RMD - ResMed: Putting GLP-1 Myths To Sleep

2024-01-10 22:09:45 ET

Summary

• ResMed, a leader in digital health with over 22.5 million cloud-connected devices sold, excels in treating respiratory disorders like sleep apnea, impacting over 1 billion globally.
• Recent data from ResMed challenges the misconception that GLP-1 obesity drugs would diminish the demand for sleep apnea treatments.
• Despite financial setbacks in Q1 2024, including a 10% share price drop and decreased gross margin, ResMed's broad market potential remains strong.
• Challenges such as product recalls, leadership changes, and cost pressures have influenced investor sentiment and require careful monitoring of future earnings.
• Investors should watch for ResMed's response to recent challenges and opportunities in the expanding market of sleep apnea treatment in upcoming earnings.

Company Overview

ResMed ( RMD ) is a global leader in the digital health sector, distinguished by its extensive range of cloud-connected medical devices. The company has achieved a significant presence in the medical device market, with over 22.5 million cloud-connectable units sold in more than 140 countries. ResMed's expertise primarily lies in diagnosing, treating, and managing respiratory disorders. These include sleep-disordered breathing ((SDB)), chronic obstructive pulmonary disease ((COPD)), asthma, and insomnia.

The company addresses sleep apnea, a widespread condition affecting over 1 billion people globally. In addition to sleep apnea, ResMed also targets secondary markets of COPD, asthma, and insomnia, potentially positively impacting the lives of over 2.5 billion people suffering from these chronic diseases through digital health innovations.

ResMed's product portfolio is comprehensive, encompassing a variety of devices and solutions. This range includes Continuous Positive Airway Pressure ((CPAP)) machines, APAP, bilevel, and ASV devices, which are essential in managing Obstructive Sleep Apnea ((OSA)) conditions. Their Automatic Positive Airway Pressure ((APAP)) devices, notably the AutoSet, are equipped with proprietary technology that monitors breathing patterns. This technology is instrumental not only in the treatment but also in the diagnosis and management of OSA. Besides these devices, ResMed also offers diagnostic products, mask systems, headgear, dental devices, and other accessories, all complemented by their cloud-based software informatics solutions.

For an investor, ResMed presents as a company at the forefront of digital health technology as a market leader with a diverse product portfolio aimed at a large and growing patient population. Their focus on respiratory disorders, particularly sleep apnea, and commitment to innovation in digital health solutions position them as a valuable investment opportunity in medical technology.

Debunked Myths about GLP-1's

The recent data presented by ResMed at the J.P. Morgan Healthcare Conference has offered a new perspective on the interaction between GLP-1 obesity drugs and OSA therapy, challenging prevalent misconceptions in the medical technology and healthcare sectors. Despite the perception that the rise of GLP-1 weight loss medicines might diminish the demand for sleep apnea treatments, ResMed's findings tell a different story.

Investor concerns about GLP-1 weight loss drugs potentially undermining the value of ResMed's sleep apnea potential market share had led to a notable drop in its stock value, with a 35% decrease from its 52-week high. This reaction is based on the study that weight loss, a known benefit of GLP-1 drugs, would reduce the Apnea-Hypopnea Index ((AHI)) in overweight or obese patients, consequently decreasing the need for OSA therapy.

However, ResMed debunked these fears by highlighting an ample, under-penetrated opportunity to treat a broad range of chronic diseases regardless of GLP-1's success. The chart shows the global OSA prevalence starting at 1 billion today and its projected growth by 2050. By 2050, the scenarios shown are the range of outcomes if OSA prevalences are reduced by 15% due to GLP-1 impact.

The projections show that even if GLP-1 drugs reduce sleep apnea prevalence by 15%, there will still be a significant demand for treatment, with a potential pool of 1.2 billion patients by 2050. ResMed's projection of having 110 million connected devices in the market further highlights the expansive growth potential.

Another myth that has been discredited is the belief that patients entering the treatment funnel would be less inclined to start CPAP therapy after taking GLP-1 drugs. ResMed's research found that patients on GLP-1 medications are 10% more likely to initiate CPAP therapy. Furthermore, resupply rates of devices are higher among GLP-1 patients, with a 3% increase after one year and 5% after two years of CPAP therapy. This data, drawn from a sample size of over 500,000 patients, underscores that GLP-1 therapy is more likely to boost CPAP therapy usage than hinder it.

ResMed's data not only refutes the misconceptions surrounding the impact of GLP-1 obesity drugs on sleep apnea treatment but also highlights a growing opportunity for the company in the expanding market of OSA therapy. This presents a favorable outlook for investors, emphasizing ResMed's resilience and growth potential in the face of evolving medical treatments.

Other Factors Influencing Investor Sentiment

ResMed's first quarter of 2024 saw a notable reaction from investors, marked by a sharp decline in share prices of over 10%. This downturn was primarily triggered by the company's financial results, which revealed a decrease in gross margin by 250 basis points year-over-year, settling at 54.5%. Additionally, ResMed's revenue fell short of market expectations by $10 million.

The management attributed this margin contraction to several factors. First, there was a shift in the product mix, notably a decrease in the sales of higher-margin ventilators. This was compounded by a less favorable geographic mix, where there was an increase in sales in regions with lower payment rates. Lastly, the company faced escalated costs related to components, shipping, and wages, which further pressured the margins.

ResMed has also been navigating through a series of challenging events. Notably, the recall of the Astral 100 and 150 devices posed a significant setback. This was accompanied by a series of leadership changes within the company, adding to the internal challenges. Furthermore, issuing an urgent safety notice concerning masks used with CPAP machines has also recently been a concern.

As ResMed approaches its upcoming 2Q24 earnings on January 24, 2024, investors are advised to watch several key aspects closely. These include updates on the resolution of the recent device recalls and safety notices, any changes in leadership and their strategic implications, and, more importantly, how the company plans to address the challenges in product and geographic mix, as well as managing the ongoing high costs. These factors will be crucial in determining ResMed's ability to rebound and stabilize in the face of recent setbacks.

Final Thoughts

In conclusion, despite the recent challenges faced by ResMed, including financial pressures and market misconceptions, the company stands on solid ground with its strong product portfolio and significant market potential in treating respiratory disorders like sleep apnea. The company's ability to debunk myths around GLP-1 obesity drugs and demonstrate an increasing demand for sleep apnea treatments indicates a robust growth trajectory. However, investors should adopt a cautious stance and "hold" on the stock until earnings reports demonstrate the company's resilience and adaptability in a dynamic healthcare industry.

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