Sleep Apnea: Wake up to Res-Med

02/14/2003 12:00 am EST

Focus:

Michael Murphy

Former Editor, New World Investor

What is sleep apnea? Says Michael Murphy, "In obstructive sleep apnea (OSA), a sleeping person may stop breathing up to several hundred times a night, and for up to a minute or longer per episode. In addition to lack of sleep, the condition causes memory loss, weight gain, and headaches. If untreated, OSA can lead to impotence, hypertension, cardiovascular disease, stroke, and even cardiac arrest." Murphy’s latest pick in his Health Investing helps battle this condition.

"A company called ResMed (RMD NYSE) makes the best system for treating the condition. It is called continuous positive airway pressure (CPAP) and consists of a small airway blower connected to a mask worn over the nose and mouth. It simply blows air up the nose while the patient is sleeping, keeping the airway passage open. The CPAP costs $700 to $1,400 and is covered by most insurance. Masks require regular replacement, so this fits into the film and camera model. CPAP provides the best cost/benefit scenario among OSA treatment options.

"Despite the seriousness of the condition, awareness among the public and even healthcare professionals is extremely low. It is estimated that less than 10% of those affected receive treatment. OSA is also vastly overlooked among children. However, awareness is growing and more doctors are diagnosing people with OSA, and CPAP is the treatment they most commonly prescribe. OSA is currently a $450 million market. It is growing 20% a year and h as expanded its share of the CPAP market from about 20% three years ago to 40% today.

"The stock is trading at about 26.2 times this year’s projected earnings, and about 21 times next year’s estimate. With a 22% projected 5-year growth rate, the current PEG ratio is just under 1.2X. I think with some patience we can get the stock a bit cheaper as fears over an Iraq war heat up. Buy RMD under $32, with a stop alert at $28. I expect the stock to hit $45 by the end of the year, which would be a 40% profit above my buy limit."

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