Making money while the world sleeps – Resmed | Summer Series

Bryce: [00:00:15] Welcome to another episode of the Equity Mates summer series, proudly brought to you by superhero over 12 episodes we're deep diving into some of the most exciting, interesting and well-known companies from both here in Australia and over in the US, in some instances will be hearing directly from the CEOs to give you firsthand insight into their companies. My name is Bryce and as always, I'm joined by my equity buddy Ren. How's it going? 

Alec: [00:00:39] I'm very good, Bryce. Very excited for this episode. One of the most exciting companies that Australia has produced following a trend of great medical marvels that we've exported to the world. CSL, we all know. Cochlear, many of us have heard of. ResMed, probably the least well known of those three. I reckon. Yeah, but another great medtech business to come out of Australia. 

Bryce: [00:01:10] Yeah, I know it well. It was head office was next to the Woolworths head office all the way out at Bella Vista for a moment there so well. 

Alec: [00:01:18] Its head office is actually in San Diego and it's been based in the states for thirty years for a moment. So you read the notes 

Bryce: [00:01:26] for a moment. It was out of Bella Vista where there was an office out there. But anyway, yes, ResMed is is the company that we're Deep Diving on today. You can find it available on the Super Hero platform, and the summer series is brought to you by Superhero, who allow you to buy Aussie and US shares and ETFs with no monthly account fees. And you can now own Qantas points with superhero, so visit Super Hero dot com that I use Qantas to learn more. Eligibility criteria, terms and conditions and fees and charges apply now. As always, with our summer series episodes, this episode gives you the opportunity to win $1000 in a superhero wallet. All you need to do is listen to this episode, head across to our Instagram page and on the corresponding post for this episode. Drop your comments with your favourite fact about ResMed, and you could go in the chance to win a thousand bucks into your superhero wallet and get trading today. So Ren, let's get into it. There's no bigger problem by the sound of it than sleep apnea.

Alec: [00:02:28] Maybe. Definitely not. No bigger problem. Maybe no bigger problem in my life. I'm pretty sure. I'm pretty sure I've got sleep apnoea. My dad has sleep apnoea. And yeah, I'm pretty confident I do. But it's not proven. It's not proven. And that is going to be a recurring theme in this episode because all this is 

Bryce: [00:02:47] that you have that aren't proven. 

Alec: [00:02:49] That's a whole other episode. But I, like many people around the world, probably have sleep apnoea but don't know it, haven't been tested and haven't given our money to ResMed to treat it. And in that fact lies the big opportunity for ResMed. 

Bryce: [00:03:09] Yeah, big opportunity. 

Alec: [00:03:10] Big opportunity. So let's talk about it. Let's start with sleep apnea. What is it? 

Bryce: [00:03:15] So it's a sleep disorder. I don't like to get your thoughts on why you think you have it, but it's a sleep disorder in which pauses in breathing or periods of shallow breathing occur more often than normal. 

Alec: [00:03:27] Basically, it disrupts normal sleep. Basically, the effect of it is that you're if you're really sleepy throughout the day, you're tired throughout the day. In kids, it can also cause hyperactivity that whole like overtired state. And then, if untreated, over time, it can lead to serious health problems such as high blood pressure, heart trouble, stuff like that. It's just being a bad sleeper, not getting enough air in the lungs, basically. 

Bryce: [00:03:55] My sister was reading a book this side note, but reading a book on the importance of sleep and this. This Professor Guy essentially says that if you were to put your body in a state to live to its maximum period, its maximum length, it would be putting it into a state of sleep 

Alec: [00:04:09] and shout out to Claire. Because before then, Bryce didn't actually know that sleep was important. So that's not true. So sleep is important. Obviously, sleep apnoea disrupts that, but I think the important thing here is just how many people have sleep apnoea but don't realise it. So these numbers are from the US. There's also some numbers from Europe we'll get to in a second. But it is estimated that one in 15 adults in the US have obstructive sleep apnoea, which equates to about 18 million people, but approximately 80 percent of these people are undiagnosed. Another estimate that I read suggested that 90 percent of patients with obstructive sleep apnoea remain undiagnosed. In another study that we looked at, it had a similar number for the US, about 80 percent. They had the market as only 20 percent penetrated. But in Europe, only five percent penetrated, meaning 95 five percent of people are undiagnosed. Most people just suffer through this. Thinking that they're not sleeping well. 

Bryce: [00:05:12] Yeah, and while ResMed helps those that do get a diagnosis, it's I think it's fascinating that so many people are undiagnosed. Yeah, there's a there's a challenge there in helping more people recognise that they have it or giving making it more accessible to get diagnosed. It feels like a whole nother podcast. 

Alec: [00:05:30] But yeah, and I feel like it's because this isn't like diabetes or, you know, cancer or any of the other serious diseases where it truly affects your life. This is like a quality of life illness. I kind of

Bryce: [00:05:44] disagree. I think a long period of time with no sleep or poor sleep has pretty intense consequences on your overall health. 

Alec: [00:05:51] Yeah, well, of course it does. But but sorry, my point is more like it's not like you get your foot cut off and you realise it and you can't go about your day to day without it. Like you can live your life and you can just think you're getting bad sleep. Yeah, and just be like, 

Bryce: [00:06:05] That doesn't mean it shouldn't be. No, no. 

Alec: [00:06:07] But. The only point I'm trying to make is that's why it's so undiagnosed. Yeah. Yeah, yeah, yeah. 

Bryce: [00:06:13] People are just like, Oh, I had a bad sleep. 

Alec: [00:06:14] Yeah, exactly. And I just keep having bad sleep, and maybe I need to cut out alcohol. Or maybe I need to stop eating before bed. And you know, all these different things and the idea of going to a doctor and getting a sleep study, I think is becoming more mainstream. Like in the last few weeks, one of our mates did. Another one is talking about it. So I think, you know, anecdotally, from the sample size of our close group, I think it's it's happening more and more, but I think 

Bryce: [00:06:43] maybe just a more aware of it now I feel, 

Alec: [00:06:45] yeah, yeah, yeah. 

Bryce: [00:06:47] So Rasmussen, 

Alec: [00:06:50] let's talk about the history of the company because we love founder led businesses. Yeah, it's not quite found a lot, but it's probably as close as you can get for a 30 year old business. 

Bryce: [00:06:59] Yes, it was founded in 1989 by Peter Farrell. They moved to San Diego in 1990, and then in 2013, Mike Farrell, Peter's son, took over as the company's CEO. So family founded and family run business. 

Alec: [00:07:15] Second generation family company. 

Bryce: [00:07:17] Yeah. And we know the importance of speaking, spoken to experts about, you know, the impacts that it can have on a company when it is founded run. But what is ResMed do for those that haven't heard of it? They do plenty, plenty of stuff in the sleep apnoea space.

Alec: [00:07:34] Yeah, the will. They create safe machines, which stands for continuous positive airway pressure machines that help people with sleep apnoea, I guess, get air in the lungs. They operate in over 140 countries and they create a whole bunch of associated products. But really, it's focussed on helping people with sleep apnoea. And they say CPAP machines.

Bryce: [00:08:01] Yeah, helping them breathe easier, sleep better. And I think also ease the pressure on the health care system by keeping people out of hospital and treat them in their homes. Sure. 

Alec: [00:08:12] Yeah. So I mean, that's not really a product for sure. 

Bryce: [00:08:15] But I mean, rather than people, their products are at home products. OK, yeah, you don't have to go to a hospital. 

Alec: [00:08:22] So, yeah, I'll give you that. They are dual listed on the ASX and the New York Stock Exchange. Pretty sure they're part of the S&P 500 index. So they're a big company and they're a true Australian success story, I think, in that they are the dominant player in a global market. We'll talk about their competitors in a second. I think Australian health care companies are something that we should be really proud of and something that we seem to do particularly well here in Australia, and this is another example of that. 

Bryce: [00:08:54] So Ren, before we take a look at the industry and some of the major competitors for ResMed, given the size of the industry, you'd think there'd be a few. We're going to take a quick break and hear from our sponsors. Let's take a look at the industry, the C pap industry, the continuous positive airway pressure machine industry, it is quite large. Market was $3.3 billion in 2019, according to some research done by BBC, and it is expected to grow to fire 4.5 billion by 2024, so compound annual growth of about six point two percent. So it's not a small industry, but ResMed certainly seem to have a pretty dominant share in this industry. 

Alec: [00:09:39] ResMed has a $37 billion market cap that is probably its biggest competitor is Philips. They have about a $34 billion market cap, so similar size. And if we look at market share, those two companies are the two big 800 pound gorilla is inspired. I guess the data we have here, it's split into obstructive sleep apnoea devices and then masks. I assume masks, other consumables. Let's start with the device, the CPR machines themselves. Talk to me about market share. 

Bryce: [00:10:13] Who's dominant? Well, we've got ResMed just out in front of Philips. 48 per cent of the market goes to ResMed in the OSA device market. Philips not far behind, though 42 per cent, and then the remaining share 10 per cent of the market is made up of all the other providers of outside devices. So, yeah, they they almost have 50 per cent market share. 

Alec: [00:10:35] If you thought Coles and Woollies were a duopoly, I mean, this is just a duopoly on another level. Absolutely. So that's devices 48 percent, ResMed, 42 percent Philips, all of the remaining providers 10 percent. What about mosques? 

Bryce: [00:10:49] Mosques is a little different. ResMed continues to hold pretty dominant share 50 percent of market share for the same masks to ResMed. Philips, though, has dropped to 35 percent of market. And as you mentioned, Fisher Paykel Healthcare, they come in with 10 percent market share and five percent to all remaining competitors. So Fisher Paykel playing in the consumable space? 

Alec: [00:11:12] No, no. I think they're playing both. I just don't think they had all this big. Yeah, yeah, yeah. Well, all I take away from that is that ResMed masks need to be changed more frequently, potentially because they've got 48 percent of device and then 50 percent of mask. And then Philips has 42 percent device, 35 percent mask, just like the device to mask ratio, suggests that you need to buy masks more often. Yeah, so I assume those are like annual figures. 

Bryce: [00:11:40] You would think so. Yeah. Look, ResMed certainly sitting pretty in terms of market share. Yeah. 

Alec: [00:11:47] Philips also had a voluntary recall earlier this year for a range of products. Not definitely something you want to say that they're voluntary recalling rather than being forced to recall, but not something you want to say that a recall has to happen. For ResMed, there's an opportunity to really capitalise as Philips, a pulling product from the market, two dominant companies in this space. Between them, they supply 90 percent of the device market and 85 percent of the mask market. 

Bryce: [00:12:15] Yeah. So in terms of the revenue mix, just having a look to your point, Ren so 60 percent of ResMed revenue is from selling the devices and then the remaining 40 per cent comes from the associated consumables, such as the masks, 60 percent of their revenue driven from the United States. 

Alec: [00:12:34] Yeah, I mean, it's it is a great business in the sense that if you can diagnose people with sleep apnoea when they're young, then they have to buy the device and then they have to keep buying masks. And eventually the device is Bryce and replaced and they're going to keep buying masks. And obviously, there's two big competitors who are constantly working to make better devices in terms of creating a product that people need to use every day and is so central to their sleep. And then you can sell consumables on top of that. If I was a ResMed executive, I would just be doing everything I can to get more sleep studies. I was just

Bryce: [00:13:14] going to say I 

Alec: [00:13:14] would be getting like vans like, you know, you know, how they do like dental check-ups, where they do like free dentist clinics and they drive around schools and all that stuff. I'll be doing like sleep, sleep. Are those going to be like, you want to do a sleep study? Is a portable sleep study. Van We're in Darlinghurst for two weeks and we're in Rushcutters Bay for two weeks. Then we're going up to Chatswood. Or you just 

Bryce: [00:13:34] go to all the corporate offices in major cities and just go lunchtime. Come on down, grab your sleep kit. 

Alec: [00:13:38] Know I get high tech. Yeah, take it home. Yeah, come back tomorrow. 

Bryce: [00:13:43] Come back tomorrow. With the results, we'll have everything here for you. 

Alec: [00:13:46] I would be doing. I would just be subsidising as many sleep tests as possible. 

Bryce: [00:13:50] Yeah, I'm surprised that, well, they may be doing something in the space to help people 

Alec: [00:13:55] never say never become more aware. Well, actually, no. Sorry, you know what the difference is because I called up to get a sleep study done. Yeah, you need a GP referral? Interesting. That's the battery, which seems.

Bryce: [00:14:07] Pointless. I don't know the ins and outs of why, but yeah, it's like if you think you need it and it's you just want a sleep test. Why? Why didn't they pay for it? 

Alec: [00:14:15] Yeah, because what's the worst that can happen there? Like a fall if you just take something to say, stop drinking. 

Bryce: [00:14:20] Yeah. Anyway, if you're listening, right, Fred, we'd love to hear from you as to what you're doing in this space to help that. 

Alec: [00:14:27] That's well like Exxon or like one of those big oil companies would just pay lobbyists to, yeah, to change the rules. ResMed get some lobbyists. Also, Exxon don't. 

Bryce: [00:14:36] So US great business in terms of that customer lifetime customer value by the sounds of it in a pretty dominant market position within the industry. How's that translating in terms of its financials? 

Alec: [00:14:49] Yeah. So $3.2 billion in revenue last financial year, half a billion dollars in net income, just shy for 470 million. So like strong numbers, when you look at the growth rate, the growth rate isn't, you know, it's not like it's not. Tech numbers are just under 12 percent compound annual growth rate in revenue for the last five years. Not bad. Yeah. And then profit six percent compound annual growth rate for the last five years. So I mean, solid growth, not mind blowing growth, but solid growth. It's not Afterpay growth. I mean, you do 12 percent a year for 20 years and you're going to get into a right for selling very well. Yeah, yeah. Yeah, it just it just feels like I don't know if Apple came up with a super machine, they would get the rest of that. The 80 percent of that market done in like three years. You're right. Yeah, it would be a big event of the best consumer hardware makers. You know, good. They would make such a good machine and they would convince the world to get a sleep test. It would just just on the point of like technological improvements. So I remember when my dad first got his sleep apnoea like machine, it was a months. It was like, take up. The whole bedside table is like full, like face mask. It was clunky and this was the late 2000s like, you know, 2008, 2009, whatever done in 10 years, the machines are sleek now. Realise that you still know you're wearing it. Yeah, yeah, yeah. But there's so much better than where they were, 

Bryce: [00:16:21] and I'm sure that's only 

Alec: [00:16:22] going to improve. Yeah, when Apple make money.

Bryce: [00:16:24] Yeah, so something that we haven't touched on, but just looking at the revenue mix as well. So they're obviously making revenue from devices. Then there's the masks and other components, but there is a SAS component to their business, always a software as a service, and they run a network of out of hospital health care management solutions. And these solutions are designed to help, you know, the providers of people delivering health care solutions delivered in a way that's more personalised and they can measure results better and overall improve the outcomes of patients. So playing in that space, a lot of a lot of IT products and now cloud connected. So they're bringing in a lot of digital health technologies to, I guess, improve the way in which you yourself can monitor your sleep and improve your sleep outcomes as well. So that is a growing part of the business. 

Alec: [00:17:15] Yeah. Now I think the last thing to mention around financials is the valuation. So we mentioned that the company is the last five years. It's growing its revenue, a 12 percent a year profit at six percent a year. What pay would you put on that? Like what price to earnings ratio for? Ballpark it for me. What would you put on that? Like 12 12? Oh, nothing trades at 12 these days. So boring companies slow, boring to unappealing. 

Bryce: [00:17:45] Ren has no business. I don't know. 

Alec: [00:17:47] I don't see anything in the market.

Bryce: [00:17:51] What's the average? What's the average of twenty twenty twenty twenty two or somebody? I guess I'd probably put it at market average. 

Alec: [00:17:57] Okay. Yeah. Well, I'll I'll take your market average and I'll raise you pay of seventy seven. Whoa. Yeah. So I think that's for ResMed, actually for a lot of these Australian tech companies. Sorry, the Australian medical companies like CSL and stuff, the question has never been about their growth prospects or the quality of their business. It's always just been a question of valuation, and ResMed is one of those because the market sees what we say. They say that there's this dominant duopoly. They see how successful Red Rose Med has been. They say the, I guess, the untested and untreated majority of people that could form the total addressable market. They sell that and they price, yeah, high expectations. 

Bryce: [00:18:43] And so 

Alec: [00:18:44] it's rare that you would find a company that's grown its revenue 12 percent and is trading at such a high paying, probably less rare in 2021 than it would have been in like twenty eighteen, but 

Bryce: [00:18:55] I'll say it sells at 43. 

Alec: [00:18:57] What's cochlear? 

Bryce: [00:18:58] Cochlear is trading at forty five, so not too far off CSL. But yeah, you're right, it's pretty, pretty lofty multiples for. Seychelles always had that issue. People like it's it's overvalued, overvalued, some valid and look at it just keeps on plugging 

Alec: [00:19:12] away. But I mean, people in the US talk about the same with Amazon, they say Amazon traded at a pay of 60 from one. It was a, you know, 100 million dollar company to when it was a trillion dollar company. 

Bryce: [00:19:21] Well, they say, sells pretty flat since the start of 2020. But anyway, we're not here to talk about say so. Let's close out by talking about some of the future prospects for ResMed Ren and then, yeah, let's see what's on the horizon. So they have a pretty big mission. 

Alec: [00:19:36] Yeah, they have a mission. And the mission is to change 250 million lives by 2025. Nate numbers there in the last 12 months, the company talks about changing one hundred and thirty million lives. I guess trading one hundred billion people is probably another way you could phrase that. So basically, I want to double the amount of people they treat per year in the next four years. I like the ambition 

Bryce: [00:20:01] just on the Apple thing. You've got me thinking because they're thinking about the digital component of this business as well, like apple harvests, sleep patterns of people. Yeah, or their iPhone 

Alec: [00:20:11] and the wall 

Bryce: [00:20:12] and their watch. 

Alec: [00:20:12] And so this is a complete tangent, but the watch that the digital watch business is getting super hot because of the data. So you know how Google acquired Fitbit or got Fitbit one of them? Yeah. And then Apple's obviously got the watch. Garmin is still its own business, the amount of data that you can give to health insurers and that you can create products on and all this stuff. Yeah, it's it's hiding up interest. So what are you saying, you saying? 

Bryce: [00:20:39] Well, I'm just thinking if you know your point of hypothetically Apple making a move in, they're going to have a fair bit of data been around being like, Hey, Ren, we've noticed through your watch and through your iPhone that you're above average in terms of poor sleep performance or ResMed should partner with Apple and they guy, you should 

Alec: [00:20:54] check out Ren. That's not bad. Yeah, yeah, yeah. 

Bryce: [00:20:57] Because we've seen that your sleep is so poor. 

Alec: [00:21:00] Yeah, anyway, Apple retail or restaurant partner. But really like when you look at this business, it's not like they're chasing a whole bunch of adjacencies in terms of, you know, where sleep experts and we've got this dominant position in the sleep apnoea market and we're going to try and move into like other sleep related issues. That's not really what the business is talking about. They're just focussed on this one sleep issue, and they're just trying to get more people to do sleep tests and get more sleep up machines out there. They do have eight thousand five hundred patents and designs. That's a lot. And they invest seven to eight percent of their revenue in R&D, which is impressive. And with that, seven to eight percent of revenue invested in R&D, it looks like there are some adjacencies that they're moving into chronic obstructive pulmonary disease, heart progressive lung disease. And I'm sure there are other diseases or other issues that they're they're looking at, but really like this as investors looking at this business, it's a sleep apnoea business that is trying to get more people to two hundred and fifty million dollars, two hundred and fifty million more machines, more mosques. That's it. Better valuation or at least grow into the valuation. 

Bryce: [00:22:21] Pretty big expectations from the market. But as we've gone through today, pretty big addressable market and a problem that it sounds like, well, we know a lot of people face and hopefully more and more people can get diagnosed to actually treat it and get a get a good sleep. Imagine if 90 percent of the population all had much better sleep could be a completely different world. 

Alec: [00:22:41] Well, I mean, if you do, if you do some simple maths and let's just say 20 percent of the U.S. is treated and I know that their revenue is global. But let's say 20 percent of U.S. is traded and they do $3 billion a year revenue off the back of that. So if everyone got tested and they got 100 percent of people with sleep apnea, you 5x their revenue $15 billion company the share prices. Sorry, the market cap is 38 billion. 

Bryce: [00:23:08] that's the multiple 

Alec: [00:23:09] everyone can get, if everyone can get traded, all of a sudden, they're trading on a two and a half price to sales ratio. Yeah, yeah, you 5x the profit you go from half a billion to two and a half billion. I mean, the pay still rich. Hmm. But maybe there's some operating leverage and economies of scale, so you're more than 5x the profit. But that's the business. Great Australian company, even though they've been based in San Diego for about 30 years, we still claim them. So good on them. Yeah, good on it. You might say me and a ResMed say Pat mosque in twenty twenty. Well, that's it.

Bryce: [00:23:46] Good luck with the sleep study. Looking forward to seeing the results of that. But look, Ren that does bring us to the end of our episode today and the end of our summer series. It's been awesome. We've Covid 12 big, exciting new age companies that have both here in Australia and over in the US. We've spoken to some awesome CEOs and had an absolute ball and we're looking forward to. Getting back on air in next week with our classic return with some bold predictions, stock of the yeah. 

Alec: [00:24:15] Yeah. Is going to be on. I hopefully by the time you're listening to this, all of spent all summer in the books and take on the superhero platform really studying my options. 

Bryce: [00:24:27] I think you should learn from it. Learn from your mistakes. Don't do that. But look, yeah, it's been awesome and a massive thank you to Superhero, who have supported the summer series over the last six weeks. Have we've given away 12 well by the end of this episode? And by the end of this week, we will have given away $12000 to the Equity Mates and superhero community.

Alec: [00:24:49] And by way, we really made superheroes. So thank you 

Bryce: [00:24:51] superhero for fire Equity Mates. So thank you to superhero. Congratulations to all of those people that have taken home a thousand in a superhero wallet and started your investing journey. And yeah, hopefully if you have joined us for the first time during this summer series, you've enjoyed the content and we hope that you stick with us throughout 2022. As we explore more companies, more sectors speak to more experts. We're really excited for the year ahead. So superhero allow you to buy Aussie and US shares and ETFs with no monthly account fees, and you can now earn Qantas points with superhero. t. So head across to our Instagram page. Drop in some of the key facts that you learnt from this episode on the corresponding ResMed post will be there today, and some of the best stats that are dropped in there will choose a winner and announce it later this week, or perhaps on Monday through our stories. So Ren, it's been a lot of fun. Love talking to stock specifics. Yeah, yeah. Big thanks to 

Alec: [00:26:02] severo. Yeah, massive thanks to Super Hero, all of these companies and more available on the superhero platform. My big takeaway from the last 12 episodes is just the range of companies that we can invest in in Australia and overseas. We've Covid companies that are working on some of the big sustainability challenges of our times, like Beyond Meat and Calix, even BWX. We've found companies that are on the forefront of new innovation, you know, like Airbnb and Atlassian. We've spoken to companies that are trying to disrupt industries like F45 and Peloton, who have two very different visions for the future of the fitness industry, but are both chasing those goals hard. And then we've just spoken about some of the great companies here and everywhere. Aria Yeah. Yeah, resonate today. It is just such a great opportunity. There's so many ways to make money in the share market because there's so many great companies trying to solve really big challenges and do big things. 

Bryce: [00:27:00] So at the end of this, you have all 12 of these in your portfolio.

Alec: [00:27:04] Well, let's put it this way I have some, but not all, okay, but I think just a massive thank you to Super Hero for letting us go deep on these 12 companies. You can check out all of them and more on their platform and excited for 2022 for more stock charts. 

Bryce: [00:27:23] So let's do it. Figure it out next week.