We have taken a fresh look at ResMed (ASX.RMD) following the transfer of coverage, focusing on what GLP-1 weight-loss drugs mean for its long-term growth. The market fears the drugs will shrink the pool of sleep apnea patients who need a continuous positive airway pressure device.

Why it matters: We see GLP-1s as a headwind, but not an existential threat. Sleep apnea is driven by age, sex, and anatomy as well as weight, so remission after major weight loss is usually partial. Most patients also stop the drugs within a year.

  • Fewer than 20% of US sufferers are diagnosed or treated, so the runway is long. ResMed trains primary care doctors to screen for sleep apnea and owns home sleep testing services in the US, making diagnosis quicker and cheaper.
  • Still, we think it is prudent to temper our long-run growth forecasts. Beyond our five-year forecast, we now assume earnings grow about 5% a year. This is down from the 7% a year we forecast to fiscal 2031, and the 16% ResMed delivered in the 10 years to fiscal 2026.

The bottom line: We trim our fair value estimate for narrow-moat ResMed by 7% to USD 280 per share, or $40 per CDI, on more moderate long-run growth forecasts. Shares are undervalued.

  • To justify the share price, revenue growth would need to halve to about 3% a year over our five-year forecast, or operating margin fall to about 32% from 36%. The latter implies ResMed cutting device prices by over 10%, unlikely given Philips’ recall damage and ResMed’s standing with physicians.

Key stats: We cut revenue forecasts by up to 5%, mostly on slower device growth. Diagnosis rates should keep rising, but more slowly, as the easiest patients to find are already diagnosed. Higher margins leave operating profit broadly unchanged.

  • ResMed generates more cash than it can reinvest, so we assume buybacks of about USD 1.4 billion a year to fiscal 2031, cutting the share count by a sixth. This lifts our fiscal 2031 EPS forecast by 11% and dividends per share by 10%.

ResMed converts physician loyalty into pricing power

ResMed aims to grow its installed base of continuous positive airway pressure users by getting more people diagnosed, while reinforcing its position as the brand physicians prefer. We think this is the right strategy for long-term value creation.

Sleep apnea is common but largely untreated. ResMed estimates less than 20% of US sufferers have been diagnosed or treated, and lower still outside the US. Most don’t recognize the symptoms, which occur during sleep and are easily dismissed as snoring or tiredness. Primary care doctors often miss them too, so ResMed trains them to recognize the condition and refer patients for testing. Testing can be costly and slow to arrange, so ResMed owns VirtuOx, which runs cheaper home sleep tests remotely. Some patients also avoid diagnosis because they don’t want to wear a CPAP mask, which ResMed tries to address with smaller, quieter devices and more comfortable masks.

More diagnoses only help ResMed if physicians prescribe its devices, so it must also remain the best CPAP option in sleep physicians’ eyes. That status rests on adherence: insurers only keep paying if the patient stays on CPAP through the 90-day reimbursement window, and many new patients give up. Published estimates put adherence at about 50% to 80%. However, with its Airview monitoring and myAir app, ResMed reports up to 87% adherence. It protects this edge by holding research and development at about 7% of revenue, outspending Philips several times over on interactions with US sleep physicians, and funding the clinical research those physicians read.

We expect this strategy to deliver revenue growth of about 7% a year over the next five years, with most of it from volume rather than price. Because physicians direct patients to ResMed, revenue can grow without a matching rise in selling costs. Selling, general and administrative expenses fell from 27% of revenue in fiscal 2016 to under 20% in fiscal 2026, and ResMed’s operating margin expanded even as gross margin drifted lower.

Growth is mostly organic. Acquisitions in adjacencies such as restless legs syndrome and residential care software have been restrained, at under 3% of revenue in most years.

Bulls say

  • Home sleep tests and ResMed’s training of primary care doctors make diagnosis quicker and cheaper, bringing more of the untreated population into therapy.
  • Selling and administrative costs fell from 27% of revenue to under 20% in the decade to fiscal 2026. If that operating leverage continues, margins could expand well beyond the modest gains we expect.
  • Treatment is far less penetrated outside the US. ResMed puts it at 10% to 15% in Europe and under 5% in Asia, against 15% to 20% in the US, leaving a long runway as diagnosis improves abroad.

Bears say

  • Philips is likely to return to the US in 2027 and price aggressively to win back share, which could pressure ResMed’s prices.
  • GLP-1s may remove more patients from the treatable pool if people stay on the drugs for longer or the efficacy of the drugs improves.
  • Tighter reimbursement in the US, whether through competitive bidding or stricter resupply rules, would squeeze suppliers and make ResMed’s premium harder to hold.

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