ResMed Inc. (RMD) Earnings Call Transcript & Summary

Hi Rob, I'll get started. Hello, all, and welcome to our conversation with ResMed. My name is Lyanne Harrison, and I'm Bank of America's Australian Health Care Analyst. As you heard, Rob Douglas is also on the phone. He's the COO of ResMed. And Rob held that role of Chief Operating Officer since September 2011. So thank you all for joining us today. Rob, are you still there?

Yes. Yes, Lyanne. I'm sorry for jumping the gun there.

That's all right. That's all right. Why don't you start by taking us -- telling us a little bit more about ResMed?

Sure. Thanks, Lyanne. Just wanted to quickly recap our recent earnings and talk to a little bit about our strategy. ResMed, we've really focused on respiratory care. And in this time of crisis with the COVID crisis going on, we have quite a part to play in some of the treatment things around the world. And through this crisis, we've really been focusing on 3 main goals: firstly, the preservation of life, and our products can really help people breathe in very difficult times; secondly, we're focusing on the safety and health of our team of 7,500 people around the world. All of whom are essential for us to be able to help the patients in the first place; and our third goal is the ongoing delivery and ongoing running of our sleep apnea business as well and products to treat sleep apnea, COPD and asthma. And so we're continuing to focus on ensuring the company is making products available to the people that need them. We reported strong results in our recent results that were announced a bit more than a week ago now, with 17% growth. In the Q&A, we can talk more about this, but there are many factors. We had significantly increased demand for our ventilation products, offset by obviously headwinds with sleep products as well. But we are focused really on our global strategy, and I'll come back and talk about strategy in a minute, but we've been very focused on a common strategy through this whole crisis and in fact, crisis has accelerated many aspects of our strategy. Now ResMed, as I mentioned earlier, our business really is around focusing on chronic treatment of disease in the home setting. We believe that the best place to treat disease is out of hospital. We focus on diseases that are incredibly common like sleep apnea and COPD. And we also have a very good software business where we provide really operating systems for provider companies in those out-of-hospital care settings. We have been well ahead of the curve in terms of our digital strategy. And at this stage, we are a world-leading connected health company, and we have over 11 million, 100% hard-connected devices in the market at this stage. And this is giving us great access to data and a great ability to improve the ways that patients have managed in our hospital care settings. Our main business lines, and we talked about this through treating sleep apnea, extremely dangerous and very common condition. At some estimates, possibly up to 1/4 of the adult population around the world has this condition, and it does need treating on a long-term basis, and our CPAP and APAP products and our associated masks are really the gold standard treatment, and we are definitely the market leader in these treatments. And our treatment devices also connect to our cloud system on a daily basis. And so we were able to provide feedback to -- especially to patients, but also to care providers about how well the treatment is working and to optimize that and in doing that, we're able to actually improve outcomes and reduce costs to the health care system. Our second business is respiratory care. We manufacture ventilators. We have an oxygen -- a small oxygen business. And we really are focused on treating patients who've got a terrible chronic disease called COPD, chronic obstructive pulmonary disease, and they can benefit late in the course of this long-term disease with the addition of vent -- of oxygen and ventilation. And we also recently acquired a business called Propeller, which is a digital platform for engaging patients and helping them adhere to their treatments for both COPD and asthma. And then our third business line, as I mentioned, is our out-of-hospital SaaS business. And these, we have a long history of out-of-hospital care and we think it makes a lot of sense for us to be the provider of the operating system software for these care providers as well. We're very good technology provider to all of these businesses. Now in the shorter term, there's been a big focus on the COVID crisis, as you could imagine. We actually were exposed to this relatively early in the piece. We have a business in China. We actually have it as a Chinese brand, and we do R&D and manufacturing and sales and marketing in China for China. And we've got a very good business building sleep apnea devices and also ventilators. And so when the crisis took off in Wuhan, we had people on the ground there providing our noninvasive ventilators to patients and really looking after them. And we saw quickly what was happening on the ground there. Obviously, our supply chain, which is not -- otherwise not based in China, does have second and third tier suppliers in China. So our supply chain immediately had to kick into high gear looking to protect our ongoing supply business and we have done a great job at that. With the emergence of coronavirus in the European and U.S. markets and the worry about the hospitals being overcrowded, there was a strong demand for ventilators that came up. Now our business has been out-of-hospital care and ventilators for the long-term use. Most of what was being looked for by these hospitals were acute care ventilators, which is not a business that we've been in recently in many markets. In some markets, we are in that business, but we really focus on long-term out-of-hospital care ventilators. And these are extremely sophisticated, very reliable and durable devices. They do a good job in the critical setting when needed. And so immediately, we had huge demand for those products. Our supply chain had to kick in the gear and we tripled our production capacity over the last couple of months of those ventilators and are delivering them to hospitals and health systems and governments around the world. On a -- sort of we've had to prioritize in where we think the products will do best and go straight on to patients and to use treating patients that are critically ill. The sales and the supply chains that we prioritized to deliver to. Looking forward, the social isolation programs are pretty well managed to prevent the hospitals generally being overwhelmed and there will continue to be strong demand for ventilators, but we expect some time in the next quarter or so for that to moderate, but it's very hard for us to predict that and -- as to where that would shift to normal. The other thing in the short term is, obviously, with the hospitals closing down, many sleep labs around the world have stop diagnosing patients. And so we have been -- had our sleep business running strongly on resupply because once the patient is on treatment, they need masks on an ongoing basis, but we expect the sort of new patient starts to be soft for quite a while. It's quite difficult to predict that in a sense that somewhat offsets the excess demand that we see for ventilators through there. And just one final statement around our long-term strategy. A few -- a year or so ago, we started talking about our 2025 strategy that we saw that the big trends in health care systems, digital health, telemedicine coming up, the desire for patients to be treated out-of-hospital and the ability for long-term care programs go there and cost pressures on health systems, we expect to see an acceleration in emergence and the importance of tech-enabled integrated care programs. And we really think we'll be a great technology provider to all of those health care providers doing that. We believe that the COVID crisis has actually brought that -- brought those trends for our 2025 strategy forward many years and our short-term focus, in addition to supplying ventilators and our sleep -- looking after our sleep market, is to look at how we can help that acceleration of our longer-term strategy. So we're very confident about our long-term growth. The impact of COVID in these crisis won't affect the number of patients that have sleep apnea and won't affect, unfortunately, the number of patients that have COPD and need long-term treatment, and they won't in the long term affect how businesses need to look after those patients. So we're very confident about the future of the business. Thanks, Lyanne.

Thank you, Rob, for that summary. I'll kick off with some questions. And just for the listeners on the call, I'd like to remind you that you can submit your questions through the conference portal. Rob, why don't we start off with -- obviously, you've gone into the implications coronavirus has had on the ResMed business. And you also mentioned that the new starts for new diagnosis patients is starting to slow. What steps is ResMed taking to alleviate some of that slowdown?

Yes. There are a number of issues around there. And obviously, we want to support the sleep labs as much as we can and any technology needs and structures of masks. I think for the sleep labs and the hospitals, they'll open probably pretty quickly, and then there will be an issue of patient confidence coming in there. So the issues of how is the equipment that the patients are going to use to be cleaned or to be single-use, making sure all those things are there. Obviously, we'll be supporting home sleep testing models as well, where appropriate, and that can also support. We have just recently in sort of pilot mode, but rapidly rolling into market release, launched a new ResMed program to supply services to our HME customers for doing remote setup of patients. So that patients can be confident of getting their treatment without actually having to even turn up to the HME shop. And there'll be several other digital and technology strategies that we believe can help through that. And the thing is it's actually -- every market's got its own subtleties in this and it's different in different markets. And they're at different stages of the recovery. Often -- things are quite different in China at this stage than you could imagine what's happening in, say, France, which is just starting to reopen or even the U.S.

Okay. And then -- and so obviously, you mentioned sleep testing. How quickly -- or home sleep testing, how quickly do you think that the industry can ramp that up given the current situation in the United States?

Well, I think there's a number of -- again, this is another one of these uncertainties of the future. So it's a little bit hard to make accurate predictions as to what's going to happen here. But the sleep labs have obviously got their infrastructure and their teams that -- whose livelihoods depend on those operations running. And they'll look to restart but we always thought that sleep labs that also did home sleep testing made sense as well. And many of them do both as well. Even in home sleep testing, there are clearly issues of the patients want to go and make a doctor visit and take a piece of equipment home and connect it to themselves overnight. So we actually have to help them get over all of those issues as well. So I don't know that we'd predict that all of a sudden home sleep testing will have a rapid increase. It may, but it will probably continue at sort of steady progress as a reasonable way to operate that can provide good diagnosis for the right patient group, ensuring that it's -- there's sort of subsequent access to patients into the land environment as well when the more complex patients need that.

Okay. And then I guess you also mentioned, I guess, your -- the ResMed's coronavirus response around ventilator production. At the last results meeting, you mentioned that there was about 52,000 ventilators that had been produced. Can you, I guess, discuss whether or not those have, I guess, all been sold now? Or have they found -- have you found buyers for them? And then also, do you see the demand? Is it still growing? Or has it started to flatten?

Yes. So yes, as we've disclosed, we've manufactured over 52,000 ventilators, which included our complex Astral and Stellar products, which can be used at invasive ventilators and also our bilevel noninvasive ventilators, Lumis ST-A and AirCurve ST. And it also included our products from China, guardian angel and Flexo as well, which are also 2 really good ventilator products as well. Now they -- like any supply chain when we manufacture, we can't manufacture is when it's a finished product and leaves our factory, but there will definitely be many of those products still in transit, and on the way there. But at this stage, we're still seeing significantly more demand than what we can actually produce. However, as the social isolation strategies have seemed to have worked and then the hospitals haven't become as overwhelmed as you would expect, then we quickly see the hospitals figure out how many ventilators they need, and then they don't want too many more. There are some areas of government stockpiling, where that's going to put a whole lot of products on the shelf, if you like, to make sure they're available and they're quite challenged to nap into it. But if you go around the world, in China, we saw the strong ventilation demand continue, but not as it's high after the sort of easing of the lockdown. In Europe, it's still pretty early days and in the U.S., but we don't think that the demand is going to last much more than into Q1 some time for that. But again, it's very, very difficult to make those predictions exactly and you could imagine that as sort of an operations supply chain business with the sales forecast or the demand forecast becoming so unclear, we had to keep an extremely close eye on this and watch out for it, not only through all the multiple tiers of our supplies capacity, but also watch out for setting up inventory problems through that system. And I think we've got that well under control.

Okay. Great. And then, I guess, you mentioned the U.S. demand there. So the U.S. government announced a fairly large package to acquire ventilators. And ResMed is one of the suppliers into this. And I understand delivery commenced last week. Is there anything you can share on this arrangement?

Well, just sort of general -- our philosophy is we like to keep our promises, and we only took orders for what we could think we could deliver. And so the supply chain team were gulping a little bit when we took orders that were way above their capacity on that day, but we knew that we could increase that. And so where we've taken an order from the government, we're confident that we can deliver it, and we've got the systems and process, and we'll fulfill that order. Specifics, we actually -- our business model is not really oriented towards wanting to supply stockpiles or wanting actually -- we talk about out-of-hospital care. We actually haven't configured our product road map or our sales strategy to focus on hospital sales on an ongoing basis. And we think in the future, that's how we'll be operating as well. And so there was much larger orders taken by other companies for different types of products and that type of thing, but we think our products we can deliver, we can deliver them on time, they've best-in-class performance, and they'll do a great job saving lives. And so we're very happy with how we are able to support the U.S. government. But actually, not only the U.S. government, we've done similar projects at different scales with several other governments around the world. And just briefly, in the future, the thing that's a little uncertain around this now is what's happening in the less developed markets. And so there are a number of countries around that are sort of later in the coronavirus journey and trying to manage what's going to happen and what the expected demand will be there. But it's not just a matter of supplying the ventilator because you actually need staff who are trained to operate it, who can look after patients, you need beds for the patients to be in. You need a sort of a standard of care or what care do you provide for patients and it's -- obviously, not all patients should be put on a ventilator. There are many other steps that should be done first. So all of that needs to be in place as well, and we'll be right there ready to help those countries when we can.

Okay. You mentioned also -- you mentioned just then in that those comments that you -- there's a possibility of you looking at or ResMed looking at the hospital market now going forward? What sort of challenges do you think that this might pose for ResMed? And is that market more competitive than the out-of-hospital market?

Yes. Actually, Lyanne, I mentioned that we had traditionally not really focused on the hospital market. Our strategy is out-of-hospital care. We think that chronic ventilation can help patients with chronic lung disease. And our devices can help patients with chronic sleep apnea disease and even asthma as well if you're talking about Propeller. We don't see our business model is pivoting to focusing on the hospital ventilation market. There are many suppliers and companies around the world who really do focus on that, and that's their business model. And we don't see a need to move into that. It looks like there are lots of new entrants in that area, but who knows where that will all shake out.

Okay. And then, I guess, I've been following the narrative around how coronavirus is being treated, and there's been a move away from invasive ventilation to, I guess, noninvasive and respiratory support probably being more preferable. Have you seen a change in the demand for your products as in a more of a shift to, I guess, the Lumis and your bilevels as the coronavirus has unfolded?

Yes. This has been an interesting story actually because one of the challenges on the -- in our global ventilation business, and we've had it for a while, is the standard of care is different in different countries and standard patient pathways and standard practices are all quite different. Even the language used to describe the modes of ventilation is different in different countries. So it can get confusing. We were then also mindful of our position as a manufacturer, and we just do have to be careful about telling people how to practice medicine. So we were sort of careful around that. We actually have -- our clinical team have produced a really good white paper that's successful on our website that talks about the different modes of ventilation and what the benefits and shortcomings are. And clearly, in some markets, there are strategies that you've probably read about as much as I am. For everyone on the audience, I'm an engineer, not an MD. So we were seeing that patients would come in with seemingly an acute respiratory distress and put straight on to these standard of care, which would be to sedate and incubate. And then maybe, as we learn from survival rates and things like that, that might be the best treatment. Going on to the noninvasive ventilation that setting is often more work for that setting because the patients -- the thing you don't want to do is sedate those patients and you probably need more staff to manage those patients. So there was that factor. There just hasn't been enough data come out to really define what is the best process, the best plan, but it looks like you don't need to rush too quickly on to invasive ventilation. Noninvasive ventilation can have a benefit. High flow oxygen therapy can have a benefit. And then we're still watching and waiting with great interest as to how sort of the post care for these patients that have been critical what that standard of care is? And I think that's all still emerging through there. And then in the wash of that, as I described earlier, there's sort of extreme demand that we've had for all of these products through there. It's a little bit hard to cite patterns out of that just yet.

Okay. And so still, I guess, in terms of coronavirus -- more thinking what the implications might be over the next year or so. I guess in the United States, you will see all the narrative about unemployment rates increasing. What are your thoughts around people losing the health care coverage? And how would that affect, I guess, ResMed's customers or patients being able to get to their resupply going forward?

Yes. It's a little bit hard to sort of hypothesize exactly what's going to happen. A few elements of history through the GFC, when obviously there was high unemployment rates as well, ResMed's business grew strongly around the world during that period and our U.S. business actually performed quite well. And I think we had many quarters through there well into the double digits growth and our lowest was probably 7%. So we did see that sleep apnea kept being an important issue to be treated through that. The world is quite different now in terms of the health care system in the U.S. as to how it's being set up and what happens to people who otherwise don't have coverage and how their care is looked after and paid for. And so I think it's probably a little too soon to say. We actually -- as you can tell, we're quite cautious about giving predictions. It could go a number of ways, but we believe that treating sleep apnea is going to be important. We believe that's one of the most cost-effective things you can do in terms of long-term health of patients. And we think it should continue to get the resources allocated to it -- to the needs.

Okay. Let's say, I guess -- I think that covered some of the questions I had at coronavirus. Let's talk back about, I guess, the sleep apnea business and the long-term implications. I guess on devices, it's been over 5 years since ResMed or Philips Respironics launched a new CPAP device. Do you get a sense that the market wants a new one? And what's the risk that you have new starts that might be lost to a competitor if they came to the market first?

Yes. So historically, it was always a product cycle driven business. And when a new platform went out, we'd see very strong quarters of growth. And that would last only a few quarters. The interesting thing with our AirSense 10 product and with the AirView solution set, which we continue to invest in and greatly enhance the value of that around, and we're constantly doing upgrades on that and then bringing in myAir, the patient engagement app, through all of that is that we've seen the AirSense 10 continue to perform strongly even 5 years out. So it's possibly a different world and just modeling back on the traditional product cycle may not be the right thing. Now that said, we haven't backed off our R&D program at all. We absolutely don't forecast product releases. So I'm not going to give you any guidance on that, I'm afraid. But we actually have, in our road map and in our mind, areas of value that we can add into the platform and to the software solutions. It will make a meaningful difference to our customers at the time -- at the right time. Now some of those we can introduce incrementally because of the software and cloud-based aspect of the overall system, and some of those benefits might come with a future platform.

Okay. And then on masks, I guess, ResMed's been very successful and taking market share with its launch strategy? How you protect and continue to grow this?

Yes. The masks have been incredibly successful. And we -- a few -- probably 2 years ago, we really sort of revised our sort of portfolio strategy and thought through what masks are needed for which patients and how do we best provide products that work for those patients to meet particular needs, and we've executed to that strategy, and we continue to execute to it. And you saw us introduce sort of naming strategy that implied that there could be generational changes within the individual mask segments. And we've got a very strong road map in our mind as where we can keep improving the masks. And until you have a mask that no patient has any complaints about, you've probably got a technology road in front of you in order to meet those needs. So part of protecting the mask thing will be to continue our running and absolutely not to get complacent about our position in the mask market. And we'll continue to try improving masks and make them better and more comfortable and less intrusive for people and then easier for providers to set up patients on and ensure that they know that they're going to have the best available treatment.

Okay. So I guess that covers both the device and mask side of your core sleep apnea business. Your opening comments, you mentioned your software as a service business. Can you explain, I guess, the revenue synergies within SaaS? And how it pulls through -- and how the SaaS business pulls through to core sleep apnea sales?

Sure. I mean it's not a simple synergy story. We've always said that these businesses are actually great businesses in their own right and can create a lot of value. And we've absolutely proved that with Brightree and how it's going. MatrixCare has been going well, but it has -- actually, the COVID crisis has affected one of its customer segments for skilled nursing facilities, are suffering somewhat from the sort of health care -- the short-term health care changes during COVID is an issue. When we acquired Brightree, we felt it made a lot of sense to have someone own Brightree, who is a strong supporter of the HME industry and would continue to invest in Brightree. And in a sense, Brightree's offering enables HMEs to really provide better care and look after patients better and get the right products to patients more efficiently and effectively and support the profitability as a result. And this is in the face of a lot of challenges onto that business coming from reimbursements and things like that. And I'd say, we've absolutely delivered on that. We continue to invest in Brightree. Our recent acquisition of SnapWorx, which, if you like, is a bolt-on business, offering a really advanced resupply program. And then when you pair that with the ResMed and Brightree resupply programs, we've absolutely got the best-in-class resupply capability in there to help those businesses be more efficient. We felt that we actually did a good job running Brightree and developing that business and investing in it and driving it. And got a good understanding of the metrics and the management models you have around SaaS businesses. And we felt with the -- Brightree actually had an emerging business that it was developing in the home care space. And we made continued investments along that to support it. And then MatrixCare was in the same area. It made sense to combine those and to sort of bring in that sort of SaaS technology orientation and long-term management perspective on that. And then that said, in the bright -- in the MatrixCare space. Now this was never part of our business case in MatrixCare. But in the MatrixCare space, there are a lot of COPD patients and a lot of sleep apnea patients as well. And we actually believe that we can add value there. And then combining the maybe Brightree, the MatrixCare and the HEALTHCAREfirst offerings, we can see that a lot of the problems of these businesses, that is the provider businesses, the main problem is staff turnover and keeping staff engaged. So having systems that help them train and automate, getting the staff up to speed and systems that are easy to use, we think is really good. But also patients get discharged between all of these settings. And so you may have a patient discharge from the hospital to a -- to a nursing facility and then to home and needing a ventilator in one of those discharges in a hospital bed in the ventilator and the others, you'll need a HME to coordinate that. And so we actually think, underlying from a software perspective, we can actually facilitate a lot of these transitions and help them and probably us having things like partnership with Cerner as well to provide better integration into those hospital EMR systems will support that as well.

Okay. Thank you so much, Rob. I think I'm just being reminded that we've come to the end of our time with you. Is there anything that you'd like to close on with any closing remarks?

Well, I'd just reiterate. We've really been focused on doing the best we can to support the coronavirus patients around the world and then to support the providers of chronic care of ongoing sleep apnea and COPD patients around the world. We view the long-term strategy. Telemedicine, digital health, out-of-hospital care is just going to become more important in the place. And we think that's a good area for investment, and we've got some very strong plans in that area.

Okay. Thank you so much, Rob, and thank you for your time and giving us your time today. Really appreciate it.

Great. Thanks, Lyanne.

Okay. And to any of the audience, if you have any follow-up questions that wasn't addressed today, feel free to send me an e-mail. I hope you enjoy the rest of your day.