Shares in narrow-moat ResMed (ASX: RMD) remain undervalued following a solid fourth-quarter fiscal 2024. Underlying earnings before interest and taxes (“EBIT”) of USD 400 million was 2% higher than third-quarter fiscal 2024, with sales up 2% on increased product demand and underlying EBIT margin largely maintained at 33%, down 14 basis points.

Gross margin was a highlight, expanding 62 basis points sequentially to 59% on favorable product mix and manufacturing cost improvements, but the benefit to operating margins was offset by operating cost growth. Fiscal 2024 revenue and earnings met our forecasts, and we leave our long-term estimates largely unchanged.

We maintain our fair value estimate of $AUD 40.50. The shares are currently trading 21% below our fair value.

Mask sales in the United States, which were up 11% sequentially, helped offset relative weakness in device sales. Nevertheless, the company maintained its market share in devices. We forecast margin expansion as ResMed’s sales mix continues to shift 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. The global sleep apnea market is still underpenetrated, with most patients being undiagnosed. A key trend that we think is helping boost new patient diagnoses is wearable technologies such as the Samsung Galaxy Watch that can detect signs of moderate to severe sleep apnea.

We’ve yet to see any material negative impact from GLP-1 drugs. ResMed has gathered data on 811,000 patients who have been prescribed a GLP-1 drug and have a sleep apnea diagnosis, showing that it may be a positive in increasing awareness.

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.

ResMed 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.

ResMed 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 unproven in homecare business management software, an area it is currently directing significant capital to and currently achieving organic revenue growth of midsingle digits.

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