Joseph Taylor: So, Shane, we're here to talk about ResMed today. The shares have been pretty volatile recently. What's behind that?

Shane Ponraj: Yes. So, Eli Lilly, which produces GLP-1 or weight loss drugs, recently published clinical trial results. It was sort of reignited concerns that these weight loss drugs might disrupt the sleep apnea industry. The study showed that on average, people just on GLP-1s with exercise and diet would lose about 18% of their body weight after one year, and that would translate to AHI, which is a measure of sleep apnea, halving on average to 26. But moderate sleep apnea is defined between a range of 15 and 30. So on average, these patients are still in the upper end of that range and would likely still benefit from being on a CPAP. This is in contrast to people who start on CPAP therapy. So instantly, for most patients, they would experience an AHI less than 5 on CPAP therapy. Doctors would sort of generally agree that the best combination care is a combination of GLP-1s and CPAP therapy. That's also for patients that present with both sleep apnea and also obesity.

Taylor: So that means you don't necessarily see these drugs as being a huge issue for ResMed's business?

Ponraj: That's right. It's also worth reiterating that obesity is just one risk factor of sleep apnea. About 50% of people with sleep apnea are not obese, and within the half, there's often other risk factors at play. It's also worth noting that in Eli Lilly's study, the average starting BMI was 39, which is quite high, and the study really represents such a small slice of the broader addressable sleep apnea population. So, we don't think GLP-1s will have a significant impact in shrinking the market, particularly when what we're seeing is that more undiagnosed patients are actually coming into the channel and being set up with CPAP, something clinicians are currently seeing, and that's also being translated to really high patient flow for ResMed at the moment.

Taylor: Okay. So, it might not be as bad a thing for ResMed as the markets are making out at the moment. We've previously spoken about ResMed, and you told me that management have actually been very open about what these GLP drugs might do for ResMed, or how they might affect the business. So, what have management said about this?

Ponraj: Yes. The management and ResMed itself are also collecting and compiling data. They've built a database of over 660,000 patients and what they've found is that people that have been prescribed a GLP-1 drug are often more likely to set up on CPAP therapy and are also more likely to stay on CPAP therapy after two years. ResMed also has data on 17,000 patients that have had bariatric surgery and these patients even post-surgery remain on CPAP therapy.

Taylor: So, looking past the topic of weight loss drugs, how is the underlying business performing and what should investors be looking out for in the future, whether that's earnings reports or updates from management?

Ponraj: Yes. So, we still think shares are undervalued at these levels. ResMed continues to deliver really strong earnings growth. They delivered 8% EBIT growth last quarter sequentially, which is huge if you annualize it. There's really no evidence yet that GLP-1s will have a material impact on ResMed, particularly in the near term. We think what is more likely is that ResMed will continue to deliver really strong earnings growth near term and the market will sort of catch on that adoption and impact of these drugs will take some time. Some key factors limiting adoption in our view is still the high cost of GLP1s, limited supply and side effects being quite common.

So, an Eli Lilly study about 25% of patients had abdominal pain and nausea and diarrhea. There are also two cases of pancreatitis which could cause some concerns. Going forward, we're still really confident in ResMed's top line given that Philips is still out of the market in the US. We also expect to see some margin expansion as the sales mix shifts to more high-margin mask and its new device, the AirSense 11, as well as through operating leverage and manufacturing efficiencies.

Taylor: Great. And you mentioned Philips there. So, the story there is that Philips had some deficiencies with their product in the US and are currently out of the market, is that correct?

Ponraj: They're currently dealing with a consent decree by the U.S. Department of Justice and that might be a multi-year thing. But right now, they're still out of the market.

Taylor: Perfect. So, as a whole, things don't look too worrying for ResMed and you're still confident about the shares?

Ponraj: Yeah, that's exactly right. It's still on our best ideas and shares remain undervalued here.