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ResMed Sees Potential in SDB Market, Eyes Global Growth

On Jul 6, we issued an updated research report on San Diego, CA-based ResMed, Inc. RMD. The company is a global manufacturer and distributor of generators, masks and related accessories for treatment of sleep-disordered breathing (SDB) and other respiratory disorders. At present, the company’s line of products includes airflow generators, diagnostic products, mask systems, headgear and other accessories.

Over the past one month, ResMed has traded above the Zacks categorized Medical Product industry. The stock has gained 3.8% in this period, much higher than the broader industry’s 0.8% improvement. We note that the top line growth was driven by a solid performance in the U.S. Also ResMed’s product launches and new strategies to capture the SDB market have boosted its earnings.

ResMed had earlier identified three horizons for future growth. In terms of progress in the first horizon, which focuses on ResMed’s core sleep apnea franchise, the company has been making an advanced technology combined with digital health and connected care solutions.

The company has also launched a new series of AirFit F20 full size masks and AirFit N20 nasal masks in the second quarter of fiscal 2017. Management expects to witness a strong demand for these products which should continue in the upcoming quarters as well.

Among the recent developments pertaining to sleep apnea, worth mentioning is the FDA clearance of ResMed’s AirMini, the world’s smallest continuous positive airway pressure (CPAP) device.

The second horizon is growth in adjacent products including homecare ventilation for Chronic Obstructive Pulmonary Disease (COPD), Amyotrophic Lateral Sclerosis (ALS) and other respiratory disorders, plus flourishing widely in geographic markets. The key emerging markets of China, India and Brazil top the list.

Within the above horizon, ResMed continues to see portable oxygen concentrators (POCs) as an important addition to its menu of respiratory care products. The integration of the Inova acquisition has focused on quality improvements to the current Activox POC platform. Management is making efforts to broaden this technology globally.

The third growth horizon incorporates a portfolio of opportunities in new markets, including clinical adjacencies such as atrial fibrillation, heart failure with preserved ejection fraction, asthma, chronic disease management as well as sleep health and wellness.

Another key area of this horizon is ResMed’s work on chronic disease management algorithms, including population health models, health care analytics, care co-ordination and Software-as-a-Service models for home health, home nursing and hospice.

In the segment of sleep help and wellness, the company formed a joint venture with Dr. Mehmet Oz – Sleep Score Labs. This partnership was initiated last quarter with an entire Dr. Oz show dedicated to the field of sleep wellness, leveraging the S+ sleep wellness tool by ResMed.

Significantly in the second quarter, ResMed has generated 10% revenue growth (up 13% at CER - Constant Exchange Rate) in the combined EMEA and APAC region. Remarkably, the upside was driven by solid Flow Generator sales, with a strong performance from the company’s combined Curative and China businesses.

Management is particularly optimistic about its mask category to return to public growth in EMEA and APAC as the company continues to launch the N20 and F20 mask series.

Overall, the market for sleep-disordered breathing (SDB) is huge and to a great extent, underpenetrated across the globe. Per a 2013 study, SDB affects 34% of men and 17% of women, aged between 30 and 70. It has been estimated that 26% of adults in the age group of 30-70 have some form of OSA (Obstructive Sleep Apnea), which is the most common form of SDB. In the U.S. alone, this represents approximately 46 million people.

A strong correlation between OSA and a number of cardiovascular diseases has been recently discovered. Studies have shown that SDB is present in approximately 83% of patients with drug-resistant hypertension, 72% of patients has type II diabetes, 77% affected with obesity, while 76% suffers from congestive heart failure.

Key Picks

ResMed currently carries a Zacks Rank #2 (Buy). Other stocks worth considering in the medical sector are Mesa Laboratories, Inc. MLAB, Inogen, Inc. INGN and Align Technology, Inc. ALGN. Notably, Mesa Laboratories and Inogen sport a Zacks Rank #1 (Strong Buy), while Align Technology carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Mesa Laboratories has a positive earnings surprise of 2.84% over the last four quarters. The stock increased nearly 10.9% over the last three months.

Inogen has a long-term expected earnings growth rate of 17.5%. The stock surged around 25.6% over the last three months.

Align Technology has an expected long-term adjusted earnings growth of almost 24.1%. The stock almost rallied 31.9% over the last three months.

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