ResMed share slump an overreaction

Thursday, January 24, 2002

Australian Financial Review

Medical device company ResMed lost close to a tenth of its market capitalisation yesterday after a rival maker of medical equipment for sleeping disorders released a competing product. Analysts labelled the slump in share price down 75 or 7.6 per cent to $9.10 an overreaction. The stock fell to as low as $8.30. Florida-based Innomed Technologies launched the Nasal Aire product, a nasal pillow which, unlike the dominant sleep apnea treatment groups, does not require a cumbersome mask or head straps that makes some people feel claustrophobic. The privately held company claimed undocumented studies showed 98 per cent of patients preferred the Nasal Aire device to that of ResMed, Respironics or Mallinckrodt. Macquarie Equities analyst Mr John O'Connell dismissed the threat as overplayed, arguing that the existing nasal pillow product of Mallinckrodt had captured not much more than 5 per cent of the market. Innomed claims it has $US20million ($38.39 million) in forward sales which would represent a 10 per cent market share. ``It is a long bow to draw to suggest that the Nasal Aire will be able to capture substantial market share from ResMed or Respironics," said Mr O'Connell. However, the big fear in the market was the implications of the product launch for barriers to entry in the sleep apnea market. ``For a stock which is valued as a long duration play the implications are not positive if it means that barriers to entry are eroding," said one fund manager. Higher competition would mean that margins would fall over time, lowering the outlook for long-term profitability. ``Innomed is owned by a venture capital firm. If the mask does become a significant threat, ResMed may just look at purchasing the company," said Deutsche Bank analyst Ms Kiara Bechta-Metti. ``Currently Tyco (which owns Mallinckrodt) is going through a company restructure, so we would not expect them to be in a position to make any purchases." Trading in ResMed was dominated by brokers ABN Amro and JB Were.