ResMed's heart failure trial disappoints

In our update on ResMed's recent third-quarter result we warned that there would be some fireworks in ResMed's share price when the results of its SERVE-HF clinical trial were to be announced later this year. Well they've been reported early and the news is not good.

The trial was conducted on patients suffering from central sleep apnea (CSA) as well as symptomatic chronic heart failure. CSA, often seen in heart failure patients, is where the brain and nervous system fail to provide the right signals to tell the body to breathe. It is distinct from obstructive sleep apnea (OSA), which is more common across the general population and is where the airway collapses during sleep. While the downsides of OSA are the insidious effects of sleep deprivation, CSA can be fatal.

The aim of the trial was to show reduced death rates and disease progression in patients with CSA alongside symptomatic chronic heart failure when treated with ResMed's Adaptive Servo-Ventilation (ASV) therapy. Unfortunately, a preliminary analysis of the results shows the opposite: 10% of the patients receiving ASV therapy died each year of the test, compared with 7.5% of the control group.

That's a statistically significant 2.5% difference, and ResMed is working with authorities to revise the labeling and instructions for its ASV devices to recommend that they're not used by people with symptomatic chronic heart failure.

It's important to note that the study says nothing about patients with CSA in the absence of heart failure, and it has nothing to do with ResMed's main business of treating obstructive sleep apnea. So the short-term impact on sales and profits will be small: less than 7% of ResMed's sales are for ASV devices and only a quarter of these are for the relevant type of heart failure patient. Putting that together gives sales of about $30m. However, as we explained in Keep heart with ResMed on 17 Mar 15 (Hold – $9.24), success in this trial might ultimately have led to sales of $1bn or more.

Of course that was always a way away, but some hope around it had undoubtedly crept into market valuations (including our own), which explains the 18% fall in the share price this morning. Our Buy price already includes a reasonable margin of safety, so we're reducing it by somewhat less, from $7 to $6.50, which implies a price-earnings multiple of about 20, and our Sell price comes down from $11 to $10. The stock is down 20% since ResMed's 'first-class problems' from 27 Apr 15 (Hold – $8.46). HOLD

Note: Our model Growth and Income portfolios hold shares in ResMed.

Disclosure: Staff members own shares in ResMed, but they don't include the author.