| Balance Sheet and Cash Flow
ResMed currently holds a strong balance sheet with net cash of $446 million in 1Q11 versus $367 million at the end of FY10 and $254 million at the end of FY09. The company ended 1Q11 with cash and cash equivalents of $540 million compared with $488.8 million at the end of 4Q10 and $451.6 million at the end of 4Q09.
Cash flow from operations was $59 million in 1Q11 versus $59.0 million in 4Q10 and $53.5 million in 3Q10.
The company repurchased shares worth $17.9 million during the reported quarter and it has 13.8 million shares remaining under its current authorized buyback program.
Inventory turnover in days increased to 91.3 days in 1Q11 from 84.4 days in 4Q10. The first reason for the sequential increase in inventory is that of a return to normal levels. Secondly, the transition to S9 caused inventory to increase.
Singapore facility: Management commented during the 4Q10 earnings call that Singapore continues to progress extremely well. The facility now assembles flow generators, masks, motors, and will be able to manufacture masks within the next 12 months. ResMed expects this facility will eventually account for 25% of volume. Management does not plan to extend their manufacturing capabilities to other low-cost base countries (i.e. South-East Asia, China) as they want to maintain “quality levels”. Singapore also offers attractive savings on the tax line.
Competitive Bidding Update
Competitive bidding is the process whereby DME providers, the distributors of CPAP equipment, tender with the Centers for Medicare & Medicaid Services (CMS) for equipment reimbursement. The CMS Program Advisory and Oversight Committee (POAC) released its timeline for the Round 1 re-bid of Competitive bidding in June 2009. The implementation of the competitive bidding program for durable medical equipment prosthetics and orthotics (DMEPOS) was extended till January 2011. A 9.5% CMS reimbursement reduction to DME suppliers was applied in order to ‘pay’ for the delay in the competitive bidding program. Although this removed uncertainty, the 9.5% cut was higher than that estimated in the first two rounds of competitive bidding. Additionally, this 9.5% cut occurred at one time point, across the board to all regions in the US instead of the staggered cuts that could have been seen from competitive bidding. This implied an average price decline in RMD masks and devices of 5.2% in FY09/FY10 as opposed to the normalized 4% price declines per annum.
In July 2010, the CMS completed the bid evaluation process and announced that average price reductions in Round 1 of the Competitive Bidding Program will be 32%. These price reductions will be implemented from January 2011.
Home Sleep Testing (HST) or Home Diagnosis
Centers for Medicare & Medicaid Services approved the use of home sleep testing in March 2008 to diagnose patients with sleep-disordered breathing using a Type II, III, or IV diagnostic device. This gives patients the choice to opt for diagnosis in their homes. The September 2008 publication of the European Society of Cardiology guidelines noted that patients with symptomatic heart failure frequently have sleep-related disorders (central or obstructive sleep apnea) and recommended the treatment of those patients with CPAP devices.
Home diagnosis will increase CPAP volumes. The development of home diagnosis could mean a change in relationships in the path to diagnosis. At present the CPAP manufacturers develop strong relationships with the sleep labs in order to influence the brand which doctors may choose to specify on the CPAP prescription. If a new business type were to emerge in order to service home diagnosis patients, volumes increase and prescriptions by nature would become more automated. The power over which brand of CPAP equipment to supply could then lie with the DME supplier instead of the sleep lab. This would in turn lead to further price competition amongst the CPAP manufacturers. In these scenarios, it becomes advantageous for a manufacturer to expand their product offering and ‘bundle’ product sales to DME suppliers.
Management noted that HST remains in the early stages, but private payor reimbursement progress (>80% of covered lives) continues to ramp. An analyst (MorganStanley) notes that on average, a sleep laboratory is reimbursed $1,400 to carry out a sleep test. Reimbursement for a home diagnostic test is only $140. Thus there is no real incentive for sleep labs to switch diagnostic methods. However, it believes this will provide a niche for a new business type to develop and service potential sleep apnea patients.
Overall, the analysts believe that this early sampling of diagnosing and treating patients will become increasingly common in the coming years, which should provide a dual benefit to the SDB market through increased patient flows and favorable mix shifts. With best-in-class auto setting generators, ResMed should be a primary beneficiary from this trend; time restrain or impact on growth rates is challenging. Thus, the analysts contend that, despite a lack of clarity on how the HST market will look, over time it should be a positive for ResMed and the entire industry, as it grants patients greater diagnostic access and may reduce healthcare costs.
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