US company ResMed is the global leader in the treatment of sleep apnea, a potentially serious sleep disorder in which breathing repeatedly stops and starts.
The devices and consumables ResMed manufacture provide airflow to those that have obstructed airflow through the night. Through better airflow, sleep quality improves, patients’ energy levels and overall health improves.

They have built an impressive medical product business on the back of a genuine patient need, coupled with consistent investment in innovation that has led to high quality market leading products with significant barriers to entry. This has manifested itself in a greater than 60% market share in global devices and similar in the mask market. The result is a business that is able to generate significant recurring sales, at high margins, with high returns on capital and strong cash flow conversion. Over the last 20 years this has resulted in significant value creation for shareholders with a greater than 20% annual return for shareholders.

Covid-19 presented some unique challenges for their sleep business in 2020-2021 and led to a period of underperformance. Diagnosis of sleep apnea has historically been carried out in sleep labs, and given Covid-19 restrictions, this disruption had caused under-diagnosis through this period. Following strong vaccination rates in the US, we expected ResMed’s Covid-19 impacted flow generator sales to improve as sleep labs reopened in 2021. On top of this, ResMed was expected to launch a new device in late 2021, the AirSense 11. We expected this to be a material driver of earnings given previous product launches had driven strong growth in sales. In addition, we also identified their competitor Phillips was experiencing product quality issues that would likely improve ResMed’s competitive position.

Having followed and held ResMed stock at various points over time we re-entered as shareholders in the middle of 2021. After investing, we benefitted from a product recall suffered by their largest competitor Phillips And this significantly boosted ResMed’s sales a‹nd share price. The shares gained approximately 50% in a matter of months, to which we largely took profits as the stock rocketed ahead of our near-term expectations. Given the stock’s more recent pullback, we continue to monitor for opportunities where we may look to continue adding back to our position in what is a high-quality well-run business with high barriers to entry.