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#Bull Case
Added 2 months ago

Positive earnings from Morningstar best share idea

Shares rose after strong earnings report but remain materially undervalued.

Shane Ponraj

We maintain our $39 fair value estimate for narrow-moat ResMed (ASX: RMD), following second-quarter fiscal 2024 results. Despite significant market pessimism given the growing prevalence of GLP-1 drugs for weight loss, underlying earnings before interest and taxes (“EBIT”) grew 15% to $366 US million sequentially on first-quarter fiscal 2024, with sales up 5% and the underlying EBIT margin expanding roughly 250 basis points to 31%. 

Our long-term estimates are broadly unchanged, but we increase our fiscal 2024 underlying EBIT forecast by 2%. This was largely due to expenses tracking slightly below our expectations, as well as strong performances in ResMed’s software-as-a-service business and device sales outside the Americas, up 16% in constant currency on the previous corresponding period.

Shares remain materially undervalued. Improving patient flow and availability of devices continue to support strong sales. We also anticipate margin expansion as ResMed’s sales mix shifts to higher-margin masks, and cost inefficiencies of simultaneously ceasing production of its older AirSense 10 devices. Our midcycle 34% EBIT margin forecast is unchanged. 

The second-quarter gross margin expanded 90 basis points sequentially to 57% versus the first quarter, driven by product price increases and reduced freight costs. In addition, selling, general, and administrative (“SG&A”) expenses and research and development expenses decreased to 19.1% and 6.4% of revenue in the second quarter versus 20.2% and 6.9% in the first quarter, respectively.

This is largely a result of the firm reducing its global workforce by 5% in October 2023, largely in noncore SG&A activities, and instead planning to invest more in product innovation and increasing brand awareness. We think this a sound strategy to help further penetrate the market.

Business strategy

ResMed is taking a “smart devices” and Big Data approach to further entrench itself as one of the two leading players in the global obstructive sleep apnea, or OSA, market. With cloud-connected devices, physicians can monitor patient compliance and encourage continued use. Higher adherence supports both reimbursement rates from payers and the resupply of masks and accessories. 

ResMed also plays a key role in producing clinical data that demonstrates treatment can minimize related risks such as hypertension, stroke, heart attack and Alzheimer’s disease. Through its own testing devices and education, ResMed seeks more widespread diagnosis and treatment of OSA.

The global OSA homecare device market, is a two-player duopoly with over 80% estimated market share split between ResMed and Philips, with ResMed the market leader in the majority of the 140 countries it competes in. 

The market offers a large global growth opportunity as penetration within developed markets is estimated at one fifth of the roughly 15% prevalence, and emerging markets are essentially untapped. In the U.S., we estimate roughly half of the 22 million people diagnosed with OSA are treated with continuous positive airway pressure, or CPAP, with another 34 million remaining undiagnosed. ResMed operates in over 140 countries with over 900 million people estimated to have sleep apnea globally, indicating the long runway for growth.

Moat rating

We award ResMed a narrow moat rating based on switching costs and intangible assets, which have helped the company achieve high customer adherence rates and above-average industry growth.

In fiscal 2020, both ResMed and Philips reported selling over 10 million total cloud-connectable medical devices globally to date. In fiscal 2021, ResMed crossed the 15 million mark. These newer-generation devices enable physicians to remotely monitor the patient’s usage and breathing performance, entrenching ResMed as a preferred provider with all three users of the data. For the patient, the device feedback encourages usage and allows them to get individualized care from the physician, leading to better clinical outcomes. For the physician, trust in recorded data and grown familiarity with the software is likely to reduce switching to a different provider. For the payor, evidence of patient compliance informs continued reimbursement support. 

The duopolistic nature of the market is also in the best interest of durable medical equipment, or DME, suppliers as it limits the number of device manufacturers they deal with. These factors have contributed to ResMed reporting up to 87% adherence rates when the physician is using its cloud-based patient monitoring system, AirView, compared with the estimated industry average adherence rate of 50%. A higher adherence rate benefits both device upgrades as well as masks and accessories revenue as the physician reminds the patient of when they should be replaced. 

ResMed typically earns 40% of group revenue from the resupply of masks and accessories. Although these are interchangeable with other brands, competitors would be challenged to offer original products that are comparable in quality and comfort without infringing on ResMed’s plethora of patents, while also having to compete with its entrenched relationships.

ResMed’s intangible assets, namely its brand and patent portfolio, have also contributed to above-average industry growth and helped maintain its commanding market share. ResMed typically spends roughly 7% of revenue on research and development each year, which has ensured consistent product launches. 

Despite growing off a much smaller base, Fisher & Paykel’s competing homecare segment has a trailing five-year revenue compound annual growth rate (“CAGR”) of 5%, lagging ResMed’s 10% over the same period. We think ResMed’s intangible brand has also enabled significant price premiums over less well-known peers. 

While Philips and ResMed are comparatively priced, we estimate ResMed’s pricing to be roughly 15% higher than the remaining peer average across the automatic positive airway pressure device category and 30% higher in the CPAP category. This may reflect higher reimbursement support. In addition, we think ResMed’s patent portfolio of over 8,200 granted or pending patents, will likely assist ResMed in maintaining its market share with less than one third expiring in the next five years.

Due to its significant market share and high gross margins in a structurally growing industry, ResMed has posted an average return on invested capital, or ROIC, of 20% over the last decade. We anticipate the company’s ROIC to far exceed its weighted cost of capital of 7.4% over our explicit forecast period, even in our bear-case scenario.

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#Bull Case
Added 2 months ago

https://www.reuters.com/business/healthcare-pharmaceuticals/philips-reaches-compliance-agreement-with-fda-over-ventilator-recall-2024-01-29/


bullish news for RMD. Phillips have been out of the picture for some time and rmd have struggled to capitalise on it somewhat but this is a big opportunity for them now with one of the big competitors basically out of the picture.


disc: I hold IRL.

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#Broker Views
Added 2 months ago

Five investment banks have released first reads research on RMD post 2Q24 results overnight

@mikebrisy's writeup very comprehensively and eloquently covers the thoughts already, including the previously hinted mindbending prospect that GLP-1's may actually be a tailwind and not a headwind

Again FWIW here are some snippets from each of the reports:

RBC:

NYSE: RMD | USD 174.97 | Sector Perform | Price Target USD 181.00

Sentiment: Positive

Our view: RMD delivered a good operational result with revenue and gross profit (non-GAAP) coming in 1% and 3% respectively ahead of consensus expectations. Operating expenses came in slightly lower which led to a 6% beat at non-GAAP income from operations. Reported earnings were lower than expectations as the company incurred $64m of restructuring costs and $6m of costs associated with the masks & magnets safety notification. Device revenues in both the Americas and RoW exceeded consensus numbers, while Masks & Accessories in both the Americas and RoW were a slight miss. We expect the stock price to be well supported given the solid sales growth and improvement in gross margins during this quarter

UBS:

Neutral, 12m PT USD $175

Overall we think the result will be interpreted positively given the focus on core gross margin. Reported gross margin fell due to costs associated with the widely discussed masks/magnets recall (label change). We perhaps expect some questions from investors around a miss in masks if devices continue to do well, and wonder to what degree the beat for devices can be linked to the "GLP-1 funnel augmentation" thesis

GS:

Buy, 12m PT AUD $32

Solid +4-6% earnings beat as US device growth normalises and GM recovery continues

2Q revenue growth of +11%, +2% vs. cons, as US device growth recovers after 1Q blip

EBIT/EPS beat +6%/+4% as gross margins improved further in 2Q (+90bps) and SG&A intensity declines once more

No guidance as typical; core debates remain: 1) competitor challenges, including timing/outcome of consent decree; 2) GLP-1 risk; 3) gross margin trajectory

JPM:

Overweight, PT USD $195

Key positives: Gross margin up 90bps sequentially. Device sales the surprise strength. Buyback started this quarter at $50m which is earlier than expected

Key negatives: Mask growth slightly weaker than we had expected. Restructuring costs higher

Expected share price reaction. Mid single digit share price increase

MS:

Overweight, PT AUD $28.60

Top line was a small beat with strength in US devices offsetting weakness in masks. Non-GAAP GP margin + 90bps to 56.9% sequentially (60bps above Street) – improvement in freight and favourable currency offset by higher component cost and neg. mix. Non-GAAP includes adj. of US$64m relating to restructuring charges and A$6m relating to the mask recall, resulting in GAAP-GP of 55.6%. The strength in margins delivered a strong beat on the bottom line with diluted EPS +13% to US$1.88 (+5% Street, -1% MSe)

We were concerned about some downside risk to US device sales growth due to the 2% growth in prev. Q, however, it was a beat (+2% MSe; +3% Street) at 8% growth. International device sales growth also positively surprised at 19% growth

Mask sales growth was a disappointment where we may have overestimated the benefit from the expanded installed base. US mask sales -6% MSe and -2% Cons, at 11% growth. International mask sales -5% MSe and -1% Cons, at 9% growth


DISC: Small position Held in RL & SM

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#2Q FY24 Results
Added 2 months ago

$RMD have announced their second quarter results, which I'll very briefly comment on. The big news, is their assessment from a trial they are running which indicates that GLP-1's are likely both to increase CPAP adoption and adherence. It will be interesting to see how the market - and the various analysts and commentators - react to this news. If true, it turns the negative thesis on its head.

ASX Announcement

Their Highlights

• Revenue increased by 12% to $1.2 billion; up 11% on a constant currency basis

• Gross margin contracted 50 bps to 55.6%; non-GAAP gross margin grew 10 bps to 56.9%

• Income from operations decreased 2%; non-GAAP operating profit up 20%

• Operating cash flow of $272.8 million

• Diluted earnings per share of $1.42; non-GAAP diluted earnings per share of $1.88


My Assessment

Strong revenue growth with devices (+11%) leading masks (+9%,...weaker than expected by the market), with the SaaS business growing at 24%.

On supply, AirSense-10 now fully available to all customers. AirSense-11 continuing to be approved in new markets, with Japan the most recent market to be approved. Still 100 markets to be approved.

On return of Phillips, Mike Farrell was bullish about the return of competition - noting that the market is competitive and that Phillips will have to fight their way back from the bottom against the 4th, 3rd, 2nd and best players. Their return for deviced in the US is still pending.

%GM contracted on the PCP comparison, but improved over the prior quarter, with the CFO projecting continued improvement in %GM through the rest of the year (absent any shipping impacts of the current Red Sea problems). %GM was slightly impacted by the mask with magnets safety notice/recall issue - a one-off which has been full dealt with in the Q.

Positively SG&A only increased by 5% (4% on CC), meaning that the these fell as a % of revenue to 19.1% from 20.5%.

The GAAP result at the NPAT level was weak, due mainly a major restructuring that has been implemented in the Quarter. This was a material item, with a $64m restructuring charge hitting the P&L. Hence the restructure announced a few months ago has resulted in a significant streamlining of the business. I'm not a fan of one-off restructuring charges, so we'll have to see over the coming quarters if the changes result in a sustainable leaner organisation. The was the major component driving a declind in NPAT over the PCP.

On a non-GAAP basis, $277m NPAT compares with $244m in the pcp, an increase of 13%.

Cash generation was strong, with operating cash flow of $273m and PPE, Intangible and Acquisition Investing Csh flows of around $32m. In the Q, $RMD bought back around $50m of shares, which they continue to plan to do each quarter going forward.

Overall, a strong result with waters muddied through restructuring charges.


GLP-1 UPDATE

The big news is the reported progress results from $RMD "real world" study of 529,000 patients on CPAP taking GLP-1s. I include the two slides below. Mike touted these results as essentially turning the "GLP-1 will kill CPAP" thesis on its head. Bascially, he said the real world evidence is that it will drive CPAP update and adherence! I'll let the slides talk for themselves, and no doubt there will be significant commentary and reaction to this over the coming days.

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Finally, Mike discussed in some detail how innovation in health wearables (Apple, Google, Samsung) is also like to provide a tailwind of increased awareness of sleep health.

OK, that's all from me. Off to teach class.

Good results. Thesis solidly intact.

Disc. Held in RL and SM


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#Financials
Last edited 2 months ago

RMD reported quarterly results, again strong double digit revenue growth (constant currency). No bounce back in margins yet though, "due to costs associated with a field safety notification for masks with magnets" as mentioned by the good research of others on here during the quarter.

Shares rallied overnight afterhours in the US, so should be good day on the ASX for RMD.

All seems to be going well - Ozempic fears still not showing in the financials one iota.

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#Broker Views
Added 2 months ago

FWIW today from Morgan Stanley

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DISC: Small position Held in RL & SM

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#Broker Views
Added 3 months ago

Could GLP-1 therapy will be a tailwind for CPAP therapy, rather than a headwind?

The following from JP Morgan Research

Key Takeaways from J.P. Morgan Healthcare Conference

ResMed presented new compelling data showing patients prescribed obesity drugs are more likely to initiate on PAP therapy and order more consumables. This evidence is at odds with our and market expectations that obesity drugs would lead to lower PAP therapy. This finding will need to be confirmed with longer-term usage (ResMed committed to providing regular updates) and real world experience as GLP-1s become more widely available, but it is clearly encouraging. We have lifted our DCF-based price targets from US$160/A$25 to US$195/A$29 after lifting our outer year forecasts and raising our terminal growth rate given the reduced GLP-1 threat. Overweight ratings retained

New analysis shows patients prescribed obesity drugs more likely on PAP therapy. In contrast to what we (and the market) expected, patients taking GLP-1 drugs are 10% more likely to initiate PAP therapy. Mask resupply rates were also shown to be 3% higher in GLP-1 patients a year on with CPAP therapy and 5% higher two years on. These results were drawn from a dataset of more than 500k patients tracking GLP-1 usage from 2021. The data suggests GLP-1 therapy will be a tailwind for CPAP therapy, rather than a headwind. The majority (close to 90%) of patients in the study were prescribed the newer GLP- 1 drugs, semaglutide or tirzepatide

SURMOUNT data expected to show combined therapy best. The CEO relayed a key opinion leader's view that SURMOUNT data (due in coming months) will most likely show the patients using both CPAP and GLP-1 will enjoy the best outcomes – i.e. lowest AHI. We share this view and believe it reduces the risk the trial results are perceived to be a clear negative for ResMed

Philips provided little new information on the sleep business. The CEO confirmed there are a number of "important chapters to be closed" with regard to the status of the 2021 device recall (Consent Decree, litigation settlement, DoJ investigation) but offered no comment on the likely timing. The recent overheating issues with the DreamStation2 device were played down, with management not expecting any material impact. Finally industry feedback has confirmed Philips has not cut prices in countries where it has re-entered the CPAP market post the recall

PT lifted as terminal growth rates increased. In light of encouraging data, we have lifted our outer-year sales growth estimates and increased the terminal growth rate in our DCF to 4% from 3.25%. This reflects our increased confidence the impact of the GLP-1 drugs will fall short of our worst fears, but is still below the level we used prior to emergence of the GLP-1 threat in 2023 

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DISC: held in RL & SM

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#Bull Case
Added 3 months ago

The shares seem to have broken out of a multi-month range between $21-25, on reasonable volume, which is encouraging price action. If this holds, a trip north of $30 beckons (likely hastened by the next quarterly earnings report on 24/01 if it beats expectations).

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#Diagnosis Tailwind
Added 3 months ago

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Source: https://www.bloomberg.com/news/newsletters/2023-12-17/apple-2024-plans-new-low-end-airpods-vision-pro-larger-iphone-16-oled-ipad-lq9jhed4

I don't see many people talking about this. Apple has probably been working towards this for many years. The Watch already records sleep stages, blood oxygen levels, and calculates sleep respiration rate (algorithmically). This might really open the floodgates for RMD, FPH, SOM, etc.

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#Industry/competitors
Added 4 months ago

DreamStation 2 safety warning could delay Philips returning to the market 

On 28 Nov 2023, the FDA issued a safety communication warning to users of Philips' Dreamstation 2 devices that their devices could overheat. The FDA has received 270 Medical Device Reports (MDRs) between 1 Aug 2023 and 15 Nov 2023 of thermal issues such as fire, smoke, burns and other signs of overheating (vs 30 MDRs in the previous 3 years)

From RBC Capital Markets:

We believe this issue for Philips' CPAP devices could further delay the finalisation of its Consent Decree and therefore lead to an extension of its time out of the new patient market in the US. We currently assume Philips returns to the Americas new patient market during the Sep 24 qtr, and therefore any delay to the finalisation of Philips’ Consent Decree could lead to higher devices sales for RMD. This new overheating issue for DreamStation 2 devices may also impact Philips' sales to new patients in markets outside the US, which could also lead to higher device sales for RMD in RoW markets 


DISC: Held in SM & RL

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#Recall
Added 4 months ago

Unsure what if any the practical implications of this are yet ...

ResMed has issued an urgent field safety notice for certain models of its AirFit masks that contain magnets, citing issues around interference with medical implants. In a letter sent to patients on 20 November, the US-headquartered company updated the contraindications and warnings in the user guides for the masks. The masks affected include multiple AirFit models from its full-face mask, nasal mask, and non-vented mask ranges and are used to deliver air from a positive airway pressure (PAP) device

The masks use magnets to provide easier attachment and detachment to headgear. The company says their use is especially important to patients with dexterity vision impairment, or those with disabilities. The safety notice is due to reports of magnetic interference of the magnets with implanted devices in the patient. ResMed has submitted five reports of serious harm, potentially caused by this issue, to regulatory authorities. No deaths have been reported. ResMed said that medical device function could be affected, whilst ferromagnetic implants could change position because of mask magnet proximity. Active medical implants that could be affected include cardiovascular devices such as pacemakers, and implantable cardioverter defibrillators (ICD). Neurostimulators and cerebrospinal fluid (CSF) shunts can also suffer from interference, along with diabetes devices such as insulin/infusion pumps. ResMed also stated that patients with metallic implants containing ferromagnetic materials are contraindicated for using the masks. This includes, among others, patients with stents, valves, and flow disruption devices. ResMed warned users to keep the mask magnets at least six inches away from medical devices or implants that may be affected. According to the letter, ResMed has sold tens of millions of masks across the last nine years

ResMed is not the only company to run into problems with magnetic masks. Philips, which has battled large recalls across its respiratory medical devices, alerted customers to safety issues of its continuous PAP or bi-Level PAP therapy masks after reports similarly designed magnets were affecting implanted devices. The US Food and Drug Administration (FDA) tagged Philips' recall as Class I, the most serious classification. The recall involved over 18 million devices sold in the US


DISC: Small position Held in RL & SM

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#Management
Added 5 months ago

ResMed has announced a host of leadership changes as "part of a new operating model to accelerate long-term growth"

Chief among the executive changes is the retirement of Rob Douglas, current president and chief operating officer, on January 1, 2024. Other moves include the appointment of Justin Leong as chief product officer, Katrin Pucknat as chief marketing officer and Mike Fliss as chief revenue officer. All changes are effective immediately

"The new operating model introduces dedicated leadership in Product, Revenue, and Marketing to the global executive team. This change aims to increase the velocity of product development and sharpen our customer and brand focus", RMD said in a statement



The new operating model introduces dedicated leadership in Product, Revenue, and Marketing to the global executive team. This change aims to increase the velocity of product development and sharpen our customer and brand focus. Ultimately, the goal is to accelerate profitable growth, while driving greater value and improved care throughout the outside hospital care continuum and the patient journey

ResMed’s new Product-led, Customer-centric, and Brand-enhanced operating model includes the following executive leadership team:

Leaders appointed into new roles:

  • Chief Product Officer Justin Leong (previously president, Asia and Latin America)
  • Chief Marketing Officer Katrin Pucknat (previously president, Germany)
  • Chief Revenue Officer Mike Fliss (previously vice president, North America sales)


In addition to the above roles, the executive leadership team also includes:

  • Chief Commercial Officer, SaaS Bobby Ghoshal
  • Chief Financial Officer Brett Sandercock
  • Chief Legal Officer Mike Rider
  • Chief People Officer Vered Keisar
  • Chief Strategy Officer Hemanth Reddy


The extended CEO operations team, reporting directly to the CEO, includes:

  • Chief Compliance Officer Jim Ellis
  • Chief Information Security Officer Todd Friedman
  • Chief Investor Relations Officer Amy Wakeham
  • Chief Medical Officer Carlos Nunez
  • Chief Quality & Regulatory Officer Dawn Haake
  • Chief Supply Chain Officer Andrew Price


ResMed also announced that Rob Douglas, current president and chief operating officer, plans to retire on January 1, 2024. Rob will immediately transition from his current role to a new role as special advisor to the CEO and remain in a consulting role through December 31, 2024. Additionally, Lucile Blaise, current president sleep and respiratory care, will immediately transition to a new role as senior vice president, strategy & business development, reporting to Hemanth Reddy. Finally, as part of the operating model evolution, the digital health technology product organization will now report to Justin Leong, and Urvashi Tyagi, current chief technology officer, will immediately transition to a role as special advisor to the Chief Product Officer through January 1, 2024. Urvashi will remain in a consulting role through December 31, 2024

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Valuation of $40.00
Added 5 months ago

Here’s a comprehensive assessment from

Morningstar. I don’t think the word “ozempic” appeared in it once- which was a relief. That discussion is a bit overdone of late.

Their analysis really does demonstrate the strengths of this outstanding business.

ResMed Earnings: Strong Mask Sales and Cost Control Offset U.S. Device Softness 

 Shane Ponraj 

Analyst 

Analyst Note | by Shane Ponraj Updated Oct 28, 2023

We maintain our USD 258 fair value estimate for narrow-moat ResMed, or AUD 40 per CDI at current exchange rates, following first-quarter fiscal 2024 results. Underlying EBIT of USD 319 million grew 4% sequentially on fourth quarter fiscal 2023, with sales down 2% but underlying EBIT margin expanded roughly 150 basis points to 29%. We decrease our revenue forecasts over the next five years by 1% on average, but our underlying EBIT forecasts increase by 1% on average, overall.

Shares are materially undervalued. We anticipate margin expansion as ResMed’s sales mix shifts to higher-margin masks and cost inefficiencies of producing its older AirSense 10 device cease. While first-quarter gross margin expanded just 20 basis points sequentially to 56% versus the fourth quarter, this is largely due to the firm still working through higher-cost inventory given historically higher component and freight costs. In addition, SG&A, expenses decreased to 20.2% of revenue in the first quarter versus 21.5% in fourth quarter fiscal 2023. Following the result, the firm also reduced its global workforce by 5% in October 2023, largely in noncore SG&A activities. Accordingly, management revised its prior guidance, now expecting fiscal 2024 SG&A expenses to be 18% to 20% of revenue from 20% to 22% prior, and fiscal 2024 research and development expenses to be 6%-7% of revenue from 7%-8% prior. We expect this to support our assumption of EBIT margin improving to 34% by fiscal 2028.

On the revenue side, U.S. device sales fell 11% sequentially to USD 346 million following a period of clearing backorders with its AirSense 10 Card-to-Cloud device. However, this was largely offset by U.S. mask sales up 7% sequentially to USD 293 million, and device sales outside the Americas up 2% sequentially to USD 219 million. With supply constraints easing on AirSense 11, the firm is focused on delivering more units into these markets and launched the device in Australia and New Zealand in first quarter.

Business Strategy and Outlook | by Shane PonrajUpdated Oct 28, 2023

ResMed is taking a “smart devices” and Big Data approach to further entrench itself as one of the two leading players in the global obstructive sleep apnea, or OSA, market. With cloud-connected devices, physicians can monitor patient compliance and encourage continued use. Higher adherence supports both reimbursement rates from payers and the resupply of masks and accessories. ResMed also plays a key role in producing clinical data that demonstrates treatment can minimize related risks such as hypertension, stroke, heart attack and Alzheimer’s disease. Through its own testing devices and education, ResMed seeks more widespread diagnosis and treatment of OSA.

The global OSA homecare device market, is a two-player duopoly with over 80% estimated market share split between ResMed and Philips, with ResMed the market leader in the majority of the 140 countries it competes in. The market offers a large global growth opportunity as penetration within developed markets is estimated at one fifth of the roughly 15% prevalence, and emerging markets are essentially untapped. In the U.S., we estimate roughly half of the 22 million people diagnosed with OSA are treated with continuous positive airway pressure, or CPAP, with another 34 million remaining undiagnosed. ResMed operates in over 140 countries with over 900 million people estimated to have sleep apnea globally, indicating the long runway for growth.

ResMed has made acquisitions of home healthcare software platforms as it seeks to leverage the trends of digital health and providing care in a lower-cost setting. Brightree, acquired in 2016, and MatrixCare, acquired in 2019, offer business management software for a range of home health providers. ResMed is currently directing significant capital to this area, and although high returns have largely been unproven, we think the move has been strategically sound given the structural industry tailwinds.

ResMed has a minority stake in Nyxoah who are developing a neurostimulation implant to treat OSA. Although we see little near-term risk from this therapy due to the higher cost and invasive surgery needed, ResMed’s minority stake hedges some risk from emerging competition.

Economic Moat | by Shane PonrajUpdated Oct 28, 2023

We award ResMed a narrow moat rating based on switching costs and intangible assets, which have helped the company achieve high customer adherence rates and above-average industry growth.

In fiscal 2020, both ResMed and Philips reported selling over 10 million total cloud-connectable medical devices globally to date. In fiscal 2021, ResMed crossed the 15 million mark. These newer-generation devices enable physicians to remotely monitor the patient’s usage and breathing performance, entrenching ResMed as a preferred provider with all three users of the data. For the patient, the device feedback encourages usage and allows them to get individualized care from the physician, leading to better clinical outcomes. For the physician, trust in recorded data and grown familiarity with the software is likely to reduce switching to a different provider. For the payor, evidence of patient compliance informs continued reimbursement support. The duopolistic nature of the market is also in the best interest of durable medical equipment, or DME, suppliers as it limits the number of device manufacturers they deal with. These factors have contributed to ResMed reporting up to 87% adherence rates when the physician is using its cloud-based patient monitoring system, AirView, compared with the estimated industry average adherence rate of 50%. A higher adherence rate benefits both device upgrades as well as masks and accessories revenue as the physician reminds the patient of when they should be replaced. ResMed typically earns 40% of group revenue from the resupply of masks and accessories. Although these are interchangeable with other brands, competitors would be challenged to offer original products that are comparable in quality and comfort without infringing on ResMed’s plethora of patents, while also having to compete with its entrenched relationships.

ResMed’s intangible assets, namely its brand and patent portfolio, have also contributed to above-average industry growth and helped maintain its commanding market share. ResMed typically spends roughly 7% of revenue on research and development each year, which has ensured consistent product launches. Despite growing off a much smaller base, Fisher & Paykel’s competing homecare segment has a trailing five-year revenue CAGR of 5%, lagging ResMed’s 10% over the same period. We think ResMed’s intangible brand has also enabled significant price premiums over less well-known peers. While Philips and ResMed are comparatively priced, we estimate ResMed’s pricing to be roughly 15% higher than the remaining peer average across the automatic positive airway pressure device category and 30% higher in the CPAP category. This may reflect higher reimbursement support. In addition, we think ResMed’s patent portfolio of over 8,200 granted or pending patents, will likely assist ResMed in maintaining its market share with less than one third expiring in the next five years.

Due to its significant market share and high gross margins in a structurally growing industry, ResMed has posted an average return on invested capital, or ROIC, of 20% over the last decade. We anticipate the company’s ROIC to far exceed its weighted cost of capital of 7.4% over our explicit forecast period, even in our bear-case scenario.

Fair Value and Profit Drivers | by Shane PonrajUpdated Oct 28, 2023

Our AUD 40 fair value estimate is based on a USD/AUD exchange rate of 0.66. It factors in 9% revenue growth in a typical year and an operating margin of 34% by fiscal 2028. ResMed has proven it can realize scale efficiencies with operating margin expanding to 31% in fiscal 2021 from 22% in fiscal 2011. We forecast SG&A expense to continue declining as a percentage of sales to 19% in fiscal 2028 from 21% in fiscal 2023, delivering EPS growth of 13% on average over our five-year forecast period.

Our forecast five-year revenue CAGR for Americas excluding software is 10%, contributing 60% of group revenue by fiscal 2028. We forecast a 9% normalized growth rate in device sales, largely consistent with the historical run rate. This run rate shows no sign of slowing due to increased diagnosis rates in a structurally growing market. Our elevated near-term growth forecasts reflects key tailwinds including the recent launch of its new flagship product, AirSense 11, diagnosis rates of OSA recovering to prepandemic levels, and most importantly, Philips’ product recall of over 5 million global devices announced in June 2021. We anticipate Philips will take until calendar 2023 year-end to replace all affected units. While affected customers can wait for a replacement, we think ResMed will see considerable elevated demand from a portion of these customers switching, as well as new customers doubting Philips’ reputation. We also forecast a five-year revenue CAGR of 13% for U.S. masks and accessories versus its 10% trailing three-year growth. This reflects our continued confidence in ResMed maintaining higher adherence rates with its cloud-connectable devices, and in turn, more frequent resupply sales as physicians remind patients when replacements are due.

Our forecast five-year revenue CAGR for other markets is 8%, contributing 28% of group revenue by fiscal 2028. Despite greater market potential, we don’t expect growth to be as strong as the Americas given it is more fragmented and experiences slower replacement rates on masks and accessories. Our forecast five-year revenue CAGR in the remaining software-as-a-service segment is 10%. 

Risk and Uncertainty | by Shane PonrajUpdated Oct 28, 2023

We assign ResMed a Medium Morningstar Uncertainty Rating. Given the consistency of growth ResMed has shown in a structurally growing market in which it has dominated, we view earnings as relatively defensive. However, the extent to which ResMed stands to benefit in the near term from the launch of a new flagship product, new OSA diagnosis rates recovering to precoronavirus levels, and Philips’ voluntary product recall, is harder to predict.

ResMed’s primary ESG risk is related to product governance, where a significant failure in quality or safety leads to a product recall or redesign. Although its products have received regulatory approval and there has been a lack of noteworthy incidents, Philips’ voluntary recall in June 2021 highlights a latent risk. As ResMed’s products are reimbursed by Medicare, selling practices in the U.S. are also regulated under antikickback laws. As reimbursing payers require the physician to specify the brand of device prescribed, ResMed’s direct marketing exposes another risk. In fiscal 2020, ResMed paid about USD 40 million to settle lawsuits, claiming the firm offered a variety of goods and services to doctors, sleep labs and DME suppliers in exchange for customer referrals. However, we don't think one-off fines or the costs to regulate sales interactions would lead to material value destruction.

Potential patent infringement and litigation costs are also a potential ESG risk. Fisher & Paykel first filed a patent infringement case against ResMed in 2016, which led to a counterclaim and tussle that lasted three years. The two firms eventually agreed to settle all patent infringement disputes out of court in February 2019. We generally view litigation costs in such one-off events as immaterial. In a worst-case scenario, patent infringement could lead to restrictions on the sale of products until the product is redesigned but this is yet to happen and much more likely for a smaller competitor lacking significant intellectual property.

Capital Allocation | by Shane PonrajUpdated Oct 28, 2023

We assign ResMed an Exemplary Capital Allocation Rating based on our assessment of balance sheet risk, investment efficacy, and shareholder distribution.

ResMed’s balance sheet is in sound condition. Financial risk is low given low revenue cyclicality, high cash conversion, and most costs being variable. We forecast the company to be in a net cash position over the five-year forecast period, while also funding its growth and maintaining a 28% dividend payout ratio.

Investment efficacy is exceptional. ResMed has generated an average ROIC of 20% over the last decade and we forecast this to increase to 26% on average over the forecast period. R&D spending which has supported above-market revenue growth, averages approximately 7% of revenue per year and we expect it to largely continue at a similar rate. Execution of realizing scale efficiencies has also been commendable, with operating margin increasing to 31% in fiscal 2021 from 22% in fiscal 2011. While the company has made few major acquisitions historically, we think recent purchases of home healthcare software providers are strategically sound as it leverages the trend of providing care in a lower-cost setting. Brightree, acquired in fiscal 2016, and MatrixCare, acquired in fiscal 2019, offer business management software for a range of home healthcare providers, and we forecast the software segment to achieve high-single-digit organic revenue growth from fiscal 2023. ResMed’s minority stake in Nyxoah, which is developing a neurostimulation implant for the treatment of OSA, hedges against the risk of emerging competition.

Shareholder distributions, which have averaged 38% of underlying net income over the last five years are appropriate. While this may appear relatively low, especially given ResMed’s high cash conversion, the company has chosen instead to spend over USD 2 billion in strategic acquisitions since fiscal 2016 to take advantage of trends in digital health in the homecare setting

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#ASX Announcements--FQ
Last edited 5 months ago

usually dont get too intersted in quarterlies, but this one did hold some interest. Re GLP-1, RMD seeing no impact across various cohorts, possibly some uptick. Mask sales are strong, and adherence remains strong, which is an indicator of repeat ordering. then i noticed the below...

blue is non GAAP and orange GAAP GM's. still enough to get bears excited i would say in this environment. interesting diversion probably adds to anxiety. RMD spoke to better trend expected through the year says decline mainly higher component costs that are starting to be cycled. we will see

the rest looked good to me.


disc Held

b294c0dc22e067b56c9a1b84185882e4f34ce4.png

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#Broker Views
Added 5 months ago

Article on Livewire : ResMed CEO says weight-loss drugs and sleep apnea therapy are complementary, not substitutes

also includes some of what Goldman Sachs had to say

FWIW at least 5 investment banks who cover Resmed released short one pager updates this morning incl

UBS - Neutral - 12m PT US$170

GS - Buy - 12m PT $33

MS - Equal Weight - PT US$180

JPM - Overweight - PT $26.50

Macq - Outperform - 12m PT $32.30


DISC: Small position Held in RL & SM

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#Margin compression continues
Last edited 5 months ago

I had been waiting for the next quarterly to see if the slide in margins continued or started to turn. Unfortunately it continues to slide down to 54.4% this quarter. I think this will reinforce the negative narrative around this stock.

The CEO last quarter was adamant this was going to return back to historic levels, which had been the position for each of the last 3 quarters, but 3 data points make a trend for me. I am watching this one with interest, but I think I will keep standing aside. The upside reward isn’t there for me yet, but I think it will be sooner or later.

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#Bear Case
Added 6 months ago

Channeling the spirit of "Strawman" I'll float a bear case for Resmed. So much has been written that the share price drop isn't justified based on the new weight loss drugs. But maybe Resmed was just overvalued before? At current price we're looking at 20-25 PE for a mature company that will do well to grow around 10% a year. I'd say a company growing around 10% is worth a PE around 20. So even if Ozempic doesn't dent Resmed's growth, I still don't see huge value at current share price for Resmed.

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#Bull Case
Last edited 6 months ago

Much has been written on GLP1 agonists being the nail in Resmed's coffin, and many here (myself included) think that this is premature.

I went digging for some medical evidence to see if I could shoot my thoughts down. 

TL:DR - Whilst GLP agonists reduce weight, it won't be enough to make an outsized dent to Resmed's business model.

---

GLP1 agonists seem to help people lose between 4-17% weight loss - with numbers of 4-6% for people with diabetes (more likely to be in Resmed's target group).

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9063254/

If any weight loss intervention is destroy Resmed's business, a person needs to 1) lose enough weight and 2) sustain the weight loss.

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7874406/

A 10% weight reduction at 1 year (picked as it's the number/duration quoted in many GLP1 studies), results in remission of OSA for 13% of people. 

That's still 87% who don't remit. 

And whilst important, weight loss alone doesn't account for sustained improvement in OSA. See the 10 year data in the link above.

If we look at weight loss in bariatric surgery, a more drastic intervention than in the above paper, the data show that 72% manage to keep >20% weight off at 10 years.

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5112115/

These weight loss numbers from bariatric surgery are likely to be far more impressive in terms of magnitude and durability than for GLP1 agonists.

Weight loss by bariatric surgery cures a lot of OSA, but not all of it.

https://bmcresnotes.biomedcentral.com/articles/10.1186/s13104-018-3484-5

In fact 45% of people had OSA that did not improve at all following bariatric surgery. So it isn't purely a weight related condition.

So what is the take home message here?

GLP1 agonists will absolutely have a role in reducing obesity, and with it OSA. But they won't single handedly cure obesity or OSA and the magnitude of the clinical effect isn't going to be as big as the market seems to be anticipating. Almost certainly not enough to justify a 30% drop in value over the last 3 months.

I'll be buying more Resmed.

Disc: Held, and buying more.

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#Industry/competitors
Added 6 months ago

From Seeking Alpha -


Philips (NYSE:PHG) lost ~8% in the pre-market Friday after the U.S. FDA said that the Dutch medical device maker has not shared sufficient details with the regulator regarding a major recall of its sleep apnea and respiratory care devices.

ResMed (RMD), a major rival of PHG in the sleep care market, added ~4% in reaction. Its other competitors in the industry include Inspire Medical Systems (INSP) and Owens & Minor (OMI).

"The FDA has reviewed the available information and data provided to FDA by Philips. We do not believe that the testing and analysis Philips has shared to date are adequate to fully evaluate the risks posed to users from the recalled devices," the agency said on Thursday.

While the company concluded that these devices have no significant health risks to patients, "the FDA believes additional testing is necessary," the regulator added.

While agreeing with the FDA's remarks on the need for more testing, Philips (PHG) said currently, five independent laboratories test the recalled products. The company added that it was in talks with the agency for further details.

"Philips' first priority is the health and well-being of patients, both in terms of providing replacement devices and testing to seek more clarity on the safety of the sleep and respiratory care devices under the recall," Reuters reported, citing a statement from the company.

Philips (OTCPK:RYLPF) has lost over 60% of its market value since it recalled millions of sleep apnea and ventilator machines in June 2021 over potential health risks.

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#Broker Views
Last edited 6 months ago

Just published in a note from by Morgan Stanley

Clear pathway for RMD for longer 

The FDA Center for Devices and Radiological Health (CDRH) has provided an update on the Philips June 2021 recall. At the FDA’s request, Philips (PHG.AS, covered by Robert Davies) had completed an independent testing program to assess the risks related to the PE-PUR sound abatement foam found in certain recalled Philips devices

Notably, the FDA has concluded that “We do not believe that the testing and analysis Philips has shared to date are adequate to fully evaluate the risks posed to users from the recalled devices. Although Philips concluded that the exposure to foam particles and VOCs from these devices is "unlikely to result in an appreciable harm to health in patients," the FDA believes additional testing is necessary”. Philips has agreed to conduct the requested additional testing

Philips remains in discussion with the US DOJ on the terms of its consent decree to resolve the identified issues with its manufacturing practices. No timeline has been outlined. The company previously guided to a Q2 consent decree finalisation


DISC: Held in RL & SM

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##rmd
Added 6 months ago
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#Bull Case
Added 6 months ago

New scientist reports on the use of AI and an infra red camera to diagnose with 90 percent accuracy sleep apnoea. Much lower cost, easier to access and greater reliability through longer observation than a single night in a sleep lab.

Could boost the uptake of RMD CPAP devices.

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#Broker Views
stale
Added 6 months ago

From UBS ...

Steps to drive OSA diagnosis

Partnership with Nyxoah

RedMed and Belgian med tech firm Nyxoah, who manufacture hyperglossal neurostimulation devices for OSA, have announced a partnership to drive awareness, diagnosis and treatment in the German market. ResMed operates in c.140 countries, so any potential uplift from one ex US market is unlikely material as far as our forecasts are concerned but it matters to us symbolically as we have been looking to the company for some direction on the action they might take should there be some diversion of patients to GLP-1 drugs aimed at weight loss, and subsequent loss of these patients to the CPAP ecosystem. We have previously written on this and at the moment estimate c.14% volume headwind a long way out and no impact near term. We have also noted prior that ResMed potentially has a variety of potential options including trying to increase diagnosis rates (knowing that not every diagnosed patient will be captureable), focussing on COPD patients and/or use of c.$4b balance sheet fire power on our estimates. We think concrete action, even if it is not drastic, is the route to reassuring investors about the evolution of strategy for the long term future of ResMed's business and would not be surprised to see newsflow like this continue.

Valuation:

We value ResMed shares using DCF and have not changed our estimates. Our USD170 price target implies an FY24e core PE multiple of c.26x, for c.10% 24-28e earnings CAGR, but we are cautious about when we think the shares can close in on this valuation given the GLP-1 narrative weighing on the stock at present. 

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#Fundie/Analyst Views
stale
Added 6 months ago

GS have published a major research note on $RMD and $FPH (available on CommSec) looking at the impact of various pharmaceutical products on the market.

I've had a quick scan, and it needs a proper read when I'm fresh, but it is a pretty deep dive. They have a well resourced global healtcare research desk!

Interestingly, they've adjusted the 12m TP for $RMD from $38.40 to $33.00, noting their DCF valuation is at $35.50,... which incidentally is about where I stand.

For $FPH the reduction is smaller to $24.00 from $25.00 because of this company's 70% focus on the hospital segement, which is less susceptible to pharmacetical treatments.

Both rated as BUY, with $FPH remaining on the GS "conviction list".

Disc: I hold both $RMD and $FPH in RL

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#Fundie/Analyst Views
stale
Added 6 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

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#Fundie/Analyst Views
stale
Added 6 months ago

A nice bit of discussion between Gaurav Sodhi and Graham Witcomb from Intelligent Investor on Youtube just released. It also includes a good discussion on RMD (from about 11 minutes in till 31 minutes in)

Buy, Hold, Sell, Exhale… Reporting season views


DISC: Small position held in RL & SM

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#History
stale
Added 7 months ago

The Market Ear has some interesting observations on obesity, calling it he new AI, as the market obsessed over a new disruption. the US market loves a disruption even a sniff of one. below by Goldman reproduced by TME.


215c3564a770e135ba70520585b338e82e4e51.png

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Valuation of $33.00
stale
Added 7 months ago
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#Bull Case
stale
Added 7 months ago

I took a sizeable position in Resmed today.

I have watched this company for many years and always missed it any today I think was the right time to buy. It may fall further and if it does I will add more but to me this is now in oversold territory.

In regards to the short position that is growing I thought Claude discussed this well on Ausbiz the call segment today. I work within the health field and have researched a lot on ozempic and also had a lot of clients who have used this medication for weight loss. Like all medications it has some pretty significant side effects. You can find these from a easy google search. BUT the side effect that is of most interest to me is the loss of muscle mass.

Muscle mass is one of the most important things for longevity. You lose muscle mass the risk is you will likely increase your risk of falls as you age, increase your risk of chronic disease and the most important one increase your risk of metabolic consequences.

As ozempic has to be taken basically forever the odds are most people will come off this and stop at some point. Which is great for me because most are metabolically damaged and they often come to my service where my goal is to improve their health the proper way, with long term results. The odds of people taking this medicine for the long term is unlikely because they will begin to feel tired, fatigued and unwell. As you are essentially starving yourself you likely will have nutrient deficiencies which will cause a host of issues most notably low energy and poor cognition. The idea of not eating many meals throughout the day and week long term is unsustainable and the fact that you do not improve your body composition necessarily as you are losing weight but not sustaining muscle long term will not improve the overall confidence in the drug. The other thing is quick weight loss solutions dump an abundance of toxins into your system because your detoxification systems are unable to manage. Plenty of waste is stored in fat mass and those who are obese have large quantities of toxins stored in them. If they lose this weight rapidly this all gets dumped into the body and can make someone very ill. Simply put taking this drug long term is not at all sustainable in my opinion. The sad thing is once these people stop taking it and have completely FUC*ED their metabolic health they will regain the weight twice as fast as they now have limited muscle mass and continue to have large amount of fat tissue in the system. This will set them back even further and my assumption is we will have an even greater obesity epidemic.

One thing i could say is positive about it is that those who just want a quick fix could take it and hopefully then change lifestyle along the way with some improved confidence to then have long term effects.

Now with Resmed the idea that people will not need this because they have lost weight is not realistic. They will still need this product. In the future my assumption is that people who have taken ozempic will need it even more. My other assumption is the world will continue gaining weight and need sleep apnoea machines sadly. The trend has been growing for years and it is unlikely to change. Most people now consume fast food/uber eats and that will continue to grow.

I do believe that doctors will prescribe ozempic more to people as it is a great service to them, people go back monthly for a new script, they get $$ for the session and repeat customers. So where they may have offered a sleep study previously to monitor this perhaps they will say try this new drug and then if that does not work to fix the issue we will do the sleep study. I do think sleep studies will become easier so this balance could go the other way.

In summary, ozempic is not a long term solution to peoples health and sleep apnoea. The only way to do this is through lifestyle changes that provide long term results.

Disc purchased today IRL

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Valuation of $32.80
stale
Added 7 months ago

Much had been said of the qualities Resmed has proven to have shown over the past 9 years, so straight to my valuation.

Underpinning my valuation is a PE of 35.

Expecting 12% growth per annum for the next 3yrs ( to 2026) which will see EPS grow from 92c to $1.29

Minimal dilution in Shares on Issue expected

Discounted back by 10% per annum

SP $32.8

I have commenced accumulating Resmed in the current pull back $25- $28

The PE multiple will be at risk if :

  • Revenues slow to single digit growth
  • Phillips re-enter the market and are aggressive in their offering
  • Operating margins compress from 32%
  • ROE falls to under 20%


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Valuation of $30.00
stale
Added 7 months ago

Valuation in Aug 2023 based on 0.89 EPS and 11% growth rate for next 10 years with PE of 30. (PE of 30 is the low point for the business on a trailing 5 year basis.)


Why do I own it?

# Market leader in hardware and supporting software to treat sleep apnea / CPAP. Have taken more market share recently due to number two player Phillips suffering a product recall.

# Been waiting patiently for some short term news to reduce the price / multiple to provide an entry point which has happened Aug 2023 on higher cost concerns and Ozempic weight loss drug concerns, both of which I believe are not permanent problems.

# Has 10 years of 14% p.a. earnings growth, yet there is still a very large undiagnosed or untreated global patient population.

# Global business now based in US, with strong owner mentality through the founder who is now Chair and his son who is CEO, both of whom hold $10 million plus of shares.

# Low debt to equity of 38% and consistently high ROE / ROCE for over 10 years

# Acceptable MOS at current price of $26.00 in Aug 2023 at a lower growth rate than the past 5 years.

# They can deliver double digit revenue and earnings growth for 5 + years so the return should exceed my 15%p.a. + target

# Still have solid tailwinds as more people are diagnosed and/or can afford treatment for many years to come


What to watch

# New widget coming along that is a better / easier / cheaper way to manage the condition. Should get plenty of notice of this change though as it takes time to change a standard of care like this.

# Effect weight loss drugs might have on condition.

# Growth rate slows to single digits given significant market share.

# Insiders selling down

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Valuation of $26.13
stale
Added 7 months ago

Original Valuation 19/08/2023

Basing my valuation on 12% NPAT growth rate for the next 5 years and a terminal PE of 30x. And considering a AUD:USD rate of around 75c, gives me a valuation of $26.13.

Have started to acquire a position with the current share price weakness.

Disc: Held IRL and on Strawman.

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#Business Model/Strategy
stale
Added 8 months ago

ResMed short sellers see an opportunity with the rise of Ozempic (afr.com)

ResMed is coming under increasing pressure from short-sellers who are banking on Ozempic, the diabetes treatment which has become a popular weight loss drug, reducing demand for sleep apnoea products.

....

The number of ResMed shares sold short – which indicates that investors are betting they will fall – has risen 128 per cent over the last three months.

......

Ozempic is manufactured by Novo Nordisk. The weekly semaglutide injection, which is designed to be a treatment for diabetes, works by mimicking hormones that tell the body it is full. Demand for the drug as a weight-loss aid has exploded, with shortages forcing the Therapeutic Goods Administration to include it on the medicine shortages database this year.

Earlier this month, Novo Nordisk released a large study that had shown the obesity treatment also had a clear cardiovascular benefit. Shares in ResMed fell nearly 20 per cent on the news, while the market capitalisation of other major medical device makers – Inspire Medical Systems, DexCom and Intuitive Surgical – slid by up to 10 per cent.

“The implication could be that investors infer that lowering obesity and diabetes burden could impact the growth curves for these names, at least longer term,” wrote Matthew Taylor, Michael Sarcone and Young Li, equities analysts at Jefferies in the US, in a note to their clients.

But, Mr Taylor, Mr Sarcone and Mr Li added, they disagreed with this view.

“In general reducing [body mass index] to a low 30s range is helpful, but a BMI [of more than] 30 is still considered obese,” the Jefferies analysts wrote. “At the same time, for a condition like sleep apnoea, the problem is not just weight but anatomical or central (brain related).”

UBS analyst Laura Sutcliffe agreed, adding that around 18.5 per cent of ResMed’s revenue could be exposed to a lower demand for its products and investors may have over-reacted.

“ResMed shares are priced as though the company has no ability to do anything about this, but [obstructive sleep apnoea] remains a deeply underpenetrated market and if US diagnosis rates of moderate-severe obstructive sleep apnoea rose just 300bps from 35 per cent to 38 per cent we think the top-line effects could be cancelled out,” Ms Sutcliffe wrote in a note to clients.

On an investor call in June, ResMed chief operating officer Robert Douglas acknowledged Ozempic’s rapid rise and weight loss success.

“We were having similar discussions years ago when bariatric surgery first came out, and people say, that’s clearly going to be a threat to your business,” Mr Douglas said. “Obesity is a contributing factor, but it’s absolutely not the only contributing factor. And then if you look at the levels of obesity versus the physiology of individual patients, there are many, many sleep apnoea patients more than we can manage at the moment.”

“Having some people have their obesity improved by the medication may make them better CPAP patients, better patients to be on CPAP. And clearly for some patients, it will mean they don’t need it as well. But we wouldn’t be able to measure it,” he added.

CPAP, or continuous positive airway pressure therapy, is the key product manufactured by ResMed. The company has seen a surge in sales – revenues rose 23 per cent to $US1.1 billion in the three months to June 30, partly helped by a recall of a rival treatment produced by Philips.

The impact of Ozempic and other anti-obesity medications like Wegovy and Rybelsus, both manufactured by Novo Nordisk, and Mounjaro, from Eli Lilly, is not limited to medical device manufacturers. In an 81-page research report released this month, Morgan Stanley said patients experienced “significant behavioural changes while they are on the drugs, as they reduce their consumption across most food categories, but cut back the most on foods that are high in sugar and fat such as confections, baked goods,

and salty snacks, as well as sugary drinks and alcohol”.

“Weight management foods such as protein bars and powders benefit from the change in behaviour. Gyms could also benefit, as … patients report exercising more often,” the investment bank’s analysts wrote. They forecast 24 million people in the US will be on anti-obesity medication by 2035.

“In an effort to bolster the commercial profile of Mounjaro, [Eli Lilly] is conducting trials across a range of other obesity-related metabolic diseases including obstructive sleep apnoea,” the analysts added.

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##KneppyOnResMed
stale
Last edited 8 months ago

Presents a balanced view of the bull/bear points post-Q4 and FY results, but like a lot of market participants, seems to be concerned about the gross margin contraction trend.

https://www.youtube.com/watch?v=oy6TliSlFJA&t=26s

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#Bull Case
stale
Added 8 months ago

Why I Believe the Market Got It Wrong About $RMD

$RMD has followed NYSE down another 5% on the open, which indicates there has been a pause for thought over the weekend (given that NYSE plummeted 18.5%).

I have picked up a parcel at $29.00, and stand poised for another, should we see the price drop to $28.50. Usually, I've learned not to catch a falling knife, but I'll make an exception for $RMD and in this note I set out why.

I have updated my valuations over the weekend, and nudged my expected value down from $37.00 to $35.10 - in truth, I could believe anything from $34 - $40, and Friday's result didn't really change that.

Some of what I cover in this straw has been discussed by other Straw People and me over the weekend. However, in this straw I go into a little more depth.

How did the market respond to $RMD results?

$RMD reported their 4Q results after NYSE closed and prior to ASX opening on Friday 3rd.

Shares are dual-listed on the NYSE, which every 1 US Common Stock trading as 10 CDIs on the ASX.

ASX 3rd August: $RMD opened at $30.10, down 11% from their Thursday ASX close of $33.85, closing the day at $30.70, down 9.31%. Volumes were high, with 14M shares traded, up on the more typical 1M. The 14M CDIs, traded are equivalent to 1.4M US Common Stock.

NYSE 3rd August: In New York, with more time to sharpen their pencils, the sell-off continued. 5.8m stock trading through the day – again around ten times typical daily volumes. New York closed at $179.25, down 18.5% (ouch!!)

The New York price, at an FX of 0.657 is equivalent to a Monday opening price of $27.28.

So all things being equal, $RMD should open around $27.28. (It didn't, it opened at $28.87, a cumulative fall since the 2nd August of 15%)

(To compare the prices on NYSE and ASX, you need to calculate: P(ASX) = P(NYSE) /10 / USD:AUD). Apologies if that is obvious to everyone, but I thought it might be helpful to explain.

Why did the market respond in this way?

In short, the result was a 5% eps miss. Market consensus was for eps of $1.69 per share, and the result came in at $1.60 per share.

While revenues grew strongly, (up 23% for the Q and 18% for the Y), analysts focused on the reduction in %GM which contracted 210 bps to 55.0% for the Q to pcp, and by 80bps to 55.8% for the Y to pcp. (Some - a small part - of this was FX)

How have valuations and targets been updated?

Using the data on marketscreener.com, and based on 6 of 12 brokers submitting target prices, after 6 have down graded the predictions on price targets have moved as follows (min, mean, max)

Pre-results:       US$ ($221.00, $259.79, $290.00)    estimated A$ ($33.63, $39.54, $44.14)

Post-results:      US$ ($207.00, $248.63, $284.00)   estimated A$ ($31.51, $37.84, $43.22)

So, the average decline is only 4.3%. However, only 50% of the dataset has updated, and usually when there are both upwards and downwards revisions, further updates follow during the next few days and even weeks. Part of the reason for this, is that the CEO and CFO will usually do a roadshow with major shareholders and institutions, and some will hold off updating their research until these conversations have taken place. In the forthcoming roadshow, the discussions will – I imagine – dig into some of the statements made on the call on the outlook for margins. In particular, remarks by Mick Farrell that high cost inventory is yet to work through fully. They’ll also dig into the impact of product mix on gross margin. Devices are lowest margin, with masks, consumables (filters, hoses etc.) on a significantly higher margin, and SaaS obviously much higher, but a small component.

The only detailed note I have is that of Goldman Sachs (Chris Cooper), an $RMD bull, who downgraded their 12m PT by 3% from A$39.60 to A$38.40, offering a detailed analysis in support.

So basically, the soft result has taken the analysts more or less back to where they were in July 2022, when everyone started getting bullish about $RMD again.

The figure below shows the consensus evolution from marketscreener.com.

f2a3e92ce792c5ca4ad38cfee2d4e8357dadee.png

Source: www.marketscreener.com


Why do I believe the market in NY and - as a consequence - the ASX on open has over-reacted?

We covered a lot of this in the usual excellent SM discussion over the week-end, so here I will summarise supported by a few data-driven charts, but I will add my own commentary resulting from the deep dive conducted during the weekend. (Yes, it was rainy in Brisbane!)

First of all, the overall result was very strong. Figure 1 illustrates.

Figure 1: Sales, Operating Profit and Net Income

f95fd3033bf2a910b921d765278c5e40788102.png

Source: Company Accounts

I have plotted the revenue growth trend from 2018-2022, which shows clearly that $RMD drove sales hard in FY23. Let’s remember what happened and understand what has been going on. Understanding this is important to believing that gross margins will be restored again over time.

First, in June 2021, Phillips had their product recall, which immediately resulted in 5 million devices being removed from the market. They’ve been absent from much of the market ever since.

But this recall happened just as the supply chain constraints and, in particular, the chip constraints were starting to bite. While everyone drew down inventory to supply the shortfall, no-one could supply at the rate required. ($FPH have separately reported the challenges they face.)

The types of chips in short supply in these devices are the same technology that are used across a range of industries, like the auto industry, white goods, televisions, audio equipment etc. Not the bleeding edge high-performing chips you find in gaming PCs and laptops. It is these “lower tech” chips that really hit the crunch. As a result, manufacturers, like RMD, re-engineered their existing devices. Air Sense 10 was reconfigured to download data to an SD card, which required fewer electronics than the direct to cloud models.

These efforts allowed RMD to continue to supply the market, but they were unable to fully meet the opportunity presented by the withdrawal of Phillips. Of course, what also “helped” was that the closure of sleep clinics during COVID-19, did constrain the flow of new diagnoses. But of course, these have now opened up again.

Roll forward to FY23, and with supply chains repaired and Phillips still out of the market, sleep clinics open again, $RMD was able to achieve bumper sales. We won't see another +18% sales ... not ever!

In Figure 1, you can see that sales were approximately $400m above where they would have been on the 5-year trend.

But that incremental $400m is largely CPAP machines, and these devices have lower margins than the masks, hoses, and accessories.

Despite the degradation in % gross margin, overall operating profit has stayed largely on its 5-year trend. The CAGR in EBIT from 2018 to 2022 was 15.6%, and FY22 to FY23 was up 22.4%. Not too shabby, and not a result justifying a 15% SP fall..

Let’s now look at margin evolution in Figure 2.


 Figure 2: Margin Evolution 2018 to 2023

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First of all, what the market is so concerned about, %GM (the top blue line). If we look at pre-COVID being FY18 - FY20 (only 3 months COVID impacted and pre-Phillips), GM averaged 58.4% - which I will take as the baseline, as it has historically moved around a bit driven by product mix and FX.

Certainly, the trend from 58.4% to the 55.0% in Q4 FY23 is a worrying trend,… if it continues. And Mile Farrell was clear that it won’t. However, perhaps the market doesn’t believe him. At Q3 Results call he said:

“I see gross margin expansion in double-digit basis points ahead for the coming quarters and throughout the fiscal year and the calendar year. I'm bullish on gross margin expansion because I see geography mix and product mix headwinds subsiding. I'm bullish on gross margin as I see ventilator growth opportunities start to come back, and I see mask growth and replenishment growth, new patient growth start to come on masks. And I'm bullish on gross margin as we go forward because I see inventory costs starting to -- we're going to start to cut into that and bring them down versus the run-up we had with our competitor being out of market.”

Ninety days comes around quickly, but we didn’t see any of this in the results. In fact, %GM continued to slide from 55.3% to 55.0%. However, Mick restated his conviction that %GM would improve in the Q$ results call – while not actually confronting the fact he’d got it wrong (even though he was pushed by one analyst in the Q&A).

But I believe that – now they have the supply - $RMD has been going all out for share. Making hay while the Phillips-Sun shine. The gross profit and strong operating cashflow shows that was a rational thing to do, even though it means there %GM will be under the microscope in Q1 FY24.

Before leaving the margin picture, it is worth highlighting the strong picture shown by net margin. Over the last 5 years, $RMD appears to be gradually ratcheting up its overall economies of scale, going from a mid-teens net margin to a low-20% net margin.

You can also see the grey line, FCF % margin. This has been volatile due to movements in inventory and lumpiness in tax payments. More on inventory next.

For the final chart, we can consider some of the key revenue ratios shown in Figure 3.


Figure 3: $RMD Revenue Ratios (2018-2023)

5ba867f8f0c3b14a8eb48ec9d553aea01fdd3b.png

Source: Company Accounts

We’ve already discussed the problem-child of %GM. Looking forward, I expect this to gradually start trending back up. Although it might not recover the halcyon days of 59.0%, it is reasonable to expect it to trend back to 57% over the next 1-to-2 years. This is because the turmoil and expediting arrangements required for the last few years, will be able to be optimised. Once AirSense-11 production fully ramps up, these manufacturing and supply arrangements will also move onto more of a steady state. Finally, inventory levels will move to more of a steady-state model. There will also be benefits on chips, as a cooling global economy and reinvestment in supply could even lead to over-supply.

True, Phillips will return, and this may increase competitive pressure on margins. But, as Mick points out, there are already several other competitors in the market ($FPH being one!). And Phillips will be starting again from at least a number 4 position in many markets.

The orange SG&A line shows how increasing economies of scale have allowed overheads to scale slower than revenue growth. Of course, FY21 and FY22 were helped by significant reductions in travel, and Mick explained that FY23’s slight uptick was due to both staffing costs and travel. Guidance for FY24 of 20-22% for SG&A allows some further headroom.

R&D has consistently been held at 6-7%, and Mick has guided for FY24 to be 7-8%. Ongoing investment in R&D is a good thing, as $RMD need to continue to reinvest to maintain its industry leadership, particularly as it strives to add further value by exploiting the huge dataset captured from customers.

I finish with Figure 3 by pointing to inventory (black line). You can see that inventory has reached 23.6% of elevated sales – a dramatic increase from historical norms of 13-15%.

Over time, $RMD should be able to manage levels back to historical norms. That said, across the board companies are reviewing their supply chain strategies, and it is to be expected that one of the lessons from the pandemic is that firms will place a greater emphasis on supply chain resilience over efficiency. So perhaps for $RMD, we will see inventory settle somewhat higher than has historically been the case.

[I admit here to being a bit of a supply chain geek, and in my spare time I teach operations and supply chain management to MBAs. I am thinking about using companies like $RMD as future teaching case studies, I already use $BRG.]


Looking Forward

$RMD continues to innovate. Mick spoke about him personally trialling the next generation of mask, due out later in FY24.

A key asset will be the huge dataset from customers that it continues to build. This will give it unparalleled insights not only into improving and innovating its own products and services, but also in identifying new therapies and positioning itself (e.g., via acquisitions) to offer these in the long term. Because of this, I have no hesitation in seeing $RMD continuing to grow revenue at 10%-14% p.a., for the foreseeable future. After all it has done a CAGR over the last 4 years of 11.2%, and last year revenue growth was 18%. I am also therefore happy to assume continuing value free cash flow growth of 5% p.a. beyond the 10-year horizon.

But before I get too excited based on a largely backward-looking analysis, what are the major risks?

1. New Therapies: As discussed elsewhere on SM, several new therapies are emerging to tackle weight loss. Obesity - particularly in developed countries - is one of the big drivers of sleep apnoea. This is something to keep an eye on over time. But I am convinced that this is a longer-term, generational consideration, and not an issue impacting my investing time horizon of 5-10 years. The rationale is as follows:

  • Sleep apnoea is under-diagnosed and under-treated; the global market is vast. Although $RMD currently treats 160m patients globally, its near-term target is to reach 250m and it estimates the potential total market at around 1bn.
  • $RMD devices have application beyond sleep apnoea, including COPD (also underdiagnosed, and growing strongly) and some cardiac conditions. There are even instances when it can be helpful in asthma. There is growing clinical evidence of the effectiveness and economic benefits of CPAP, APAP, and related therapies. The cloud monitoring adds to the toolkit that incrementally allows patients to be trreated in the home.
  • $RMD has the market leading position, helped by the withdrawal of Phillips for what will be 2 to 3 years by the time Phillips returns later this year. Both $RMD and competitors have filled the gap in the market place, and while the return of Phillips will increase competition, it will not be a game-changer, as the market is already competitive. One investment bank has estimated that $RMD has driven its markets share from 47% in 2019 to over 60%.
  • Drugs are emerging and growing in use; however, they are expensive. The lifetime cost of the current GLP-1 treatments is c. $480,000, which $RMD estimates to be 35x the cost of the CPAP. Adherence to drug treatments is low at the 1-year mark, compared with >80% cited for CPAP, and the new drug treatments - though reasonably well-tolerated – have a wide range of side effects from lower risk higher prevalence to some rare/severe conditions. CPAC’s primary issue is some discomfort and facial marks from the masks.


2. Product Recall: Of course, Phillips has shown what a devasting impact a product recall can have. And, hopefully, $RMD have learned lessons and will be unrelenting in their pursuit of quality. While no-one can ever rule out such a shock befalling the company, I prefer to accept this risk through constraining my position size to 6.0% rather than in a valuation scenario, where I cannot assign a reasonable probability.


My Key Takeaway

There is nothing in $RMD’s performance that causes me to doubt the basis of my updated $35 valuation. And when considering various scenarios around that value, a SP below $30 offers a very highly skewed risk-reward profile to the upside.

If there is one surprise, it is that Mick was premature in predicting the GM% improvement. That is uncharacteristic of him. But as their supply chain pressures eased, perhaps the pent-up demand, the gross profit and market share opportunity was just too tempting. In any event, SP has paid a heavy -15% price for that error. And I contend the correction is a gross over-reaction.

Quality companies regularly present pullbacks. Those are the days I buy them. Today is one of those days. I've taken a small bite at $29.00, and have another order in at $28.00, if Mr/(s) Market will oblige me (which I doubt (s)/he will).

Disc: Held in RL (I don't hold companies that have proven to be long-term wealth winners on SM)

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Valuation of $35.10
stale
Added 8 months ago

Initial post was on 100% equity basis.

Updated to include capital structure and other tweeks as follows:

D/E = 36%, Cost of debt = 6%, Cost of Equity = 10%, WACC = 9.0%

SOI increase at 0.4% p.a.

Also, revenue scenarios tweaked down to 11%, 12.5% and 14% growth p.a.

Updated Scenarios:

1: $31.34

2: $34.97

3: $38.99

Average Val. = $35.10

------------------------------------------------------

Updated DCF based on three scenarios:

ASSUMPTIONS

Explicit period of 2024-2033; FCF g-CV=5% (which may be conservative)

Revenue growth: three scenarios 11%, 12.5% and 14%

Capex at 4% x revenue

No explicit GM% assumption, but Net Margin trends from 21.50% to 23.75% driven initially by %GM returning to 57% over next two years, then continued operating leverage from SG&A.

Maintain R&D at 7%x Revenue, although may tighten in later year to preserve %NM margin assumption if SG&A leverage maxes out, which would be consistent with maturing business and g-CV of 5%.

Change in working capital driven by inventory returning to 17% x Revenue, (previously 14%).

No allowance for cash flow release as inventory normalises over next two years, although assumed leverage reduced from 1.0 x EBITDA to bring interest charge down in line with net margin assumption.

WACC=10%

AUD:USD = $0.75 (note currently = $0.657)

Results:

Scen 1: $30.86

Scen 2. $34.30

Scen. 3. $38.12

Average Valuation (equal weighted): $34.40

Significant differences to previous model: slightly less agressive on revenue scenarios. Assume flat GM%, leading to more gradual net margin improvements over time. Raiseed inventory % of sales increased working capital y-o-y.

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#Q3 FY23 Results
stale
Last edited 8 months ago

Dropped circa 10% following earnings miss. Top line continues to grow. Interested in others perspectives. Short term weakness with a buying opportunity given the long term tail winds?

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Valuation of $30.00
stale
Added 11 months ago

at 15/5/23 growth Return (inc div)   1yr: 27.11%   3yr: 10.99% pa   5yr: 21.78% pa

RMD - CDI 10:1 FOREIGN EXEMPT NYSE

Dividend: USD 0.044000cps

So RMD a capital growth share. Dividend pay-out ratio is ~ 20.7%

Retained earnings are ploughed back into business.

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#Update - Dividend/Distribution
stale
Added 11 months ago

not huge yield - ' need a 'ventilator' to pump this divi yield..lol, USD 0.04400cps Yield: 0.52% , No Franking.

RMD - CDI 10:1 FOREIGN EXEMPT NYSE

9cd3b86f8e554f17ef3ee0c9bf1b55b5e1932c.png

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#Q3 FY23 Results
stale
Added 11 months ago

$RMD reported 3Q results on Friday. As I'd spent the second half of last week focused on my small cap results, I had to catch up on the recording of the earnings call over the weekend.

Results were pretty much in-line with market consensus: rrevenues were slightly ahead and EPS slightly behind due to lower % GM and higher expenses.

However, it was a fascinating result as the disussion contained a bit of everything impacting the PCP comparisons: tail-end of pandemic, recovery of supply chains, return of demand due to post-pandemic opening up, and the prolonged absence of a major competitor from the market (Phillips recall and aftermath).

 

Their Highlights

All comparisons are to the prior year period

• Revenue increased by 29% to $1,116.9 million; up 31% on a constant currency basis

• Gross margin contracted 150 bps to 55.3%; non-GAAP gross margin contracted 200 bps to 56.1%

• Income from operations increased 28%; non-GAAP operating profit up 27%

• Operating cash flow of $282.6 million

• Diluted earnings per share of $1.58; non-GAAP diluted earnings per share of $1.68


My Observations

The standout result was in devices, which comprise 55% of revenue. Sales rose by 43% in constant currency, and this was the engine that drove outstanding revenue growth. This had been well-signalled to the market and benefited from two major tailwinds.

First – supply chain. Over the last two years, $RMD has been impacted significantly by supply chain, especially chip, constraints. This had significantly impacted the global roll-out of their new connected AirSense 11 cloud-connected product, which allows customer data to be uploaded to the cloud, shared with healthcare professionals and analysed to provided patient guidance. Previous generation AirSense 10 had been re-engineered to get around constraints. However, the big issue was that just as new customers started returning to GP’s and sleep clinics, supply across the world became constrained. Markets move into management by allocation from available suuply, and waiting times for new devices blew out to many months.

Second, in mid-2021, Phillips a major competitor had a product recall and has essentially been absent from the market while it remediated faulty products with existing customers and redesigned the product, having to go through regulatory approvals all over again. This has given $RMD (and $FPH) reduced competition in the market and exacerbated the supply shortage.

On the call, $RMD indicated that in the USA, AirSense 10 can now fully meet demand in the USA and is now “off allocation” and will get to a normal position in other markets over the next two quarters. Air Sense 11 is lagging, and will continue to see improved availability over the next several quarters. This latter product is still going through regulatory approvals in several markets.

The results call goes into these issues in some detail and provides a great case study into just how long it is taking supply chains to heal, following the disruptions induced by the pandemic and its aftermath (as well as other things going on in the chip industry).

What I found remarkable, is that when you stand back and look at the performance of $RMD over the last 5 years, you see just how well the company has been managed - pandemic, what pandemic! Sales have grown steadily at a CAGR of 12% and Earnings at a CAGR of 23%. (Figure 1 – note: I have used FY23 consensus forecast.)

Figure 1

74e5dd4bfe3abec977f16fdaaf544fc6acfc7a.png

The Future

Through the remainder of CY23, $RMD will continue to benefit from continuing improvements in supply as more and more of its global markets come into balance, as AirSense 11 is approved and launched, and as Phillips begins to re-establish supply.

CEO Mick Farrell spoke on the call about the overall market opportunity. He noted that $RMD had made a contribution to improving the lives of 156 million people in the last 12 months and remains on track to achieve its goal of 250 million by the end of FY25.

However, $RMD’s eyes remain focused on the global opportunity of 1 billion people suffering with obstructive sleep apnoea that needs to be treated worldwide, to which if you add in COPD asthma and insomnia, you’re talking 2.5 billion people in the total addressable market. Now of course, many (most?) of these people will unfortautely not have access to the healthcare or financial resources needed for $RMD’s products and services. But nonetheless, $RMD remains very bullish about the runway ahead of them.

During Q&A analysts asked Mick about threats from new therapies(e.g. drugs), and I was encouraged by the response and would encourage holders of $RMD and $FPH to listen to the recording of the investor teleconference.

With connected devices, SaaS products and the MEDIFOX DAN acquisition, $RMD are investing heavily in R&D to make maximum use of the data their devices are generating. They already have data for 14.5 billion nights of sleep data, to which they are applying AI and ML technology to be able to provide tailored clinical advice to customers and healthcare professionals, which will potentially drive improved efficacy and efficiency outcomes in the treatment of conditions.


Valuation

Overall, broker valuations edged up following the results, with 3 of the 11 covering analysts nudging up their valuations by about 1% on average.

Market consensus on valuation stands as $36.12 (min. $32.04; max $39.17; n=11; source Marketscreener.com) indicating a modest upside to Friday’s close of $33.71.

I don’t yet have my own model for $RMD, however, I think these estimates span a reasonable range of views as to the extent to which $RMD (and $FPH) have been able to gain a sustainable market lead over Phillips versus the expected increasing competitive intensity that will return over the coming years as Phillips get back into its stride and tries to make up lost ground (Phillips CFO on the record that they will not discount heavily to recover share).

$RMD is on a forward p/e of 40, which is reasonable in its sector given its growth and earnings stability. Referring to Figure 2 below, if you ignore the step up in P/E during late 2021/early 2022, when earnings were hit by the full impact of supply chain constraints, $RMD tends to sit at an average P/E of around 45, so it is not expensive on a historical basis - although the current discount can easily be understood in the current higher interest rate environment, and may actually be high on a recent historical basis.

Figure 2: P/E over last 5 Years

 f3a1db768fef2018120782477175a2ae3c2458.png

Overall Takeaways

This was a strong result. Due to excellent investor communications, the market understands that the eye-watering quarterly result will not be repeated. However, with the pandemic behind us and supply chains well on their way to full repair, $RMD is well and truly back to business as usual.

I expect to see sustained low teens revenue growth with 15%+ earnings growth over the near to medium term.

As a holder of both $FPH and $RMD, given that the former’s SP has run very hard over the last 6 months, I am considering a re-weighting of my RL portfolio from $FPH to $RMD, maintaining the combination at 6% of my total portfolio. It is great to have two ASX-listed companies as well-managed, global market leaders in hospital and home care segements, respectively.

 

Disc: Held IRL (2.5%). Not held in SM.

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#INAP - an alternative to CPAP
stale
Last edited one year ago

https://www.inapsleep.online/

A walk through by Vik Veer an ENT specialist in the NHS

https://youtu.be/2VF6o1nfaIU

He explains why CPAP doesn't work well for people with tongue-based problems (which is usually where the mandibular devices come in like Somnomed / RMD's version) and how this device cuts into that part of the solution.


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#Risks
stale
Added 3 years ago

VIX more volitility here.

Excerpt from Thursday, Yahoo.com:

How are the USA markets?Kayne Anderson Rudnick portfolio manager, told Yahoo Finance on Thursday. "I think there's a lot of uncertainty, and how I would characterize this rally is, it is kind of a cynical rally, where people don't necessarily feel as strongly about the economy, but they feel they have to stay invested. And so I think the fact that it is in this mindset means that it could pull back very quickly. So I would expect more volatility going forward." 

Recent data on the economic recovery has been mixed, with job openings rising to yet another record high in May and labor scarcities curbing the pace of the rebound across industries. Thursday's jobless claims report showed new weekly filings unexpectedly increased, with the number of new filers and total claimants still highly elevated compared to pre-pandemic levels

So I may have to do a Jesse Livermore here!

 

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#Competitors
stale
Last edited 3 years ago

Competitors

 

NYSE listed Inspire Medical Systems (INSP) could pose a threat to company's providing sleep apnea solutions, such as Resmed or Oventus.

My understanding of Resmed is that they provide CPAP machines and CPAP masks. I can’t imagine it would be particularly appealing to have to wear a mask at night.

Oventus provide a mouthguard device and apparently have a higher retention rate.

NYSE listed Inspire Medical Systems is an FDA approved obstructive sleep apnea treatment that works without the need of a mask or hose. In a short outpatient procedure, Inspire is placed under the skin of the neck and chest. With the click of a button, Inspire provides gentle stimulation to key airway muscles during sleep allowing you to breath normally. See the link below for a video:

https://www.youtube.com/watch?v=EAFbdc3cWRM

 

Scientific Literature

1 scientific paper demonstrates 90% of patients no longer snored and 79% reported a reduction in sleep apnea events.

Another scientific paper reports 94% are satisfied with Inspire and 96% say Inspire is better than CPAP and would recommend it to others.

*I have not read the papers to see if any conflicts of interest, methodology errors etc exist.

https://journals.sagepub.com/doi/abs/10.1177/0194599818762383?journalCode=otoj

https://erj.ersjournals.com/content/53/1/1801405

 

Jonah Lupton provides his bull thesis on INSP on episode 78 of The Investing City Podcast around the 36:15 mark

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