Thread by @bizalmanac

1/ Dr. Matthew Walker claims, “…evidence that makes clear all of the dangers…when sleep becomes short have not been telegraphed to the public. It is the most glaring omission in the contemporary health conversation” in his 2017 book, Why We Sleep

amazon.com/Why-We-Sleep-M…

2/ 2-9% of adults in the U.S. suffer from abnormal breathing during sleep, known as Obstructive Sleep Apnea (“OSA”). Heart attacks, strokes and other chronic conditions are highly correlated with OSA. Resmed, $RMD, is the leading provider of Sleep Apnea care products globally

3/ Resmed sells continuous positive airway pressure, “CPAP”, mask systems used to treat OSA and as well as ventilators and portable oxygen concentrators used to treat Chronic Obstructive Pulmonary Disease and other respiratory diseases

4/ Dr. Colin Sullivan pioneered CPAP as a treatment for OSA in 1981. In 1986, Baxter established the Baxter Centre for Medical Research (BCMR) and accepted CPAP as a developmental project, continuing Sullivan’s effort to commercialize his treatment

pubmed.ncbi.nlm.nih.gov/6112294/

5/ In May of 1989, Baxter wound down BCMR and withdrew their commercial support of Sullivan’s project. Baxter offered Dr. Peter Farrell, the head of BCMR, the option to transfer to North America and keep his job as a VP of R&D. Farrell declined and instead chose to focus on CPAP

6/ By September 1989, Farrell had created a company, recruited staff and a board of directors, including Sullivan, raised AUD$1.2mm in venture funding and spent AUD$558k buying Baxter’s sleep apnea assets. ResMed’s foundation was laid but its prospects were still in doubt

7/ Sullivan was the first to publish research on CPAP, but he was not the first to bring a commercial CPAP treatment to market. Respironics, an American company, began selling CPAP systems to treat OSA in 1986, two years before Baxter began selling their product in Australia

8/ Resmed’s first five years were both successful and challenging. Sales grew at a 100% CAGR as The Company improved their technology and expanded distribution. Resmed survived takeover attempts by Medtronic in 1990 and Respironics in 1994, before IPOing in 1995

9/ Since 2010, Resmed’s sales and FCF have grown at 10.5% and 18.6% p.a. with over 1100 bps of FCF margin expansion and 800 bps of FCF / assets improvements. In the last three years, sales and FCF CAGRs have improved to 12.7% and 26.7% p.a.

10/ Resmed sells their products primarily to home healthcare dealers after a patient is referred by their physician. Health insurers reimburses costs in most countries. Marathon explains well the values of distributors of high-priced products in their essays, Capital Returns

11/ Over the past five years, RMD has spent ~60% of their EBITDA on software businesses. The software businesses deepen Resmed's distributor relationships and through the data generated improve patient care and product development. Software contributed 12% of FY2020 revenues

12/ The sleep apnea device market is an oligopoly with Resmed controlling ~42%, Respironics ~32% and Fisher & Paykel ~22%. Respironics was bought by Koninlijke Philips in 2007 and is reported within their Connected Care Segment as of 2019

13/ Dr. Peter Farrell served as Resmed’s CEO for nearly 25 years after he led the MBO from Baxter. Farrell’s son, Mick, has been employed by RMD since 2000 and has served as CEO since 2013. The Farrell's currently own ~$140mm worth of stock

14/ RMD exhibits similar sales and FCF growth, margin and ROA profile and trading multiples to other high quality medical device businesses. Similar to it’s peers, RMD’s EV / EBITDA – Capex multiple is elevated compared to the past three years

snt.io/JYFi3XDzV

15/ Health Insurers pay for the majority of ResMed’s products and so changes to reimbursement policies have significant impacts, especially in the U.S.A. Australia and China are the largest countries that currently do not offer reimbursement for sleep apnea products

16/ Inspire Medical Systems, $INSP, offers an OSA treatment for patients non-compliant with CPAP masks, 35-65% of the population. Their solution requires an implanted device and is early in its acceptance by the insurance and medical communities but may threaten RMD in the future

17/ ResMed is a wonderful business; double digit sales and earnings growth, mid-teens returns on assets and a leading position in a market they invented. Peter Farrell’s continued involvement is valuable and The Company’s investments into software are strategic