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A Valuable Treatment

A Valuable Treatment

Resmed was the first company under my coverage when I joined Montgomery and I’ve thoroughly enjoyed following the company for five years. Over this time, I’ve always been fascinated by the treatment of sleep apnea, and it’s helped shape my understanding of an important investing principle: To generate value, you don’t need to solve a problem, you just need to provide a solution that’s materially better than your competitors.

For those unfamiliar with Resmed, it specialises in products that treat sleep apnea, a condition where the airways collapse during sleep and the brain is starved of oxygen. Sleep apnea is a major health condition, and unfortunately is becoming increasing prevalent as people get older and larger.

At this time, the most effective treatment for sleep apnea is physically pumping air into the airways through a mask during sleep. Surgery isn’t a cure-all, and there is no magic pill that keeps the airways open.

As you can imagine, it’s not entirely comfortable sleeping like you’re flying a fighter jet. Such is the discomfort with this treatment that a patient is considered adherent if they wear the device 4 hours per night, on 70 per cent of the nights, during 30 consecutive days.  To put this in context, imagine being diagnosed for high blood pressure by your doctor, who prescribes you pills but tells you to only take half of the recommended daily amount, and only on week days. If you only wear a mask for 4 hours during a night, it’s not like your sleep apnea disappears during the remaining hours of rest.

But while the treatment can be uncomfortable, Resmed demonstrates that providing a superior solution to a major problem can be highly valuable. Even though flow generators are expensive, it’s far cheaper for people to sleep in their own beds than in a hospital bed. I trialled the home sleep test when I started covering Resmed, and I can still remember the restless sleep I had that night. Yet I have family that use a Resmed device every night and swear by the benefits of the product.

Resmed has built an amazing suite of products and a robust ecosystem. It generates high margins and is fortifying the barriers to entry in the market by reinvesting around 7 per cent of its sales in research to keep improving the solution.

Now, there is every possibility that sleep apnea is cured in the future. But this won’t happen overnight (alright, I’ll stop with the sleep puns). And any advancement would take time to erode the solid market share that Resmed has amassed. Yes, Resmed hasn’t cured sleep apnea, and the prescribed treatment doesn’t have high compliance. But while Resmed remains focused on providing increasingly superior solutions, the benefits it provides to both patients and shareholders is material.

It’s on this note that I’m very pleased to announce I’ve transitioned to Operations within Montgomery and coverage of Resmed has passed to Andreas Lundberg. Andreas is a superb analyst and has quickly gained a thorough understanding of the company (as you can see from his post here).

Resmed has been a wonderful investment, and I have every confidence that Andreas will continue providing great insights on its prospects.

The Montgomery funds own shares in Resmed.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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2 Comments

  1. Tony Belcher
    :

    There is a dark side to this force: Resmed sells its machines here for about twice the price of the same machine in the US (exchange-rate adjustments included) and then acts to prevent US sellers selling here via their online sites. A very nasty form of old-style protectionism that sees it making extra profits at the expense of Australian sleep apnoea sufferers. So much for patriotism… :-(

    I agree that it would be a great investment but my blood boils every time I have to replace a part on my Resmed machine and I’m sure I’m not the only one.

    It’s a bit like what used to be said of Oz banks – the average punter would be better off putting their money into bank shares than into the bank itself.

  2. david klumpp
    :

    Hello Ben (Andreas)- RMD is a great company and is on my watch list for a cheaper price. Can you comment on the relative strengths of RMD and FPH, which seems to compete quite effectively in this space? FPH is more diversified as it has other lines within the medical gases field; one advantage I can think of. Another question is on whether if one has the option, is there is any benefit either way in buying RMD on NYSE, or ASX ?

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