Although our nation’s healthcare is often seen as too costly, it is credited with many important medical innovations. And benefits accrue to people not just here in the United States, but around the world.

 

#-ad_banner-#Take obstructive sleep apnea, as an example. The common and insidious sleep disorder, in which breathing briefly stops dozens of times during the night, affects 25 million Americans and 100 million people globally. The prevalence could climb much higher due to rising rates of obesity, a chief sleep apnea risk factor.

 

Although sleep apnea is most commonly associated with snoring, it’s a major health problem. Sleep apena sufferers have a higher risk of heart disease, stroke and daytime fatigue that is severe enough to cause people to fall asleep at the wheel.

 

Such consequences have spurred massive and growing demand for the devices used to detect and treat sleep apnea. The market for treatments is on pace to expand to $19.7 billion by 2017, from $8 billion in 2011, according to India-based research firm MarketsandMarkets.

 

Many publicly traded companies are jumping on this trend. But my favorite is ResMed, Inc. (NYSE: RMD), a mid-sized medical device firm with nearly three decades in the sleep apnea market, dominant market share and best-in-class growth and profitability metrics. Its stock is up more than 120% in the past three years. Annual sales currently total nearly $1.6 billion.

 

 

Metric	RMD	Industry Avg.
Revenue Growth (3-Year Avg.)	7.8%	6.5%
Net Income Growth (3-Year Avg)	15.0%	0.1%
Operating Margin (Past Year)	25.5%	16.7%
Net Margin (Past Year)	22.0%	11.5%
Return On Assets (Past Year)	15.0%	7.0%
Return On Equity (Past Year)	20.8%	15.2%

 

 

ResMed was founded in 1989, when much of the healthcare community hadn’t yet realized that snoring could be a sign of something much more serious. The firm quickly became an early leader in continuous positive airway pressure (CPAP) treatment, the first effective nonsurgical sleep apnea device.

 

CPAP devices keep the airway open, which helps users breathe freely during sleep. This therapy has proven benefits, including improved quality of life and a reduction in health problems requiring hospitalization.

 

However, a major obstacle early on was most sleep apnea sufferers couldn’t tolerate CPAP machines. The masks were big and uncomfortable and the airflow generators were bulky and noisy.

 

ResMed has made substantial progress on the noise issue, reducing sound output to something like low-level white noise. The firm is constantly refining nasal mask designs for optimal comfort and secure fit, and its CPAPs have become significantly more compact. That has enabled ResMed to secure 40% of this market.

 

While CPAP devices are still ResMed’s largest business, accounting for 54% of total revenue, ResMed, is a key player in other sleep disorder niches. It currently holds 70% of the market for nasal masks and has developed portable diagnostic devices and compliance monitoring systems. Together, these three product categories account for 46% of revenue.

 

ResMed has been steadily ramping up research & development, spending an average of $124.3 million during in each of the past three fiscal years — nearly twice the 2009 total.  

	2009	2010	2011	2012	2013	2014	Past 12 Months
Revenue (In Millions)	$921	$1,092	$1,243	$1,369	$1,514	1,555$	1,578$
R&D (In Millions)	$63	$75	$92	$110	$145	118$	121$
Percent Of Revenue	6.8%	6.9%	7.4%	8.0%	9.6%	7.6%	7.7%

Making R&D a top priority has resulted in a strong product pipeline, with several dozen new launches in the past five years. One of the latest, a nasal mask that’s half the weight of the previous version and designed to help make positive airway pressure quieter, was introduced in January.

 

In September, the company launched a lightweight, portable ventilator here in the United States, which is suitable for patients who have difficulty breathing due to chronic lung disease or other medical conditions. The device first became available in Europe and the Asia-Pacific region in May.

 

ResMed also sells a couple portable diagnostic devices, the newest of which has been available for about a year. This particular device is compatible with an online platform that enables medical professionals to analyze their findings.

 

Along with innovation, ResMed is stressing international expansion:  In fiscal (June) 2014, international revenues climbed 8% to $716 million, led by double-digit gains in European and Asia-Pacific sales..

 

Domestically, competition and stingier reimbursement from Medicare and other insurers have helped keep a lid on product pricing. In fiscal 2014, these factors contributed to a 1% decline in North- and Latin-American sales, to $839 million.

 

To offset those headwinds, ResMed is looking to expand the market by helping raise awareness of sleep apnea — a smart strategy since as many as 80% of moderate-to-severe cases remain undiagnosed. Key methods include lobbying large medical associations and sponsoring educational programs for health care professionals and the general public.

 

The firm also continually seeks new applications for its technologies, such as an iPhone app that aids in sleep apnea diagnosis. In August, management initiated what it calls an ecosystem approach, where all aspects of sleep apnea diagnosis and management are combined into an integrated product platform.

 

Risks To Consider: Competing new technologies are a constant threat. In April, for example, the FDA approved a small implantable “neurostimulator” that treats sleep apnea by opening the airway with electrical signals, rather than pushing air through it like positive airway pressure.

 

Action To Take –> Don’t worry about competition from neurostimulators yet. Implanting the devices requires surgery, so it could be years, if ever, until they’re considered a direct substitute for positive airway pressure.

 

Looking ahead, I expect CPAP to remain the first-line treatment for sleep apnea. Global demand for it should rise with sleep apnea incidence, awareness and diagnosis. As the dominant industry player, ResMed is well-positioned to benefit from these events and should comfortably attain the 12%-a-year profit growth Wall Street analysts are projecting for it. At current earnings multiples, such growth is plenty sufficient for a 65% gain in ResMed’s stock price during the next five years.

 

Sometimes the little ideas are the big game-changers — something like a medical device that let’s someone sleep through the night. StreetAuthority compiled a list of what we believe are the next great trends called “The Hottest Investment Opportunities For 2015.” For more information on the game-changing idea that could move the markets and change the world, click here.