ResMed Inc

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

A global manufacturer of medical devices and cloud-based software solutions for respiratory disorders, primarily focused on sleep apnea and COPD.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

ResMed Inc. (RMD) is a global medical technology company that designs, manufactures, distributes, and sells medical devices and cloud-based software solutions for respiratory disorders. The company’s primary focus is on sleep apnea and chronic obstructive pulmonary disease (COPD), but they also offer solutions for other respiratory-related conditions and diseases, including neuromuscular disorders, as well as other conditions which affect the respiratory system.

Business Overview

  • Revenue Distribution: ResMed’s revenue can be broken down into two main categories:
    • Devices: This segment includes various CPAP (Continuous Positive Airway Pressure) and other non-invasive ventilators, masks, and other related accessories, and more recently, digital health solutions used in at-home healthcare. These products are used by individuals at home and medical facilities. The segment makes up the vast majority of the revenues, as medical devices are core to the company’s offering. The device segment accounts for around 66% of total revenues
    • Software: This segment provides software products for remote patient management and remote health monitoring, along with consulting, training, and IT support. This segment is growing faster than the devices segment due to the increasing adoption of digital solutions and represents roughly 34% of revenues in FY2023.
  • Geographic Presence: ResMed has a strong global presence. Sales are segmented into:
    • Americas: The biggest segment that includes the US, Canada, and Latin America
    • Europe, Middle East, Africa: Second largest market, where the business has a major presence in countries such as France, Germany, Spain, and Italy
    • Asia Pacific: Is the smallest of the three, but a growing one. Australia is an important market in this segment.
  • Industry Trends:
  • Aging Population: The global population is aging, leading to more people needing treatment for sleep apnea and other respiratory diseases.
  • Rising Awareness: The awareness of sleep apnea is increasing, leading to more people seeking diagnosis and treatment.
  • Technological advancements: A trend towards smaller, more comfortable, and more connected medical devices is growing. Software-as-a-service solutions are seeing more traction as remote patient monitoring becomes more common.

  • Shift Towards At-Home Care: Driven by factors including hospital costs and better technology, patients are choosing to treat respiratory disorders at home instead of healthcare facilities

  • Competitive Landscape:
    • ResMed competes with other medical device companies, such as Philips Respironics, Fisher & Paykel Healthcare, and Invacare.
    • There is also increasing competition in the sleep apnea market from new entrants, most notably in the digital health and sleep diagnostic space
    • Competition is particularly concentrated in a few markets; a competitive duopoly dominates most of the sleep market.
    • Competitors rely on patents, regulatory hurdles, brand value, quality, and pricing advantages.
  • What Makes ResMed Unique?:
    • Strong Focus on Innovation: ResMed has consistently been focused on research and development and innovating.
    • Geographic Reach: They have a leading global presence and an established supply chain.
    • Strong Portfolio of Integrated Solutions: ResMed offers a variety of solutions encompassing devices, masks, and cloud-based software for remote patient management, which positions it well for long-term success.
    • Data Analytics: ResMed has been focusing on data analytics that improves patient outcomes and improves profitability and efficiency.
  • Financial Performance:
    • Gross Margins: In FY2023, Resmed has a gross margin of 57.3%. That’s considerably higher than what you would see in most other sectors
    • Operating Margins: In FY2023, ResMed’s operating margins were 21.2%. This is a healthy level, and should allow for a sustainable business model for the company.
    • Strong Revenue Growth: ResMed has had strong growth in revenues and net earnings. Revenue has grown by about 10-15% YoY, while net earnings has grown by 30-40% YoY in the recent years.
  • Profitability: The company has a track record of above average profitability. ROIC is around 10-15%.
  • Consistent Cash Flow: Resmed has a very healthy track record of generating consistent positive cash flow from its operations.

Moat Analysis

Based on the information above, RMD has some degree of competitive advantage, but it is not very strong to give it a moat rating of anything higher than 3. Moat Rating: 3/5

The most critical determinant of a company’s moat is their ability to generate consistently high returns on capital. These returns are what create value for shareholders in the long-run. Although ResMed has good ROIC, it is not extremely high (compared to say 20+%), because competitors can mimic most of the products and make the barriers to entry lower. Hence a Narrow moat rating of 3 seems fair.

  • Intangible Assets: RMD has a good brand in the sleep apnea market, with decades of R&D spent towards this area.
  • Switching Costs: ResMed’s integration with its clients create high switching costs, making customers sticky. Once they implement RMD into their systems, its very hard to switch to a new competitor. Switching costs create pricing power, hence the company can extract profits.
  • Network Effects: There is a modest network effect that benefits RMD. As RMD scales and incorporates more data to its analysis platform, more hospitals and physicians are likely to be attracted to the platform, and in turn, more data could make the product better.

Risks to the Moat & Business Resilience

While ResMed enjoys a number of competitive advantages, it is also exposed to the following risks that may erode its moat:

  • Competition: Increased competition, especially on prices, can erode profit margins and result in price declines. ResMed also faces increasing competition from new entrants, especially in digital health.
  • Technological Disruptions: Technology is rapidly changing in the industry, with new alternatives that can make existing technologies and products redundant.
  • Regulatory Changes: New regulation or changes to regulation can hurt profit margins, and affect market share by affecting R&D spending and approvals.
  • Supply Chain Disruptions: Like most manufacturing companies, RMD faces the threat of supply chain disruptions that can have devastating effects on profitability.
  • Pricing Pressures: In addition to greater competition from competitors, regulatory pressure can also lead to decline in prices.

Resilience:

  • Diversification: ResMed’s diversification into digital solutions and other respiratory diseases gives it resilience and the ability to expand its total addressable market.
  • Recurring Revenue Model: The company generates recurring revenue streams from its software solutions and consumables. They offer software on subscription basis.
  • Strong Financial Position: The company’s strong cash flows make it well prepared to withstand the impact of a downturn.
  • Experience and Long Track Record: ResMed has many years of operation, which has allowed them to grow a very loyal base of customers.

Understandability: 2/5

Although ResMed’s overall business is easy to understand, the complexities come in the many different types of products they sell, and the complicated regulations, pricing policies, and accounting methods. In addition, the healthcare industry is generally more complex to model than other industries. Overall, a 2 seems like a good score for the understandability of the business

As an investor, you should be able to have a decent understanding of a company you’re investing in. Complexity adds risk, and you won’t have enough conviction in the face of adversity if you don’t properly understand the business you’re invested in. Hence the understandability is a good measure of the complexity of the business model

Balance Sheet Health: 4/5

ResMed possesses a very healthy balance sheet. However, it is not without its flaws.

Strong balance sheet allows the company to be stable in adverse market environments. The company has to depend less on external funding, which makes them less dependent on credit markets and makes them a safer long-term investment.

  • Debt-to-Equity: The ratio is currently around 30%, which is a solid sign. The company’s reliance on debt is pretty low.
  • Cash Position: RMD had roughly $573 million in cash and equivalents as of the most recent quarter. It’s not extremely high, but provides safety and flexibility.
  • Low Level of Goodwill: Goodwill is roughly 8% of total assets, which is a low ratio indicating less overpayment on previous acquisitions.

Recent Concerns & Management Commentary

  • Supply Chain Issues: ResMed has faced supply chain challenges and are working to mitigate those, while at the same time looking to increase production capacity.
  • Competitive Pressures: In the most recent earnings call, Resmed executives have acknowledged increasing competitive pressure and market uncertainty in the sleep apnea market, as both Philips Respironics and other new entrants attempt to steal market share.
  • Pricing: Management has noted a trend of decreased prices for medical devices, specifically in the public procurement market. They are trying to increase prices where possible and lower costs in order to preserve profitability.
  • Growth Initiatives: The company has a laser focus on their digital health initiatives, with R&D spending mainly focused on these new technologies that provide remote monitoring and cloud-based healthcare support. Also, there is a lot of R&D emphasis on new product development, and better patient compliance, in order to maximize the positive effects of their products.
  • Acquisitions: ResMed has been acquiring small niche-based companies in areas such as cloud and digital health, as it looks to solidify its position in its core markets and expand to new ones. They have announced many new acquisitions and partnerships in the past two years
  • Share Repurchases: Management seems confident in the long-term prospects of the business, and has thus been buying back shares for the last year. This increases the per-share earnings and return for the shareholders

The management team seems confident in the future of the company and the path forward they have laid out. However, the company remains exposed to both industry and global risks, which could affect profitability and growth.