ResMed Analysis

This is an analysis that I (Xander) made about ResMed for an F305 project, serving as an illustrative example of our previous article "Building Your First Stock Pitch"

Company Overview

ResMed (the “Company”) is a global leader in digital health and cloud-connected medical devices. The company provides treatments for primarily respiratory illnesses such as sleep apnea, chronic obstructive pulmonary disease (COPD), and other chronic diseases. Founded in 1989 and headquartered in San Diego, CA, ResMed has 9,980+ employees and sells its products in 140+ countries. In the past twelve months, the Company has worked with 178mm+ lives with its digital health products and cloud-based software solutions

The Company divides its business revenues into “Sleep & Respiratory Care” and “Software as a Service.” (SaaS) The “Sleep & Respiratory Care” segment is reported into “Devices” and “Masks & Other,” which engages in medical devices used to treat disorders such as sleep apnea and chronic obstructive pulmonary disease (COPD). Products under this business line include the AirMini, the world’s smallest portable continuous positive airway pressure (CPAP) machine. ResMed’s SaaS business unit provides business management software to out-of-hospital health providers. The Company offers a variety of services including ResScan, which allows for clinical analysis and patient data management designed to improve therapy and support long-term compliance.

Product Market Environment

ResMed operates primarily in the Respiratory Devices industry with a ~28.85% market share in a consolidated $14.2bn industry. Their primary market is composed of consumers who struggle with sleep apnea, where the global prevalence is rapidly growing (currently at ~1bn people, expected to grow to 1.4bn by 2050). Representing nearly 30% of the global population in ResMed’s total market, more than 80% of them remain undiagnosed, allowing ResMed to sustain its leadership in the growing market. Their secondary market includes ~480mm people with COPD and ~860mm people with insomnia.

Within the broader respiratory disease market, the top 5 players (including RMD) make up ~83.01% of revenues. A few of ResMed’s key competitors in this market include: Fisher & Paykel (NZE: FPH), Philips (NYSE: PHG), Bausch + Lomb (NYSE: BLCO), and Intuitive Surgical (NASDAQ: ISRG). The Company’s medical devices range from a full set of products for obstructive breathing such as adaptive-servo ventilation therapy machines, auto-adjusting pressure devices, sleep masks, and other accessories.

Sales / Future Financial Strategies

In order to maintain their competitive advantage in an evolving market, ResMed continues to use their SaaS business as an additional way to collect data about respiratory diseases around the world. To date, the Company has collected ~19bn nights of respiratory medical data. From their market dominance, ResMed has 28mm+ patients in AirView, 150mm+ accounts in out-of-hospital care network, and 3.5mm+ diagnostic tests processed in the cloud. The Company has a 3-pronged long-term goal: 1) slow chronic disease progression, 2) reduce overall healthcare system costs, and 3) improve the quality of life for the patient.

In addition to their broader goals, ResMed’s management team is pursuing a combination of short- and long-term financial goals including: reinvesting in product development (7% of revenue invested in R&D), pursuing M&A targets, and share repurchases (buyback program resumed in Q2’24 of $50mm / quarter). Over the past three years, RMD has deployed $3bn of capital into these goals with 40% allocated to M&A, 29% in reinvestments, and 5% in the share repurchase program. The last 26% is used to maintain the Company’s dividend payout.

ResMed is continuing to increase investment and production of the AirSense 11 and AirCurve 11 platforms, securing regulatory clearances into new countries. A few key initiatives for further growth include: partnerships with physicians and providers to drive resupply programs and establishing subscription programs.

Revenue Assumptions:

ResMed’s revenue forecast is built on three cases: the bear case (case 1), the base case (case 2), and the bull case (case 3). For the “projection” period, the model is built on Wall Street estimates. When looking at a broker spread on FactSet for ResMed, 15 research analysts provided projections for the next fiscal year, and those projections were used to form the base case for the model. The bear case is derived from a trim in expectations compared to the base case. For less volatile segments such as its respiratory devices, the bear case was made of a 1.5% decrease from the base case estimates, with the bull case reflecting a 1.5% upside to the base case revenue numbers. For more volatile or younger-stage developments, such as masks and the SaaS business line, the bear cases and bull cases reflect a higher deviation of 2% from case 2. In the extrapolation period, Street estimates are combined with long-term management guidance and tweaks from our groups understanding of the company through reading research reports to make adjustments in the final year. With the end goal of having the base case FY’31 revenue align with our terminal growth rate of 2.5%, we were able to have a baseline of estimates for case 2.

Cost / Balance Sheet Assumptions:

As a mature medical devices company, ResMed’s financial statements reflect a fairly traditional business model. Majority of the underlying cost assumptions (including R&D, SG&A, PP&E, Other Current Assets, Income Tax Payable, and Other Current Liabilities) are reflected as a percentage of revenue. Other expenses, such as Depreciation, Capital Expenditures, and Working Capital Accounts are projected as a percentage of PP&E or turnover metrics (DSO, DIH, and DPO). For the “projection” periods for operating expenses, consensus analyst estimates were used. For other line items, the “projection” period represents an average of historical years (unless otherwise specified in the Company’s 10K, 10Q, or 8K) with the “extrapolation period” stepping down by a certain margin coming into the model’s terminal year (FY’31). 

For the bull and bear cases, a specified spread is taken from the base case, following the trend of stepping down (albeit by various levels) into ResMed’s terminal year. This represents that whichever case is used in the model, the company will still go into perpetuity after seven more years.  

Operating Model:

After incorporating all of the revenue assumptions with the feeder tab, the operating model (representing the base case) to make the discounted cash flow valuation for ResMed is found below: