ResMed

What a difference a week makes. The market couldn’t get enough of ResMed after its excellent interim result last Friday (which prompted an upgrade to Long Term Buy from us), but it’s giving it all back today after overnight news on round two of the US Government's Medicare competitive bidding program.

Medicare is a large government-administered health insurer in the United States, covering about 15% of all Americans. Over the past couple of years it has been shifting the way it pays for ‘durable medical equipment’ (like ResMed’s flow generators) to a competitive bidding process, whereby medical equipment suppliers bid for Medicare contracts. Overnight, Medicare announced the results of the latest round of this competitive bidding process.

Apparently Medicare beneficiaries will make annual savings of about 47% on their CPAP machines and accessories. That’s a big number and is no doubt why the market is a bit spooked. However, it looks to us like an overreaction.

First of all, the announcement had been expected, although the detail may be somewhat worse than expected. Secondly, ResMed management has previously said it expects a negligible impact on its earnings from competitive bidding, and until we hear something from the company to the contrary, it seems reasonable to take this at face value. Finally, Medicare counts for about a fifth of ResMed’s US revenues, which makes it about 10% of group revenues. So there’s a limit to how serious the problem can be. Certainly today’s 8% fall in ResMed’s share price looks overdone to us.

The stock is down 8% since ResMed's dream run continues from 25 Jan 13 (Long Term Buy – $4.52) and it remains a LONG TERM BUY.

Note: We're adding 2000 ResMed shares at $4.15 for a total consideration of $8,300.00 to the model Growth portfolio.