A Valuable Treatment

By Ben Macnevin | More Articles by Ben Macnevin

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.