From: The Australian

Rebecca Urban

SHARES in ResMed have fallen sharply from recent highs amid renewed fears over the latest healthcare changes in the US.

The decline has coincided with increasing short interest in the company’s US-listed stock ahead of its upcoming fourth-quarter results, suggesting hedge fund investors are betting its earnings could disappoint.

About 19 per cent of the medical device-maker’s shares have been sold short, data from Bloomberg shows, making it one of the most shorted stocks on the New York Stock Exchange last month.

While most local healthcare stocks have enjoyed a recent boost courtesy of the falling Australian dollar, the dual-listed company’s shares are off about 13 per cent in the US and more than 6 per cent on the Australian Securities Exchange since their mid-May peaks.

Market sources indicated that several US-based stockbrokers had raised concerns about the impact of cuts to reimbursement for the company’s sleep-disorder breathing therapies now that phase two of the government’s competitive bidding program for the supply of medical equipment has kicked in.

Implemented by President Barack Obama, the program requires suppliers to submit bids to provide certain equipment and supplies at a lower price than Medicare has previously paid.

Medicare then uses those bids to set the reimbursement rates, meaning a price cut for the Continuous Positive Airway Pressure machine category of more than 40 per cent from July 1.

ResMed is a leading developer, manufacturer and distributor of CPAP machines, used to treat sleep apnea, a condition that has been linked to a range of serious health problems, including heart disease, stroke and diabetes.

Concerns competitive bidding could damage the company’s profitability have been compounded by suggestions it faces competition from new market entrants to the US, largely low-cost manufacturers based offshore or selling online.

In a recent investor briefing, ResMed’s Americas boss Jim Hollingshead acknowledged “nobody is happy with the extent to which reimbursements have been cut”, but pointed out that only a quarter, at most, of the company’s US-based payers were subject to competitive bidding.

That represented between 10 per cent and 12 per cent of the group’s global revenue, he said. Local analysts and investors, however, appear relatively unfazed, claiming ResMed’s substantial bargaining power should enable it to minimise the squeeze.

In a note to clients last week, Citi healthcare analyst Alex Smith said the risks were more than factored into the company’s share price.

He described ResMed’s recent underperformance as a buying opportunity for investors as well as an opportunity for the company to return excess capital via its buyback scheme, which was “highly EPS/value accretive” at the current price.

Mr Smith also noted that the recent sharp depreciation of the Australian dollar should offset the worst-case outcome from competitive bidding.

“It is unlikely ResMed will absorb anywhere near the entire price reduction and our feedback from distributors of durable medical equipment generally supports this,” he said.

“Furthermore, ResMed will have initiatives to offset the impact by managing product and customer mix, bundling and general cost-out initiatives.

“These will only need to equate to a 1-2 per cent reduction in the overall cost base to offset the impact of competitive bidding in full.”

Charlie Lanchester, deputy head of equities at Perpetual, also believes that concerns about competitive bidding have been overdone.

“On its current valuation, relative to other stocks in the healthcare sector, the company looks very attractive, particularly given the strength of its balance sheet,” Mr Lanchester said.

Perpetual increased its stake in ResMed from 6.4 per cent to 7.4 per cent in March.

The company’s next earnings update is due on August 2, with net income for the three months to June 30 tipped to be about $80 million.

ResMed shares closed 8c higher on Friday at $4.90.