The fundamentals of the respiratory device market, including the sleep disorders market, remain strong, with both U.S. and international markets poised for growth into the foreseeable future. That's the view of Joshua Zable, a medical devices analyst at Natixis Bleichroeder (New York City), after attending the International Respiratory Congress, held earlier this month in Orlando.

According to Zable, the present strong state of the industry is the result of many years of “increased development of evidence-based care; continued prevalence of respiratory and sleep disorders; internationalization of respiratory care paradigms, as developed in the United States; increasing industry participation; and breakthroughs in information technology.”

The annual International Respiratory Congress, organized by the American Association for Respiratory Care (AARC; Irving, TX), provides a look at the latest products and trends in advanced respiratory technology.

“After discussions with attendees, we continue to believe that the sleep and respiratory markets for devices continue to be healthy and growing,” Zable says. “Further of interest is that the sleep and respiratory space appears to be getting more visibility outside the United States, which should support continued growth in the industry.”

The Importance of Reimbursement

Zable says the possibility of home diagnostic testing reimbursement is arguably the most important issue on the minds of players in the sleep device market. To date, the Centers for Medicare and Medicaid Services (CMS; Baltimore) has provided reimbursement only for facilities-based polysomnography for the diagnosis of obstructive sleep apnea. But on December 14, 2007, CMS issued a memo containing a proposal to provide reimbursement for home diagnostic testing for obstructive sleep apnea.

“Nearly all home testing devices fell under the proposal—classes II, III, and IV—and this potential change in diagnosis can spur growth in what we already view as one of the most attractive markets in medtech,” Zable says. “With the final ruling expected to be posted no later than March 14, we do not expect an immediate impact from this ruling, but it should allow the proper channels time to prepare for this change.”

Additionally, the American Academy of Sleep Medicine (AASM; Westchester, IL) recently published its recommendations for the use of portable monitoring as an alternative to the established practice of using in-laboratory polysomnography for the diagnosis of obstructive sleep apnea. “The AASM recommended portable monitoring's use, in conjunction with comprehensive sleep evaluation, for obstructive sleep apnea patients for whom polysomnography is not possible due to mobility, safety, or critical illness issues,” Zable says. “While the AASM continues to assert that portable monitoring should not completely replace polysomnography, we view this compromise as an indication of recognition that reimbursement for home diagnostic testing is on its way—in some shape or form.”

Players in Motion

In addition to forecasting continued growth in the sleep and respiratory markets for devices, Zable provides the following insights into some of the major and emerging sleep and respiratory device players that were on hand at the AARC meeting.

Respironics. Zable says that Respironics Inc. (Murrysville, PA) seems well positioned to benefit from an estimated 15% market growth rate in the obstructive sleep apnea therapy market. “Respironics is a diversified respiratory company, with leadership in multiple respiratory areas,” Zable says. “Despite being known as the leader in sleep devices, Respironics is also the leader in noninvasive hospital ventilation, an area that is receiving more attention.

“Children's Medical Ventures and Respiratory Drug Delivery [both units of Respironics] are smaller businesses, but could be future growth drivers for the company,” Zable adds.

Only a few weeks after the AARC meeting, Respironics announced that it had entered into a merger agreement under which Royal Philips Electronics will purchase the company for approximately $5.1 billion.

ResMed. A pure-play respiratory device manufacturer, ResMed Inc. (Poway, CA) is one of the largest players in the obstructive sleep apnea market. “Despite recent challenges associated with a product recall, we still believe the company is a leader in the space,” Zable says. “New product launches should drive growth.

“A few years ago, ResMed acquired Saime SA for noninvasive ventilation,” Zable adds. “While the company has deliberately and slowly developed new products, the company does intend to distribute Saime's products in the United State when it is ready. This should boost growth and diversify the company.”

Vital Signs. Vital Signs Inc. (Totowa, NJ) , along with its subsidiary Sleep Services of America, had a significant presence at the AARC meeting, during which the company displayed three new products: its new fluid warming system called enFlow, a single-patient use laryngoscope blade called SteeLite, and an endotracheal tubes line of products called Redi-Tube. “While most investors continue to hone in on Vital Signs' acquisition strategy as related to its sleep business, we believe Vital Signs appears ready to look to acquisitions or partnerships to help it expand geographically, specifically outside of United States,” Zable says. “As a reminder, 70% or more of its revenues are derived from United States, so international expansion could be a real driver of growth.”

Xltek and Natus Medical. Exhibitors at the AARC meeting also included Excel-Tech Ltd. (Xltek; Oakville, ON, Canada), now part of Natus Medical Inc. (San Carlos, CA). “The integration appears to be going well, with products launching on schedule,” Zable said. “Despite going head to head with significantly larger companies in the space, the combined Natus-Xltek entity should have the largest market share in its business lines.” Xltek develops and markets computer-based electrodiagnostic systems and disposable supplies used by medical practitioners to aid in the detection, diagnosis, and monitoring of neurologic and sleep disorders. “Xltek used to compete with Natus, among others, in the neurology space, so Natus will now use its products, intellectual property, and distribution to leverage its neurology business,” Zable adds.

Invacare. Zable says Invacare Corp. (Elyria, OH) is also making a bid to become a larger player in the sleep market. At the AARC meeting, the company displayed a new, low-cost continuous positive airway pressure (CPAP) device. “Despite Invacare's reach and reputation, previous efforts in sleep have fallen short of expectations,” Zable says. “While the new device is an improvement to previously launched devices, we continue to believe that Respironics' and ResMed's leadership will be difficult to challenge.”

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