The latest thinking on the sleep market

 - 
08/06/2009

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You can't have too much market intelligence, and I always like to hear what Wall Street analysts have to say about the HME market: where it is and where they think it is going. Here's  a report on the sleep market, courtesy of  Wells Fargo Securities, that greeted me when I turned on my computer this morning and opened my email:

* We Think U.S. Sleep Market Growth Remained Stable In FQ4 2009.  We believe that the U.S. sleep market grew by 8-9% in FQ4 2009, consistent with the past few quarters.  Sleep centers in our Q3 2009 Sleep Center Survey (conducted late June) reported patient volume growth of 6% in the last 12 months and expect growth of 9% in the next 12 months.  Similarly, HMEs in our Q2 2009 HME Sleep Survey (conducted early May) reported sleep growth of 7% in the last 12 months and expect growth of 9% in the next 12 months.

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* International Markets Are Tougher To Forecast, However.  We assume that international markets continued to grow at 10-11% constant currency or cc (putting global growth at 8-10% cc).  On one hand, international (particularly European) healthcare markets seemed to have slowed in Q2 while on the other hand, RMD might benefit from the swine flu as it did with SARS in 2003.

* We Think RMD Has Been Gaining Significant Market Share.  While Philips (PHG) does not give much detail on Respironics' results, comments on its Q2 call implied that Respironics had flat growth which we assume implies nominal (0-5%) sleep growth.  Combined with RMD's mid-teens growth, we think this puts the market at around 10% cc globally.  We think that RMD has been gaining share from Respironics particularly in the U.S. driven by the Apria contract and RMD's new VPAP product line.

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* New Platforms Coming Soon.  We think Respironics is likely to begin to roll out a new flow generator platform as early as late August with the auto-setting version coming first.  Our checks indicate that the new platform is significantly quieter than the M Series and has a humidifier designed to better prevent water leaks into the electronics.  We also think that RMD is likely to begin to roll out of a new flow generator platform possibly around early 2010.  If this timing proves accurate, we think RMD's growth may slow until it launches its new platform.

* Lowering Estimates; RMD Reports FQ4 Results After Markets Close Thursday, August 6th.  We are lowering our FY 2010 EPS to $2.12 from $2.18 given Respironics' impending platform launch and exchange rates.  For FQ4 2009 model revenue of $246.4MM (4.8% growth, 13.6% constant currency growth) and EPS of $0.58.  This compares with consensus of $243.2MM and $0.54.  We expect RMD to meet revenue consensus and beat EPS consensus.  RMD's conference call is at 4:30 pm ET: 1-866-362-4829, pass code 36112832.

— Mike Moran

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