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Stock: Resmed LimitedCode: RMDMarket Cap: US$2.4bnRecommendation: None 

Ever been kept awake at night by incessant snoring? Whether it be your partner, sibling, room mate, or ‘bunk buddy’ from back in the day at school camp – culprits will rarely admit to their undesirable habits without a wall of resistance. So how to overcome those self perceived sleeping beauties? These days science is on your side. Apart from roiling the ear drums of bed partners, research has proven that snoring is actually not doing the person in question any good either.

Enter Resmed, a leading company in the treatment of Sleep-Disordered Breathing (SDB) and other respiratory problems. The company was formed in 1989 for the sole purpose of selling a stgice for treating obstructive sleep apnea (OSA) which is a major subset of SDB. Since then the company has dramatically expanded its product offering.

Since inception, Resmed has maintained its focus on SDB, actively raising public awareness of the condition over the years. SDB is estimated to affect around 20% of the adult population which makes it as prolific as diabetes or asthma. The term “sleep-disordered breathing” actually includes a range of respiratory disorders from dreaded snoring to more severe OSA. OSA occurs when the airway temporarily collapses during sleep, stopping or restricting breathing for up to ten seconds or more. This can occur hundreds of times each night, severely affecting sleep patterns. Apart from the obvious quality of life impacts, research has shown that poor sleeping patterns can be linked with stroke, heart failure, hypertension, diabetes, obesity and coronary heart disease. So if you’re regularly having bad night’s sleep, it’s really no joking matter!

With information on the severity of sleeping disorders and the effects on personal wellbeing gaining increasing publicity, Resmed’s marketability has transformed it into a US$2.4bn institution. The company has a presence in over 68 countries but has particular exposure to the $2bn US market for sleep breathing stgices – of which Resmed and its bigger rival Respironics currently control about 80%. It is this sort of market penetration that has seen revenues increase every year since listing on the NYSE in 1995. Profits have grown along a similar trend, growing every year at a double digit rate bar two (FY01, FY07) when headline figures were reduced by one-off factors.

Without stating the bleeding obvious, earnings have been the key to the company’s rise. While most ASX200 companies have been issuing profit downgrades and mass writedowns, Resmed delivered a blockbuster result for the quarter ended 31 Dec 2008, posting record revenues and profit figures. Quarterly profits rose 26% to US$33.9m, and revenue jumped 10% to US$223m, primarily on the back of increased sales of stgices to assist with sleep-related breathing.

This good earnings news sent the share price on a solid run that tested its all time high. However the wave of optimism proved short lived, as the stock is now down 25% from its February peak. The fall back has taken place just as life returned to the broader market, pushing the ASX200 index 20% above its bear market lows. Often stocks that fail to join in significant market rallies have something sinister lurking beneath the wood work. Canny investors who pick up on such divergences have the opportunity to take pre-emptive action.

In the case of Resmed there is speculation doing the rounds that the market for treatment of sleep-related disorders may not be as resilient as once thought. While sleep apnea has long-term health implications, treatment is fairly discretionary in the short run, particularly amongst less severe patients. Unlike an important antibiotic or other pharmaceutical product that a patient cannot simply live without, a treatment for poor sleeping patterns is probably more dispensable when one is cash-strapped.

There are some indications that patient volumes going through US sleep centres have fallen – so will this translate into a restless period for Resmed’s growth ambitions? Having increased revenues every year since 1995, Resmed’s sales record suggests the sceptics may be jumping at shadows. Also in the company’s favour is the fact that all stocks in the health care space have been sold off over the last month as the market has rallied. So Resmed’s failure to comply with the upward momentum could simply reflect a short term shift in sectorial sentiment rather than an indication of negative company specific news.

Each argument has merit. But with the stock’s valuation premium to the market reflecting a defensive earnings stream, we will be keeping close tabs on the company’s fortunes over the next few reporting periods. They say inertia is the most powerful force in the universe. Will it continue driving Resmed’s sales higher? Or will fears of discretionary health spending cut backs turn out to be more than just a ‘bad dream’?

Joshua Terlich is an analyst at wise-owl.com, one of Australia’s leading independent stockmarket research houses. Click here for your complimentary report.


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