I found this a really useful article. They use RMD as the example but lessons applicable to any company

Best

C

How to identify a company's capital allocation strategy

ResMed is used as an example of how to spot a company’s capital allocation strategy in its financial statements.

Joseph Taylor

Capital allocation is the act of deciding what to do with cash generated from operations or raised from equity or debt markets. It is often referred to as a CEO’s most important job, and they generally have five main options.

The five main avenues for capital

Pay dividends

Dividends are perhaps the purest form of capital return. The company decides a percentage of profits to pay out and each shareholder gets a cash payment for each share they own. The shareholder can then decide to spend, save or reinvest the funds they receive.

Buy back shares

By buying back shares the company increases the percentage ownership of the remaining shareholders. Just like any share purchase, price matters. If shares are repurchased at a price above their intrinsic value, it is likely the money could have achieved a better return elsewhere.

Pay down debt

Paying off debt is also a return of capital – only this time to bondholders rather than shareholders. This can also be a good thing for shareholders as lowering debt can reduce the financial risk of a company. It should also reduce future interest and debt payments, meaning more cash can be allocated elsewhere.

Invest in organic growth

Profits can be reinvested in the hope of sowing even more profits in the future. Investments in organic growth might include buying more property and equipment, increasing research and development spending, hiring more staff or moving into new territories or product lines.

Buy other companies

Instead of reinvesting internally, management might choose to acquire another company. Creating shareholder value through acquisitions is famously hard – but it is possible. Berkshire Hathaway (NYS:BRK.A), Constellation Software and Danaher (NYS:DHR) have excelled while channeling a lot of capital towards acquisitions. But the fact they are so famous might tell you something.

Unless investments in growth can return more than the company’s cost of capital, profits should likely be put towards dividends, debt reduction and share buybacks at favourable prices. The right decision for a company is closely linked to the maturity of its business and the industry it operates in. If a company still has plenty of room to grow its sales and profits, a higher reinvestment rate is probably more suitable.

How to spot capital allocation decisions in the financial statements

This article will show you how to assess capital allocation decisions in a company’s numbers. To do this, we will study ResMed’s income statement, cash flow statement and balance sheet from their 2016-2023 annual reports.

ResMed (ASX:RMD) is a medical device and software company focused on treating sleep apnea. They are one of two leading players in the market and recorded over USD $4 billion of revenue in 2023. Because ResMed’s primary market listing is in New York, the numbers in this article are all in US dollars.

First, we’re going to look at how much of ResMed’s profits have been dedicated to returning capital versus growth investments. To do that, we’re going to look at dividends and share buybacks.

ResMed's dividend payout ratio

To find out what percentage of ResMed’s 2023 profits were paid out as dividends, I took the “Cash Dividends Paid” from the financing section of their Cash Flow Statement. I then divided this number by “Net Income” figure at the top of this document. You can see both of these numbers highlighted in the cash flow statement below. 

ResMed earned $0.9 billion in profit in 2023 and paid out around USD 0.25 billion of it in dividends.

This gives us a dividend payout ratio of 29%, which is relatively low compared to other large-cap ASX stocks and other healthcare firms:

A lower dividend payout ratio can mean that management sees opportunities to invest profitably in future growth. By contrast, more mature companies in low growth industries usually pay out most of their profits as dividends.

Like most financial measures, dividend payout ratios are more useful when you look at them over a longer period. Doing so shows us that ResMed’s dividend payout ratio has trended down from over 50% to around 30%.

Even at this early stage, we’ve learned two valuable things about ResMed’s capital allocation:

• It has a relatively low dividend payout ratio
• 
  
• It has recently pivoted to paying a lower percentage of profits out as dividends

I then looked at share buybacks to see if ResMed’s profits have been funneled here instead.

ResMed's share buybacks

Share buybacks show up in the investing activities section of the Cash Flow statement under the line item “Payments for common stock”. At the time of their 2023 annual report, ResMed had not spent any money on share repurchases since 2019 so there is no line entry for this in the 2023 report. 

The Cash Flow Statement does show us the money generated by issuing new shares. For ResMed, this has been larger – a total of over $300m since 2016. You might want to understand why this has happened, but it is beyond our remit today. One thing is clear though – ResMed has not used its profits to aggressively reduce the share count recently.

Let’s look at our running total:

• ResMed has a relatively low dividend payout ratio
• 
  
• ResMed pivoted to paying out less profits
• 
  
• ResMed is not buying back shares at the moment

This suggests that most of ResMed’s profits are being reinvested in the hope of generating future profits.

Different types of growth investment

As we covered earlier, growth investments can be organic (internal) or inorganic (buying other companies). Investments in organic growth might include:

• Higher research and development (R&D) spend
• 
  
• Hiring more staff
• 
  
• Buying more Plant, Property and Equipment (usually called Capital Expenditures or capex)

For investments in R&D and capex, it can be useful to take these amounts as a percentage of a company’s revenue over time. To do this, I found the amount spent on R&D near the top of ResMed’s Income Statement:

And I found their outlay on capex in the “Cash flow from investing activities” part of the Cash Flow Statement:

Taking a longer view, we can see that both R&D and Capex have stayed at similar levels as a percentage of revenue:

Staff are another potential investment area, so I looked at the number of full-time employees reported in ResMed’s annual reports:

ResMed’s headcount has essentially doubled since 2018. But this hasn’t happened in a straight line. There are several years of small growth and a few big bumps in 2016, 2017, 2019 and 2023. This offers a clue as to how ResMed has invested in future growth.

ResMed’s acquisition strategy

By looking at the investing activities section of ResMed’s cash flow statement since 2016, we can see they have spent over $3 billion buying other businesses. The company’s net income totaled just under $4.2 billion over this period, so it is a significant amount.

As we suspected from the changes in headcount, ResMed’s biggest dealmaking years were in 2016, 2019, and 2023. Here is how Morningstar analyst Shane Ponraj describes ResMed’s acquisition strategy:

“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 also 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.”

As Shane alluded to, it can be hard to judge the merit of an acquisition until many years later. But we can be clear on this: ResMed has allocated a lot of capital to acquisitions over the past few years.

Another important use of capital

You might remember that paying off debt is another common way to spend excess profits. You can see repayments of debt in the financing section of a company’s cash flow statement:

The effects of this will also show up in the balance sheet, which shows what a company owns (assets) and owes (liabilities). Major things to note in the balance sheet include:

• Total borrowings (the sum of current and long-term debt)
• 
  
• Cash and equivalents (from the balance sheet)
• 
  
• Net debt (borrowings minus cash)

Here is that data for ResMed from 2016-2023:

I have highlighted ResMed’s big dealmaking years in yellow because I think there is clear trend. Whenever ResMed has borrowed money to do a deal, it has aggressively channeled earnings towards debt repayments in the years after.

Total borrowings fell from almost $1.2bn in 2016 to $0.3bn in 2018. Then they fell again from almost $1.3bn in 2019 to under $0.7bn in 2021. This shows how knowledge of real-world events adds context to the numbers you see bouncing around in financial statements.

What we’ve learned about ResMed

ResMed’s financial statements have taught us a lot about their capital allocation in recent years. We learned that:

• ResMed has cut the percentage of profits distributed as dividends
• 
  
• ResMed did not buy back a lot of its own shares
• 
  
• ResMed’s investments in R&D and Capex stayed constant
• 
  
• ResMed allocated most capital to acquisitions and paying off debt

One thing we haven’t done is assess how wise these capital allocation decisions were.

That is a topic for another day – but in case you were curious, our analyst Shane Ponraj rated ResMed’s capital allocation as “Exemplary” as of May 2024. He cited a strong balance sheet, efficient investments and appropriate shareholder distributions.

If you'd like to learn more about assessing capital allocation, take a look at Shani's article 'The most important decision a CEO can make'.

And for more on ResMed, you can view its security detail page here and read about their impressive Q3 fiscal 2024 earnings here.

https://www.livewiremarkets.com/wires/why-has-resmed-rocketed-up-and-is-the-ride-over

Nothing particularly new in this report but some numbers and assumptions with which to compare to.

ResMed’s impressive earnings

Strong device sales and rebound in margin.

Shane Ponraj

Shares in narrow-moat ResMed (ASX: RMD) remain undervalued following a strong third-quarter fiscal 2024. Underlying earnings before interest and taxes (“EBIT”) of USD 394 million was 8% higher than second-quarter fiscal 2024, with sales up 3% and the underlying EBIT margin expanding 145 basis points to 33%.

Sales growth was largely driven by new patient demand while gross margins expanded significantly due to reduced freight and manufacturing cost improvements. Given the quicker-than-expected margin improvement, we increase our fiscal 2024 underlying EBIT forecast by 5% to USD 1.47 billion. Our long-term earnings estimates increase more modestly by roughly 2%. We raise our fair value estimate by 2% to USD 264, or $40 per CDI (ASX listed shares) at current exchange rates.

Improving patient flow and availability of devices continues to support strong sales. We also anticipate further margin expansion as ResMed’s sales mix shifts to higher-margin masks, and cost inefficiencies of simultaneously producing its older AirSense 10 device cease. Our midcycle 34% EBIT margin forecast is broadly unchanged.

Our forecast five-year revenue compound annual growth rate increases to 10% from 9% prior. The global sleep apnea market remains largely untapped and more than big enough for ResMed to remain a meaningful part of the solution. A key trend we think is helping boost new patient diagnoses is wearable technology such as the Apple Watch that can track and indicate signs of sleep disorder breathing.

There continues to be no negative impact from GLP-1 drugs. ResMed has gathered data on 660,000 patients who have been prescribed a GLP-1 drug and have a sleep apnea diagnosis. It was found that participation rates for positive airway pressure therapy were 10.5 percentage points higher in the sample population versus patients who have not been prescribed a GLP-1 drug. In addition, mask resupply rates in the sample population were 3.1 percentage points higher one year after the PAP setup and 5.0 percentage points higher two years after the PAP setup.

Business strategy and outlook

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 US, 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.

Moat rating

Learn more about how to identify companies with sustainable competitive advantages.

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.

Phillips is settling in the US for personal injury caused by its faulty sleep apnoea devices.

The market is loving it, with shares up big. ResMed is down mildly in the pre-market.

More here - https://www.cnbc.com/2024/04/29/philips-shares-rocket-33percent-as-firm-settles-us-respiratory-device-case.html

Strong results, revenue, earnings, gross margin, patient numbers up. "double-digit growth in both operating profit and earnings per share,” - Shredding the bear case and shorters last year so far.

Should be a strong day today - up high single digits in the US afterhours.

Third Quarter 2024 Highlights

All comparisons are to the prior year period

• Revenue increased by 7% to $1.2 billion; up 7% on a constant currency basis 
• Gross margin grew 260 bps to 57.9%; non-GAAP gross margin grew 240 bps to 58.5%
• Income from operations increased 25%; non-GAAP operating profit up 23%
• Operating cash flow of $402 million and debt repayments of $220 million
• Diluted earnings per share of $2.04; non-GAAP diluted earnings per share of $2.13

https://investor.lilly.com/news-releases/news-release-details/tirzepatide-reduced-sleep-apnea-severity-nearly-two-thirds

RMD had a 5% drop in the US overnight after Eli Lilly’s SURMOUNT phase 2 result.

Looking at the results from a pleb’s point of view.

1. Looks huge. A ~27 drop in events per hour. RMD ded.
2. But they didn’t explicitly disclose where the patient's AHI started and where they ended. Looks like might be something like from 50 to 25 events. Which still makes them moderate OSA patients. Still need PAP therapy.
3. Patients using PAP with the drug performed slightly better. So a RMD baggy would say that it’s in fact a tailwind because Lilly will help led gen for RMD.

Interested to hear what others think

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.

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.

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

$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.

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

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.

FWIW today from Morgan Stanley

DISC: Small position Held in RL & SM

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 

DISC: held in RL & SM

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).

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.

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

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

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

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

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

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.

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.

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

Resmed could have a strong run into the new year and long term outlook looks solid.

https://edition.cnn.com/2023/10/05/health/weight-loss-drugs-serious-digestive-problems-study/index.html?utm_content=2023-10-05T19%3A00%3A13&utm_medium=social&utm_source=igCNN&utm_term=image

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. 

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.

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.

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

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?

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

$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

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

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.

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.

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