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Is ResMed Inc. (CHESS) (ASX:RMD) under threat from this high growth innovator?

“Many people have sleep apnea, but may not even know it. In fact, sleep apnea affects more than 3 in 10 men and nearly 1 in 5 women, so it’s more common than you might think”.

That’s a direct quote from the ResMed Inc. (CHESS) (ASX: RMD) website and in my view, one of the key reasons that make Resmed an attractive investment

Like CSL Limited  (ASX: CSL) and Cochlear Limited  (ASX: COH), Resmed has a large total addressable market and has been capturing more of that market.

Resmed’s revenues grow at double-digit rates and in the last financial year, it made US$2.3 billion in revenue. That is a lot of money for a company that still has a large market to capture.

Its no wonder then that this lucrative market has attracted competition with the latest being the New York Stock Exchange (NYSE) listed Inspire Medical Systems Inc.

Unlike Resmed’s CPAP devices, Inspire’s therapy devices are mainly inside the body and do not require the patient to wear a mask. The images below provide a visual comparison between a Resmed mask and Inspire’s therapy.

Source: Resmed website

Source: Inspire website

I have never used a CPAP device before, but I would imagine that the mask might be more uncomfortable to use.

So is Resmed under threat from this disruptive innovator? Here are some reasons why I think investors should take the threat from Inspire seriously:

  • Whilst Inspire only started trading on the NYSE this year and has a market cap of less than US$1 billion, it is a spin-off from Medtronic PLC, another NYSE listed company which has a market cap of US$125 billion. That’s the kind of backing you want to see in a small company, from a company that has a lot of relevant IP and deep pockets.
  • Inspire has a very high sales growth rate of over 80% which is very impressive, even though it’s coming from a lower base compared to Resmed.
  • Inspire has higher gross margins (roughly 80% compared to Resmed’s 58%) although it’s not yet profitable.

Foolish Takeaway

For now, I think there is no immediate threat to Resmed’s bottom line but investors will need to keep an eye on Resmed’s R&D investments and how their products compare to new upstarts such as Inspire.

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can find Kevin on Twitter @KevinGandiya.

The Motley Fool Australia has recommended Cochlear Ltd. and ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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