ResMed Posts Mixed Q3 Results, Brightree Buyout On Track

On May 25, we issued an updated research report on San Diego, CA-based ResMed Inc. (NYSE:RMD) – a global provider of generators, masks, and related accessories for the treatment of sleep-disordered breathing (SDB) and other respiratory disorders. The company currently carries a Zacks Rank #3 (Hold).

ResMed posted a lackluster third-quarter fiscal 2016 with earnings missing the Zacks Consensus Estimate and revenues meeting the same. Nevertheless, ResMed’s segmental as well as geographical performance was strong.

ResMed had earlier identified three horizons for future growth. In terms of progress in the first horizon, which includes ResMed’s core sleep apnea franchise, the company has agreed to buy Brightree. Management expects this acquisition to expand its Air Solutions platform with a stronger end-to-end value proposition for ResMed’s customers.

With respect to the second horizon, which includes growth in adjacent product and geographic markets, ResMed recently acquired Inova Labs. Management expects to achieve meaningful revenue growth from the addition of Inova’s products to its respiratory care portfolio as it aims to market these products across the 100 countries that it operates in.

Further, the company’s earlier completed Curative Medical acquisition is a perfect example of its efforts toward making meaningful investments and pursuing acquisitions in high-growth areas. The company also holds a strong cash balance position.

On the flip side, the failure of the SERVE-HF trial to meet its primary end point last year hampered ResMed’s sales from Adaptive Servo-Ventilation (ASV) devices. Going forward, management expects to witness declining sales from ASV devices in the ongoing fourth quarter as well. The trial failure will have the maximum impact on the company’s operations in the EMEA and APAC regions.

ResMed’s ability to sell its products largely depends on the extent of availability of sufficient reimbursement for the same. In markets like Spain, France and Germany, government coverage and reimbursement are currently available for these products but are subject to constraints such as price controls or unit sales limitations. In other markets, such as Australia, there is currently limited or no reimbursement for devices that treat SDB conditions. Competitive headwinds and challenging macroeconomic conditions prevailing in the global economy also pose threat to the stock.

Key Picks in the Sector

Better-ranked medical stocks are SurModics, Inc. (NASDAQ:SRDX) , Baxter International Inc. (NYSE:BAX) and Boston Scientific Corporation (NYSE:BSX) . While SurModics sports a Zacks Rank #1 (Strong Buy), Boston Scientific and Baxter carry a Zacks Rank #2 (Buy).