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Fisher & Paykel Healthcare to challenge ResMed for market share

Fisher & Paykel (ASX: FPH), is arguably New Zealand’s answer to ResMed (ASX: RMD). The company has over 2,750 employees in 33 countries and sells its products to over 17,000 customers. It has about 2,800 products and 100 distributors (although it also employ its own direct sales team in certain markets).

Fisher & Paykel specialises in respiratory devices, and earns more than 40% of its revenue from devices that treat obstructive sleep apnea (OSA). These devices compete directly with those offered by ResMed. Treatment of OSA requires a machine that controls the air pressure, a mask to deliver the oxygen to the patient, and, for those that want it, a humidifier.

Fisher & Paykel has recently announced the launch of its new mask, which it hopes will give it an edge over the competition. In the past, mask design has focused on making the masks less uncomfortable for patients. With its latest offering, the Pilairo Q, Fisher & Paykel have taken into consideration the comfort of the partners of those with OSA.

The key selling point of the new mask is that it is “virtually silent”. This addresses one of the major drawbacks of treatment. Breathing out through the older masks is so noisy that some patients resort to listening to music to obscure the sound. The opportunity to reduce the impact on a partner is likely to be a strong selling point for both the Pilairo Q mask and, as a consequence, the company’s SensAwake machine.

Fisher & Paykel generates the majority of its revenue by supplying hospitals with a range of devices that allow patients to breathe more easily. The treatment of OSA is within the company’s field of expertise, but it only entered that market about a decade ago. CEO Michael Daniell estimates that the company supplies about 8% of the market for OSA devices. The clear strategy is to use technical innovation to improve market share.

In the last few years, Fisher & Paykel has been taking on more debt. At the end of FY 2013 it had about $135 million in interest bearing liabilities, up more than 15% on 2012. Interest payments are now 5.6% of operating cash flow. While this does not threaten the viability of the company, it is unnecessary. The company pays a 3% unfranked dividend at current prices. Unfortunately, it also has unlisted options equal to about 3.4% of the current number of shares on issue.

Foolish takeaway

Fisher & Paykel is currently priced for double-digit growth for at least another five years. In my opinion, shares offer no margin of safety at current prices. Nevertheless, the company is worthy of a spot on your watchlist. Shareholders of ResMed should also take note — Fisher & Paykel has the expertise and ability to seriously compete from across the Tasman.

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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.

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