We transfer coverage of ResMed (ASX: RMD), one of the largest respiratory care device companies globally. It primarily sells flow generators and masks for the treatment of sleep apnea. Demand is underpinned by increasing awareness and diagnosis of sleep apnea, and aging populations.

The bottom line: We keep our USD 290 per share, or $40 per CDI, fair value estimates, narrow moat rating, Exemplary Capital Allocation Rating, and Medium Uncertainty Rating. Shares are cheap as we are likely more optimistic than the market on ResMed’s ability to take advantage of growing sleep apnea awareness.

  • The market seems concerned due to potential alternative therapies and device sales growth moderating slightly. However, positive airway pressure remains the gold standard in reducing interrupted breathing, and the sleep apnea market is largely underpenetrated.
  • The firm estimates less than 20% of those with sleep apnea have been diagnosed or treated in the US. A key trend boosting diagnoses is wearable technologies such as the Apple Watch that track sleep and can detect signs of sleep apnea.

Big picture: GLP-1 drugs were seen as an existential threat to sleep apnea devices, but this appears overblown. ResMed’s data shows GLP-1 patients are actually more likely to use the company’s devices than non-GLP-1 patients, probably because they are a more health-motivated cohort.

  • Our forecast five-year sales and EBIT CAGRs are intact at 8% and 10%, respectively, consistent with ResMed’s guidance to fiscal 2030 for high-single-digit sales growth and higher earnings growth. We expect increasing diagnosis rates within the largely underpenetrated market to drive growth.
  • Recent mask sales have been solid with continued strong demand for newly launched fabric masks. These fabric masks boast higher adherence rates due to improved comfort and are hence beneficial for prescribing physicians, patients, and payors.

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 where it competes. 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, which is 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.

Bulls say

  • The long-term growth opportunity for respiratory homecare devices is sizable as both developed and emerging markets are still significantly underpenetrated.
  • The focus on cloud-connected devices has led to increased adherence, supporting both reimbursement rates and the resupply of masks and accessories.
  • ResMed stands to benefit from Philips’ significant product recall and the launch of its new flagship product, AirSense 11.

Bears say

  • Market share gains from Philips’ product recall may be limited as affected customers can wait for a replacement unit, purchase an alternative Philips product, and ResMed’s supply chain may be constrained.
  • Reimbursement rates and pricing are under threat as CMS continues to seek savings in the Medicare program and newer treatments such as neurostimulation implants are emerging.
  • ResMed is largely unproved in homecare business management software, an area it is currently directing significant capital to and currently achieving organic revenue growth of midsingle digits.