ResMed Inc. (RMD) Earnings Call Transcript & Summary

Good afternoon, to everyone in the Midwest and the East Coast. Good morning, to the folks on the West Coast. My name is Margaret Kaczor. I'm the research analyst here at William Blair & Company who covers ResMed. I am required to inform you that you can obtain a complete list of research disclosures or potential conflicts of interest at williamblair.com. Now first of all, thank you for everyone dialing in to the Blair conference. This is a name that we are featuring going into the conference. Because for us, ResMed is one of the best positioned companies we believe during and post COVID-19. The company has a wide range of products that are used to treat patients in hospital with the vent side, but also boasts one of the broadest digital platforms in all of MedTech, if not the broadest and also has a very, very healthy and large home health business. So for us, this should allow them to weather the storm, better than their peers, while also benefiting from that accelerated move towards digital care. So as we've discussed this time, the conference is virtual, so we're going to keep this primarily to a fireside chat. There is a way for you guys to send us questions, feel free to do so, and I will see them, and I will do my best to slot them in. But with that, we're very pleased to have Mick Farrell, the CEO of ResMed; and Dave Pendarvis, the General Counsel and CAO. Now Mick, did you have some opening comments before we start off?

Yes, sure, Margaret. Let me kick off with just maybe 2 or 3 minutes of opening remarks, and then we'll just go to Q&A, if you could direct that. Look, this has been a very unique period for companies across the world during the last 150 days. The COVID-19, coronavirus crisis has impacted all of the 140 countries that we do business in, in different ways and in different waves. Some of which have gone, some of which are starting, some of which haven't even started yet across that range of 140 countries. And during this crisis, when you think about it -- and ResMed was right there at the start, we make ventilators and sleep apnea equipment in China in a plant just outside Shanghai, called -- town called Suzhou, a little town of 10 million people or so. And we saw the ventilation demand double, triple and then beyond. Everything that we could make that was shipping out to Hubei province and then across China. And so we really watched this in January, February, March as the crisis impacted around the world. And what we saw was that same demand for ventilators take off country by country -- really city by city, hospital by hospital but also country by country around the world. And ResMed, we did our best to up with that demand. I mean we made 52,000 ventilators in the March quarter, which was triple our production from the same March quarter in 2019. And then now through this June quarter, we've been continuing that production at absolute maximum capacity on our invasive ventilator, which is the Astral product. So to your point that you made Margaret, through this crisis, ResMed has been there. It's great that we made an extra $35 million in revenue and made many tens of thousands of ventilators. But more importantly for us, ResMedians, we actually saved lite. We were there, keeping people breathing while they were fighting -- their immune system was fighting this virus, and tens of thousands of people are alive because of what ResMed did in the March quarter and the June quarter. And we're just incredibly proud as a company around that. We just did a poll survey this week and the pride level of ResMedians in what they do is at an all-time high. I'm talking like 95% plus. And this is something that we're thrilled about. But to your point, as everyone, there's been impacts of COVID-19 across the economy with shutdowns going city by city, country by country, and those had a dramatic impact on our sleep apnea diagnosis rate. If a hospital was shut down, there were no sleep apnea diagnoses happening in that hospital during that shutdown period. And as the countries open up, there will be some countries that do an L-shape recovery, some countries that do a U-shape recovery and some countries that do a V-shape recovery. And we're seeing all of the above already in our diagnostics data as we look at not only at ApneaLink Air and access there, but also our new patient setups on our cloud connected sleep apnea devices. But during this crisis, it's been an interesting thing where we have, as you said, have the tailwinds of doubling and tripling and beyond our ventilation manufacturing capabilities, but also dealing with those dips and recoveries on a city by city, country by country basis. Interestingly, we've seen the sleep devices obviously reduce with those lockdowns, the sleep masks and accessories not only maintained itself but actually increased during the crisis. We don't think this was a stockpiling like with the toilet paper and hand sanitizer, we actually think it's a systemic change where people see the importance of respiratory medicine, the importance of respiratory hygiene and those replacements have not only picked up but also maintained that pickup during the recovery. So as we're starting to see sleep apnea devices pick up, we're seeing sleep masks maintain that high level higher than pre-COVID. The second thing I'll talk about is 3 trends that happened during COVID-19 that we think is sustainable and how we think that actually accelerates ResMed's 2025 strategy. So those 3 things are: number one, the importance of digital health. As you said in the intro, Margaret, ResMed is a world leader in digital health and MedTech, and I would actually claim across health care. We have 6 billion nights, 6 billion nights of medical data in the cloud. We have over 11 million, 100% cloud connectable medical devices, mostly sleep apnea devices, but also bi-level, noninvasive ventilators and even invasive ones that are connected to the cloud. The importance of digital health was absolutely highlighted by COVID-19, the ability to do remote monitoring, remote interrogation of a ventilator or a sleep apnea device or a COPD treatment device picked up. The use of our digital health play in inhaled medications, use of COPD and asthma inhaled medications through our Propeller app picked up double digits. So the importance of digital health was shown during COVID-19, and that's a trend that will last beyond the crisis. Secondly, the importance of respiratory medicine. I mean you die of suffocation mostly as consequences of COVID-19. And so the importance of respiratory medicine and respiratory health has never been higher, and we think that did pick up the masks and accessory sales, but we think that trend not only exists during COVID-19 but is sustainable beyond it. And the third trend, which I mean it was brought to our highlight through the crisis and is part of that long-term strategy and it was highlighted was the importance of outside the hospital health care. So not being treated in emergency room or emergency department or in a ward, never been more important than during COVID-19. It's a tragedy that people with chest pain, so symptoms of cardiac arrest or shortness of breath, symptoms of COPD, didn't even show up to an emergency room during this crisis. It's actually an awful tragedy. We're doing our best to work with hospitals to advertise that hospitals are safe. But the idea of not being treated at a hospital was highlighted during COVID-19. 95% of ResMed's revenues in most countries, 90% plus globally are outside the hospital. And we think that, that trend to outside the hospital care was not only highlighted during COVID-19, it's right for the economics and it's right for people and consumers are now aware of the importance of outside hospital care. So I'll close with this that our ResMed 2025 strategy, which is about helping 250 million people in out-of-hospital care, helping people sleep better, breathe better and live better high-quality lives outside the hospital. Those trends and moving from 100 million lives changed in that area of outside hospital care in 2019 to 250 million lives by 2025 in out-of-hospital care. We think that long-term strategy has been accelerated during COVID-19. And in fact, if it wasn't Dave joining me here but our President and COO, Rob Douglas, he'd say, ResMed 2025 strategy should now happen in ResMed 2022 time frame. So we're actually -- he thinks can accelerate this thing by a couple or 3 years, I think that's optimistic and fantastic, and I want us driving that from the leadership level. But I can tell you the importance of digital health, the importance of respiratory medicine, the importance of outside hospital care have never been more important than during COVID-19 and will be beyond. And it's part of our long-term strategy, we've been driving for 7 years in this digital health space and 30 years in the space of respiratory medicine, we think all 3 of them power on through. Margaret?

Perfect. Now that was a great intro. And I wanted to follow-up with a question on 2022 versus 2025. So maybe for the folks that are on the line, recall for them what you guys had predicted in 2025 in terms of, I think, the number of patients that you expect to hit versus today. And I guess the bigger picture question of that is, what kind of decisions as an executive leadership team can you guys make to try to help support that or accelerate that, whether tactical and more strategic?

Yes. Well Margaret, I mean, obviously, during the COVID-19 crisis, we established the global task force, and we were really on this. And so we created a project management office, really me and Rob and Dave and our top team of 12 folks executive leadership around the world. And the primary focus there was very simple. The hierarchy of things was, number one, preservation of life. The goal during this crisis was to maximize ResMed's production of ventilators and ventilation masks, so that we could keep people breathing, keep people alive in the 140 countries we serve. And we didn't seek to profit maximize or look for the highest bidder, we said, let's take the epidemiology model that we've created, this patient flow model and that will tell us what the demand will be in China, in South Korea, in Singapore, in Italy and France, and the U.S. et cetera, and now in Brazil and India as they start to pick up. And we -- then a lot of production after maximizing it to those countries based on that and then found really good ways to work with, for instance, with the U.S. government HHS FEMA. We had a contract, $30 million contract that was fulfilling there. We did the same with the governments in France, China, Germany, U.K., with National Health Service in Australia and Singapore and around the world. So the task force did a really good job of getting our whole global team behind that crisis. It's one of the reasons that I said pride is at an all-time high that we're able to take on relatively small part of our business. A single-digit percentage part of our business in ventilation and make it double and triple for March and June and will go through to the September quarter. To your point about as we exit the crisis and go to the new normal, the new world normal, what can we do to achieve that accelerated goal, bringing our long-term strategy forward. We created -- we pivoted that whole task force team to now talk about market acceleration, strategy acceleration, and so that work around market acceleration, strategy acceleration is going on as we speak. It's going on city by city, country by country. And we're seeing some parts of the world pick up in a sort of V-shaped recovery mode. There are states in the United States that have gone fully opened. There were parts, countries in Northern Europe that never shut down. So their opening has been really facilitated in Sweden and Norway and so on. And so ResMed is there driving the diagnostic acceleration for sleep apnea. And we're seeing rates. We talked about on our last earnings call, a double-digit decline in the number of sleep apnea diagnosis. We're seeing that pick up, and we're not quite yet at pre-COVID levels in the countries. But the double-digit decline is actually now only a single-digit decline in some of those countries. And we're really starting to see that 90% of normal pick up in some of those countries. A lot of them are still at sort of 0% to 5%. When you shut down the whole economy like India did until last week, and some states in the United States were until last few weeks, those rates were still way down in terms of diagnosis, but we're really starting to see those pick up. And so as we go city by city, country by country, what we're doing is saying, "Hey, what worked during the crisis can work post the crisis." If you had tried models of home sleep apnea testing and remote patients set up using all ResMed's technology from screening, diagnosis with ApneaLink Air, remote setup of a patient with TeleHealth, the Zoom call that we're using now. Look at the technology we have to talk to investors that we would have all been flying to beautiful Chicago and seeing the beautiful June. We're all doing this virtually. Why can't you set up a patient and engage with them in the same way you are on the symptoms of cardiac health or COPD before they come to the hospital, let's do that for sleep apnea. So we've seen those types of things really pick up with experimentation in countries around the world. And we think that driving the digital health, that driving the respiratory medicine, that driving out-of-hospital care will accelerate through this. And obviously, it's HME by HME in the United States, it's payer by payer in the United States. But we're seeing really good cover of payers saying home sleep apnea testing, remote settings as part of the economics they'd like to see. And we're seeing doctors who had to do something during emergency, say, actually, you know what, that's peer-reviewed published evidence that home sleep apnea testing and set up actually does work on a clinical level, it now works in my practice. And I've been doing it for the last 90 days. Why don't I continue with that as a larger percentage of the patient pool that used to come to my lab. And so look, it's an evolution of the model, but COVID-19 suddenly show that digital health and out-of-hospital care are very valid parts of the health care ecosystem, and we would argue is an area that should be accelerated post this crisis. But not only the sort of existential percentage of GDP spent on health care, which is far better spent outside of the hospital than inside the hospital. But also for the business practice of a doctor and for the comfort and quality of life for a patient and for the economics of the government or private health care system.

And so is it fair to say, in some of those countries, I don't know the percentage of home sleep apnea in Germany or some of the international countries, but there was always some amount of diagnoses happening at 20%, 25%. That maybe continues to grow. But could you get some international regulations or payers, national payers, saying, "You know what, home sleep test [indiscernible]?"

Well it's interesting, Margaret. I'll actually have Dave chime in on the second part of that of -- we're working with governments around the world to influence policy and with payers across private payers in Germany and the U.S. around influencing that policy around home sleep apnea testing. But yes, look, December 31, pre-COVID times, home sleep apnea testing was maybe around 40%, maybe 45% of U.S. diagnosis. Pre-COVID December 31 time frame, it was maybe 70%, 75% of French -- home sleep apnea testing was 75% of French diagnosis. But just next door in Germany, it was maybe 10%, 15% of diagnoses were in home sleep apnea testing. So did all of those percentages increase, percentage of home sleep apnea testing during COVID? Absolutely because hospitals were either shutdown or lockdown for COVID patients. And so the places that haven't adopted home sleep apnea testing at the greater levels, like the U.S. and France -- U.S. and Germany did pick up to their numbers closer to the French numbers. And what I think is post crisis, will there be a structural change? I think so. And Dave will talk to what we're doing with the different payers in the different states around -- sorry, for my home office phone going there in the background, home sleep apnea tests will -- did pick up during Germany. And I do think that those will sustainably be changed. The insurance companies have seen that it's not only as good but better for their economics, but as good for their patients as well. And I'll have Dave answer the second part, and I'll come back after my phone stops ringing in the background.

Yes. Thanks, Mick. Thanks, Margaret. So we've, for a long time been engaging with government payers, particularly outside the U.S., government payers in the U.S. and private payers to try to drive policy and reimbursement practices that will enhance the adoption of digital technologies, including, but certainly not limited to, the adoption of home sleep testing. It's an important area. There's always an important role for laboratory testing for certain patients and in certain situations, and we wanted to just open the funnel. We're not trying to replace laboratory testing with home sleep testing, so we want to just open the funnel and have this be an alternative opportunity when it's right for the right patient and the right situation. So we've engaged with the governments in Australia, the governments in the U.S., the governments in Germany, the governments in the U.K. to try to drive the adoption of these technologies. But we've also done things that we can do, that we can control to launch offering. So you would have seen that we have made a press release that we accelerated the launch of a respiratory care specialized version of our patient monitoring system, AirView, in Europe. Because, as Mick said, the respiratory care became so important in this crisis. In the U.S., we launched a very rapidly developed mass selector tool that enabled that remote setup. Because one of the things that's hard to do remotely and can be done really well in person as a respiratory tech looks at you and your face, you look at the different faces of the 4 frames here and the Brady Bunch screen we've got, and they're very different. And what mask works for me, Mick, Margaret, Amy, very different. How do you do that remotely? We've developed a tool that can be used. We're using -- shipping, and we're trying to ship, drop ship for our patients where that makes sense and working with government. So in every step of the way, our offerings, what our customers and physicians need and then what policy and reimbursement can be, whether it's promoting TeleHealth or other digital solutions. We're trying to work on all those things to accelerate and maintain the momentum that has been developed during the crisis.

Good. No, that was very helpful. And I think a lot of people, frankly, have been a little skeptical in the sleep apnea business just because we have seen some of the survey work coming out of hospitals saying how sleep labs are down and so on. It sounds like may be you are seeing either at least kind of wave, a rolling wave one way or the other where folks do start to come back. And so you won't see that kind of, I don't know what a double-digit decline is, but 50%, 60% decline in sleep apnea on devices. I have to try. So...

So look, Margaret, yes, I mean the interesting part is -- I actually don't think it's appropriate to give a number because you've got 140 countries. And then within that, you've got multiple states in the U.S., 50 states, within that, different hospital systems, and they're all taking different approaches as to how they open in the health system. Their ambulatory service centers, their primary care physician visits and their full hospital systems. But if you're looking for an analog of how ResMed sort of sleep apnea diagnosis rate is going to pick up. And to your point, what the idea was in a particular city or a particular geography? I'm not going to give you a number. I know you're through one out there, Margaret, but that number might apply in Southern Georgia. But if you look at the primary care physician visits in that area of the geography that you're trying to model and then you look at the ambulatory service center visits as proxies for, if you like, out-of-hospital sleep doctor visits and out-of-hospital sleep apnea clinic visits, they're very good proxies. As PCP visits start to pick up in a certain geography, then sleep apnea referrals will pick up. And then as ambulatory service -- surgery centers pick up, as the ASCs pick up, then the out-of-hospital sleep apnea labs will pick up. And then as ORR visits and ORR surgeries within operating room surgeries within a hospital system pickup, those were the model further in-hospital sleep apnea ones. There's no real strong proxy for home sleep apnea testing, to your point, it's kind of an extra part of the portfolio that sleep doctors and sleep providers had during the crisis that they've now experimented with. To Dave's point, we think post crisis, there will be a portfolio. There'll be very sick patients with atrial fibrillation or a history of cardiac or COPD or they have overlap syndrome, apnea and COPD potentially, those patients all need to come to a sleep lab. And so those will pick up as those PCP visits, ASC visits and hospital visits pick up. But the home sleep apnea testing will be far more scalable as the economics are far better and the adherence rates. And to Dave's point, even something as difficult as getting the right mask for the right person for the rest of their life to treat sleep suffocation, that can be attempted through TeleHealth and can be attempted through ResMed's monitoring tools that can use technology to facially map and then assign the right mask for someone. All that tech has been tried out a lot during this crisis, and we think it will help with the L-shaped, the U-shaped and the V-shaped recoveries. And we're going to have all of them in the different cities and the different geographies and the different countries. And what I like -- what I'm really liking is as I talked to my head of Germany or I talked to my Head of Asia growth markets and Latin America growth markets last night is we're starting to see recovery as the economies are opening up in those diagnosis rates with an L, with U, and with a V in some of the countries that are going with more aggressive openings up. Will there be second waves and some Ws and some dips? Yes. And people on this growth conference are looking at retail and all sorts of industries that will go through much more dramatic ones. In health care, we've got far more balanced in the boat because if you suffocate or if you have shortness of breath, even though you weren't going to a hospital to see the doctor during the absolute lockdown, as soon as things open up, after getting food, shelter water, right after the supermarket and going to the pharmacy to get your medicines, it's the next thing you do, take care of those symptoms, and we're really starting to see that recovery. But we'll have parts of the world that recover in June, parts of recovery in September and parts of recovery in December as the portfolio of that ResMed's data pick up and make sure that we get those patients diagnosed, treated and managed on our platforms for sleep apnea, COPD and our asthma platform with Propeller.

And one of the things that I think maybe folks don't give enough confidence in or a little surprised about is your commentary on the mask side. So thinking with growth, it sounds like you're seeing that continued growth, not even a decline, which is maybe a little bit better than what folks anticipate. Is that better utilization? Is it just incoming patient volume for masks? What's driving that?

Yes. So it's a good question, Margaret. And it's not increasing new patients. As we said, actually, the new patients have slowed. So that part of the masks and accessories side, the new patients are actually down in line with the sleep device is probably down for -- correlated with those PCP visits, the ASC visits, the diagnosis. But the ongoing installed base folks who have sleep apnea and have been diagnosed and are on treatment and often are on a replenishment schedule that they choose when they reach out to their HME or their home care provider for replacement masks and accessories. We saw that, as we said, as you noted, during our March earnings call, we talked about this, people really got involved in this. And as I said in the opening, we don't think it's a temporary thing that we have people like hand sanitizer and the toilet papers have stockpiled for a little while, and we're back to normal. We think people on hearing about COVID-19, on hearing about this respiratory medical illness that could literally cause death within days, hours, minutes, they said, "My god, look at the device on my bedside table. I've had this opportunity to get a new mask every 3 months. But I've always just -- I don't know, life got in the way, and I did that every 6 months or every 12 months." They then said, "Well I've got a reminder from my HME. My co-pay is this. I'm going to take care of this part of my health." And then they went, wow, and I'm a personal user of our sleep apnea therapy. So I can really empathize on this. When you get that brand-new mask out of the package, it rejuvenates your therapy. It smells new and you have this new thing and it makes therapy that's so snide, it feels better and people get addicted to having clean respiratory medical equipment. And they say, this is a really good thing. So we think that the pickup absolutely was driven by COVID-19, the importance of respiratory medicine and by our customers adopting whether it's Brightree or our Snap technology, automated ways of either through e-mail, text or interactive voice response, IVR to contact that patient and get them there and through live calls, that contact picked up through the HME. So it was a combination of sort of consumer pull, if you like, on the need for respiratory health and then the channel push, if you like, by driving Snap and Brightree type of replenishment programs. But then the third one is, is it sustainable? And we absolutely think it is. Now does it go back to pre-COVID? No, I think it's higher than that. Does it stay at the peak it got to during COVID? We'll see. And the same thing as we see the recoveries, we'll see what the new normals are in replenishment. But we think that it's been permanently changed by consumers getting better care by the providers saying that they can make this work. And really, for the payers because what they will see is an adherent patient, and we've shown this through our big data, an adherent patient on therapy. Replenishing their mask on a regular basis is actually a lower cost to the total health care system because that patient doesn't show up as much in the hospital. They don't show up as much looking for more medications for their other co-morbidities of cardiac, diabetes and so on. So we think it's a win-win-win. It worked during the crisis, and it's something that will allow us to be part of that acceleration of ResMed 2025 strategy.

Yes. So lots to go over on that, but I did want to switch over to vents because you kind of hit it on the front end, 52,000 systems that were manufactured in that last quarter. Were those all sold? And how sustainable can that be? Is this 3 months, 6 months, 12 months? What are you seeing?

Yes. So it's a really good question, Margaret. And so we made 52,000 ventilators in the March quarter, triple what it was in the March quarter of 2019. We didn't sell all 52,000 in that quarter. We did sell a lot more. We did sell -- we talked about double and triple our normal sales. The demand was almost infinite in countries that were affected, Northern Italy, Southern Switzerland during that peak. But we couldn't manufacture and keep up with the flow there. But look, what I can tell you is that during here in the June quarter that this isn't news to anybody. The COVID-19 virus has -- coronavirus has still been spreading around the world and lots of hospital systems and countries are still making sure that they have enough ventilators and getting the capability to do that. So as it spread from Europe to North America, we've kept up with that demand, and those orders continue through June and September. As we move now to Latin America, to sub-Saharan Africa and other parts of Southeast Asia and South Asia, so big countries like India, Indonesia, Malaysia, large, multi 100 million, billion populations, we are seeing demand for those ventilators there. And so we think that this -- it goes up. It surges, it peaks and then it plateaus and comes back down. But our global model in 140 countries, we're not done with coronavirus, and there will be second waves as we get to winter. I see we've got 1 minute left. And so I could go on much longer, but I think that tailwind does last. But it does peter out. And then you see the pickup of the sleep business come back to sort of counterbalance that. It's an interesting way that ResMed's helping during the crisis, but also setting ourselves up for the future. Dave, anything I missed there?

Yes. I think you got it. We've got continuing demand on both sides, the sleep demand recovery and the vent demand continuing. Obviously, it will tail off at some point, but it's our job to try to boost the sleep demand up and make the curves cross.

Perfect. Yes. We have a minute left. So the last question I would just respond to is from an M&A perspective, historically, it's been relatively active, especially on the SaaS side of the portfolio. Is this something that you guys can continue to do? Does this accelerate that interest from your side? Or multiples just high enough for maybe you're ready to pause for a bit?

Look, obviously, we don't signal when we're in discussions or deals and so I'll just put that caveat out there. But in a general context, M&A is a very important part of our long-term growth. We have incredible organic growth. I mean 936 million people suffer from sleep apnea. 400 million people who suffer from chronic constructive pulmonary disease. We've got so much room to grow in our organic growth in the business, and that's our primary focus. But yes, look, we look at augmenting either technology tuck-in or growth M&A. We've been very successful with acquisitions like Brightree and look at Propeller and then the takeoff of the digital health for inhaled medication. So I think the long-term growth of both our SaaS business with Brightree and MatrixCare and our digital health play with Propeller have incredible long-term capabilities. Look, in the area of helping people sleep better, breathe better and live better lives with outside hospital software, there are many opportunities for ResMed to look at, and we have an active M&A team. We're not going to use this crisis to go sort of look valuation is low, let's jump in now of these startups because we want to be fair to the people as they grow. But then it is an opportunity that we might look to partner people who need cash and to look at minority equity stakes or M&A deals for the longer-term during this crisis. So we're not being opportunistic about it, but we are looking at what's out there. And we don't have anything that we're ready to announce now, but it's always an interesting part that organic plus inorganic growth part is good uses of our cash for long-term growth.

Well with that, I think we are out of time, but thank you guys all for chiming in. Congratulations to the team and everything you guys have been able to do in terms of helping with the crisis. Thanks to everyone on the line. If you have any questions, please feel to write to me or Amy Wakeham or the rest of the team at ResMed. Have a good one, guys.

Great. Thanks, Margaret.

Thanks, Margaret.

Thanks.

Thanks, Margaret. Bye, all.