Sleep treatment and healthcare business ResMed Inc. (CHESS) (ASX: RMD) copped a hiding overnight as its NYSE-listed scrip fell around 15% on news that it has been forced to abandon a trial into heart failure.
The clinical trial was designed to test the effectiveness of Adaptive Servo-Ventilation (ASV) therapy in treating central sleep apnea and chronic heart failure. Shockingly the trial detected that some patients receiving the ASV therapy may have an increased risk of cardiovascular mortality compared to other patients in the control group.
The study suggested that the cardiovascular mortality rate in the study group was 10 per cent per year, compared to 7.5 per cent in the control group. The 2.5 per cent variance significant enough for ResMed to announce it is to abandon the trial and revise the labels and instructions for when its ASV devices are appropriate to use.
Sleep disordered breathing is found more commonly in patients with heart failure and the trial's failure is a major setback in the company's attempts to pioneer innovative treatments for chronic heart failure.
ResMed also faces another problem after its third quarter results posted in late April showed falling margins mainly due to declines in the average product selling price and an unfavourable product mix.
To Wall Street healthcare analysts with a stack of letters after their name falling margins are a traditional sell signal, while trial results like these are enough to cause potential heart failure in the analysts themselves.
Although ResMed did post healthy double-digit revenue growth on a constant currency basis in the third quarter and has a long history of growing profits.
Much of the premium in ResMed's share price has reportedly been based around various clinical trials it's undertaking and the precipitous price falls today will reflect the premium's removal.
The stock is likely to come under the microscope now and investors may be best off waiting until the dust settles before taking any action.
ResMed is likely to be travelling in the opposite direction to Sirtex Medical Limited (ASX: SRX) today, which is a more speculative business growing into the United States that provided an update to some of the clinical trials it has been undertaking itself recently.
Sirtex is an interesting prospect, but why would smart investors chase speculative stocks on huge valuations when they can buy gangbusters growth stocks on attractive valuations?
