ResMed CEO says weight-loss drugs and sleep apnea therapy are complementary, not substitutes

ResMed (ASX: RMD) flagged another modest decline in margins for the first-quarter of FY24 as higher manufacturing costs overshadowed a 16% jump in revenue. The stock is down around 2% in early trade.

First quarter at a glance

“ResMed has started Fiscal Year 2024 with strong revenue growth driven by ongoing patient flow and solid demand across our global sleep and respiratory care markets, alongside increasing adoption of our outside hospital software solutions,” said CEO Mick Farrell.

• Revenue up 16%, to $1.1 billion

• Gross margins down 250 bps, to 54.4%

• Net income up 4%, to $219.4 million

• Operating cash flow of $286.3 million

Goldman’s take

Goldman retained a Buy rating with a $33.00 target price on Friday. The key takeaways from analysts Chris Cooper and Daniel Downes include:

• Revenue growth was in-line with expectations as strong mask growth in both the US and Rest of the World offset US device softness impacted by ventilator safety action

• “For the first time in many quarters, US performance was driven by masks (+23%) rather than devices (+2%), with the latter presumably impacted by the field safety notification on Astral.”

• Gross margins are still contracting year-on-year but at a shallower magnitude than 4Q23

• Several unknowns: Ability to capture sustainable share from the Philips’ CPAP recall, no guidance for FY24 and risks from GLP-1 weight-loss drugs

ResMed’s earnings call highlights

I trawled through ResMed’s earnings transcript. These are some of my favourite comments from CEO and Chairman Mick Farrel.

The sleep apnea market remains massive, even with aggressive GLP-1 drug penetration:

“Our epidemiology model … [estimates] 1.4 billion people suffering from sleep apnea in 2050. We then overlaid an aggressive assumption for the adoption of this new pharmaceutical class globally. We assumed some of the highest penetration rates … With this aggressive and sustained adoption of the new drug class, we forecast that the global prevalence of sleep apnea will still be around 1.2 billion people in 2050.”

GLP-1 drugs and CPAC therapy are seen as complementary, not substitutes and adherence rates are expected to remain steady.

“... it's obviously early days, but we're tracking many thousands of patients on GLP-1s and PAP and we're seeing maintenance of adherence. We're seeing patients make use of resupply programs and there’s really no change .. At the aggregate level, we're seeing no change there. We are seeing more patients coming into the funnel.”

Gross margins expected to improve in FY24.

“As we move through fiscal year 2024, I'm confident and I'm laser-focused that we will continue to see improvements in our gross margin with GM leverage programs focused on five key areas.” These areas include:

1. Drive to launch AirSense 11 and make it available across all markets

2. Drive ongoing mask growth and resupply programs

3. Increase software solutions growth, moving from high-single digit organic growth to double-digit organic growth with increased net operating profit leverage

4. Manufacturing efficiencies, freight cost reductions and stabilisation in component costs

5. Cost reduction actions across non-core areas of the business to fresh up cash

Americas mask growth driven by increased patient inflow into the healthcare system and strong demand generation initiatives.

“I do believe we are seeing more patients come into the funnel, more patients into primary care…. [weight loss drug companies] will turn that into marketing to bring people in for the miracle drug."

"And that will absolutely bring patients in for assessment for all the other co-morbidities that are associated with a patient that might have been severely overweight and now likely on the other side of these will still be overweight, including sleep apnea, COPD and other cardiovascular diseases.”