ResMed Inc.

ASX:RMD

ResMed Inc.

ASX:RMD
TradeAdd trade order Follow Unfollow Set Price Alert
$32.75 (-0.3%)
Last close price
#4
Rank
60
Held by
57
Followers
TradeAdd trade order Follow Unfollow Set Price Alert
Reports (7) My Report Forum Investors
Forum Topics RMD RMD Fundie/Analyst Views

Pinned straw:
Remorhaz
Added 7 months ago

Yet more "confirmation bias :)" on RMD in relation to the GLP-1 drugs - this time from Morningstar Australia - with a video interview of their analyst covering RMD

Is the sharp fall in ResMed's share price justified?

The potential for weight loss drugs to impact the sleep apnea giant has weighed on the share price, though Morningstar analyst Shane Ponraj thinks it’s overdone


I'm starting to get superficially concerned that this is becoming the consensus view and we're all camping out on the same side of the boat (certainly it seems amongst fundies and analysts here in Australia - tho it appears in the US the view is perhaps essentially the opposite)


The video/article is probably premium only behind the paywall so here's the transcript ...


James Gruber: Sleep apnea device maker ResMed (ASX:RMD) share price has taken a beating of late, thanks to the hype around drugs that supposedly cure obesity. If right, it could impact the demand for sleep apnea devices. It's a good time to catch up with Shane Ponraj, Morningstar's analyst, to discuss the latest developments.

Shane, thanks for your time today.

Shane Ponraj: No worries. Thanks, James.

Gruber: Worries about the effectiveness of new weight loss drugs and the potential impact on sleep apnea device demands seem to be behind ResMed's share price fall. First, can you tell us about these weight loss drugs?

Ponraj: Yeah, sure. So, the class of drugs we're talking about are GLP-1 drugs. So, some of the brand names you might have heard of are Ozempic and Wegovy. And these drugs have been around for a while and traditionally, they've been used to treat type 2 diabetes. But it's found that these drugs are also quite good at weight loss. And Wegovy around two years ago was first approved officially for this indication.

So, just as a background, GLP-1 is a hormone that our bodies produce in response to food. So, when we eat food, our blood sugar rises. But when our body senses GLP-1, our pancreas produces insulin and suppresses glucagon, which helps to bring back the blood sugar down. So, for people with diabetes, this is really important because elevated blood sugar can do all sorts of damage to arterial walls and increase the risk of serious health complications. And for weight loss, GLP-1 actually slows down how quickly food passes through our body and our brain also suppresses our hunger and our appetite. So, basically, we essentially feel fuller for longer on a lower amount of food.

Gruber: And how effective are these drugs when it comes to weight loss?

Ponraj: Yeah. So, these drugs are quite effective for diabetes and also for weight loss. The average weight loss is around 15% and typically, it's administered by injectables on a weekly basis. But it's reasonable to assume that as supply improves, there will be an oral version of this drug that will be quite accessible in the future, but that should take some time.

Gruber: How could these drugs impact the sleep apnea market?

Ponraj: So, the thinking here is that if most sleep apnea patients are obese and these drugs solve obesity, then for the most part, they should solve sleep apnea as well. But it's important to remember that obesity is just one risk factor of sleep apnea. A lot of it is anatomical, so the jaw end where the tongue sits and sometimes also central, so brain related, and obesity just worsens this by constricting the airway more.

Gruber: Are the weight loss drugs a real threat to ResMed then, in your view?

Ponraj: Look, it's reasonable to assume some sort of impact, but we think that's more than priced in now. Basically, we think the global sleep apnea market is untapped and largely under-penetrated and more than big enough for ResMed to remain a meaningful player in addressing sleep apnea. So, sleep apnea patients might be obese on average, but those who take the drugs after they lose 15% of body weight, many of them will still be technically obese. And close to all of these patients who are on the drugs, it won't solve their sleep apnea completely, but it would rather have a proportionate drop in the number of episodes or the amount of times that the airway is obstructed when they sleep. So, someone who has severe sleep apnea might move down to moderate sleep apnea, but they would still greatly benefit from being on a CPAP machine.

Gruber: So, these latest developments don't change your view much on ResMed's outlook for the next 12 to 24 months?

Ponraj: No. We think these drugs will continue to have little to no impact on ResMed in the near term. ResMed is still delivering really strong top-line growth, and we think what's more likely is that the market will realize that these drugs will take some time to be widely adopted and more than that for it to flow through into ResMed's financials. So, some of the factors that we see limiting widespread adoption is cost. So, these drugs aren't widely reimbursed yet. Supply – so, even now, a lot of people with diabetes are struggling to get access to these drugs. And third is patient adherence. So, side effects are minor, but still very common in terms of nausea, vomiting, diarrhea. And you have to also ask yourself what would happen to people who come off the drugs. Will they put the weight back on? In terms of ResMed's revenue in the near term, they're still dominating the industry. Their main competitor, Philips, is still out of the market. Sleep apnea diagnosis rates are continuing to recover and improve. And in terms of their supply constraints that they experienced during the pandemic of chip shortages, that's pretty much behind them now.

Gruber: So, I assume then that ResMed's economic moat remains unchanged?

Ponraj: Yeah, we retain our narrow moat for ResMed. If anything, ResMed's moat has strengthened since Philips' recall. So, physicians are more often prescribing ResMed's products now to new patients who are then entrenched into the ResMed ecosystem. ResMed boasts the highest adherence rates in the industry of 87% and their devices and masks are only getting better with time in terms of being smaller, quieter, more comfortable. So, they are the number one player in the market for a reason.

Gruber: Your fair value on the stock is $39. It offers a lot of upside from here. How do you derive that price target?

Ponraj: Yeah. So, our forecasts on the revenue line are quite in line with consensus. I think the biggest driver of why we're different is that we're forecasting EBIT margins to expand a bit to 34% in five years from about 31% in fiscal '21. EBIT margin is around 29% currently, but near-term, we think the sales mix should shift to higher-margin masks and accessories. Cost inefficiencies of manufacturing both the A10 and the AirSense 11 device that should stop once the company focuses on the AirSense 11 and the full benefits of freight, and component costs coming down, that's yet to fully flow through to the P&L. And longer-term, we think SG&A costs will continue to scale as they have done in the past. And we think that's a reflection of the growing evidence for sleep apnea and that being more widely understood.


DISC: Small Position Held in RL & SM
thunderhead
7 months ago

RMD has been quick off the blocks on open on the NYSE and is on track for a third positive day in a row - up another 4% at the time of writing. We'll see how it closes.

10
thunderhead
7 months ago

Decent close. At this rate, we’ll be back to 30 in a couple of weeks :P

7
thunderhead
7 months ago

I saw that clip too. Nothing earth-shattering, but it is a good summation of the bull case.

We got our first up day in god knows how long yesterday, on good volume, despite weak day for the indexes. The broader indexes, especially in the US, still look weak, so further gains may be capped, but otherwise that is a bullish sign.

11
Solvetheriddle
7 months ago

I think RMD shareholders need to mentally prepare for a long hard slog. the US will press a disruption play (thye love them) and only yield when shown they are wrong. there are several examples of that in the US where stocks have been forced much lower than expected but have bounced maybe a year later when the threat has been found to be much smaller than feared. need to be right and patient with this one. factoring quite a disruption atm imo.

23
mikebrisy
7 months ago

@Solvetheriddle if you look at nearly all great companies over a 10-20 year period, there are usually multiple occasions when shareholders have had to ride out a pull back of 30% to 50% or more, and had to wait more than a year to recover lost ground. I think you are right, in that there is unlikely to be a quick recovery in $RMD. Sure, some of the heavy over-sell may recover over coming months, particularly if we get a few quarters of strong sales growth. But I think it will be a long road back to $35+.

Conversely, one future catalyst is when the clinical trial looking at GLP-1 drugs impact on people diagnosed with OSA is reported. There is a risk that a read out on that study could present another leg down. So, we shouldn't be premature and conclude the rout is over. Equally, the result may be favourable and that might give a favourable bounce.

I have recently gone through the transcript of $RMD's presentation at the Bank of America Global Healthcare Conference on Sept 14th. When I get a moment, I might summarise the key points, if I miss any below.

One of the StrawPeople here has observed here a while ago that $RMD is a well-managed company with lots of levers to pull. The presentation and, in particular, the Q&A shows just how much work they are already putting into this, as most of the Q&A focused on GLP-1 impacts.

For example, they have 17,000 GLP-1 patients already using their connected CPAP products, so they are working to understand how GLP-1 is impacting AHI scores. They might even publish the work at some stage.

The presenting Exec. Rob Douglas COO, pointed out that there isn't a clear "linear" relationship between weight and OSA. I'm trying to unscramble the transcript, but I think he even said that GLP-1 and CPAP might be complementary. For example, for severe OSA sufferers with very high AHI's there can be problems with adherence to CPAP (I think this is due to the higher pressure required and air bypassing the mask seal creating discomfort.) If GLP-1s can reduce the AHI from 40 (severe) to 20 (moderate), patient adherence might be improved as the system can work effectively as a lower pressure. This would actually enhance the effectiveness of the CPAP benefit.

He also commented that if more overweight patients present to primary care for GLP-1s, when they are profiled and diagnosed, the physican might recommend a sleep clinic test, because sleep qualtiy is one of the standard questions asked by cardiologists. So a marketing and education push might be needed here to adjust market positioning with physicians.

There is also a scenario that CPAP is prescribed in parallel with GLP-1, so that the patient gets immediate benefit from CPAP, while the weight loss occurs over a year or two. This is in the event that GLP-1 is proven to reduce OSA.

The point being, with OSA greatly under-diagnosed, if the public demand for weight loss medication results in more presentations of over-weight people for diagnosis, there could actually be an uplift in CPAP demand if it results in increased referrals to sleep clinics. Rob said that the main driver for someone to refer themselves today is a seriously complaining partner ("stop snoring or I'll leave"), although he also described the pathways through cardiology and endocrinology. So the GLP-1 phenomenon might significantly increase the rate of diagnosis of OSA.

Clearly Rob was framing arguments that are positive for $RMD, as you'd expect him to do, but my reason for repeating them here, is to underscore that fact that $RMD have a lot of levers to pull and there may well be ways in which they can turn what appears to be a head-wind from GLP-1 into a tailwind, or at least mitigate the risk. What is encouraging for me, is that nothing he said about GLP-1s was negative. He wasn't trying to knock them, in fact he was positive about their potential to improve health, and seemed to have several ideas about how the GLP-1 revolution might be positive for $RMD.

Bottom line, I agree with you, this will likely take years to play out and so the disruption thesis may well sit there unopposed for some time. (Just as well I'm a long-term investor) Personally, I wouldn't buy $RMD as a quick trade, I bought more because - on balance - I think over the long term the company will do well out of all of this! The Conference on the 14th gave me some of the first practical insights into how that might occur.

30
thunderhead
7 months ago

The "long slog" may very well be the case (and I don't mind that), but I am leaning on the company surprising to the upside in the quarters ahead relative to the expectations embedded in the price. We are not going to approach all-time highs or the like, but I wouldn't be surprised with a quick 20-30% over a 12 month period from these levels :)

15