Company Reports

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.

Shares in narrow-moat ResMed remain undervalued following a strong third-quarter fiscal 2024. Underlying EBIT of USD 394 million was 8% higher than second-quarter fiscal 2024, with sales up 3% and the underlying EBIT margin expanding 145 basis points to 33%. Sales growth was largely driven by new patient demand while gross margins expanded significantly due to reduced freight and manufacturing cost improvements. Given the quicker-than-expected margin improvement, we increase our fiscal 2024 underlying EBIT forecast by 5% to USD 1.47 billion. Our long-term earnings estimates increase more modestly by roughly 2%. We raise our fair value estimate by 2% to USD 264, or AUD 40 per CDI at current exchange rates.

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.

We maintain our USD 258 fair value estimate for narrow-moat ResMed, or AUD 39 per CDI at current exchange rates, following second-quarter fiscal 2024 results. Despite significant market pessimism given the growing prevalence of GLP-1 drugs for weight loss, underlying EBIT grew 15% to USD 366 million sequentially on first-quarter fiscal 2024, with sales up 5% and the underlying EBIT margin expanding roughly 250 basis points to 31%. Our long-term estimates are broadly unchanged, but we increase our fiscal 2024 underlying EBIT forecast by 2% to USD 1.4 billion. This was largely due to expenses tracking slightly below our expectations, as well as strong performances in ResMed’s software-as-a-service business and device sales outside the Americas, up 16% in constant currency on the previous corresponding period.

We maintain our USD 258 fair value estimate for narrow-moat ResMed, or AUD 40 per CDI at current exchange rates, following first-quarter fiscal 2024 results. Underlying EBIT of USD 319 million grew 4% sequentially on fourth quarter fiscal 2023, with sales down 2% but underlying EBIT margin expanded roughly 150 basis points to 29%. We decrease our revenue forecasts over the next five years by 1% on average, but our underlying EBIT forecasts increase by 1% on average, overall.

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.

Coronavirus continues to suppress sleep apnea diagnosis rates and hence Resmed’s sleep device sales in third-quarter fiscal 2021, but still broadly track our full-year expectations for a pandemic-softened showing. However, better-than-expected mask sales--in combination with a time value of money adjustment--lead us to upgrade narrow-moat Resmed’s fair value estimate by 3% to USD 149. Our AUD equivalent valuation is unchanged at AUD 19, given the recent strength of the AUD. ResMed guided to low-single-digit sequential revenue growth in the fourth quarter and still benefits from reduced travel expenses. Accordingly, we increase our underlying fiscal 2021 EBIT forecast by 4% to USD 907 million, but our five-year EBIT CAGR forecast is unchanged at 9%. While ResMed stands to benefit from structural trends in respiratory and digital health, as well as the launch of its next generation AirSense 11 product in the U.S. later this calendar year, shares continue to screen as overvalued at current levels.

We increase our fair value estimate for narrow-moat ResMed by 5% to USD 145 after second-quarter fiscal 2021 results. However, we lower our AUD equivalent valuation by 3% to AUD 19 to reflect the recent appreciation of the AUD. A faster rebound in sleep device sales than we anticipated, in tandem with a time value of money adjustment, drive our valuation upgrade. While ResMed stands to benefit from structural trends in respiratory and digital health, we still expect sleep apnea diagnosis rates to remain under pressure near-term due to the pandemic--currently about 80% of pre-pandemic levels in the U.S. We anticipate adjusted EPS growth of about 7% to USD 4.67 in fiscal 2021 before accelerating to a 10% CAGR over the fiscal 2022–25 period to USD 6.78.

We increase our fair value estimate for narrow-moat ResMed by 4% to USD 138/AUD 19.60 following first-quarter fiscal 2021 results. Roughly half of the upgrade stems from a moderate reduction in our cost assumptions, a third is to account for the time value of money, and the remainder is due to a sharper rebound in sleep device sales than we previously credited. While ResMed stands to benefit from structural trends in respiratory health, out-of-hospital healthcare, and digital health, we still expect sleep apnea diagnosis rates to remain under pressure near term and pandemic-related ventilator sales to trail off. We anticipate adjusted EPS of USD 4.37 in fiscal 2021, virtually flat with the prior year, and thereafter growing at an 11% compound annual growth rate to USD 6.55 by fiscal 2025.

ResMed is taking a “smart devices” and “big data” approach to further entrench itself as one of the two leading players in the global sleep apnea market. The strategy is two-fold – accelerating diagnosis of the underpenetrated market and monitoring patient compliance which keeps diagnosed patients in the treatment net and payers happier to reimburse the cost of respiratory devices.

While narrow-moat ResMed’s fourth-quarter revenue grew 2.7% on the prior year, the top line was separately boosted by once-off ventilator sales of USD 125 million, adding an additional 6% to total gains. However, the near-term outlook is subdued as current sleep apnea diagnosis rates are tracking below the previous corresponding period, or pcp, and coronavirus-related ventilator sales are expected to trail off. These headwinds lead us to trim our previous fiscal 2021 revenue and adjusted EPS estimates by 3%. Nonetheless, following a transfer of analyst coverage, our long run view is broadly unchanged. We expect ResMed to continue to grow strongly and gain share within the respiratory devices market. As such, we reduce our fair value estimate only slightly, to USD 133 (AUD 18.30) from USD 134 (AUD 20.00), including updating the USD/AUD exchange rate to 0.72 from 0.67 prior. Shares continue to screen as substantially overvalued.

Narrow-moat ResMed posted a strong third-quarter result which was boosted by USD 35 million in ventilator sales to treat coronavirus patients in China and Europe, but did not yet capture the effects of the significant drop-off in sleep apnea diagnoses. Despite expecting additional ventilator sales in the next quarter, we are anticipating overall revenue to be down as sleep apnea devices are currently trading down double digits. Overall revenue is roughly split 50% devices, 40% masks and accessories, and 10% software services. However, following a deep dive on market penetration in the U.S. and the success of the ResMed resupply model, we increase our long-term growth rates for masks and accessories and consequently our fair value estimate to USD 134 (AUD 20) from USD 114 (AUD 17).

ResMed is taking a “smart devices” and “big data” approach to further entrench itself as one of the two leading players in the global sleep apnea market. The strategy is two-fold – accelerating diagnosis of the underpenetrated market and monitoring patient compliance which keeps diagnosed patients in the treatment net and payors happier to reimburse the cost of respiratory devices.

Narrow-moat ResMed posted a quarterly result materially in line with our expectations. We upgrade our fair value estimate to USD 114 from USD 109, and to AUD 17 from AUD 15.50, due to time value of money and a near-term increase in mask and accessories sales in the U.S. We update our exchange rate assumption to 0.67 USD/AUD from 0.70 which contributes half of the AUD gain. ResMed’s eco-system approach to retaining clients via connected devices and resupply services is paying dividends and we continue to factor the company growing share in the sleep apnea market. We forecast five-year revenue CAGR of 8.6% which is a blend of stronger U.S. growth at 9.8% and slower growth of 4.4% in other markets. We expect 10% organic growth from the Software as a Service, or SaaS, segment. This delivers group GAAP earnings growth of 10% compounded to fiscal 2024.

ResMed is taking a “smart devices” and “big data” approach to further entrench itself as one of the two leading players in the global sleep apnea market. The strategy is two-fold – accelerating diagnosis of the underpenetrated market and monitoring patient compliance which keeps diagnosed patients in the treatment net and payors happier to reimburse the cost of respiratory devices.

Narrow-moat ResMed reported fiscal 2019 adjusted core EPS up 4.1% to USD 3.20 from USD 3.07, in line with our expectations. Our EPS adjustments differ to those of the company. We did not anticipate the litigation provision of USD 41 million relating to a mask and accessory resupply programme, however, it does not impact our forward view. The full-year DPS of USD 1.50, up 5.6%, fell short of our expectations with the payout ratio dropping to 53% from 65% and we adjust our forecast payout ratio down to between 50% and 55% over the next five years from 65% previously. We roll forward our forecasts and consequently update our fair value estimate to USD 109 from USD 104 and to AUD 15.50 from AUD 14.90, due to the time value of money, and assuming a constant exchange rate of 0.70 USD per AUD. ResMed screens as slightly overvalued at current levels.

ResMed is taking a “smart devices” and “big data” approach to further entrench itself as one of the two leading players in the global sleep apnea market. The strategy is two-fold – accelerating diagnosis of the underpenetrated market and monitoring patient compliance which keeps diagnosed patients in the treatment net and payors happier to reimburse the cost of respiratory devices.

Despite many Australian-listed healthcare stocks we cover having substantial revenue exposure to the U.S., the latest potential regulatory changes in that market pose a low risk to our fair value estimates. The cost of and access to healthcare is an emotive topic among U.S. voters and hence at the forefront of political agendas. Of relevance to the Australian companies that operate in the U.S. is the draft Lower Health Care Costs Act, or LHCCA, which aims to improve transparency in the healthcare sector and reduce prescription drug pricing, as well as President Donald Trump’s recent executive order on transparency and comments on capping drug prices to the lowest developed-country level.

We raise narrow-moat ResMed’s fair value estimate to USD 104 from USD 101 or AUD 14.90 from AUD 14.40 for the Australian listing. The increase is a function of tempering our medium-term sales forecasts offset by lowering our cost of equity assumption to below average based on a reassessment of the resilience and low systemic risk of the business. ResMed’s strategic direction of creating connected devices that allow patients, medical practitioners and payors to get both clinical and compliance data is key to our view the company will further entrench itself in the respiratory devices market. The connected respiratory device is taking on increased importance as reimbursement levels in France are linked to evidence of patient compliance. We expect this to spread to other geographies and currently only ResMed and key rival Philips have connected products. As such, we factor market share gains into our 8.4% five-year CAGR revenue growth assumption, ahead of estimated market growth of 6% to 7%.

ResMed is taking a “smart devices” and “big data” approach to further entrench itself as one of the two leading players in the global sleep apnea market. The strategy is two-fold – accelerating diagnosis of the underpenetrated market and monitoring patient compliance which keeps diagnosed patients in the treatment net and payors happier to reimburse the cost of respiratory devices.