Meet HME's new billion dollar baby

Thursday, August 31, 2006

Respironics joined an exclusive club when it reported that in fiscal 2006, which ended June 30, the company generated just over $1 billion in revenue. That milestone came 30 years after Chairman Jerry McGinnis founded the company in 1976. Of all the other companies that do much if not all of their business in the HME industry, only Apria, Lincare, Invacare and Medline can claim a similar distinction. Respironics' CEO John Miclot talked to HME News last month about the company's earnings and what the future may hold for its core sleep therapy business.
HME News: How much of Respironics' revenue is generated from your sleep division?
John Miclot: When I became CEO in 2003, I had strategy that had three objectives. One was growth, and we have been doing that. The second was consistent and predictable performance, and we've hit or exceeded Wall Street's number for 27 consecutive quarters. The third was to broaden the company, and the reason was that I felt the biggest threat to the company at the time was that about 80% of our business was in sleep-in CPAP-and if anything changed--if there was a fundamental changing in the market dynamics--the entire company was at risk. Also at that time 15% of our business was outside the United States. Today, 50% of our business is sleep disordered breathing, 25% in ventilation; and then we have children's medical ventures and drug delivery, which make up about 12% of the company when the are combined. And now 30% of our business is outside the United States.
HME: How many people in the United States are candidates for sleep therapy?
Miclot: We say that there are about 50 million Americans who suffer from some form of sleep disordered breathing. Of that 50 million, 20 million have severe obstructive sleep and are candidates for CPAP. Of those, about 20% are now on therapy.
HME: Those numbers seem to bode well for Respironics' future.
Miclot: We gave guidance to Wall Street for fiscal year 2007, and we projected 14% to 16% revenue growth and earnings in the 18% 20% range. On $1 billion, that means you are getting about $150 million bigger every year. We think 15% to 20% market growth is very sustainable over the next five to 10 year horizon.
HME: Were do you think the biggest innovations in sleep will be during that time?
Miclot: I think there are all kinds of opportunities. I believe that over time you will see auto-titrating devices become more utilized. We've got places like France and Japan where that is the model. And the reason is that these patients change over time. They sleep on their back, gain weight or lose weight and the pressure requirements change. After three years they could have a different need. I think humidification and the means to humidify a patient could change. There is plenty of opportunity to innovate in this space.
HME: How much money does Respironics spend on R&D?
Miclot: Last year we spent $60 million on research and development, and we said we'd be spending 6% of our revenue again this year. On a billion that will be in the $60 million to $65 million range. A significant portion of that goes into our sleep disordered breathing, and patient interface remains an area where we remain very active doing development.
HME: Are you worried that insurers will cut back on reimbursement as utilization increases?
Miclot: That is one of the reasons we felt it was important to bring a guy like Dr. David White into the organization as chief medical officer, really proving the case that the treatment of these patients is cost effective, and it is very important as it relates to the comobidies.
HME: What kind of HME is most suited to thrive in the sleep market?
Miclot: We find that the homecare provider who has a respiratory focus, who is not only treating sleep disordered breathing but COPD and is in the respiratory med business--those are the people who have the clinical infrastructure and sales organization and sales people who can do a great job treating sleep disordered breathing.
HME: With so many people in need of testing, and sleep labs running long back logs, do you think Medicare will ultimately accept home testing?
Miclot: I think it is incumbent on us to work with the medical community to do the definitive study that says it is as good as polysomnograhy and put that issue bed. I can tell you that we are actively working toward that. You've got to go do it, and that is what we are going to do."