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Poway, Calif.-based maker of sleep apnea pumps expects to continue growth trend
(San Diego Union-Tribune, The (KRT) Via Thomson Dialog NewsEdge) Dec. 30--For a sign of how business is at Resmed, a company that makes breathing masks to help people with sleep apnea, one need look no further than the company's Poway warehouse.
In shipping and receiving, where the sleep masks, hoses and pumps arrive from the manufacturing plant in Australia, boxes spill into the aisles. Workers rush to fill orders.
There is a general bursting-at-the-seams feeling resulting from the international company's 13 consecutive years of more than 20 percent growth.
Company executives and longtime bullish analysts expect that level of growth to continue, as the world medical community becomes increasingly aware that people whose sleep is interrupted by the snoring, snorting and gasps of sleep apnea are more prone to hypertension, stroke and heart problems.
"Early on, treating (sleep apnea) was largely a lifestyle issue because people were falling asleep in the day and this would help them feel better," said Benjamin Andrew, an analyst with William Blair & Co. in Chicago.
There was a suspicion though that there was more to this clinically, said Andrew, whose firm helped take Resmed public in 1995.
"What we've seen over the last few years is just an avalanche of scientific reports supporting links between sleep apnea and other disease like hypertension, heart failure, stroke, diabetes and depression," he said. "People are going to be looking back and say 'My goodness, how important sleep is to your overall health.' Today it's recognized, but it has not become a national obsession like exercise and health. I believe this will become the third piece of human health."
Resmed chief executive Peter Farrell laughed when he first saw the company's prototype technology in 1986. It was a crude, low-tech device: basically a reverse vacuum cleaner placed over the face to blow air into a person's airways, preventing the constriction and closures that cause sleep apnea.
Colin Sullivan, a pulmonary specialist from the University of Sydney Medical School, was treating about 100 patients with the technology at the time, Farrell recalled. To convince the skeptic Farrell that the device worked, Sullivan showed him a videotape: A sumo wrestler was sleeping on his back and, in the words of Farrell, "snoring like there was no tomorrow."
The wrestler's body was connected to a blood pressure monitor and a heart monitor. Suddenly the man stopped breathing, his lips turned blue. Then he snorted and gasped awake before he asphyxiated.
His blood pressure and heart rate sank.
Then the breathing mask was attached to the man's face and his breathing problems subsided.
"They put this Darth Vader mask on his face, it was like some Rube Goldberg thing glued to this guy. It covered his face like a toilet seat," Farrell said.
"It was connected to a machine that I swear you could run a swimming pool on, and it sounded like a freight train."
Farrell asked Sullivan what he thought the prevalence of such sleep disorders must be.
"At least 2 percent of the adult population," Sullivan said.
Farrell had been working with Baxter Healthcare, which built a billion-dollar business on the market for kidney problems, which is about 0.2 percent of the population.
"This seemed so clearly to make sense," Farrell said. "I could smell a monster."
Twenty years later, sleep specialists estimate that 20 percent of adults have sleep apnea -- and Farrell thinks it is closer to 30 percent. That means at least 18 million to 20 million people in the United States suffer from just that one sleep disorder. About 7 percent of those cases are moderate to severe.
And only 4 million have been diagnosed, Farrell said.
Resmed, which employs 2,000 people worldwide, has now made the Forbes magazine list of 200 best small companies for nine years running, a distinction based every year on a firm's last five years return on equity and gross profits.
The huge pump that blew air into the sumo wrestler is now small enough and light enough to fit into a case smaller than a shoe box. And apnea patients can choose between features such as humidification, pressure on exhalation to make breathing seem more natural with the mask on, and the ability to download data from the machine that tracks when and how frequently problems occur during sleep.
The masks come as small as the company's nasal pillow, a lightweight plastic tube that sits just below a person's nose.
Resmed's ability to constantly refine and improve its products has allowed the company to maintain its position as market leader, said Andrew, the analyst. Some analysts had suggested price was important, but that has been shown not to be the case, he said.
This steady success has not escaped investors.
Since shares on the New York Stock Exchange split two for one in March 2000, Resmed shares nearly doubled in value until another two-for-one split was approved in August and paid out in September.
Shares were selling around $40 this week.
The company also trades on the stock market in Australia, where Resmed first started. But now the majority of investors are in the United States, according to Andrew.
Ideally, Resmed would like to sell its products directly to the customer instead of through distributors. That's difficult to do in the United States because of the way the health care reimbursement system works.
Overseas, however, Resmed has been making a push to get closer to the consumer. Since July 2003, Resmed has bought four of its distributors in Europe and Asia.
Increased sales worldwide, and a track record of controlling manufacturing costs, has put Resmed on line to bring in $500 million in revenue this year, Andrew said.
In fiscal 2005, which ended June 30, sales jumped 25 percent to $426 million, while net income grew 13 percent to $64.8 million, or $1.82 a share.
As of Sept. 30, Resmed had $134.2 million in cash, which it is putting to use expanding existing facilities, or building new ones, here in San Diego and across the world in Sydney, Australia.
At its ever-expanding manufacturing and research and development campus in Sydney, Resmed is in the midst of an expansion project expected to be completed by the second half of 2006. The company expects the building there will cost an additional $43.8 million, to be taken from cash on hand and cash from operations.
The expansion at the company's manufacturing center is needed to keep up with its growth over the last 13 years, observers said.
"All the while the company's done a good job of maintaining strong gross margins in a tough reimbursement market like the U.S.," Andrew said. "That means they're controlling costs well on the manufacturing side, which isn't an easy thing to do."
Meanwhile, Resmed executives figure its 250 employees working at corporate headquarters in Poway will outgrow that building in 18 months.
During that time, the company plans to build a new headquarters for its administrative offices and its distribution warehouse on 10 acres it bought this summer in Kearny Mesa, said Keith Serzen, the company's chief operating officer for the Americas.
The company went looking for land for a new and larger facility last year and found the pickings slim. There were only five lots in all of San Diego County that were large enough and fit the needs of Resmed, Serzen said.
In July, the company paid $21 million for three adjacent lots on the grounds of the old General Dynamics rocket-building facility. They were the last three lots available in the master-planned, 244-acre San Diego Spectrum, a combination of business and residential properties between Kearny Villa and Ruffin roads. The site is pure dirt now, he said. Surrounding it are offices for Jack in the Box, Frito Lay and a Fairfield hotel.
At a time when other companies are expanding outside San Diego and California, in locales that offer lower real estate costs and tax breaks, Resmed decided to "show its commitment to the city and to keeping corporate headquarters here," Serzen said.
The move is also relatively convenient for the employees, which in the long run also makes investors happy. Construction of the new headquarters is expected to begin next year.
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