Student Research Sector: Healthcare Industry: …...Student Research This report is published for...

Student Research This report is published for educational purposes only by students competing in the CFA Institute Research Challenge.

Important disclosures appear at the back of this report

Sector: Healthcare Industry: Medical Appliances & Equipment

hosted by CFA Society San Diego

San Diego State University

http://3.bp.blogspot.com/-TtTgz0srM70/TWZhfoyjq1I/AAAAAAAAACs/iNuu_Co_kWY/s1600/sdsu_logo.gif

Student Research This report is published for educational purposes only by students competing in the CFA Institute Research Challenge.

Important disclosures appear at the back of this report

Sector: Healthcare Industry: Medical Appliances & Equipment

.0M

1.0M

2.0M

3.0M

4.0M

5.0M

6.0M

7.0M

$-

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

Vo

lum

e (

Millio

ns)

Sh

are

Pri

ce

Volume

Last Price

4= Most favorable to RMD 1= Least favorable to RMD

Source: Team’s Analysis

Ticker: RMD (NYSE) Recommendation: HOLD Price: $48.31 (as of 1/25/13) 12-Mo Price Target: $49.56 (+4.0%)

Diluted Earnings/Share

Q1 Q2 Q3 Q4 Fiscal P/E

Sep Dec Mar Jun Year Ratio

2011A $0.36 $0.37 $0.34 $0.37 $1.44 21.5x

2012A 0.33 0.42 0.44 0.53 1.71 18.3x

2013E 0.49* 0.53* 0.57 0.62 2.21 22.0x

2014E 0.57 0.60 0.62 0.68 2.47 21.0x

*Actual EPS from FY 2013 (Source: Bloomberg & Team Estimates)

Highlights: Cash Rich with Room to Grow

Fundamentals and valuation are indicative of a HOLD: Our recommendation is driven

by the company’s leading position in the Obstructive Sleep Apnea (OSA) and Respiratory device market, as well as a strong balance sheet. Our 12-month price target of $49.56 provides a 4.0% upside gain, inclusive of dividends. The target price is based on an EPS estimate of $2.36 (Next 4 Qtrs) and a P/E multiple of 21x.

Cash rich with room to grow: RMD has achieved 72 straight quarters of growth and has

grown its cash balance to $958.28M. Furthermore, Obstructive Sleep Apnea (OSA) remains 85% undiagnosed, giving RMD considerable room to grow in the future. We expect sales to grow by 11.8% and 10.6% in 2013 and 2014 respectfully. Growth is mainly driven by awareness created through the Company’s marketing and educational efforts coupled with the advent of Home Sleep Testing (HST).

ResMed will continue to benefit from Home Sleep Testing (HST): The advent of HST

has helped grow awareness and diagnosis of OSA, with RMD in a unique position to benefit. HST is diagnosed through an APAP machine which has fueled a favorable product mix shift for RMD, supporting a higher gross margin and revenue growth.

Leader in Innovation: The Company’s strategy is to create the most innovative fully-

integrated product line. RMD is able to achieve this through heavily investing in R&D and reaching end users by driving awareness of Sleep Disorder Breathing (SDB). RMD has the world’s largest product portfolios to diagnose and treat OSA, with over 1,300 patents amassed.

January 25, 2013

Source: Team’s Analysis

52 Wk Price Range $26.46 - $48.47

Average Daily Volume (3m) 1,136,209

Beta 0.77

Dividend Yield (Estimated) 1.5%

Shares Outstanding 143.1 Million

Market Capitalization 6,926.3 Milllion

Institutional Holdings 51.7%

Insider Holdings 1.6%

Book Value per Share $12.24

Debt to Total Capital 13.5%

Return on Equity 17%

Market Profile

ResMed Inc.

Team Consensus vs. Performance __________________________________ For FY 2013, our team estimates that RMD will earn $2.21/share. For the 1Q and 2Q of FY13, RMD reported combined EPS of $1.02, representing 46% of the total annual estimate. For FY2014, our team estimates that RMD’s EPS will grow by 12% to $2.47.

Source: Bloomberg

http://3.bp.blogspot.com/-TtTgz0srM70/TWZhfoyjq1I/AAAAAAAAACs/iNuu_Co_kWY/s1600/sdsu_logo.gif

CFA Institute Research Challenge January 25, 2013

3

Masks & Accessories

46%

Flow Generators

54%

Business Description

ResMed Inc. (NYSE: RMD) established in March 1994, develops, manufactures, and distributes medical equipment intended to diagnose, treat, and manage respiratory disorders. It is a global leader in providing non-invasive treatment against obstructive sleep apnea (OSA), a common form of sleep-disordered breathing (SDB). Product Portfolio

RMD possesses one of the world’s largest product portfolios to diagnose and treat OSA, with over 1,300 patents amassed. These products include diagnostic devices, airflow generators, masks, headgear, and support accessories (Appendix 18). RMD produces Continuous Positive Airway Pressure (CPAP), Variable Positive Airway Pressure (CPAP), and AutoSet (APAP) airflow generator systems to titrate and treat SDB. From the airflow generator, positive airflow is sent to the patient through either a mask or nasal pillow, opening the airway to the lungs. As a result of its commitment to product development, RMD aims to launch new flow generator platforms every five years and new masks every 18-24 months. Introduced in 2010, the S9 is the latest successful flow generator platform. RMD’s high-end devices within the S9 platform, as well as the newly introduced Stellar 100 and Stellar 150 ventilators, have driven recent sales growth. RMD also offers home sleep testing (HST) devices and patient data management systems to better diagnose and manage sleep disorders. The recent Q2 FY 2013 announcements show that airflow generators accounted for 53.8% of total sales, and masks and accessories accounted for 46.2%.

Constant Innovation

Much of RMD’s continued success and competitive differentiation in the SDB industry lies in its commitment to improving product offerings and finding new product applications. It holds clinical trials for new products in the United States, Australia, Germany, France, the United Kingdom, Italy, China and Switzerland. The company invested $109.7 million, $92.0 million and $75.2 million in fiscal years 2012, 2011 and 2010, respectively. These amounts represent 7-8% of net revenues. RMD is currently in efforts to apply its technology to combat common complications such as stroke, hypertension, and congestive heart failure (CHF). Getting to the Patients

RMD’s main end users are individuals at home, but they have recently begun reaching out to hospitals, dental offices, and trucking companies. It utilizes a direct sales force, network of distributors, and independent manufacturers’ representatives to market its products to home healthcare dealers, sleep clinics, and third-party payers, in over 70 countries worldwide. Healthcare professionals heavily influence which type of diagnosis and industry brand the patient pursues. Therefore, the entrance into each national market is based upon customer preferences, physician referral, SDB awareness, and local reimbursement policies. Future Intentions

Roughly 55% of RMD’s manufacturing is located in Singapore, with lesser production operations in Australia, Malaysia, California, and South Carolina. The company is expected to continue incrementally transferring more manufacturing to Singapore and Malaysia, expecting to reach up to 75%. The tax benefits and generous corporate relocation concessions provided by those governments are perceived to overcome the lesser utilization of the large Australia plant. As a result, RMD’s effective tax rate has decreased to 27.06%, 25.60%, and 23.23% in fiscal years 2010, 2011, and 2012, and currently sits at 20.8% from Q2 2013 figures. RMD has an intense interest in penetrating emerging and underdeveloped markets, such as China, India, South America, and the Middle East. However, pursuance into new markets is contingent upon the local level of prevalence and reimbursement policies. The company is very optimistic about its future in the Asia-Pacific region, namely China and India, partly due to the rapidly growing middle class in these countries.

Corporate Information

Headquarters

9001 Spectrum Center Blvd San Diego, CA 92123 Key Officers Chrmn, CEO COO

P. Farrell R. Douglas CFO CAO

B. Sandercock D. Pendarvis Board Members

P. Farrell G. Pace M. Quinn C. Roberts R. Sulpizio R.Taylor J. Wareham Founded Employees

1994 3,700 Source: Company Data

Stellar 100 Ventilator

Quattro FX Mask

S9 Airflow Generator


4

Share Distribution Over 51% of RMD’s outstanding shares are held by institutional investors. Investment advising companies account for approximately 82% ownership. The predominant geographic ownership of shares is the United States with 83% and Australia following with 6%. The top five individual and institutional shareholders are displayed in the charts below. Insiders account for only 1.6% of shares outstanding as of September 30, 2012.

Top 5 Individual Shareholders (as of 12/17/12)

Top 5 Institutional Shareholders (as of 9/30/12)

Name Shares (% outstanding) Name Shares (% outstanding)

1. Peter Farrell 909,346 (0.64%) 1. Blackrock 8,881,794 (6.21%)

2. Michael Quinn 768,000 (0.54%) 2. Vanguard Group Inc. 7,007,124 (4.90%)

3. Robert Douglas 99,831 (0.07%) 3. Bank of New York Mellon Group 3,874,996 (2.71%)

4. Michael Farrell 86,796 (0.06%) 4. State Street 3,871,259 (2.71%)

5. Gary Pace 77,273 (0.05%) 5. Commonwealth Bank of Australia 3,799,350 (2.66%)

Source: Bloomberg

Industry Overview and Competitive Positioning The Home Healthcare Equipment industry, specifically relating to OSA and other respiratory devices is maturing and highly competitive. The market is dominated mainly by two players, RMD and Philips Respironics, with a few smaller players competing to gain market share. The primary market is middle-aged adults, especially those suffering from obesity, hyper-tension, diabetes, and other comorbidities. It is estimated that 20% of the adult population suffers from mild to severe OSA, with 85% being undiagnosed

i. The worldwide growth of this market is estimated to be 6%-

8%. Notably, the industry is going through a huge shift to Home Sleep Testing, which will help bring down the percentage of undiagnosed adults as well as shift the demand to higher quality products. The Advent of Home Sleep Testing

In the past OSA was diagnosed in sleep clinics through a polysomnogram (PSG). This would cost around $1,000-$2,000 and require the patient to sleep overnight in a lab. Because of the cost and inconvenience to the patient the no show rate for patients that are diagnosed with OSA is estimated to be around 30%. Currently the industry is going through a paradigm shift to HST. HST is the diagnosis OSA through an APAP machine at the patient’s home. In addition to allowing the patient to be diagnosed in the comfort of their home, the cost of a HST is around a third of the price of a PSG, averaging around $400

ii. Since the inception of HST, 70% of providers have implemented

pre-approval for patients to get a PSG test, and this number is expected to rise to 75% by the end of 2013. In 2012 HST grew to 25% of total sleep tests conducted, and is estimated grow to over 50% by the end of 2013. The benefits that the industry has and will continue to see from this paradigm shift are considerable. These benefits include: Reducing the “no show” rate, driving awareness and acceptance of the prevalence of OSA, and increasing the demand for higher margin APAP machines over CPAP machines. Competitive Bidding

As a healthcare company RMD and its competitors are required to go through a competitive bidding process periodically. Round two of competitive bidding is expected to take place in July of 2013

iii.

Though no material price declines were seen after round one, round two could have a significant impact on prices given that it is applied 91 Metropolitan areas, whereas round one impacted only 9. RMD believes round two will not significantly impact their prices and has a strategy in place to circumvent the changes. Regardless of competitive bidding the industry does continue to see an annual 5% price decline.

Obamacare

The Patient Protection and Affordable Care Act, or Obamacare, signed into law in 2010 has created notable change to the healthcare industry. Under the Affordable Care Act, an excise levy of 2.3% on US sales of Class II and III medical devices took effect as of January 1, 2013. This tax will only be applied to devices that are used in the hospital setting, representing roughly 5% of RMD’s


5

business. This is expected to have less than a $1Miv effect on RMD’s bottom-line, but will likely to

hit RMD’s competitors harder as they are more heavily invested in the hospital space. Emerging markets provide significant growth prospects

According to Peter Farrell, the worldwide growth rate for the industry is 6-8% with the Asia-Pacific helping support slower regions with an average 8% to 10% growth rate. In the future companies will look to BRIC countries to expand. More specifically, RMD has placed its focus on India and China, whose middle class represent the best growth opportunities for the company. RMD’s decision to have manufacturing in Singapore (Appendix 17) has placed them in a position to penetrate the Asia-Pacific market. These growth rates will likely be sustained due to the high level of pollution major Chinese cities are experiencing. According to government monitoring, levels of the pollution particles were above 700 micrograms per cubic meter recently – dangerously above the World Health Organization’s safety levels of 25. This poor air quality will ultimately lead to an increase in the amount of respiratory issues, further increasing the market in the Asia-Pacific region. Taxes and regulations push industry to increase margins

In this competitive single focused market, margins are crucial for sustaining an advantage over competition. This makes other sources of profit maximization essential, such as maximizing tax shields and lowering regulation costs. RMD has taken a proactive stance to improve margins by moving operations to tax havens such as Singapore. Moving manufacturing to Singapore has allowed RMD to be strategically located while also realizing enormous tax advantages. Since 2007 RMD has lowered their effective tax rate from 32.23% to 23.23%, which is considerably lower than its competition.

Five Forces

Threat of New Entrants (3)

Threat of new entrants is a low risk factor to RMD. The profitability of the industry has been maintained for the last ten years, hovering around a modest 12%, which is unlikely to attract new competitors. Additionally, the technology in products is heavily patented and would require extensive R&D for a new competitor to make a comparable product.

Bargaining Power of Customers (4)

The home healthcare dealers and sleep clinics have little bargaining power with RMD because their products are seen as the premium product on the market. Additionally, there is a plethora of equipment dealers and clinics when compared to the remaining four manufacturers in the space. We believe the lack of RMD products in these dealers’ inventories could hurt them in the long run, thus diminishing their bargaining power.

Bargaining Power of Suppliers (4)

Given that RMD is the largest player in the SDB equipment space, suppliers rely on the company for a large portion of their revenues. RMD’s size combined with the fact that many of their supplies can be bought off the shelf or from many suppliers signifies that suppliers have little to no bargaining power. However, some products require uniquely configured components from a single-source supplier. This gives the supplier the leverage to negotiate higher prices, and represents a considerable inventory risk if RMD was to lose a single-source supplier.

Threat of Substitute Products (3) We see substitute products as a long-term threat. Surgical procedures and dental appliances designed to treat OSA and other SDB related respiratory conditions currently exist in the market place, but are a long ways away from being as effective as CPAP devices. The mechanical nature of OSA and SDB make it difficult to be treated through these substitute products; however, if the development of this technology were to gain traction, it could result in RMD’s products becoming obsolete.

Competitive Rivalry within the Industry (2)

RMD’s products are in a highly competitive space which is the largest threat to the company’s market share and revenue growth. Competitive bidding and new product releases from competitors continue to put pressure on prices. RMD has been able to combat this by investing heavily in R&D and developing superior products with a fully-integrated system. We expect the strength of the RMD brand and soon-to-come new mask line to protect RMD’s dominance in the market


6

ResMed 46%

Respironics 34%

Fisher & Payklell

13%

Other 7%

RMD Market Share

Source: Mizuho Securities and Team Estimates

Competitors RMD competes in the Home Healthcare equipment industry. More specifically, its products are used for the treatment OSA and other respiratory illnesses. This market is highly competitive; nonetheless, the company is the leader in the space with approximately 46% of market share. RMD competes largely through product innovation, customer support, and efficient distribution. The RMD brand is seen as the highest quality on the market, allowing the company to charge more for its products. The higher ticket price combined with lower manufacturing costs in Singapore and global distribution network has allowed RMD to achieve a gross margin that is consistently around 10% higher than its competition.

In addition to developing quality products, RMD secures its share in the market by leading space in education. They reach physicians and sleep clinics through online webinars and the trainings. Furthermore, RMD has established a foundation to promote the research and treatment of sleep apnea. The Company also uses various social media tools to market to their customers. Recently the industry has gone through a period of consolidation. RMD’s main competitors are: Respironics, a division of Philips BV; DeVilbiss, a Vestar Capital Partner Company; Fisher & Paykel Healthcare Corporation Limited; and CareFusion.

Phillips Respironics (Subsidy of NYSE: PHG)

Phillips Respironics is RMD’s largest competitor representing approximately 34% of the market. Together Phillips Respironics and RMD make up 80% of the sleep apnea market. Before being acquired by Philips BV, Respironics led the space, but since 2008 the business has seen a decline in market share, forcing Philips to realize €450M impairment to goodwill in July of 2011. Fisher & Paykel Healthcare (NZSE: FPH.NZ)

Fisher & Paykel is more focused on the hospital market than RMD, with around 43% of their sales from OSA devices and equipment and 53% from respiratory and acute care used in the hospital setting. Within the OSA market Fisher & Paykel has a stronger focus on the lower end CPAP devices, while RMD continues to shift towards the higher margin APAP and Bi-level products. DeVilbiss Healthcare (Private)

DeVilbiss Healthcare is a privately held Limited Liability Corporation owned by Vestar Capital Partners. The Company’s products are manufactured in the United States, Europe, and Asia and are distributed worldwide. While DeVilbiss’ main product line is sleep therapy, the company also offers products in oxygen, aerosol, suction, and ENT Therapy. Their OSA product range is comparable to RMD’s offering everything from CPAP to Auto Bi-Level devices.

CareFusion (NYSE: CFN) CareFusion poses little threat to the OSA market, having only two CPAP devices; however, they will be seen as a larger competitor as RMD tries to increase their product presence in institutional healthcare market.


7

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

2007 2008 2009 2010 2011 2012

Year Over Year Revenue Growth

13.8% 5YR CAGR

Investment Summary Recommendation

Our “Hold” recommendation reflects a positive outlook for the company and industry that has already been incorporated in the stock price. We project top-line revenue growth of 10%-12% in the coming years and year-over-year EPS growth of 29%, 12%, and 10% in years 2013-2015, respectively. Competitor cost pressures will continue to be a headwind, but focusing on high-end devices should eliminate pricing threats. Growth has been fueled by the traction of HST, and we see this as continuing trend in the near future. Our target price of $49.56 reflects our expected EPS of $2.36 for the next 12 months, and a P/E multiple of 21x. We expect the company to pay regular dividends for the foreseeable future, with an average yield of 1.6%. In our view, the stock’s current price of $48.31 is not significantly different from any of our estimates. Therefore, we reiterate our hold recommendation. Potential Upside

Given the company’s steady EPS growth, RMD could be considered a strong growth stock. We see great potential for RMD to penetrate emerging markets, grow its presence in the institutional healthcare market, and be seen as the preferred provider for patients being diagnosed through HST. The company remains extremely optimistic about the growth of HST, largely due to the move from providers to require approval for PSG, now representing 75% of

covered lives. Based upon the growing market we think the stock is worth hanging onto.

$0.57 $0.62

$0.57 $0.60

$-

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14

Earning Trends

Mean Analyst Estimate EPS Actual EPS Team Estimates


8

ResMed Event Analysis Timeline RMD’s daily price showing key events Source: Bloomberg

Acquisitions ResMed is conservative when it comes to acquiring businesses. They have a large cash balance on hand, but only acquire companies with a close strategic fit. Their most recent acquisition, Umbian, offers a comprehensive patient compliance management solution. This will allow RMD to improve patient compliance and be seen as favorable to providers. Other recent acquisitions include BianceMed Ltd. and Grüendler GmbH which have provided RMD with non-contact sleep monitoring devices and humidification products, respectfully. In years with and without acquisitions RMD has been able to see positive revenue growth and a stable ROIC. This shows that RMD is able to sustain performance and growth through internal operations, and only acquires businesses when they believe it will create and economic value added benefit.

Valuation We valued RMD extrinsically using multiples of Price to Earnings Ratios (PER) and Enterprise Values to Earnings Before Interest Tax Depreciation and Amortization (EV/EBITDA) of comparable companies. We also computed the value of RMD intrinsically with a Discounted Cash Flow (DCF) valuation. Our current 1-year price target for RMD shares is $49.56, and was based off of our 12 month forward P/E ratio of 21x. Our P/E ratio for calendar year 2014 decreased to 20.5, projecting a 2-year price target of $52.30 per share (Appendix 11). Multiples

We expect end of year 2013 EV/EBITDA and P/E multiples to be 12x and 21x respectfully. These numbers are slightly above their 2012 multiples and represent a slight premium to the industry's 10-year average. Historically RMD has traded above industry multiples, and we believe this trend will continue in the future. The wide acceptance of HST has opened up growth prospects for RMD, allowing them to experience a slight uptick of their EV/EBITDA and P/E multiples in the coming years. Though the company’s P/E multiples have fallen off from their 10-year average of 27.7x, we believe they will stabilize in the 19x-21x range. The consensus estimates for the P/E ratios for the Healthcare Supplies Industry and the S&P 500 Midcap Healthcare Sector index dropped by 8.6% and 12.1%, respectively, from 2012 to 2013 and


9

fell even further in 2014 (Appendix 10). We believe this is due to the new tax laws taking effect this year and hurting the overall index’s bottom line. We estimate that the Medical Device Tax will have negligible effect on RMD’s effective tax rate due to the small amount of products the tax applies too.

DCF Valuation

We project an income statement for the next 5 years that drove our DCF projections (Appendix 8). From fiscal year 2010-2012 the compounded annual growth rate (CAGR) for RMD’s revenue was 11.9%, over the next five years we estimate RMD’s revenue will have a CAGR of 11.2%. We calculated the terminal value of the of the cash flows using two methods, a perpetuity model and an exit multiple method. Using the perpetuity method with a terminal growth rate of 3% and 8.7% terminal WACC, RMD was valued at $48.52. (Appendix 9) To calculate the weighted average cost of capital (WACC), we took each countries risk premium and multiplied it by the weight of revenues RMD does in each country or region. Refer to Appendix 12 for a specific breakdown of weights and the computation of WACC. The capital asset pricing model was used to calculate the cost equity, using the weighted risk premium, and the ten year US government treasury as the risk free rate. Our beta was calculated regressing 5 years of historical monthly returns of RMD and the S&P 500 The WACC increases from 8.2% to 8.7% during the 5 year projection period due to the increase in the risk free rate which is currently at historic lows. Transaction Comparables

Lastly, we used a transaction comparable to value the company. RMD’s biggest competitor Philip’s acquired Respironics in March of 2008. Respironics offers therapy products for obstructive sleep apnea and portable ventilation, as well as monitoring devices for newborns, sleep diagnostics, and products for the treatment of respiratory disorders. Philip’s offered to buy Respironics for $66/share which equated to a EV/EBITDA multiple of 19.25x. Based on this multiple, and RMD’s estimated 2013 EBITDA, an implied share price of $54.70 is calculated (Appendix 15).

Target: Respironics

Acquirer: Koninklijke Philips Electronics NV

Completed: 3/17/08

Total Value Deal Multiples

Revenue: 3.72x Total Assets: 3.62x

EBITDA: 19.25x EBIT: 26.91x

Currency: USD ($)

Final Value: $4,615.27 M

Risks to Target Price

Our price targets rely on several forecasts that reflect our own assumptions about the future economic environment, as well as the company’s own profitability. Therefore, any significant changes to those assumptions could have a considerable impact on our forecasts. Some of these assumptions include the rate of revenue growth, economic growth, as well as our selective discount rate. Changes to any of these factors could significantly alter our estimates. Likewise, our multiples are largely based on market sentiment. Therefore, our estimates are vulnerable not only to changes in the company’s cash flows, but also to changes in market sentiment. In the event RMD’s P/E ratio is lower than our estimate, then our target price could overestimate expected returns.


10

Financial Analysis: Strong Growth, Balance Sheet & Cash Flow

Earnings

RMD achieves impressive earnings every year and its EPS will continue to grow. We expect a 5-year CAGR of 14.4%, largely due to expansion in Asia and an increase of customer awareness and diagnosis through HST. We expect EPS of $2.21 for FY 2013, and $2.47 in FY 2014, with modest growth going forward.

Gross Margins Will Improve

Gross margin continues to be supported by the lower cost of manufacturing in Singapore and Malaysia, and a favorable shift to a higher margin product mix. RMD increased its manufacturing to upwards of 50% and plans to increase as 75% by the end of the year. In addition to operational efficiencies, the advent of home sleep testing has fueled the shift to the higher margin APAP flow generators. Gross margin was improved by .04% to 61.8%.

Competitive Bidding

Revenues and growth in the 9 MSA’s where Round 1 of competitive bidding took place was in line with the rest of the market. Management believes that competitive bidding will have negligible effect on earnings, and has not seen a change in competitive behavior ahead of Round 2. RMD’s brand has helped support pricing power; however, the industry continues to see a 5% annual price decline. This price decline is more than offset by RMD’s shift to higher margin products.

Cash Flow

Cash flow remains strong, helping increase the net cash balance to $657.43M. Through continuous improvement to its supply chain RMD has been able to significantly reduce their days held in inventory, allowing them to achieve their best Cash Conversion Cycle in FY 2012 in over ten years. RMD continues to use its excess cash to repurchase shares, pay dividends, and fund acquisitions. The Company announced its third quarterly dividend in 2Q13 of $0.17and repurchased 1 million shares for a total consideration if $400M. As of 31-Dec-12, RMD had 7.6M shares remaining under its current buyback program. We expect RMD to payout an identical quarterly dividend throughout 2013 and repurchase an additional 784,000 shares. Balance Sheet & Financing

We expect RMD to maintain a healthy balance sheet with cash and cash equivalent making of upwards of 40% of total assets. It currently has a net cash balance of $657.43M and relies on internally generated funds to finance operations. The large cash balance gives RMD financial flexibility and can make strategic acquisitions should the opportunity arise. Having a low level of debt to equity and high interest coverage ratio means the company should not have a problem obtaining any future loans.

Profitability

ROIC and ROE have been stable throughout the last ten years hovering around 12% and 15% respectfully. With an average WACC of 9.2%, we see this as a strong indication that RMD is able to create value through both its operations and acquisitions, and expect this trend to continue in the future.

100

120

140

160

180

200

0

20

40

60

80

100

DI an

d C

CC

DS

O a

nd

AP

O

Cash Conversion Cycle Analysis Days sales outstanding Days payble oustanding

Days in inventory Cash Convesion Cycle


11

U.S.A 55%

Rest of World 19%

Germany 13%

France 10%

Australia 3%

Geographic Revenues, FY2012

Investment Risks Macroeconomic Environment

Like many multinational businesses, RMD is vulnerable to the macroeconomic risks that are weighing on the global economy. This is particularly true as the company hopes to expand sales into emerging markets, specifically India, China, the Middle East, and South America. Approximately 45% of sales in FY 2012 were generated from countries overseas. Germany and France alone comprised 13% and 10% of FY 2012 revenues respectively. Thus, the company’s ability to achieve top-line growth depends largely on the strength of the global economy. Price Competition

While we see more pricing pressures in the low-end arena, RMD focuses more on higher end products that foster compliance. In addition, RMD believes Medicare's push for competitive bidding for durable medical equipment will not materially affect performance. Market Share Loss

As a leader in the sleep apnea market, RMD faces a risk of reduced market share from new competitors entering the market space. However, we continue to view the long-term fundamentals of the sleep-disordered breathing (SDB) market as intact, given the strong links between SDB and chronic disease and a highly underpenetrated marketplace. We also see the company and its peers benefiting from increased interest in SDB therapy, given Medicare's decision to expand coverage for CPAP devices for those diagnosed at home with SDB and the acceptance of home tests by private payers. Foreign Exchange Risk

ResMed faces foreign exchange risks due to the large amounts of cash the company holds overseas in other countries. Due to unfavorable U.S. corporate tax rates, RMD repatriates minimal amounts of revenue earned abroad. Although this may improve foreign cash balances, there is an increased risk to fluctuating exchange rates. To mitigate its foreign exchange risk, RMD uses forward currency contracts. Regulatory Risk

ResMed faces continual regulatory risks that ultimately can affect future earnings caused by increased taxes or fees. For instance, the Medical Device Excise Tax, effective as of January 1, 2013, is a 2.3% levy on US sales of Class II and Class III medical devices. RMD’s flow generators and masks and accessories are exempt under the retail exemption in section 4191(b)(2). The Company’s more complex products, such as VPAP and ventilators are likely to qualify and therefore the 2.3% levy continues to apply to this equipment only. These products are small portion of U.S. sales and therefore the tax will not have a significant impact to earnings.

Corporate Leadership Transition Risk

RMD is expected to internally replace current CEO, Peter Farrell, by the end of 2013. The two leading candidates for the position are Michael Farrell, President of the Americas, and Robert Douglas, COO. The subsequent management changes are not expected to have a significant impact on the overall direction of the company. A smooth transition period is expected and likewise we see no negative impact on our price target. Source: 10-K


12

Appendix 1

Multiples: P/E and Enterprise Value (EV/EBITDA) Figures below show RMD’s P/E ratio over time as well as enterprise value to EBITDA ratios for RMD and its competitors. Source: Bloomberg

Historical P/E Method Comparable EV/EBITDA Method

Forward P/E 20.50 Forward EV/EBITDA Multiple 12x

12-Month EPS $2.36 12-Month EBITDA $481.03M

Price $49.56 Price $43.30

Appendix 2

Multiples: EPS Growth Estimates Earnings per share data for ResMed Inc. Source: Bloomberg and Team Estimates

18% 23%

11%

29%

-30%

66%

36% 30%

18% 17%

29%

12% 10%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80% EPS Growth

2011

2011

2011

2011

2011

2012

2012

20

12

2012

2012

2013

2013

2013

2013

2013

0

5

10

15

20

25

RMD BDX FPH NZ CFN VAR

EV/EBITDA


13

Appendix 3

DuPont Analysis RMD DuPont Factors of Profitability Source: Bloomberg

0

0.5

1

1.5

2

2.5

0

5

10

15

20

25

30

35

40

45

50

DuPont Analysis


14

Appendix 4

Historical Income Statements ResMed Inc. (NYSE: RMD) Source: 10-K, 10-Q, & Team Estimates

Income Statement Assumptions 2010 2011 2012 LTM FY H1 Dec-12

Revenue Growth 1 18.6% 13.8% 10.1% 10.3% -0.7% 10.8%

COGS as a % of Sales 40.0% 40.4% 40.0% 38.9% 38.4% 38.2%

SG&A as a % of Sales 30.1% 29.9% 29.3% 28.7% 28.8% 28.6%

R&D as a % of Sales 6.9% 7.4% 8.0% 7.9% 8.0% 8.1%

Donations to research foundations 3,000 1,000 1,000 1,000 0 0

Amortization of acquired intangible assets 0.7% 0.8% 1.0% 0.8% 0.7% 0.7%

Interest income as a % of Sales 1.5% 2.2% 2.5% 2.2% 2.4% 2.3%

Interest expense as a % of LT Debt 2.2% 1.8% 1.9% N/A N/A N/A

Other, net as a % of Sales 0.6% 0.9% 0.6% 0.1% 0.0% -0.6%

Effective Tax Rate 27.1% 25.3% 23.2% 21.8% 21.2% 20.8%

Dividend per share $0.00 $0.00 $0.00 $0.34 $0.34 $0.17

Number of shares repurchased 2,520 4,893 13,617 6,338 1,216 1,000

1. Revenue growth is calculated by using the previous year, 6 months, or quarters data.

Historical Period

Income Statement 2010 2011 2012 LTM FY H1 MRQ 3

Net revenues $1,092,357 $1,243,148 $1,368,515 $1,437,271 $716,269 $376,537

Cost of sales 436,874 501,822 547,780 558,946 274,909 143,825

Gross profit 655,483 741,326 820,735 878,325 441,360 232,712

Gross Margin 60.0% 59.6% 60.0% 61.1% 61.6% 61.8%

Operating expenses:

Selling, general and administrative 328,858 371,249 401,621 412,984 206,118 107,815

Research and development 75,202 92,007 109,733 113,855 57,546 30,326

Donations to research foundations 3,000 1,000 1,000 1,000 0 0

Amortization of acquired intangible assets 8,041 10,146 13,974 11,650 5,138 2,501

Total operating expenses 415,101 474,402 526,328 539,489 268,802 140,642

Income from operations 240,382 266,924 294,407 338,836 172,558 92,070

Other income:

Interest income 1 16,696 27,801 33,866 31,947 16,970 8,498

Interest expense 2 -2,667 -1,758 -4,786 N/A N/A N/A

Other, net 6,178 10,740 8,458 1,035 -227 -2,168

Total other income, net 20,207 36,783 37,538 32,982 16,743 6,330

Income before income taxes 260,589 303,707 331,945 371,818 189,301 98,400

Income taxes 70,504 76,721 77,095 81,151 40,094 20,458

Net income $190,085 $226,986 $254,850 $290,667 $149,207 $77,942

Basic earnings per share $1.26 $1.49 $1.75 $2.03 $1.04 $0.54

Diluted earnings per share $1.23 $1.44 $1.71 $1.99 $1.02 $0.53

Dividend declared per share $0.00 $0.00 $0.00 $0.34 $0.34 $0.17

Basic weighted average shares outstanding 150,908 152,471 145,901 145,061 142,931 143,214

Diluted weighted average shares outstanding 155,098 157,195 149,316 148,473 146,382 146,689

Historical Period


15

Appendix 5

Projected Income Statement ResMed Inc. (NYSE: RMD) Source: 10-K, 10-Q, & Team Estimates

Terminal

Income Statement Assumptions Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 2015 2016 2017 2018

Revenue Growth 1 4.0% 7.8% -7.5% 6.5% 2.7% 7.5% 10.5% 11.0% 12.0% 12.0%

COGS as a % of Sales 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5%

SG&A as a % of Sales 28.5% 28.5% 28.5% 29.0% 28.8% 28.5% 29.1% 29.1% 29.1% 29.1%

R&D as a % of Sales 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

Donations to research foundations 1,000 0 0 0 1,000 0 1,000 1,000 1,000 1,000

Amortization of acquired intangible assets 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Interest income as a % of Sales 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

Interest expense as a % of LT Debt 0.5% 0.5% 0.5% 0.5% 0.6% 0.6% 2.1% 2.2% 2.2% 2.2%

Other, net as a % of Sales 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Effective Tax Rate 21.0% 21.1% 21.3% 21.5% 21.5% 21.5% 22.0% 23.0% 24.0% 25.0%

Dividend per share $0.17 $0.17 $0.17 $0.17 $0.17 $0.17 $0.68 $0.68 $0.68 $0.68

Number of shares repurchased 392 392 550 550 550 550 2,200 2,200 0 0

1. Revenue growth is calculated by using the previous year, 6 months, or quarters data.

FY 2014FY 2013

Yearly Projection Period


16

Appendix 6

Projected Income Statement ResMed Inc. (NYSE: RMD) Source: 10-K, 10-Q, & Team Estimates

Terminal Year

FY 2013

Total

FY 2014

Total

Income Statement Mar-13 Jun-13 2013 Sep-13 Dec-13 Mar-14 Jun-14 2014 2015 2016 2017 2018

Net revenues $391,598 $422,143 $1,530,011 $390,482 $415,864 $427,092 $459,124 $1,692,562 $1,870,281 $2,076,012 $2,325,134 $2,604,150

Cost of sales 150,765 162,525 588,200 150,336 160,108 164,430 176,763 651,636 720,058 799,265 895,177 1,002,598

Gross profit 240,833 259,618 941,811 240,147 255,756 262,662 282,361 1,040,926 1,150,223 1,276,748 1,429,957 1,601,552

Gross Margin 61.5% 61.5% 61.6% 61.5% 61.5% 61.5% 61.5% 61.5% 61.5% 61.5% 61.5% 61.5%

Operating expenses:

Selling, general and administrative 111,606 120,311 438,034 111,287 120,600 123,003 130,850 485,741 544,252 604,120 676,614 757,808

Research and development 31,328 33,771 122,645 31,239 33,269 34,167 36,730 135,405 149,623 166,081 186,011 208,332

Donations to research foundations 1,000 0 1,000 0 0 1,000 0 1,000 1,000 1,000 1,000 1,000

Amortization of acquired intangible assets 3,916 4,221 13,275 3,905 4,159 4,271 4,591 16,926 18,703 20,760 23,251 26,041

Total operating expenses 147,849 158,304 574,955 146,431 158,028 162,441 172,172 639,071 713,577 791,961 886,876 993,181

Income from operations 92,984 101,314 366,856 93,716 97,728 100,221 110,190 401,854 436,646 484,787 543,081 608,371

Other income:

Interest income 1 9,790 10,554 40,040 9,762 10,397 10,677 11,478 42,314 46,757 51,900 58,128 65,104

Interest expense 2 -1,329 -1,329 -5,384 -1,329 -1,329 -1,595 -1,595 -5,848 -5,583 -5,848 -5,848 -5,848

Other, net 3,916 4,221 7,910 3,905 4,159 4,271 4,591 16,926 18,703 20,760 23,251 26,041

Total other income, net 12,377 13,446 42,566 12,338 13,226 13,353 14,474 53,391 59,877 66,812 75,531 85,297

Income before income taxes 105,360 114,760 409,422 106,053 110,954 113,574 124,664 455,246 496,523 551,599 618,613 693,668

Income taxes 22,126 24,214 86,434 22,589 23,855 24,418 26,803 97,666 109,235 126,868 148,467 173,417

Net income $83,235 $90,546 $322,987 $83,464 $87,099 $89,156 $97,861 $357,580 $387,288 $424,731 $470,146 $520,251

Basic earnings per share $0.58 $0.64 $2.26 $0.59 $0.62 $0.63 $0.70 $2.54 $2.79 $3.11 $3.44 $3.81

Diluted earnings per share $0.57 $0.62 $2.21 $0.57 $0.60 $0.62 $0.68 $2.47 $2.72 $3.03 $3.36 $3.71

Dividend declared per share $0.17 $0.17 $0.68 $0.17 $0.17 $0.17 $0.17 $0.68 $0.68 $0.68 $0.68 $0.68

Basic weighted average shares outstanding 142,822 142,430 142,762 141,880 141,330 140,780 140,230 141,020 138,820 136,620 136,620 136,620

Diluted weighted average shares outstanding 146,297 145,905 146,237 145,355 144,805 144,255 143,705 144,495 142,295 140,095 140,095 140,095

FY 2013 FY 2014



17

Appendix 7

DCF Valuation Assumptions ResMed Inc. (NYSE: RMD) Source: 10-K, 10-Q, & Team Estimates

DCF Assumptions Linked to I/S Assumptions 2010 2011 2012 LTM

Yearly Revenue Growth 18.6% 13.8% 10.1% 10.3%

COGS as a % of Sales 40.0% 40.4% 40.0% 38.9%

SG&A as a % of Sales 30.1% 29.9% 29.3% 28.7%

R&D as a % of Sales 6.9% 7.4% 8.0% 7.9%

Other Operating Expenses as % of Sales 1.0% 0.9% 1.1% 0.9%

Effective Tax Rate 27.1% 25.3% 23.2% 21.8%

Depreciation and Amortization as % of Sales 5.6% 5.7% 6.3% 5.9%

Capital Expenditures as % of Sales 5.2% 5.4% 3.4% 3.3%

Historical Period

Terminal Year

DCF Assumptions Linked to I/S Assumptions 2013 2014 2015 2016 2017 2018

Yearly Revenue Growth 11.8% 10.6% 10.5% 11.0% 12.0% 12.0%

COGS as a % of Sales 38.4% 38.5% 38.5% 38.5% 38.5% 38.5%

SG&A as a % of Sales 28.6% 28.7% 29.1% 29.1% 29.1% 29.1%

R&D as a % of Sales 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

Other Operating Expenses as % of Sales 0.9% 1.1% 1.0% 1.0% 1.0% 1.0%

Effective Tax Rate 21.1% 21.5% 22.0% 23.0% 24.0% 25.0%

Depreciation and Amortization as % of Sales 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

Capital Expenditures as % of Sales 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%

Terminal Growth Rate 3%



18

Appendix 8

DCF Valuation ResMed Inc. (NYSE: RMD) Source: 10-K, 10-Q, & Team Estimates

Terminal Year

2010 2011 2012 LTM 2013 2014 2015 2016 2017 2018

Revenue $1,092,357 $1,243,148 $1,368,515 $1,437,271 $1,530,011 $1,692,562 $1,870,281 $2,076,012 $2,325,134 $2,604,150

CAGR of Rev 11.9% 11.2%

% Growth 0.0% 13.8% 10.1% 11.8% 10.6% 10.5% 11.0% 12.0% 12.0%

COGS 436,874 501,822 547,780 558,946 588,200 651,636 720,058 799,265 895,177 1,002,598

% of Sales 40.0% 40.4% 40.0% 38.9% 38.4% 38.5% 38.5% 38.5% 38.5% 38.5%

Gross Profit $655,483 $741,326 $820,735 $878,325 $941,811 $1,040,926 $1,150,223 $1,276,748 $1,429,957 $1,601,552

SG&A 328,858 371,249 401,621 412,984 438,034 485,741 544,252 604,120 676,614 757,808

% of Sales 30.1% 29.9% 29.3% 28.7% 28.6% 28.7% 29.1% 29.1% 29.1% 29.1%

R&D 75,202 92,007 109,733 113,855 122,645 135,405 149,623 166,081 186,011 208,332

% of Sales 6.9% 7.4% 8.0% 7.9% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

Other Operating Expenses 11,041 11,146 14,974 12,650 14,275 17,926 18,703 21,760 23,251 27,041

% of Sales 1.0% 0.9% 1.1% 0.9% 0.9% 1.1% 1.0% 1.0% 1.0% 1.0%

EBIT 240,382 266,924 294,407 338,836 366,856 401,854 437,646 484,787 544,081 608,371

% of Sales 22.0% 21.5% 21.5% 23.6% 24.0% 23.7% 23.4% 23.4% 23.4% 23.4%

Taxes 65,037 67,429 68,377 73,953 77,448 86,211 96,282 111,501 130,580 152,093

EBIAT 175,345 199,495 226,030 264,883 289,408 315,643 341,364 373,286 413,502 456,278

Plus Depr. & Amort. 61,563 70,616 85,856 84,096 91,801 101,554 112,217 124,561 139,508 156,249

% of Sales 5.6% 5.7% 6.3% 5.9% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

Subtract CapEx 56,855 66,609 47,135 48,088 61,200 67,702 74,811 83,040 93,005 104,166

% of Sales 5.2% 5.4% 3.4% 3.3% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%

Net Working Capital

Change in A/R 24,742 30,799 20,293 16,186 29,087 33,174 36,269 41,986 50,841 56,942

Change in Inv. 32,272 -11,394 -18,806 2,135 51,260 24,332 26,244 30,381 36,788 43,949

Change in Prepaid Exp/other current assets 16,012 -8,678 25,316 -3,233 8,864 8,615 9,419 10,904 13,203 14,788

Change in A/P, accrued expenses, income taxes, and other liabilities-6,457 -12,785 72,796 35,454 20,370 21,929 23,868 27,630 33,457 37,472

Change in NWC 79,483 23,512 -45,993 -20,366 68,840 44,192 48,064 55,640 67,375 78,207

Free Cash Flow to Firm 100,570 179,990 310,744 321,257 251,168 305,302 330,705 359,166 392,629 430,154

Discount Factor 0.96 0.89 0.82 0.75 0.69

Present Value of Free Cash Flow to Firm 241,524 271,409 270,953 269,984 270,964

Terminal Value 7,568,889

Historical Period Fiscal Yearly Projection Period


19

Appendix 9

DCF Valuation ResMed Inc. (NYSE: RMD) Source: 10-K, 10-Q, & Team Estimates

Sum of PV of FCFF 1,324,834 Terminal Year EBITDA 764,620

PV of Terminal Value 5,223,497 x Exit Multiple 10.00

Enterprise Value 6,548,331 Terminal Value 7,646,201

Less Total Debt 300,852 PV of Terminal Value 5,276,852

Plus Cash 958,280 Sum of PV of FCFF 1,324,834

Implied Equity Value 7,205,759 Enterprise Value 6,601,686

Fully Diluted Shares Outstanding 148,510 Less Total Debt 300,852

Implied Share Price 48.52$ Plus Cash 958,280

Implied Equity Value 7,259,114

Fully Diluted Shares Outstanding 148,510

Implied Share Price 48.88$

Exit Multiple FormatPerpetuity Format


20

Appendix 10

DCF Valuation Sensitivity Analysis and Multiple Analysis ResMed Inc. (NYSE: RMD) Source: 10-K, 10-Q, & Team Estimates, Bloomberg

48.52$ 1.0% 2.0% 3.0% 4.0% 5.0%

6.7% 48.72$ 56.32$ 68.09$ 88.73$ 134.37$

7.7% 43.40$ 48.72$ 56.32$ 68.09$ 88.73$

8.7% 39.47$ 43.40$ 48.72$ 56.32$ 68.09$

9.7% 36.45$ 39.47$ 43.40$ 48.72$ 56.32$

10.7% 34.06$ 36.45$ 39.47$ 43.40$ 48.72$

Implied Share Price using a Perpetuity

Terminal

WACC

Terminal Growth Rate

48.88$ 8.00 9.50 10.00 10.50 11.00

650,000 37.51$ 42.04$ 43.55$ 45.06$ 46.57$

700,000 39.37$ 44.25$ 45.88$ 47.50$ 49.13$

764,620 41.77$ 47.10$ 48.88$ 50.66$ 52.43$

800,000 43.09$ 48.67$ 50.52$ 52.38$ 54.24$

850,000 44.95$ 50.87$ 52.85$ 54.82$ 56.80$

Terminal

Year EBITDA

EV/EBITDA Multiple

Implied Share Price using Exit Multiple Method

2014 EST 2013 EST 2012 2011 2010 2009 2008 2007 2006 2005 2004

ResMed 20.5 21 20.89 23.5 23.98 24.51 29.25 32.61 33.55 31.27 29.79

Respironics 27.07 25.25 29.08 26.79

Health Care Suplies Industry 13.62 16.83 18.28 17.59 20.84 17.86 17.99 23.16 24.66 21.17 21.22

S&P Midcap Healthcare Sector 15.11 17.15 19.22 20.06 23.78 21.87 15.27 28.12 25.92 29.42 27.54

2014 EST 2013 EST 2012 2011 2010 2009 2008 2007 2006 2005 2004

ResMed 11.5 12 10.18 12.03 14.02 11.53 12.19 15.37 19.92 17.04 16.37

Respironics 12.00 10.66 12.66 11.62

Health Care Suplies Industry 8.4 9.58 9.03 10.28 12.28 9.76 9.61 12.98 13.68 11.65 11.65

S&P Midcap Healthcare Sector 8.68 9.40 9.83 9.47 10.36 9.44 9.31 14.86 13.44 14.42 12.26

1. Index Estimates are consuses estimates from Bloomberg, historical data also came from bloomberg. ResMed's estimates came from the team.

Calendar Year P/E Ratios 1

Calendar Year EV/EBITDA Averages 1

Acquired by Philips

Acquired by Philips


21

Appendix 11

Multiple Analysis ResMed Inc. (NYSE: RMD) Source: 10-K, 10-Q, & Team Estimates, Bloomberg

2014 EST 2013 EST

Diluted EPS $2.55 $2.36

P/E 20.5 21.00

Estimated Price $52.30 $49.56

EBITDA 526,635 481,032

EV/EBITDA 11.5 12

Estimated EV 6,056,307 5,772,388

Less Total Debt 300,798 300,798

Plus Cash 958,280 958,280

Implied Equity Value 6,713,789 6,429,870

Fully Diluted Shares Outstanding 148,510 148,510

Implied Share Price 45.21$ 43.30$

ResMed Calendar Year Price

$49.56 20 20.5 21 21.5 22

2.16 43.20$ 44.28$ 45.36$ 46.44$ 47.52$

2.26 45.20$ 46.33$ 47.46$ 48.59$ 49.72$

2.36 47.20$ 48.38$ 49.56$ 50.74$ 51.92$

2.46 49.20$ 50.43$ 51.66$ 52.89$ 54.12$

2.56 51.20$ 52.48$ 53.76$ 55.04$ 56.32$

2013 Implied Share Price using P/E Multiple

Forward P/E Estimate

Diluted

EPS

43.30$ 11 11.5 12 12.5 13

440,000 37.02$ 38.50$ 39.98$ 41.46$ 42.94$

460,000 38.50$ 40.05$ 41.60$ 43.15$ 44.69$

481,032 40.06$ 41.68$ 43.30$ 44.92$ 46.53$

500,000 41.46$ 43.15$ 44.83$ 46.51$ 48.20$

520,000 42.94$ 44.69$ 46.44$ 48.20$ 49.95$

EBITDA

2013 Implied Share Price using EV/EBITDA Multiple

Forward EV/EBITDA Estimate


Appendix 12

WACC Computation ResMed Inc. (NYSE: RMD) Source: Bloomberg & Team Estimates

Countries Risk Premium 3 Weights Weighted Risk Premium

USA 8.77% 55% 4.80%

Germany 10.88% 13% 1.44%

France 8.84% 10% 0.90%

Rest of Europe 1 10.16% 12% 1.18%

Australia 7.19% 3% 0.19%

Rest of Asia Pacific 2 9.57% 7% 0.71%

Totals 100% 9.21%

1. Took an average of the risk premiums for the following countries Austria, Britain, Finland, Ireland, Netherlands, Norway, Spain, Sweden, Switzerland.

2. Took an average of the risk premiums for the following countries RMD does business in China, Hong Kong, India, Japan, New Zealand.

3. Risk Premiums taken from Bloomberg on 1/14/2013, using the countries 10 yr government bond rates as the risk free rate.

Weighted Risk Premium Calculation

Terminal Year

2013 2014 2015 2016 2017 2018

Cost of Debt

Cost of Debt 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Tax Rate 21.1% 21.5% 22.0% 23.0% 24.0% 25.0%

After Tax Cost of Debt 1.6% 1.6% 1.6% 1.5% 1.5% 1.5%

Cost of Equity

Risk Free Rate 10 yr US Treasury 1.9% 1.9% 2.0% 2.2% 2.3% 2.4%

Market Risk Premium 9.2% 9.2% 9.2% 9.2% 9.2% 9.2%

Beta 1 0.716 0.716 0.716 0.716 0.716 0.716

Cost of Equity 8.5% 8.5% 8.6% 8.8% 8.9% 9.0%

Current Capital Structure

Market Value of Debt 4.2% 4.2% 4.2% 4.2% 4.2% 4.2%

Market Value of Equity 95.8% 95.8% 95.8% 95.8% 95.8% 95.8%

Total Capital 100.0%

Target Capital Structure

Debt to Total Cap 4.2% 4.2% 4.2% 4.2% 4.2% 4.2%

Equity to Total Cap 95.8% 95.8% 95.8% 95.8% 95.8% 95.8%

WACC 8.2% 8.2% 8.3% 8.5% 8.6% 8.7%

1. Beta is calculated by using monthly returns for the past 5 years of RMD and the S&P 500 and regressing them.

Projection Period


23

Appendix 13

Computation of Fully Diluted Shares Outstanding ResMed Inc. (NYSE: RMD) Source: Bloomberg, 10K

Sep-12 Weighted Avg Grant-Date Fair Value Weighted Avg Remaining Term to Vest in Years

Outstanding at beginning of period 2,160,873 29.13 1.6 years

Granted 8,214 31.28

Vested -29,359 30.67

Forfeited -33,860 28.95

Outstanding at end of period 2,105,868 29.12 1.4 years

Restricted Stock

Sep-12 Weighted Avg Exercise Price Weighted Avg Remaining Term to Vest in Years

Outstanding at beginning of period 9,363,720 20.52 3.3 years

Granted 6,000 31.61

Exercised -1,234,325 18.04

Forfeited -34,700 23.17

Outstanding at end of period 8,100,695 20.89 3.2 years

Exercise price range of granted options

31.61

Options exercisable at end of period 5,419,413 19.11

Options

Share Price as of 1/14/2013 $ 48.31

Outstanding Options 8,100,695

Weighted Avg Exercise

Price of Options 20.89$

Treasury Stock Method Shares

Outstanding From Options 4,597,828

Restricted Stock Outstanding 2,105,868

Weighted Avg Grant

Date Fair Value 29.12$

Treasury Stock Method Shares

Outstanding from Restricted Stock 836,506

Shares of Common Stock on

10/24/2012 143,075,417

Restricted Stock 836,506

Options 4,597,828

Fully Diluted Shares Outstanding 148,509,751

Fully Diluted Shares Outstanding


24

Appendix 14

Profitability RMD’s profitability as measured across ROA, ROE, ROI Source: Bloomberg

Appendix 15

Transaction Comparable Multiples RMD’s share price based upon multiples of Philips Electronics’ (PHIA NA) acquisition of Respironics Inc. (NYSE: RESP) on 12/21/07 Source: Bloomberg

Multiples Applied to ResMed Inc. (RMD)

RMD 2013E Multiple Equity Value Shares

Outstanding Implied Share Price

Revenue 1,498.33 3.72x $4,956.04 143.08 $34.64

EBITDA 438.67 19.25x $7,826.65 143.08 $54.70

EBIT 360.10 26.91x $9,072.54 143.08 $63.41

RMD LTM Multiple Equity Value

Shares Outstanding Implied Share Price

Revenue 1,393.50 3.72x $4,559.03 143.08 $31.86

EBITDA 398.10 19.25x $7,038.64 143.08 $49.19

EBIT 314.02 26.91x $7,825.49 143.08 $54.69

0%

5%

10%

15%

20%

25%

30%

Profitability

ROE (%) ROA (%) ROI (%)

Announce Date 12/21/07

Total Value Multiples

Revenue 3.72x

EBITDA 19.25x

EBIT 26.91x


25

Appendix 16

Valuation Methods – Football Field List of valuation methods with varying sensitivities from low to high end. Current and target price shown by two vertical lines. Source: Team Research

$30.00 $35.00 $40.00 $45.00 $50.00 $55.00 $60.00 $65.00 $70.00

P/E

EV/EBITDA

DCF - Perpetuity

DCF - Exit Multiple

Transaction Comparables

Estimated Share Price

Valuation Method:

Current Share Price ($48.31)

12-Mo Target Price ($49.56)


26

Appendix 17

ResMed Worldwide Map - Locations Global map of ResMed’s distributor and office locations. Source: Team Research & 10K


27

Appendix 18

ResMed Product Offerings List of ResMed’s products by category. Source: Company Data

PRODUCT CLASSIFICATION INFORMATION DESIGNS

AIRFLOW GENERATORS

Continuous Positive Airway Pressure (CPAP) Maintains a constant positive airway pressure. S9 Escape, S9 Elite

Variable Positive Airway Pressure (VPAP) Bi-level system that provides two air pressure levels, coinciding with patient breathing patterns.

S9 VPAP S, S9 VPAP Auto, S9 VPAP Adapt

Automatic Positive Airway Pressure (APAP) Auto titration device, increasing air pressure in response flow limitations, apneas, hypopneas, and snoring.

S9 Escape Auto, S9 AutoSet, S9 AutoSet for Her

Noninvasive Ventilation (NIV) Assists in oxygen and carbon dioxide exchange while breathing.

S9 VPAP ST-A, S9 VPAP ST, Stellar 100

HUMIDIFIERS Attachment Connects to airflow generator. Adds moisture to air, providing relief to sinuses and throat dryness.

H5i, HumidAir 2i

MASKS

Full Face Unobtrusive airflow to the nose and mouth. Quattro FX, Quattro FX for Her, Mirage Quattro

Nasal Pillow Lightweight mask that seals the nostrils without obstructing the patient's view.

Swift FX, Swift FX for Her, Swift FX Bella

Nasal Mask Provides a comfortable seal around the nose. Mirage FX, Mirage FX for Her, Mirage Softbell

ORAL APPLIANCES Mandibular Repositioning Device (MRD) Custom-fitted, lower jaw positioning device. An alternative to airflow generator devices for treating mild to moderate OSA.

Narval CC

PORTABLE DIAGNOSTICS Home Sleep Testing (HST) Easy, convenient, reliable, and cost-effective diagnostic devices.

ApneaLink, ApneaLink

DATA MANAGEMENT

EasyCare Online Cloud-based patient data collection and therapy management system.

EasyCare Online

ResScan Customizable monitoring software used to manage therapy.

ResScan


28

Appendix 19

RESMED Inc. Management Team Bios Source: ResMed Inc.

Peter C. Farrell, PhD, DSc, AM Founder, Chairman and CEO Dr. Ferrell is the founder, Chairman, and current CEO of RESMED Inc. Before the company’s inception, he served as a Vice President and Director at Baxter Healthcare, a medical device manufacturing company. From his endeavors with RESMED Inc., Dr. Ferrell has been awarded many honorary professional and academic fellowships and named San Diego and US Entrepreneur of the Year in Health Sciences. He received BE in chemical engineering from the University of Sydney, SM in chemical engineering from MIT, Ph.D. in chemical and biomedical engineering from University of Washington, and D.Sc. from the University of New South Wales. He is also a fellow, faculty advisor, director, or chairman for numerous organizations across the United States and Australia, including UCSD, Harvard University, and Scripps Research Institute.

Karen Borg President, Asia-Pacific

Before becoming President in Asia-Pacific in 2012, Ms. Borg worked in a strategic capacity for a number of international companies, including Nestle, Revlon, Goodman Fielder, and Seagram. She also has an expertise in healthcare in the global economy. Ms. Borg received her BA from the University of Sydney.

Don Darkin President, SDB Strategic Business Unit Since 1999, Mr. Darkin has held many strategic roles within RESMED. Before coming to RESMED, he was a Vice President in the biotech and medical industries. With his mechanical engineering and inventing background, Mr. Darkin holds 81 patents worldwide, and credentials from MIT and the University of New South Wales.

Robert Douglas Chief Operating Officer Mr. Douglas has a decorated history within RESMED. Since joining RESMED in 2001, he has held many COO and Vice President roles in both Australia and the United States. Mr. Douglas received two BS degrees from the University of New South Wales and an MBA from Macquarie University. He is also a board member for the Australian Science Media Centre, a nonprofit organization promoting science in the media.

Michael Farrell President, Americas Before joining RESMED in 2000, as Vice President, Business Development, Mr. Farrell worked for management consulting, biotechnology, chemical, and steel companies, including The Dow Chemical Company and BHP Billiton. He received a Bachelor of Engineering from the University of New South Wales, MS in Chemical Engineering from MIT, and MBA from MIT’s Sloan School of Management.


29

Jim Hollingshead

Chief Strategy Officer Dr. Hollingshead joined RESMED in 2010 as Vice President of Strategy & Business Development, and assigned as CSO in May 2011. Before RESMED, he worked as a strategy consultant for Deloitte and Monitor Group. He has expertise in the biotechnology field. Dr. Hollingshead has a History and International Relations degree from Stanford University, and MA and PhD in Political Science from Cal Berkeley.

Frank Lacagnina

Chief Information Officer Before joining RESMED in 2010, Mr. Lacagnina’s experience in the IT field includes IT Director at Motorola Inc. and ON Semiconductor, and CIO for a sovereign Native American nation in Arizona. He holds a BS from the University of Arizona, and has management training from the Thunderbird International School of Business and W.P. Cary Business College at Arizona State University.

Geoff Neilson

President, Respiratory Care Strategic Business Unit Before joining RESMED in 2006, Mr. Neilson was the CEO of Milvella Ltd., an ophthalmic device company. He received a B.Sc in Electrical and Electronic Engineering from Heriot-Watt University in Edinburgh.

David Pendarvis

Chief Administrative Officer and Global General Counsel Prior to joining RESMED in 2002, Mr. Pendarvis worked in litigation for the law firms Gray Cary Ware & Friedrich LLP and Gibson, Dunn & Crutcher LLP. He received a BA from Rice University, JD from the University of Texas, and MS in Executive Leadership from the University of San Diego.

Anne Reiser

President, Europe Ms. Reiser began with RESMED as the Sales Director in 2006. Before RESMED, she had extensive experience in the European medical device industry. Ms. Reiser holds an Bachelor of Law Degree from the University of Clermont-Ferrand, and Master’s degree in Business from Ecole Supérieure de Commerce de Clermont-Fd.

Brett Sandercock

Chief Financial Officer Before his tenure at RESMED, Mr. Sandercock held finance and accounting roles in large international health-related companies and PricewaterhouseCoopers, focusing on manufacturing and distribution. He received a B.Ec. from Macquarie University


30


31

Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this company. The author(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content or publication of this report. [The conflict of interest is…] Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as an officer or director: The author(s), or a member of their household, does [not] serves as an officer, director or advisory board member of the subject company. Market making: The author(s) does [not] act as a market maker in the subject company’s securities. Ratings guide: Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with [Society Name], CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

i ResMed Investor Presentation – Q1 2013 ii Mizuho Securities USA Inc. U.S. Equity Research Report – Q2 2011 HME Sleep Survey

iii CMS.gov

iv RMD Earnings Call – Q2 2013

Student Research Sector: Healthcare Industry: …...Student Research This report is published for...

Documents

Transcript of Student Research Sector: Healthcare Industry: …...Student Research This report is published for...