ResMed Shakes Off GLP-1 Scare

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The great obesity drug scare of 2023 is now behind ResMed as evidence in the December quarter suggests GLP-1s are actually a positive for the sleep apnoea industry.

-ResMed beats December quarter forecasts
-GLP-1s now seen as beneficial to sleep disorder diagnosis
-Gross margin expected to improve
-Balance sheet solid, buybacks continue

By Greg Peel

Global leader in sleep apnoea devices ResMed ((RMD)) posted a solid December quarter, beating consensus by around 4%, or 2% not counting a lower than expected tax rate. Revenue grew by 10% year on year driven by global flow generator sales up 10%, global mask/accessories sales up 11%, and SaaS up 8%.

Devices continued incremental share gains in the Americas (up 12% year on year) and strength in Rest-of-World (9%) as the global AS11 rollout advances, while demand for AS10 remains. Masks grew by 10% in the Americas and 7% in RoW, suggesting a normalisation in RoW mask growth.

Strong Americas sales appear to be underpinned by market leading cloud-connected devices, Morgans suggests, with the latest AS11 platform continuing its country by country rollout, and masks benefiting from personalised solutions, such as the just-launched N30i AirTouch — an industry first fabric mask designed for improved comfort, with early feedback “outstanding”, helping to drive new patient set-ups and resupply.

While Residential care software sales slowed a bit, Morgans notes, with softness in skilled nursing and senior living, which “really has not picked up since covid”, management flagged strong growth in Medifox Dan and Brightree and has guided to overall high single-digit top line growth, with double-digit profit gains.

The Big Scare?

It was around 18 months ago ResMed’s share price collapsed due to the advent of new GLP-1 weight-loss drugs which, it was feared, would replace the need for sleep apnoea treatments. But while the market responded on a “sell now, ask questions later” basis, analysts were wary but not convinced GLP-1s would genuinely upset demand for ResMed’s products.

Indeed, it was argued GLP-1s might even provide a boost for ResMed, as the sudden frenzy would lead the world’s obese (and not so obese) to learn about the availability of and appreciate the benefits of sleep apnoea treatments.

Well, they were right, it would seem.

The top line momentum and recent channel checks have prompted Jarden to rethink the stance it took on outer year forecasts as a result of the advent of GLP-1 drugs.

The combination of obstructive sleep apnoea (OSA) awareness stemming from GLP-1s amongst patients and physicians, the proliferation of home sleep testing options and increased use of wearable devices with inbuilt OSA prompts lead Jarden now to expect to more than offset any impact on ResMed from mild to moderate OSA patients dropping out of continuous positive airway pressure (CPAP) therapy from GLP-1 related weight loss.

Over the medium to longer term, revenue growth is expected to be complemented by demand generation initiatives, with GLP-1 medication and consumer OSA detection technology supportive of new patient diagnosis/flow, notes Macquarie. ResMed expects this to drive high single-digit revenue growth guidance over the next five years.

The strength in US devices sales, in Goldman Sachs’ view, is early evidence the growing awareness of OSA from the uptick in consumer wearables and GLP- 1 therapies is translating to additional demand for ResMed’s products.

Undeniably, there is a range of potential new drivers coming into contention, suggests Wilsons, having deftly reversed the GLP-1/obesity “CPAP anti-narrative”, which this broker now sees as potential tailwind, and noting a plethora of new diagnostic modalities and services seeking to create a step-change for the sleep industry.

ResMed continues to argue GLP-1s and wearables will bring patients into the funnel, notes Citi, albeit it will be gradual — healthcare systems capacity will likely keep a lid on new patients’ growth.

Yet, while the December quarter may have offered some proof that GLP-1s were at worst no threat to ResMed and at best and additional tailwind, the reality is ResMed’s share price had regained all it had lost in the initial scare by August last year, and has since surged ahead to reach its earlier peak of mid-2021.

There wasn’t much to be disappointed about, Jarden suggests, other than the stock rallying strongly on high expectations leading into the result (up 9.3% over January). Expectations of increasing top-line momentum were delivered, with device revenues beating consensus and masks coming in line.

The share price clearly anticipated more of an upgrade which wasn’t forthcoming, Jarden points out, considering the gross margin remained flat on the September quarter. ResMed’s share price weakened on Friday post release and then plunged another -3% on Monday, albeit the Australian market in general was slammed due to Trump tariff fears, so not too much can be read into the market’s immediate response.

Gross Margin

Gross margin increased by 260 basis points year on year driven by manufacturing and logistics efficiencies, as well as improved component costs, Macquarie notes. However, gross margin was flat quarter on quarter at 59.2%, which was disappointing, except that management noted forex headwinds of -30bps (on a balance of US dollar, euro and Singapore dollar exchange rates).

ResMed expects second half and FY25 margins to be between 59-60% with initiatives in place to leverage manufacturing and procurement as well as scale benefits. Other factors that should assist, Jarden notes, include mix, growth in the high margin SaaS business (with Medifox Dan called out as performing very strongly in the December quarter) and any future Singaporean Government incentives including 250-300% tax deductions on qualifying R&D expenditure.

Further upside for gross margin is possible as more shipping capacity comes online in response to easing tensions in the Red Sea. Jarden notes sea freight charges between Asia-Europe and Asia-US have already started to drop by -20% over the last three weeks but remain significantly above on pre-covid levels.

Jarden sees ResMed as well positioned to take advantage of these changes, but the big freight rate reductions will only take place when there is more certainty in the Middle East and when ResMed can shift further away from its reliance on air freight.

Jarden expects ResMed will achieve some freight savings in the second half, but given the three-month lag effect before this appears in the P&L, it is likely to be only noticeable in the June quarter and beyond. When ResMed can ultimately start shifting, when it does unwind it should provide an opportunity for gross margin to improve beyond 60%.

Balance Sheet

While operating cash flow growth (13%) lagged earnings growth, Wilsons notes, net debt stands at just US$151m. Given ResMed’s lower debt levels, management expects to generate positive net interest receipts in the second half. The business will continue its share buyback program of US$75m per quarter.

With ample cash reserves of US$522m, capital allocation preferences continue to be reinvested in growth via R&D, tuck-in acquisitions, and the share buyback program.

Responses

Citi has drawn on management’s expectation that while GLP-1s and wearables will bring patients into the funnel, this process will be gradual, in maintaining a Neutral rating. Citi’s target rises to $41.00 from $38.00.

Morgans continues to view ResMed as well positioned to leverage growing awareness of sleep disorders via consumer wearables and weight loss drugs, moving upstream in the diagnostic pathway. Morgans retains Add, lifting its target to $43.60 from $41.33.

In Ord Minnett’s view, ResMed is set to continue to deliver robust growth in earnings, supported by further increases in gross margins, revenue growth and operating leverage. This broker also sees the company as considering an increase in the size of its share buyback program by the end of FY25 given the expectation the balance sheet to be net cash by then.

Ord Minnett retains an Accumulate rating, which sits in between Buy and Hold, with a target increase to $44.80 from $43.90.

Macquarie continues to see ResMed as attractive at current levels, given solid earnings per share growth over the forecast period, a favourable balance sheet position and valuation appeal. ResMed remains a preferred sector exposure for Macquarie, hence Outperform maintained, with a target increase to $45.10 from $41.10.

UBS covers the company from its US business and has post result release upgraded to Buy from Neutral with its target price lifting to US$290 from US$255. That leaves four Buy or equivalent ratings and one Hold among brokers monitored daily by FNArena covering ResMed. The consensus target is now $43.63 not counting UBS.

Wilsons has downgraded its ResMed rating to Market Weight from Overweight, while upgrading its target another 2% to $42.82. The recommendation change stems from believing earnings expectations now capture the outlook Wilsons had previously upgraded for. THis broker suggests some of those drivers look finite and may only have a few quarters left to run.

While undeniably there are a range of potential new drivers coming into contention, those narratives are too under-developed to predict, Wilsons believes, let alone admit to earnings or valuation outlook.

Goldman Sachs has no such inhibitions when it comes to projecting ResMed’s future growth path. It is this broker’s assessment the December quarter result continues to highlight the defensiveness of ResMed’s existing patient cohort in light of rising GLP-1 usage and progress in executing management’s 2030 strategy. Goldman Sachs thus reiterates its Buy rating, increasing its target incrementally to $49.00.

Jarden’s shift in thinking around GLP-1 impact to outer year forecasts has this broker lifting its target to $41.48 from $36.60 while retaining an Overweight rating.

Interesting footnote: Broker views on ResMed over the past couple of years have always included speculation on if/when rival Philips will re-enter the market post its earlier device recall. In reporting on ResMed’s December quarter, such speculation was notably missing in action.

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