In less than two months, Resmed Inc (ASX: RMD) shares have cascaded 35.7% to their lowest price since March 2020.
The violent hit to the medical device company comes amid mounting fears of market disruption caused by glucagon-like peptide 1 (GLP-1) drugs.
Going against the grain, I decided to buy Resmed shares last week. In this article, I'll explain why I think the market is being irrational and how Resmed could still succeed in this evolving landscape.
Shoot first, ask questions later
Known more commonly by their label names, such as Wegovy and Mounjaro, weight-loss medications are creating a ruckus in the healthcare industry. The fear is that GLP-1s could uproot existing indirect treatments due to the prevalent link between an array of health issues and obesity.
It's a classic example of root cause analysis: addressing the source of the problem rather than trying to treat the symptoms.
Resmed is a big player in treating obstructive sleep apnea (OSA) — a sleep disorder believed to affect 20% of the global population. It is commonly cited that obesity is considered one of the main risk factors for sleep apnea, with estimates indicating roughly 70% of OSA sufferers are obese.
Investors are worried that these new medications could usurp Resmed by solving the underlying cause of the disorder it treats, hurting Resmed shares. While the jury is still out on the substantive evidence, it appears shareholders are not waiting around to find out.
Three reasons why I think GLP-1s won't eat Resmed's lunch
I want to provide three clear-cut points for why I added Resmed to my portfolio.
- Early evidence for reduced sleep apnea from GLP-1 use is combined with exercise and a restrictive diet. This may suggest that sleep apnea issues could persist without lifestyle changes.
- If GLP-1s do disrupt the OSA industry, the market opportunity remains significant. An estimated ~485 million people with sleep apnea are not exposed to obesity — Resmed currently serves around 160 million.
- Weight-loss medications and continuous positive airway pressure machines (CPAP) — the devices Resmed sells — could be complementary.
Homing in on that last point. The real winners from this are the people who suffer from sleep apnea. It may give people more choice. Studies show that some people don't stick with CPAP machines… likewise, others don't gel with these new medications.
I think investors are forgetting that different solutions can co-exist in large markets.
Pulling the trigger on Resmed shares
I have long admired Resmed as a company. The ability to constantly innovate on its devices, expand its market share, and maintain commendable margins.
However, during my time as an investor, the Resmed shares price has usually traded on a price-to-earnings (P/E) ratio of between 30 and 50 times. I couldn't stomach the premium price. A mistake in hindsight.
The market's recent irrationality, in my opinion, has given me a second chance. Now, Resmed trades at 24 times earnings.
Still conscious of the risks, I have added a modest position with the intention to add more in the future. Right now, Resmed shares make up 2.7% of my personal portfolio.
