Healthcare device company, ResMed, which is listed on the Australian Stock Exchange, released its third quarter result for its June 2013 financial year. ResMed specialises in the Obstructive Sleep Apnea (OSA) market which manufactures masks that regulate patients breathing while they sleep.

Overall revenue growth was inline with analyst expectations but improved margins and the 31% increase in net profit after tax (NPAT), was stronger than forecast.  However, management stated OSA masks, which account for approximately 50% of revenue, had lower than expected growth.

Slower OSA mask growth was a result of market share losses due to the release of new products by competitors, Fisher & Paykel Healthcare (FPH) and Phillips. FPH has a March financial year end and will be reporting its full year results next month. The NZ company is expected to deliver around 15% earnings growth due to market share gains in OSA masks. This is a good result considering the headwind due to the strength of the NZD vs USD.

The ASX Healthcare Accumulation Index, which includes FPH and ResMed, was the best performing sector index on the ASX, rising 48% since the end of April 2012.  Including dividends, FPH’s total shareholder return gained 30% for that period and ResMed gained 38%. This strong performance of the sector is due to the increased reliance on the healthcare industry by the aging baby boomers, as well as the introduction of ‘Obamacare’ in the United States which has resulted in patients getting care they might not have received without insurance coverage.

While the sector remains attractive, there are three core risks. Product failure which could result in a costly product recall, expensive development of a product that is unable to be commercialised and the way products are paid for by Government which could lower reimbursement rates for manufacturers.

Overall Milford believes that the healthcare sector will continue to perform well as the growth drivers in the sector, aging baby boomers and increased spend on healthcare, will be around for many years. Hopefully this performance will be a catalyst for IPOs of more healthcare companies.

Victoria Harris

Investment Analyst

Disclosure of Interest: Milford Asset Management holds ResMed and Fisher & Paykel Healthcare shares on behalf of clients.