reimbursement thorn is a new federal rule
that requires patients to verify that there's a problem with a
mask before they can get a replacement. Medicare pays for up to
four replacement masks a year.
"It probably slowed U.S. masks some in the September quarter,"
Matson said of the new rule.
U.S. mask sales grew 13% in the last quarter in constant
currency while U.S. flow generator sales rose 17%.
However, ResMed said sales weren't impacted by Medicare
issues, suggesting instead that patients were trying out new
masks on a trial basis from rivals.