Should you buy, hold or sell ResMed shares?
By Andrew Dale
The expansion of GLP-1s like Ozempic to address obesity amongst the general population has impacted a number of names in the medtech sector on concerns that these novel treatments will disrupt existing markets.
ResMed (RMD:ASX), provider of continuous positive airway pressure (CPAP) machines for the treatment of sleep apnea, chronic obstructive pulmonary disease, and other respiratory conditions, has not been immune to the uncertainty these drugs have introduced.
While some have hypothesised that GLP-1s will negatively impact the total addressable market of sleep apnea sufferers, we take a different view and posit that GLP-1s and their widespread adoption offer an opportunity for ResMed to add to its already long growth runway and further its commanding competitive position.
What does ResMed do?
ResMed provides medical devices that are used to assist people with their breathing while sleeping.
The majority of their devices are used in the treatment of Obstructive Sleep Apnea (OSA) which tends to occur in middle aged adults that are overweight (but not always).
They produce both a CPAP machine, as well as many forms of masks that are attached to these machines.
The company's largest market of exposure is the United States of America, followed by Europe and the rest of Asia.
What is ResMed's market share?
ResMed's CPAP device is the market leader with a current market share in excess of 85%.
ResMed have combined superior design and cloud connectivity, the latter of which provides both the patient and health care providers with real time compliance and monitoring data, to commercial success.
Additionally, this connected feature ensures compliance from the user and enables timely replenishment of masks and other associated equipment.
This culture of innovation has resulted in continual enhancements to the CPAP machine itself in addition to the development of a suite of consumables, particularly masks, to suit a wide array of patient needs.
How has ResMed defeated competitors?
The company has had to contend with multiple sources of disruption over the past 12-24 months, some of which have aided the company's standing, while others have challenged its position.
The demise of key competitor Philips due to a major product recall benefited ResMed, increasing their market share in CPAP's from roughly 50-60% to 80-90%.
Conversely, the largest challenge to overcome in recent times has been the sentiment associated with GLP-1s, or diet drugs. Given the largest cause of OSA is obesity, any drugs or treatments that help to reduce the effects will have an impact on treatment protocols.
While recent studies provide indications of the positive impacts of GLP-1s on OSA, the awareness that has been created in the market around obesity and OSA has actually increased the funnel for diagnosis, which in our view is a net benefit to ResMed.
Most now agree that the most effective form of treatment for OSA is a combination of CPAP and GLP-1s, which bodes well for future demand for ResMed's products.
How is ResMed performing?
After a restructuring announcement and a focus on general operating costs, the operational leverage that ResMed has always had has started to flow back through into gross profit margins.
We believe these results will continue to stay strong over the medium term while the company consolidates its market position and better manages its cost base.
The usage of GLP-1s and the awareness that these products have created related to OSA will continue to drive headline demand for sleeping-related solutions.
ResMed is the leader in the space and given CPAP is the only treatment that is 100% effective assuming compliance, it will always feature as part of the treatment protocol.
We also think that CPAP therapy and GLP-1s will be used in combination for people who are severely obese.
The most complicated aspect of this long-term treatment is adherence, paired with regular exercise and a restricted calorie diet. For many, adhering to this combination is much easier in a controlled trial setting than in everyday life.
This does not account for the cost, which will come down over time, but will remain multiples more expensive than the proven CPAP therapy even if GLP-1 costs fall by 50%.
Should you buy, hold or sell ResMed shares?
ResMed's share price recently experienced some weakness as results from the Surmount-OSA trial were released, reigniting GLP-1 related concerns.
It is still our view that the most appropriate way to manage OSA going forward is with CPAP therapy in combination with GLP-1s, assuming the patient is obese.
Sleep apnea is still a major problem and an underpenetrated market both in the US and globally, leaving a considerable runway for future growth for ResMed.
With other competitors still well behind, we remain positively disposed to the company's long-term prospects and potential. Buy.
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