ResMed caught between two narratives: Bearish sleep apnea data and bullish analysts

ResMed (ASX: RMD) shares fell as much as 6.3% to $27.05 in early trade on Thursday after a late-stage trial of Eli Lilly's weight loss drug, Zepbound, showed positive results in reducing sleep apnea severity among obese adults.

Participants in two studies using Zepbound experienced a notable decrease in apnea-hypopnea index events – instances of interrupted breathing during sleep – per hour compared to those receiving a placebo over a 52-week period.

The two key takeaways from the trials were:

1. "Achieved a mean apnea-hypopnea index reduction of up to 63% (about 30 fewer events per hour), meeting all primary and key secondary endpoints in two phase 3 clinical trials."

2. "Meaningfully improved sleep apnea symptoms in those with moderate-to-severe OSA and obesity with and without PAP therapy, and based on these results, Lilly plans to submit these data for global regulatory reviews."

Overnight, NYSE-listed ResMed CDIs opened 1.6% lower and finished the session down 5.97% to US$173.83. The CDIs are listed on a 10:1 basis and after currency conversion, implied a $27.00 open for ASX-listed ResMed shares on Thursday.

Analysts remain bullish

A number of US-listed sleep apnea device makers finished the overnight session higher, namely Inspire Medical Systems (+9.9%) and Nyxoah (+2.7%).

JPMorgan was quick to defend Inspire Medical Systems, with analyst Robbie Marcus suggesting that the data points from Eli Lilly were not strong enough to replace breathing machines and sleep apnea devices.

He believes weight loss drugs like Zepbound could play a complementary role in treating sleep apnea and retained an Overweight rating for Inspire. UBS held a similar view, recommending investors buy Inspire on any weakness.

Bloomberg reported that some analysts perceive the data as negative for sleep apnea therapy, with Airfinity suggesting that the market for breathing machines could contract by over 11% in the coming years.

The somewhat positive views from analysts might explain why ResMed has managed to bounce from session lows of $27.05 (-6.3%) to $27.66 (-4.2%) as of 11:30 am AEST.

Volatile times

It has been a bumpy year for ResMed, with the shares up 8% year-to-date but down 16.5% in the past twelve months. The stock has been subject to a number of selloffs driven by weight loss drug developments, notably:

• 5 January 2024: Eli Lilly announced a new website to allow patients to get their weight loss drug prescription through a telehealth provider. This move will improve access to drugs like Zepbound. ResMed shares finished the session down 2.7%.

• 9 November 2023: The US FDA approved Zepbound for adults with obesity or who are overweight with at least one weight-related condition. ResMed shares finished the session down 3.7% and another 2.7% over the next two sessions.

Resmed 12-month price chart with above headline selloffs in red (Source: TradingView)

ResMed reported its second quarter earnings on 29 January, where pretty much all key metrics topped consensus expectations by 4-6%. Some of the key numbers from the quarterly result include:

• Revenue up 12% to $1.2 billion (consensus $1.14 billion)

• Gross profit margin of 56.9% (consensus 56.2%)

• Gross income up 20% to $365.5 million (consensus $345 million)

• Dividend per share of 48 cents (in-line with consensus)

Short vs. long-term expectations

A late January report from UBS said, "There is a good chance that newer GLP-1s will be able to offer enough weight loss so that some patients will be able to stop using CPAP machines. In time, we think that 14% of ResMed's volume could be lost."

The underlying market for sleep devices in the US was growing at 9.5% per annum before the pandemic and pre-Philips disruptions (where they issued a major product recall). UBS believes the company can continue to compound its competitive advantages in this space over the next 1-2 years and expects to see FY24-28 sales growth of 6.6% per annum.

Putting it all together: ResMed is currently down around 20% since August 2023 highs but up almost 30% from October lows. The company is sandwiched between still-solid earnings, demonstrated by the better-than-expected second-quarter result and gross margin improvements, and overhang from weight loss drugs. In recent months, the stock has had a pretty good track record of bouncing off weight-loss-drug-related news. But how much of that can be attributed to bullish market conditions? We'll find out more about ResMed fundamentals when it releases its third-quarter results on Thursday, 25 April.