Is the worst over for ResMed shares?

ResMed shares have rebounded 13% since hitting a four-year low last Friday.

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ResMed Inc (ASX: RMD) shares have rebounded by 12.87% since hitting a four-year low of $21.25 last Friday.

The ResMed share price is currently $24.02, up 4.48%, making it one of the top five ASX 200 risers today.

The sleep treatment company's share price has been under pressure amid concerns that highly effective GLP-1 diabetes and obesity medicines like Ozempic could reduce demand for ResMed's medical devices.

ResMed shares also fell 10% in just one day in August when the company released its FY23 results, revealing an 18% revenue bump but an 80 basis-point fall in gross margin to 55.8%.

Overall, ResMed shares have tumbled 26% over the past six months.

But does this week's rebound indicate the worst is over?

ResMed shares rebounding as brokers say buy

Firstly, let's recap why there is concern among investors about these diabetes and obesity medicines.

Obesity is a common precursor to Type 2 diabetes and can cause obstructive sleep apnoea (OSA).

ResMed makes continuous positive airway pressure (CPAP) machines that treat sleep apnoea.

Research shows 70% of people suffering from OSA also suffer from obesity. So, investors are worried that GLP-1 medicines will remove a big chunk of the market for ResMed's CPAP machines and other devices.

But my Fool colleague Mitch points out that the OSA market opportunity for ResMed is still huge, even if you remove obese patients from the picture.

Harvard Health estimates that sleep apnoea affects an estimated 20% of the world's 8.1 billion people.

If 30% of them do not suffer from obesity, that leaves a potential market of 485 million people who are already using ResMed's products or may benefit from using them as future customers.

ResMed's total customer profile for all its products is less than half this at 160 million.

Thus, Ozempic and similar GLP-1 medicines may not disrupt ResMed's business as much as investors fear.

This is one of the reasons why Mitch bought ResMed shares for his own portfolio last week.

Here's what the experts say

Top broker Goldman Sachs makes the same point as Mitch. The broker says the OSA market "remains under-penetrated, with global estimates suggesting <20% and many countries well below this level".

Goldman is among a bunch of brokers recommending that investors buy the dip on ResMed shares.

It recently reiterated its buy rating on ResMed but reduced its 12-month price target to $33. This implies a potential upside of 37% for ASX investors who buy ResMed shares today.

Goldman has considered the impact of obesity medicines on ResMed's business and developed a base case that has informed their latest stock rating and price target.

The broker explains:

Our base scenario adopts our base case obesity forecasts from above (i.e. -7% reduction in obese or overweight with comorbidity population by 2030E). It then assumes the following patient retention on CPAP (mild 55%; moderate 70%; severe 80%). In this scenario we could see only a modest benefit of AHI [Apnea-Hyponea Index] in GPI-2 over GPI-1, which could result in a lower level of patients.

Overall, we expect continued adoption/success of the GLP-1/GIP class to reduce the OSA population addressable by CPAP, but the impact to RMD/FPH is mitigated by: i) long-term market share gains from competitors; and ii) continued improvements in OSA diagnosis rates (potentially catalysed by the GLP-1/GIP class itself).

Macquarie recently retained its outperform rating on ResMed shares with a trimmed price target of $32.60.

Wilsons retains its overweight rating and a 12-month share price target of $36.25.

Analyst Shane Storey says:

As stunning as some of the new GLP-1Ra agents look, they are unlikely to impact the gross epidemiology of OSA.

Whether they are approved or not for an OSA indication, they look unlikely to provide complete resolution of OSA symptoms and to combat CPAP as standard of care.

Bell Potter adds another point, saying, "Competitive dynamics are very much in favour of RMD due to the Philips recall and improving semiconductor availability".

The broker currently has a buy rating and a $39 price target on ResMed shares.

Morgans also has an add rating on ResMed shares with a $36.95 price target.

Motley Fool contributor Bronwyn Allen has positions in Macquarie Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group, Macquarie Group, and ResMed. The Motley Fool Australia has positions in and has recommended Macquarie Group and ResMed. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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