Executive Summary / Key Takeaways

• ResMed has evolved from a medical device manufacturer into a digital health platform, creating an end-to-end ecosystem from diagnosis through ongoing therapy management that generates recurring revenue, expands margins, and builds nearly insurmountable switching costs.

• Gross margin expansion to 61.5% in Q1 FY26 reflects structural operational improvements—not temporary tailwinds—driven by manufacturing efficiencies, component cost optimization, and logistics scale that management expects to sustain in the 61-63% range through fiscal 2026.

• The convergence of GLP-1 medications and consumer wearables creates a once-in-a-generation awareness catalyst for sleep apnea, with ResMed's data showing these trends actually increase therapy initiation rates by over 10% rather than cannibalizing the market.

• Philips' ongoing recall remediation has permanently shifted market share, with ResMed now commanding 50-60% of the OSA device market while leveraging its superior software ecosystem to maintain pricing power and customer loyalty that competitors cannot replicate.

• The critical variable for investors is execution on international expansion, where Asia Pacific penetration remains below 5% despite representing the largest long-term opportunity, making geographic growth the primary swing factor for sustained double-digit earnings expansion.

Setting the Scene: The Sleep Apnea Platform That Outgrew Its Hardware Roots

ResMed, founded in 1989 and headquartered in San Diego, California, spent its first three decades building the world's most reliable continuous positive airway pressure (CPAP) devices. For years, investors viewed it as a medical hardware company—cyclical, capital-intensive, and vulnerable to commoditization. That perception no longer matches reality. Today, ResMed operates a two-segment business model where hardware serves as the Trojan horse for a high-margin, recurring-revenue digital health platform that manages over 154 million lives through cloud-connected devices and software.

The industry structure reveals why this transformation matters. Obstructive sleep apnea affects 2.3 billion people globally, yet market penetration remains strikingly low: 15-20% in the United States, 10-15% in Europe, and below 5% across Asia Pacific. This isn't a mature market—it's a massive, underserved population where diagnosis and treatment rates struggle to keep pace with rising prevalence. A landmark Lancet study projects 77 million U.S. adults will suffer from OSA by 2050, a 35% increase from 2020. The value chain has traditionally been fragmented: patients visit sleep labs, receive diagnoses months later, obtain devices through durable medical equipment providers, and receive minimal ongoing support. ResMed is systematically collapsing this chain into a seamless digital experience it controls.

Competitive dynamics have shifted decisively in ResMed's favor. Koninklijke Philips (PHG)' Respironics division, once part of an 80% duopoly, continues grappling with recall remediation costs and regulatory scrutiny, with its Sleep & Respiratory Care segment posting single-digit declines while ResMed grows devices at 8-11% across regions. Fisher & Paykel Healthcare (FPH) competes effectively in masks but lacks ResMed's end-to-end platform. Inspire Medical (INSP)'s surgical alternative serves a niche of CPAP-intolerant patients, not the mass market. ResMed's 50-60% market share in OSA devices reflects not just scale, but a moat that deepens with each digital touchpoint.

Technology, Products, and Strategic Differentiation: The Fabric of Competition

ResMed's product innovation strategy fundamentally changes the basis of competition. The AirTouch N30i and F30i masks, launched in late 2025, replace traditional liquid silicone rubber with fabric-based interfaces—a shift CEO Mick Farrell believes "could permanently change the basis of competition in mask innovation." Why does fabric matter? It addresses the primary reason patients abandon therapy: discomfort. By offering a premium, more comfortable alternative that maintains compatibility with existing device platforms, ResMed captures higher average selling prices while improving adherence rates. The masks and accessories category grew 12% in the U.S. during Q1 FY26, outpacing device growth, demonstrating that innovation in peripherals drives incremental revenue with minimal customer acquisition cost.

The AirSense 11 platform represents more than a device refresh—it's a cloud-connected digital hub. With touchscreen interfaces, over-the-air update capabilities, and integrated cellular connectivity, each device becomes a data collection node that feeds ResMed's ecosystem. This transformation converts a one-time hardware sale into an ongoing relationship. The myAir patient engagement platform, enhanced with the Dawn generative AI assistant launched in Australia and the U.S. during 2025, provides personalized 24/7 therapy support. When patients receive AI-driven coaching that improves adherence, they become less likely to switch brands. The data shows this works: API calls into ResMed's systems exceeded 3 billion in Q1 FY26, up 40% year-over-year, indicating deepening platform integration and stickiness.

ResMed's diagnostic acquisitions complete the funnel. The $140 million VirtuOx purchase in Q4 FY25, combined with the NightOwl home sleep apnea test and Somnoware physician software, creates a direct pathway from suspicion to treatment. This matters for two reasons. First, it accelerates time-to-therapy, capturing patients before competitors can intervene. Second, it generates valuable data on patient flow that ResMed uses to optimize its own demand generation. Management noted that tuck-in acquisitions contributed to the 8% U.S. device growth in Q1 FY26, proving that vertical integration drives top-line results.

Research and development spending at 6.5% of revenue—consistent with management's 6-7% guidance—funds next-generation platforms that extend beyond sleep apnea into broader respiratory insufficiency. The investment isn't just in hardware; it's in AI-enabled comfort settings (Comfort Match), continuing medical education programs that have trained 22,000 physicians, and digital sleep health concierge capabilities. This creates a reinforcing cycle: better technology drives adherence, adherence generates data, data improves algorithms, and improved algorithms make the platform more indispensable.

Financial Performance & Segment Dynamics: Evidence of a Structural Inflection

ResMed's Q1 FY26 results demonstrate that margin expansion is neither accidental nor cyclical. Gross margin improved 290 basis points to 61.5%, driven by manufacturing and logistics efficiencies, component cost improvements, and the sea freight-to-airfreight ratio returning to pre-COVID levels. Supply chain normalization isn't just a tailwind; it's revealing the underlying leverage in ResMed's model. Management's guidance for 61-63% gross margins through fiscal 2026 indicates confidence these improvements are sustainable, not one-time recoveries. The operating leverage is equally compelling: income from operations grew 15% while revenue grew 9%, as SG&A expenses as a percentage of revenue improved to 19.4% from 19.5%.

The Sleep and Breathing Health segment, representing 87% of revenue, grew 10% to $1.17 billion in Q1 FY26. The regional breakdown reveals important nuances. U.S., Canada, and Latin America delivered 10% growth with devices up 8% and masks up 12%. Europe, Asia, and other markets also grew 10% reported (6% constant currency), with devices up 11% and masks up 7%. The constant currency deceleration in international masks—growing only 4%—signals a temporary headwind, not structural weakness. Management explicitly stated they expect acceleration to high single-digit growth in the current quarter, suggesting inventory or distribution timing issues rather than competitive share loss.

Device growth of 8-11% across regions is particularly impressive given the Philips recall-driven surge in prior years. This proves ResMed isn't just filling a temporary supply gap—it's winning new patients and retaining them. The real-world data on GLP-1 medications provides further evidence: those prescribed both GLP-1s and PAP therapy show 10% higher initiation rates and 3-5% better adherence at one and two years. Far from cannibalizing the market, weight-loss drugs are activating a motivated patient population that previously avoided diagnosis.

The Residential Care Software segment, while smaller at $166 million in Q1 FY26, serves as a strategic enabler. The 6% reported growth (5% constant currency) masks a deliberate portfolio shift. Management is "increasing investment in high-growth, higher-margin parts of that RCS portfolio while reducing exposure to lower-growth, lower-margin areas like services businesses." This demonstrates discipline in capital allocation, as the company refuses to subsidize low-return activities even if they provide some strategic value. The MEDIFOX DAN platform and core Brightree verticals are growing robustly, while skilled nursing facilities face headwinds. Management's confidence in reaccelerating to high single-digit growth with double-digit operating profit growth within 12 months hinges on this portfolio pruning.

Cash flow generation underscores the business model's quality. Operating cash flow increased $132 million to $457 million in Q1 FY26, driven by higher net income and working capital improvements. Free cash flow of $414 million in the quarter implies a 31% free cash flow margin—exceptional for a medical device company. This robust cash flow funds both growth investments and shareholder returns without straining the balance sheet. The company repurchased $150 million in stock during Q1, part of a planned $150 million quarterly pace for fiscal 2026, while maintaining $1.38 billion in cash and $1.5 billion in undrawn credit facilities. Net debt is effectively zero, giving ResMed firepower for strategic acquisitions like the recent VirtuOx deal.

Outlook, Management Guidance, and Execution Risk

Management's fiscal 2026 guidance reveals a company operating from a position of strength. The 61-63% gross margin target is supported by a "pipeline of gross margin expansion initiatives" and a "science-based approach" to supply chain management. This signals a shift from reactive cost control to proactive margin engineering. The sea freight-to-airfreight normalization provides a baseline, but component cost improvements and manufacturing scale—like the new Calabasas facility doubling U.S. capacity—drive sustainable gains. The Indianapolis distribution center, operational in 2027, will improve delivery velocity to 90% of customers within two days, enhancing network resilience and customer satisfaction.

SG&A guidance of 19-20% of revenue reflects continued investment in "demand generation, demand capture and demand curation." ResMed is spending to accelerate market penetration while competitors retrench. The company's direct-to-consumer advertising experiments in select cities have shown significant increases in patient flow, demonstrating that awareness investments convert to revenue. R&D at 6-7% funds next-generation masks, cloud platforms, and AI technology—critical for maintaining the innovation edge that justifies premium pricing.

The tax rate increase to 21-23% from 18.8% reflects global minimum tax legislation (Pillar Two) effective July 2025. While this creates a headwind of 220-420 basis points, management expects a refundable investment credit from Singapore to provide partial offset. This quantifies a known regulatory risk, removing uncertainty. The impact is manageable given operating margin expansion and doesn't affect the core thesis.

RCS guidance is particularly important. Management expects growth to accelerate from mid-single digits to "mid- to high single-digit growth in the back half of fiscal year 2026 and achieving sustainable high single-digit growth with double-digit operating profit growth in 12 months." RCS is the "key synergistic enabler" for the core business, driving demand generation and resupply programs that improve patient adherence. Success here creates a virtuous cycle: better software drives more device sales, which generate more data to improve software.

The $150 million quarterly buyback plan, combined with a $0.60 quarterly dividend, reflects capital allocation discipline. Management stated the buybacks will "comfortably more than offset any dilution from the vesting of equity to employees" while leaving "significant funds available for strategic technology and... seamless pathway type tuck-in acquisitions." This demonstrates balanced capital deployment—returning cash to shareholders while maintaining flexibility for value-creating M&A that accelerates the digital health strategy.

Risks and Asymmetries: What Could Break the Thesis

The most discussed risk—GLP-1 medications like Eli Lilly (LLY)'s Zepbound—represents potential disruption but current data suggests limited near-term impact. While these drugs reduce apnea-hypopnea index , ResMed's analysis of 1.2 million patients shows GLP-1 prescriptions increase PAP therapy initiation by over 10% and improve adherence. The Lancet study incorporating GLP-1 effects still projects 77 million U.S. OSA patients by 2050, a 35% increase. This reframes the risk: GLP-1s expand the addressable patient pool by motivating obese individuals to seek treatment, rather than replacing devices. The asymmetry is positive—if GLP-1s prove more effective than expected, ResMed's software-driven adherence advantage becomes even more valuable for the subset still needing therapy.

Philips' potential recovery remains a competitive threat, but the recall's scope and duration have created lasting damage. Philips' Q3 2025 Sleep & Respiratory Care segment posted lower sales and single-digit declines, while ResMed grew devices 8-11%. More importantly, ResMed's software ecosystem creates switching costs that hardware alone cannot overcome. A patient using myAir with Dawn AI who achieves better adherence is unlikely to switch to a Philips device even if supply normalizes. This suggests market share gains are sticky, not temporary.

International execution is the critical swing factor. Asia Pacific penetration below 5% represents enormous opportunity, but also execution risk. Cultural differences in healthcare delivery, reimbursement models, and consumer awareness require localized strategies. The AirSense 11 launch in India during Q2 FY25 shows progress, but masks in Europe/Asia grew only 4% constant currency in Q1. Management's confidence in acceleration to high single-digit growth this quarter will be a key data point. International markets are the primary long-term growth engine; if ResMed can't replicate its U.S. success overseas, the growth premium in the stock valuation becomes harder to justify.

Supply chain disruptions, particularly semiconductor availability, remain a latent risk. While the company successfully navigated COVID-era shortages, the new Calabasas manufacturing facility and Indianapolis distribution center represent significant capital commitments that could pressure margins if demand softens. The $15.8 million restructuring charge in Q1 FY26 for workforce planning suggests proactive management, but also indicates the organization is adjusting to slower growth in certain areas.

Patent litigation presents financial and operational risk. While ResMed won favorable rulings against NYU and Cleveland Medical Devices in 2025, Fractus S.A. filed a new suit in October 2025 related to antenna technology. Management cannot estimate potential losses from open matters. Intellectual property is core to ResMed's moat; successful challenges could enable low-cost competitors to replicate key features, compressing margins.

Valuation Context: Premium Pricing for Platform Economics

At $255.83 per share, ResMed trades at 26.2 times trailing earnings and 21.3 times free cash flow, with an enterprise value of 7.0 times revenue. These multiples command a premium to medical device peers but a discount to pure-play SaaS companies—a reasonable reflection of its hybrid model.

The valuation metrics tell a story of quality. Gross margin at 60.7% and operating margin at 34.6% significantly exceed Philips (43.5% gross, 7.7% operating) and approach Fisher & Paykel's gross margin (42.6%) while delivering far greater scale. Return on equity of 25.4% and return on assets of 14.2% demonstrate efficient capital deployment. The debt-to-equity ratio of 0.14 and current ratio of 2.89 provide balance sheet strength that Philips (D/E 0.79, current ratio 1.32) cannot match.

Free cash flow yield of approximately 4.7% (based on $1.66B FCF and $37.3B market cap) offers downside protection while funding a 0.94% dividend yield with a conservative 22.4% payout ratio. The planned $600 million in annual buybacks reduces share count, supporting per-share metrics.

Relative to growth, the valuation appears reasonable. ResMed trades at 24.9 times forward earnings while delivering 9-10% revenue growth with expanding margins. Fisher & Paykel trades at 9.4 times forward earnings but with negative operating margins and one-fifth the revenue base. Philips trades at 16.7 times forward earnings but with declining segment performance and regulatory overhang. The premium reflects ResMed's superior execution, market share gains, and digital health optionality.

The key valuation driver is whether investors recognize the platform transformation. If valued purely as a device company, the multiple may compress if growth slows. If the market prices ResMed as a digital health platform with recurring software revenue and network effects, the multiple could expand. The current 7.0x EV/Revenue multiple sits between device peers (Philips at 1.3x) and SaaS companies (typically 10-15x), suggesting the market is partially but not fully recognizing the transformation.

Conclusion: The Flywheel Is Accelerating

ResMed has engineered a rare combination: margin expansion in a hardware business while building a defensible digital health platform. The 290 basis points of gross margin improvement in Q1 FY26 is structural, driven by manufacturing scale and supply chain sophistication that competitors cannot quickly replicate. This operational excellence funds investments in AI, diagnostics, and direct-to-consumer marketing that deepen the moat.

The convergence of GLP-1 medications and wearables isn't a risk—it's a catalyst. These trends expand the diagnosed patient pool and improve therapy adherence, directly benefiting ResMed's integrated ecosystem. With market penetration below 5% in Asia Pacific and only 15-20% in the U.S., the addressable market remains massively underserved. The company's ability to capture this opportunity hinges on international execution, where Q1's 4% constant currency mask growth must accelerate to high single digits as management projects.

Competitive positioning has never been stronger. Philips' recall created a permanent share shift, and ResMed's software ecosystem ensures those gains are sticky. The RCS segment's portfolio rebalancing toward high-margin SaaS platforms will accelerate growth in H2 FY26, creating a virtuous cycle where software drives device sales and device data improves software.

The investment thesis succeeds or fails on two variables: execution in Asia Pacific markets and the pace of RCS margin expansion. If ResMed can replicate its U.S. digital health success internationally while driving RCS to double-digit profit growth, the current valuation will prove conservative. If international growth stalls or GLP-1s prove more disruptive than current data suggests, the premium multiple could compress. Given the evidence of operational leverage, market share gains, and platform stickiness, the asymmetry favors patient investors who recognize that ResMed has outgrown its hardware roots to become the operating system for sleep health.