ResMed Moves Up On Home Sleep Tests For Sleep Apnea


Shaquille O'Neal, the burly retired NBA player, is on a new team of sorts, and it's a big one: patients with obstructive sleep apnea.

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 ( RMD ), 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 ( PHG ), 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 treatment."

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 Harvard.)

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 masks.

"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 protrude inside.

"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 million.

After the U.S., the next largest single market is Germany, which accounts for 14% of revenue, and France with 12%, Farrell says.

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 says.

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 says.

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."

Medicare Pressure

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: PHG , RMD

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