ResMed stock catapulted to an eight-month high Friday after shrugging off concerns that weight-loss drugs would undercut its sleep apnea treatment devices.
Last August, shares took a nearly 20% hit after Novo Nordisk said patients who used its weight-loss drug, Wegovy, for five years had a 20% reduced risk of cardiovascular events, like heart attack and stroke. The news sent medical device stocks into free fall.
Last week, Eli Lilly said its weight-loss drug Zepbound significantly cut down on sleep apnea symptoms. Investors hammered ResMed stock again, taking shares down almost 6% on April 17. But ResMed's first-quarter report, issued late Thursday, apparently eased those worries. On Friday, ResMed stock surged 18.8%, closing at 217.97.
ResMed Chief Executive Mick Farrell says weight-loss drugs like Wegovy and Zepbound aren't going to eliminate the need for medical devices. Instead, they'll bring new patients into doctors' offices and improve diagnosis rates of other related conditions, like sleep apnea.
"There was a sentiment that these drugs were going to stop a lot of disease and, therefore, medical devices wouldn't be needed," he told Investor's Business Daily on Friday. "These weight-loss drugs will bring patients into the funnel and then they'll have to be treated for all the chronic diseases they have."
A year ago, the market was betting against ResMed stock, he said. Now, shares opened at their highest point since early August, retaking their 50-day moving average, according to MarketSurge.
"These GLP-1s are not a hindrance to ResMed, they're a tailwind to ResMed," he said.
ResMed Stock: Benefiting From GLP-1s
ResMed is the biggest maker of continuous positive airway pressure devices, or CPAPs, the standard treatment for patients with sleep apnea. Farrell refers to sleep apnea as "sleep suffocation." Due to the way the face is shaped, the airway can collapse during sleep, causing patients to stop breathing.
There are roughly 2 billion people worldwide, including those with sleep apnea, who could use ResMed's devices, he said. But sleep apnea is woefully underdiagnosed. He estimates that 80% to 85% of people in the U.S. who have sleep apnea don't know it. The numbers are even higher abroad.
But the tide appears to be changing. In the fiscal third quarter, ResMed's sales grew 7% to $1.2 billion. That topped expectations for $1.17 billion, according to FactSet. Adjusted earnings grew 27% to $2.13 per share, also above ResMed stock analysts' forecasts for $1.93.
ResMed has tracked more than 660,000 patients taking GLP-1 drugs like Wegovy and Zepbound. Patients prescribed a weight-loss drug are 10.5% more likely to start using a CPAP to treat their sleep apnea than patients with sleep apnea not taking a weight-loss drug, Farrell said.
That's because people will come in for the weight-loss drug, but physicians will do a full workup — looking at parameters like cholesterol, blood pressure, blood sugar and sleep. These are patients who, without the promise of weight-loss drugs, likely weren't regularly going to the doctor, he said.
"It's going to bring a patient into the primary care physician who probably wasn't showing up anyway because they're overweight, they knew they were going to be told, 'Diet, exercise, and here's all these other things I want you to do,' " Farrell said. "So, they didn't come in."
Combination With Weight-Loss Drugs
It's important to note that patients taking weight-loss drugs will likely still need a CPAP to control their sleep apnea, Farrell said.
In Lilly's recent study, the company tested its drug Zepbound in patients with and without a CPAP. The group of patients who also use a CPAP device had better outcomes. But they still experienced some sleep apnea incidents at night.
Coming into the study, patients had an average AHI — apnea-hypopnea index — of 50. That means in an hour patients were suffocating 50 times for at least 10 seconds. At the end of the study, patients still had a residual AHI of about 20, he said.
"That's suffocating every three minutes of sleep," he said. "Any primary care physician, let alone any sleep physician, on the planet will feel obligated, legally in this country, Hippocratic oath globally, to diagnose and treat that sleep apnea."
Notably, fiscal third-quarter growth was driven by North and South America, but William Blair analyst Margaret Kaczor Andrew said Europe, Asia and other markets also topped forecasts.
The number of devices ResMed sold climbed 5% globally — or about 8% when excluding strong year-earlier sales in China amid Covid — and mask sales rose 10%. Andrew reiterated her outperform rating on ResMed stock.
Smartwatch Trend Will Be Key
Longer-term, CEO Farrell expects strong CPAP growth as smartwatches become more capable of detecting possible sleep apnea. In February, the Food and Drug Administration authorized Samsung's Galaxy watch to detect signs of sleep apnea.
Farrell notes that Apple's smartwatch and Alphabet's Google FitBit both monitor wearers' sleep patterns. The Apple Watch also has a built-up pulse oximeter that looks at oxygen in the blood. Oxygen in the blood becomes limited during sleep apnea incidents.
"The megatrend on big consumer tech might be slightly larger" than the pharmaceutical trend, he said. "I don't think they're fully appreciated."
Andrew, the William Blair analyst, expects ResMed to notch high-single-digit overall topline growth, or better, going forward. Needham analyst Mike Matson hiked his price target on ResMed stock to 236 from 224. He rates shares a buy.
Follow Allison Gatlin on X, the platform formerly known as Twitter, at @IBD_AGatlin.
