Is it time to buy the ResMed dip again?

Weight-loss drug trial results have seemingly trapped ResMed (ASX: RMD) in a cycle of repeated selloffs. However, the stock has consistently rebounded from these dips, buoyed by better-than-expected earnings and management's assurances that weight loss drugs complement their business.

The question remains: Is this time any different?

The latest trial results

Pharmaceutical giant Eli Lilly reported the phase 3 clinical trial results for tirzepatide over the weekend. The trials evaluated the drug for the treatment of moderate-to-severe obstructive sleep apnea (OSA) in adults with obesity,

Some of the key takeaways include:

• Tirzepatide reduced moderate-to-severe OSA severity by up to 62.8% (~30 fewer events per hour)

• 43.0% to 51.5% of participants on highest tirzepatide dose reached disease resolution criteria

• Eli Lilly submitted tirzepatide for FDA approval for OSA and obesity treatment

• Most common side effects include gastrointestinal issues such diarrhea, nausea, vomiting and constipation

Citi's take

Citi says it will take a couple more years for weight-loss drugs to have an impact on the CPAP market. "The impact of GLP-1s on CPAP devices and masks sales remains difficult to assess and will depend on GLP-1s uptake, adherence, and overall OSA market growth," the analysts said in a note on Thursday.

In a worse case scenario, the data indicates that weight-loss drugs are a viable treatment option for approximately 70% of OSA patients that are obese. "Assuming that half of these patients see disease remission, it could mean a ~35% decline in the total addressable market for CPAP," the report said.

The analysts expect the CPAP market to experience a total addressable market decline of circa 15% over FY26-28, resulting in ResMed revenue growth of 4%/3%/2% over FY26-28 (down from 6%/4%/2% respectively).

The report downgraded ResMed from Buy to Neutral and lowered the target price from $36 to $30. This breaks a 20-month streak of being Buy-rated on the stock.

No negative impacts to date

ResMed's recent financial performance has shown resilience in the face of weight-loss drug concerns. The company's earnings have consistently surpassed analyst expectations for the past two quarters (results announced on January 25 and April 26, 2024). The better-than-expected earnings resulted in one-day share price rallies of 6-89% on both occasions.

Contrary to fears about potential negative impacts from weight-loss medications, ResMed's management has maintained an optimistic outlook. In the latest quarterly commentary, Chief Executive Mick Farrell offered a nuanced perspective on the GLP-1 trend:

"We believe the increased utilisation of GLP-1s to treat obesity will bring many new people into the healthcare funnel, activating them to see their primary care physicians as they strive for weight loss and other medical help."

"This will open these patients up to knowledge of their other chronic diseases from their primary care physicians, including awareness of chronic diseases such as sleep apnea, ultimately driving new patients into diagnosis and treatment pathways that may not have previously been considered or being treated for those patients."

The bottom line

ResMed's current valuation reflects the market's cautious stance on the potential impact of weight-loss drugs. According to Citi, the company is trading at 21.8-times FY25 earnings, a moderate discount to its pre-pandemic average of 24-times.

Recent trial results are increasingly pointing towards a significant disruption in the CPAP industry due to weight-loss treatments. Underscoring this shift, Eli Lilly has already submitted an FDA application for its sleep apnea treatment, with the company anticipating a regulatory decision as early as the end of this year.

While ResMed has demonstrated resilience by rebounding strongly from weight-loss drug-related selloffs throughout the year, the looming threat is becoming more pronounced.

The key question now is: Can ResMed once again push back against the doubters with another set of better-than-expected results?