This Pick Withstood the GLP-1 Challenge. Stick With the Stock.

ResMed stock fell in 2024 after the market became concerned a new Eli Lilly pill would reduce patients’ obstructive sleep apnea enough to lower demand for ResMed’s CPAP machines. (Dreamstime)

One year ago, we recommended buying ResMed stock after concerns that weight loss drugs would hurt demand for its sleep apnea treatments knocked shares down. Anyone who has ridden the stock for the subsequent gains should hang on for more.

We said to buy shares in early July 2024, when the stock had gotten knocked down to $192. The market was concerned a new Eli Lilly pill would reduce patients’ obstructive sleep apnea, or OSA, enough to lower demand for ResMed’s CPAP machines and masks.

From that point—even as Lilly started selling its OSA treatment—ResMed’s earnings grew aggressively. It even shared data showing GLP-1 patients were 11% more likely to use CPAP products versus non-GLP-1 users. The stock is up 32% to $253 since the Barron’s article was published.

Demand growth has been consistent. Between last year and this year, analysts expect sales to have grown almost 10% annually to $5.3 billion, close to its annual growth of a tick over 10% from 2011 to 2023, according to FactSet.

That has been driven by more people buying the products, as nearly one billion people globally have OSA, according to the American Thoracic Society. ResMed said on its fiscal third-quarter earnings call it serves 151 million lives. It, along with Dutch medical device company Koninklijke Philips , dominates the CPAP market and has plenty of runway for more customer adoption.

The reality is that Lilly’s OSA treatment merely reduces, but doesn’t vanquish, OSA in some patients. It also doesn’t reduce the ailment for everyone. Combine that with the possibility that CPAP machines can work in tandem with Lilly’s pill, and competitive concerns for ResMed can subside.

“We note that RMD has yet to see an impact from the FDA approval of Eli Lilly’s Zepbound for OSA in December 2024,” writes Needham analyst Mike Matson.

Other threats to CPAP sales appear contained. Private pharmaceutical company Apnimed hopes for Food and Drug Administration approval in 2026 for its OSA pill. When the pill sells, it is unlikely to fully terminate the condition in patients, with recent trial results showing a 56% reduction in subjects.

Matson also notes ResMed could eventually buy Apnimed, valued at $394 million in April, in which case ResMed would benefit from Apnimed’s success. That aside, Apnimed, founded in 2017, hasn’t begun acquiring patients, and Matson says it won’t even begin selling until at least 2027.

Meanwhile, expectations for ResMed’s success have only strengthened recently. It has beaten analyst’s sales estimates in each of the past six quarters. Even though it missed earnings per share forecasts—which it usually doesn’t—in the third quarter, the 0.3% shortfall was driven by a higher-than-expected tax rate, not anything related to demand. So analysts have lifted this year’s sales and earnings projections since last July—when competitive concerns flared up.

The earnings growth potential looks robust. Analysts expect another percentage point of gross profit margin increase next year, with the company selling more of its higher-margin products. Management will have to ramp up spending on research and development, keeping profit growth from exploding into the teens in percentages. But it will continue to repurchase shares, which is why analysts expect about 11% annual EPS growth for this year through 2029 to $14.36.

That growth should boost the stock, which trades cheaply versus its history, at a current 23.7 times expected EPS for the coming 12 months. That is below its three-year peak of 36 times. It may not reclaim that multiple soon, but it could still rise as the business continues to prove it isn’t threatened by GLP-1s, especially because the growth should take place over many years from today.

At the very least, the multiple likely won’t drop below 20 times, its low since last July’s scare, and its level just before third-quarter earnings sent the stock up 10% in one day.

Sometimes the best action to take is no action. Hold this one.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com