Keep heart with ResMed
Recommendation
The excitement appears to be building around the benefits of ResMed's ventilation therapy for heart failure patients, judging by its share price, which has soared 18% since ResMed: Interim result 2015 and 69% since ResMed set to awaken on 13 Oct 14 (Buy – $5.47).
According to ResMed, around three-quarters of heart failure patients also suffer from some kind of sleep apnea – about half of them with obstructive sleep apnea (which results from a collapsing of the airway) and the other half with central sleep apnea (which results from problems with the body's neurological feedback mechanisms that control breathing during sleep).
ResMed is currently funding a number of studies to demonstrate the benefits of treating these patients with ventilation therapy.
Key Points
Study has demonstrated benefits of CPAP for HF patients
Larger study relating to central sleep apnea due later this year
Raising price guide; Hold
One small study was presented over the weekend to the American College of Cardiology 2015 Scientific Sessions. It showed that out of a group of 70 acute heart failure patients with sleep apnea, the mean number of hospital return visits within six months decreased by 0.8 visits for those who underwent continuous positive airway pressure (CPAP) treatment, and increased by 1.1 visits for those that didn't. The study is part of a larger study, CAT-HF, which is due to report in 2016.
Big study; big market
The bigger study, however, is ResMed's SERVE-HF trial, which involves 1,325 patients enrolled between 2008 and 2013 and is due to wrap up later this year. The study aims to showcase the benefits of providing adaptive servo ventilation therapy to patients with central sleep apnea and heart failure.
Around half a million people are diagnosed with heart failure each year in the US alone, and with ResMed's main treatment machine, the VPAP Adapt, selling for about US$3,200, the available market could be around US$1.5 billion. Given that the US currently accounts for about half of ResMed's sales, the worldwide market might be as much as US$3 billion. And if ResMed was able to get a 50% share of this market, it would almost match the US$1.6 billion revenue the company achieved in the year to June 2014.
Now of course there are a lot of ifs in all of this – not least that SERVE-HF hasn't even concluded yet – but it does demonstrate the dangers of relying exclusively on past and even current numbers for healthcare companies. The good ones keep innovating to improve their various treatments and bring them to a wider market.
Valuation boost
This is something we've run into before with CSL, where we doubled our sell price over two years following our last buy recommendation on 27 Feb 12 (Long Term Buy – $32.44) before finally dispensing with the price guide altogether. With this type of company such artificial benchmarks can act more as a shackle than a source of useful information. The more important thing is to keep an eye on your portfolio weightings (our recommended maximum for ResMed stays at 7%) and take profits along the way – that way you'll have banked some of the benefits even if the hopes turn to dust. In line with this, we're going to sell 550 shares in our Growth Portfolio to take its weighting down from about 8.5% to 7%.
ResMed doesn't have the research pipeline of a CSL, so we'll keep the price guide for the time being. However, with the potential for heart failure treatments as well as the substantial valuation boost from the weaker Australian dollar (which is down another 5% since we reviewed the company's interim result less than two months ago), we're going to give it a substantial boost, from a buy-sell range of $6.50–9, to a range of $7-11. HOLD.
Note: We're reducing ResMed in our Growth Portfolio to 3,000 shares by selling 550 shares at $9.24 to raise a total of $5,082. We also hold ResMed in our Income Portfolio.
Disclosure: The author regrets that he no longer owns shares in ResMed.