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Sleep apnea, CPAP, oxygen therapy: these are not Apple-associated words. Yet over the past few months, we've found it difficult to shake a heretical thought: why wouldn't Apple want to buy ResMed?
For the past five years or so, ResMed has been building what it describes as a 'connected care ecosystem' to make its respiratory devices more useful to patients and healthcare providers.
The company has spent nearly US$2.0bn on acquisitions that strengthen its software, data management and analytics capabilities. It's this basket of connected digital services - and their piles of consumer healthcare data - that we think could soon put ResMed in Apple's sights, if it isn't already.
It's worth understanding these units a little better before we explain why 2020 could see a big deal.
In 2014, ResMed introduced a cloud-based software platform called 'Air Solutions', similar to the Apple interface that seamlessly links your Apple products behind the scenes.
The major selling point was the 'AirView Monitoring and Compliance Management System' which enables doctors to wirelessly monitor how and when a patient uses their machine, collect diagnostic and therapy information, and - somewhat creepily for the technophobes - 'monitor and change your patients' device settings remotely without having to leave your desk.'
In 2016, ResMed went all in on this strategy, buying US-based software maker Brightree for US$800m so that it could integrate billing, patient resupply, procurement and business analytics into its system.
Brightree was the missing link that connected patient devices with Home Medical Equipment (HME) suppliers and healthcare providers. Brightree works as an online platform to manage a clinic's main business processes and workflow functions - integrating ResMed's devices with Brightree put ResMed at the core of a clinic's operations.
ResMed's next largest acquisitions were MatrixCare and HEALTHCAREfirst in 2018. MatrixCare serves long-term care providers, such as nursing homes, with business software to manage referrals, claims, payroll and patient nutrition data. HEALTHCAREfirst, on the other hand, manages electronic health records, billing and other administrative processes. ResMed has spent the last year integrating their features into a single platform.
One final noteworthy acquisition was Propeller, an asthma monitoring company bought this time last year. Propeller builds small sensors that attach to an asthma patient's inhaler and tracks medication usage. The data generated is then provided to patients so they can track their adherence and get feedback - and the data is also sold to big drug makers so they can monitor how patients use their therapies.
While ResMed's digital businesses are small in terms of direct revenue, management knows their strategic value: the acquisitions enable ResMed's products to communicate with each other wirelessly, share information with healthcare providers, and offer clinicians tools to boost productivity.
Once patients and doctors start to use ResMed products, they think twice about using something from a competitor the next time around, just as an iPhone user will probably stick to iPhones if they also own an Apple Watch and MacBook. That's the value of a cloud-connected ecosystem.
While US-based Respironics, ResMed's main competitor, is building its own cloud lineup, ResMed is winning the race so far with a 50% share of the sleep apnea device market compared to 39% for Respironics.
Today, ResMed's digital businesses serve more than 18,000 healthcare providers, manage the information of more than 90 million patients, and connect 11 million devices to its cloud software. More than four billion nights of sleep treatment data has been collected, and the company now has a treasure trove of medical information on patients as well as operational data on healthcare providers and clinics.
So why Apple? And why now?
ResMed's market cap of US$22bn would normally make it too large for any company to buy. If Apple did buy it, it would be the largest transaction in Australian history, assuming Apple would need to pay a 15-30% premium for shareholders to bite.
Still, with US$100bn of cash sitting on Apple's balance sheet, the company would have no trouble making an offer. More importantly, ResMed could be worth a lot more in Apple's hands than as either a standalone company or in the hands of a competitor.
Since the launch of the Apple Watch a few years back, Apple has continuously added tools to help consumers monitor and manage their health. From the Apple Watch's new heart monitoring and ECG functions, to support for hearing aids, women's health and medication reminders, Apple clearly sees health monitoring and management as a key part of its future.
On the face of it, sleep apnea may sound too niche for Apple but it's a condition with a huge pool of undiagnosed patients. Sleep apnea affects over 900 million people worldwide, while asthma affects a further 150 million. Some 80% of those are undiagnosed. Of the billion people who own an Apple product, roughly 100 million or so are likely to have either sleep apnea or asthma.
Furthermore, three recent acquisitions suggest Apple already has its eyes on the segment. In 2016, the company acquired Gliimpse, which allows patients to store and share healthcare records. In 2017, it bought Beddit, which makes sleep sensors and sleep monitoring software. And in 2019, it bought Tueo, which makes under-the-mattress sensors to detect asthma.
If Apple continues to push into health monitoring - particularly sleep medicine, respiratory disorders, and asthma - we're hard pressed thinking of a better acquisition than ResMed. ResMed would significantly bolster Apple's intellectual property in those areas, and it would put Apple at the heart of the doctor's office too, allowing it to control the flow of data from the first beep of a monitoring sensor to record management, referrals and treatment.
Trying to put a precise figure on what all that is worth to Apple would be an empty exercise. Tech acquisitions tend to be valued far more on strategic hopes than on current earnings.
Nonetheless, with the CPAP device market growing at 11% a year and Brightree's revenue growing at twice that rate, we think ResMed could have US$600m or more in net profit a few years from now, up from US$419m today. ResMed's forward price-earnings ratio of 38 looks steep, but for a business of this quality with that sort of income and growth rate, we think it's justified.
Yes there's been tough competition for ResMed's core CPAP and mask business in recent years. Yes there's still uncertainty around ResMed's ability to integrate its digital acquisitions. But ResMed is now sitting on a goldmine of patient data and technology patents, and the company has plenty of free cash flow with a clean balance sheet to boot. We know ResMed's tools would be useful to 100 million Apple customers, and Apple has more cash lying around than it could possibly invest internally.
There isn't quite a 'for sale' sign in ResMed's window, but our guess is that there may be a few Apple executives tapping on the glass. HOLD