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Has ResMed found the ‘holy grail’ of healthcare?

It’s a big call to make, but ResMed (ASX: RMD) chairman Peter Farrell believes that the breathing apparatus manufacturer may just have found the “holy grail of healthcare delivery” with the mask systems the company provides. If his evidence is record company revenue and earnings, he could be right.

ResMed announced record revenue for the quarter to March 31 up 10%, and net income up 31% on the same period in 2012. The company announces quarterly results in accordance with its listing on the NYSE, but the news will be welcomed by investors with a 32% jump in diluted earnings per share (eps).

A key driver behind the result is ResMed’s focus on a new breathing mask range. In comments to the Associated Press, Farrell described the masks as meeting various needs for sufferers of sleeping disorders like sleep apnea – improving patient quality of life, slowing the progression of co-morbid (or additional) disease and reducing healthcare costs. The company is planning to launch two new mask products this year which it hopes will keep the revenue flowing in.

Rival mask manufacturer Fisher & Paykel Healthcare (ASX: FPH) is also expecting a big jump in mask sales this year. In February the company raised its earning guidance from between NZ$69-72 million to NZ$75 million. The company is expecting a 14% increase in second half operating revenue, up from 8% in the first half of the financial year.

Breathing-derived sleep-disorders affect one in four people according to ResMed’s Farrell, who estimates the company has only reached 5-15% of the potential market. This market includes individuals as well as public and private hospitals like Ramsay Health Care (ASX: RHC) and Primary Health Care  (ASX: PRY). The masks can be sold at good margins, so increasing volumes without too much price discounting should continue to yield good results for both suppliers.  In 2012 RMD had a full-year operating margin of 21.5%, while FPH was slightly lower at 18%.

Foolish takeaway

Both companies have increased their spending on research to develop new mask products. ResMed’s R&D spending was up 10% for the quarter, but it will be money well spent if it can continue to deliver strong growth.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Regan Pearson owns shares in FPH. 

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