Unmasking an attractive opportunity

ResMed (RMD) is a leading global developer and manufacturer of medical devices for sleep apnea and other respiratory-related disorders.

What is sleep apnea and why is treating it important?

There are three types of sleep apnea: obstructive, central and mixed. Of the three, obstructive sleep apnea (OSA) is by far the most common. Despite the difference in the cause of each type, in all instances people with untreated sleep apnea stop breathing repeatedly during sleep, sometimes hundreds of times during the night, and often for a minute or longer.
The interruption of air supply to the lungs is called an apnea. Each interruption reduces the supply of oxygen to vital organs such as the brain and heart, which, if left untreated, particularly in severe cases, can contribute to medical problems such as diabetes, high blood pressure, heart disease or strokes.

The prevalence of sleep apnea is increasing with age and obesity levels, with some estimates suggesting that as many as 80% of people suffering from it remain undiagnosed – this is a huge untapped pool of potential patients.

Growing demand

As awareness of sleep apnea and the potential negative health effects increases, we believe demand for the devices available to treat the condition will grow strongly, not only due to quality of life benefits for sufferers, but also potential overall healthcare system cost savings, as expensive-to-treat medical problems are reduced. Importantly, not only will demand increase for the machines, but also for the higher margin accessories like masks, nasal pillows, filters and tubes, which require more regular replacing.

Proven track record

While we appreciate that the constructive industry dynamics do not guarantee individual company success, ResMed has a proven track record. It already sells its award-winning products in around 100 countries, and is a global leader in connected care with more than 3 million patients remotely monitored every day.

In a competitive industry, ResMed invests heavily in research and development, which it can do given its strong cash flow generation and conservative balance sheet that includes cash in excess of $800m. Since 2008, the company’s return on equity has more than doubled from 10.5% to 22.4% at the most recent full year result. This means that for every $1 of shareholder capital invested, ResMed now generates around 22 cents of profit each year that can be returned to shareholders or used to invest for future growth. Importantly, this has been achieved with minimal use of debt, which can inflate the return on equity figure when companies borrow funds to grow, instead of using retained earnings.

So, while ResMed’s shares may seem expensive compared to the broader market, it would be wise to remember one of Warren Buffett’s most famous quotes: “Price is what you pay. Value is what you get.”

Quick Stats:

  • Approximately 50% of those with sleep apnea suffer from hypertension
  • An estimated 1 in 5 American adults has mild OSA
  • Untreated sleep apnea sufferers are up to 6 times more likely to be involved in a car accident

If you would like more information please call 1300 ELSTON or email info@elston.com.au and an adviser will be in touch.