ResMed Inc. (RMD) Earnings Call Transcript & Summary

All right. Hi, everyone. So my name is Gretel Janu. So I've got here, Mick Farrell, CEO of ResMed; and Dave Pendarvis, CAO of ResMed. So Nick, David, thank you very much for your time today for joining our conference. Now it's great to have you here virtually.

So I think to start us off, Mick, do you want to start off to give us an update as to how the business has performed during COVID? A quick highlight of the latest results, given they were just a couple of weeks ago, and then we'll jump into some of the questions.

Yes. Sounds good, Gretel. I'll do just a very brief maybe 3-minute intro, and then allow the bulk of the time, Gretel, for you to facilitate Q&A from the team that's on. So look, incredible 2020 here with just fundamental changes to so many industries and health care, particularly. I think there were 3, what I would call, trends or outcomes from COVID-19 that are worth sharing. The first is, what we saw is the importance of respiratory health and respiratory hygiene went up exponentially these last 90 days. COVID-19 attacks the upper airway, the lungs, causes mucus formation on the alveoli and literally suffocates a person from the inside. And that's its cause, its primary cause of impacting. It also has impacts on the cardiovascular and cerebrovascular system potentially, but that's the primary way. And so the importance of respiratory health and respiratory medicine took off during COVID-19. The second thing that COVID-19 generated in terms of a trend was the importance of telehealth, remote health, telemonitoring, remote patient monitoring, digital health, in general. That importance increased also extraordinarily during this time. And the third area that's been an impact these last 9 months of COVID has been the importance of delivery of health care outside the hospital. And so -- and that's where 90-plus percent of ResMed's revenues are and where we focus. So those 3 areas, important respiratory health, has driven double-digit improvements in things like our Propeller health, adherence to COPD and asthma medications. It's driven up secular and ongoing changes in the number of masks and accessories that patients are acquiring on a quarterly and semiannual basis. The importance of digital health has driven levels of home sleep apnea testing as a percentage of diagnoses in countries. That went to 100%, but certainly will end up at an equilibrium above where they were pre-COVID. And the third thing, the importance of out-of-hospital health care, where ResMed is investing in home medical equipment, skilled nursing facilities, home health hospice, and frankly, every single sleep apnea and COPD device that we sell, whether a ventilator or a cloud-connected inhaler, all of them are delivered away from the hospital and preferably in the home. So those 3 trends were there. They were part of our 2025 strategy. They just got accelerated during this time. The short-term tailwinds that we had that are very much receding now, ventilator sales, Gretel, you saw this in the March quarter. We had an extra $35 million worth of sales in the March quarter. We had an extra $125 million worth of sales in the June quarter, and an extra $40 million worth of sales in the September quarter. So you can sort of see that sort of up of the S and down of the back end of the s-curve there on that. And we've said, in this December quarter, we expect de minimis, so significantly less than $40 million in the December quarter. But we did do some things that accelerated time to market of AirView ventilation as part of that, while we sold those 150,000 ventilators that we made from Jan 1 to June 30. But with that sort of tailwind going away, we now look at the headwinds that were there, and as they recede, how fast are we getting back? And we look at different regions of the world. In some parts of Europe, we're at 80%, 90%, even 95% of patient flow that we saw pre-COVID. In the U.S., maybe somewhere around that 70% patient flow, pre-COVID. And in Asia in general, somewhere in that 70-plus percent range. China is right on 70%, but we look at that as sort of an indicator for the region. Yes, the quarterly numbers, everyone saw them, Gretel. We're plus 9% constant currency; on revenue, plus 24%; on NOP, saw some really good leverage there at plus 37% on sort of earnings per share. It's not our first rodeo, and everyone on this call, I guess, has been following us for a while. Our 1-year total shareholder return as of our numbers on June 30 was 28%. Our 3-year total shareholder return as of September 30 was 131%, and our 5-year total shareholder return as of September 30 was 264%. So it wasn't sort of the first quarter. We've done that, you look back 20 quarters, there's been some really solid performance. As we look forward, we're going to see a lot of interest as the economy opens up. People are getting very excited about the first Phase III release of that one vaccine from Pfizer. We're going to wait out time. We think it's a slow and steady U-shape recovery, if you like, of the flow of patients. And then the vertical part of that U happens only when there's a widely available vaccine and treatment. But certainly, really, really good hope for what we're seeing going forward. Gretel, that's my 5 minutes. Back to you.

Perfect. Now I guess just sticking on that, just in terms of the short-term performance to start off with. I guess, how confident are you, just particularly with Europe and what we're seeing in the northern hemisphere as well in the U.S., rising COVID cases, lockdowns starting in Europe. Is that going to impact your business like it did in kind of April when we saw the lockdown? So how confident are you that the business will stay open, we'll see continual improvement in the next few months?

Yes, we're actually very confident in the steady sequential growth of the flow of sleep apnea, COPD and asthma patients despite second, third, fourth, fifth waves. And in fact, case numbers, everyone talks about flattening the curve. Flattening the curve was flattened hospitalizations and flattened ICU bed usage and flattened ventilator needs in hospitals. Those curves have been flattened. And every time we see a second or third wave, like we did in China and throughout other parts of Southeast Asia these last 3 months and we're starting to see now Northern Hemisphere coming to winter in Europe and it will hit North America and beyond, the definition, sort of the physics here, is the first wave is a higher amplitude than the second wave, than third wave and the fourth wave and the fifth wave. It impacts people who are younger, who are healthier, and there's just less hospitalizations, there's less use of ICUs, there's less use of ventilators. We're seeing that because we're directly there in the numbers for at least the ventilators. We're also seeing that because many of us are on the boards of hospitals and health care systems, where we see these reductions at the second, third and fourth waves. And that's responding in the way communities are dealing with second, third and fourth waves. We were right in the midst of second and third waves in Beijing, Shanghai, and even cities of over 9 million people that were shut down in China, yet in the June quarter, we talked about being at 50% of pre-COVID flow of patients in China. But by the September quarter, that had gone up to 70% of pre-COVID patient flow. So a 20% improvement in the flow of patients for sleep apnea clinics, in terms of sleep apnea testing as well as in lab as well as hospital clinics in China in the midst of second and third waves. And if you look at -- just to drill down in Germany, where we know our business incredibly well. We're vertically integrated. We saw that even with Angela Merkel bringing in sort of a shutdown, heavy shutdown on bars, restaurants and anywhere where there's indoor crowds, they are not changing anything about digital health, about in-clinic health and even in-hospital health. There's masks, there's distancing. You still go and get the health care you need. So we are seeing that 90%, 95% of pre-COVID patients flow in Germany, and it hasn't been affected by the sort of second and third waves and what's going to happen in, what I call, the retail entertainment sector, where I think they will be very strong in the lockdowns. But in health care, I think we're realizing that the initial scares were peaked with heart attack systems that didn't show up to a hospital was very detrimental to the health care outcomes of countries. And so what you want to do is close down optional things like travel, entertainment, retail and allow open digital health, in-person health and hospital health, as appropriate, scaling preferably with the digital side of it. But no, I think we're very -- going to be very resilient through health care here and through the flow of patients through the second and third waves, because the amplitude is less and because health care systems around the world are learning how to deal with it. And across our portfolio of 140 countries, Gretel, that slow, steady improvement that we're going to see on those COPD and asthma patients on a quarter-on-quarter basis through the year, we're highly confident of that across that whole portfolio.

So in France and Germany, in particular, because those countries have entered lockdowns in the last few weeks, there hasn't been any change in terms of sleep labs closing down or it just continues?

Yes. Yes, I haven't spoken about France. But yes, Macron, after Merkel did a shutdown, he then put one in France. And he had similar stuff. We don't have as close access to the sort of patient flow data in France as we do in Germany, but certainly, our discussions with our many customers there, the home care providers who provide that is that we're still seeing a steady increase in the flow of patients above what it was at the 90-day of this, in that sort of March quarter and the June quarter. We saw a step-up in September. We're still seeing that as we look over these last weeks of what's been happening. Again, the shutdown in France wasn't for health care systems, wasn't don't go see a doctor. It was don't go to an indoor restaurant, don't go to an indoor nightclub, don't go to a bar with lots of people as the Northern Hemisphere winter comes and they're worried. As the flu season dawns, there'll be -- COVID on top of flu season would be potentially an impact on hospitals and ICU beds, and so they're avoiding that. And so look, I think it's actually a mature response. We've learned from what happened in Asia and Europe is doing the right response, and we're going to see those sort of, I think, retail shutdowns for some states here in the United States. In others, maybe not. But in health care, I do not see people saying don't get a primary care, don't go to specialist care.

Yes. And just in terms of home testing as well, because there has been a real acceleration due to COVID, just -- if we look post-COVID, is that actually now going to continue to stay? Is that growing the market faster because you'll have increased utilization of home testing plus the sleep labs? Just how do you think about it in a post-COVID world?

Yes. It's interesting. I mean, COVID was a forced experiment in home sleep apnea testing for even, I'd call, recalcitrant doctor or practice that just said, "Nope. I'm only going to use what I've done for 20 years, and I've always brought someone into this lab. And I've always had EMG, EOG, EKG and EXG all over the patient. I can't diagnose sleep apnea without that." Which just isn't true. There's 95% sensitivity and specificity on home sleep apnea testing. It's been peer-reviewed and published. And we actually -- and then the next response was, "Well, the patients diagnosed in that way will be less adherent." We're peer-reviewed and published now. Many, many, many studies in the press to show that, no, home sleep apnea-tested patients, when prescribed therapy and set up, can achieve equal or even higher adherence rates to those going through a lab. And so all those we're taking off the table pre-COVID in terms of the clinical data. But what happened was a forced experiment, where your lab is shut down. There is nothing you can do here in March. And the only way you can diagnose is if you embrace this little technology that's been around for a decade and half called home sleep apnea testing. Do you want to try it now? And so everybody did try. And what they found is it's lower cost, patients prefer it often. It's lower impact to the health care system, lower cost to that end, the sensitivity and specificity from peer-reviewed press, 95% sensitive and specificity from this apnea device or this competitor device in there. And then the outcomes, patients are happy and getting on to their sleep apnea therapy and being adherent to therapy. And so we proved it. Now does it mean the whole world goes 100% home sleep apnea testing? Absolutely not. But if in Germany, in December 2019, let's say -- because that was a slow adopter, I'd say, of home sleep apnea testing, despite the country's great adoption of many other technologies. Let's say it was 20% home sleep apnea testing in December 2019 in Germany. It went to 100% of a much lower number in March, April. I don't think it will go back to 20%. I think it will end up maybe 10 percentage points higher at the end of this equilibrium. We don't know where it will properly land. But it might be 30% or 35% of diagnoses post this in-home sleep apnea testing versus 65% going back just with no-show clinical and so on, back to where they were before. But that 15 percentage point improvement brings more patients in at a lower cost and drives them through. So it's a big change for Germany. France, right next door, was probably 80% home sleep apnea testing before COVID. And so I think when it went to 100, it will probably end up maybe 5 or 10 points above what it was. Maybe it goes to 85% or 90% home sleep apnea testing. Because there really wasn't a huge incentive for the physician in -- the hemologist in France to refer to A or B part. It was really about the clinical care need. In the U.S. last one I'll do on this analogy, Gretel, was at 45% roughly, 40% to 50% of the diagnosis in the United States being home sleep apnea testing pre-COVID. December 2019 is the snap point. I think that will push out maybe 10, 15 percentage points. You'll end up somewhere around 55%, maybe as high as 60% home sleep apnea testing. Again, all it will do is provide more choices for consumers. It will have less leakage of people just refusing to go to a lab or a hospital, and it'll be more efficient care for us to be able to scale and grow. Does that mean we have a V-shaped recovery in December if everything goes back to normal? Absolutely not. But does it give a little more, I think, meat on the bones of that argument of a U-shaped steady recovery? Absolutely. And does it mean, when we do have a widely available vaccine and/or treatment like Tamiflu for COVID and remdesivir on steroids, then when all the fear and uncertainly is gone, I do think when all 3 options are there for home sleep apnea test, ambulatory lab test or in-hospital lab tests, when all 3 are offered, we will have a more scalable -- and the opportunity to move total industry growth up by some amount. Don't know whether it's 25, 50 or 100 basis points, but there'll be some extra scale provided by the forced experiment in home sleep apnea testing. And you can actually argue all the rest or other aspects of digital health, but -- such as remote patient monitoring, population health management, but home sleep apnea testing is one we've seen right out of the gate.

Yes. So on that, you -- historically used to say that the industry was growing at mid-single digits. So you're basically saying, we can add a little bit to that going forward post-COVID?

Yes. I mean, I think -- before COVID, it feels like a decade ago, but so I think 10 months, not 10 years, but 10 months ago, yes, we were talking about sort of our industry on average between sleep apnea, COPD, and some of that SaaS, that ResMed was sort of looking at mid- to high single-digit growth, where mid-single-digit growth was sort of the devices and high single-digit growth was sort of the masks and accessories and software. And so yes, I think that whatever that number was, adding 25 or 50 or 100 basis points to it is a possibility. This is total speculation for me. I don't know what the market each will be. All I know is that people tried digital health, they were forced to. And in particular the area of home sleep apnea testing, there's some permanent changes to doctors and health systems that have never tried it that have adopted it, that will never be able to give it up just because of consumer demand and because of the cost savings in their own system.

So on average, what is the cost savings from home testing versus in a lab?

Look, that's 140 stories, right, in all the 140 countries. And actually, even in the U.S., it's 50 stories. But on average, an in-lab PSG test might cost them around $1,250 to $1,500. Whereas on average, the average reimbursement for our home sleep apnea test might be on the order of $200 to $250. So you're talking, not quite an order of magnitude, but sort of a 3x, 4x 5x reduction in cost for the payer. And with -- in general, for the peer-reviewed press, 95% sensitivity and specificity to the test. So there was always a clinical reason and an economic reason to change. The real lack of reason for change was just inertia in the system. And sticking to what we have done always, and COVID sort of put a span of networks and caused all sorts of awfulness, but in this case, allowed doctors to try telehealth, sometimes for the first time. Certainly, home sleep apnea testing sometimes for the first time, also remote patient monitoring. And also, "Hey, can I manage my whole portfolio of patients remotely?" And the answer is they can. And we think it does have a permanent impact.

Okay. So now, moving track a little bit, just on to masks. So resupply has been a really big driver of your mask growth in recent quarters. I guess going forward from here, why do you expect it to continue to be so strong? And at what point should we start to expect resupply to start to slow down in terms of the growth it adds to the mask growth?

Yes. It's a good question, Gretel, and there's -- when you just -- I was already -- all the way to the end where you said what happens to the total mask and accessories growth because there's like 5 or 6 factors that go into that. There's installed base, there's replenishment, and then there's the increase of the sort of frequency of which people will do that. And so there's no real impact necessarily on how many new patients get into the system or patients on a resupply program. But the frequency change that happened due to COVID, we do think has some permanency to it. And I got a lot of skepticism, I think, on the call in March when I said I don't think this is a onetime thing like toilet paper and hand sanitizer, where people were just stocking up on stuff. And that we thought, you know what? I'm a personal user of a device, and I'll replenish my mask. And every time you get a new mask, it truly is like that new car smell, I've got a brand-new fresh mask. And you feel reengaged in your sleep apnea therapy again. It's almost as clean when you wash it with warm, soapy water and have it there, it just doesn't feel the same. And I think there's some element of "Hey, I've been doing this warm, soapy water thing for 3 months, 6 months with this mask. It has seen some wear and tear. And now I've got engaged because of the importance of respiratory health has gone up because of COVID and I'm thinking about this more." And just the psychology was a permanent stage. And we saw that in the June numbers, but it was still up. And we saw it also in the September numbers. So traditionally, 3 quarters becomes a trend. I think that's a change, not to the new patient flowing in. That one actually went down. Not to how many patients are on a resupply program. That probably went up a little, but not that much. But I think there's a permanent change to the frequency at which the average consumer will say, "I think I should get myself a mask that is clean so that I can have clean airways and participate in this." Not just because I just I want to not get COVID, but because all the other things that my doctor have been telling or my DME have been telling me, or my friends have been telling me, I'm now applying that here. And so look, we'll have another update in December as to where we're at to see if it's 4 quarters of sort of change there, but I think all those factors will go in. The trouble will come when we look at year-on-year growth versus quarter-on-quarter growth. We're going to get a lot of surges, and ventilator's going up, and this mask issue went up with new patients coming in or down with this one. But over the portfolio of that, I still think we're going to see solid mask growth throughout this bumpy fiscal year, but certainly ongoing, I think. And look, we haven't been pushing on this just the last 10 months. We have been pushing on this for 10 years. And our ResMed resupply program has been going for 5 and 10 years. For post cards, 10 years ago through to digital applications on Air Solutions 5 years ago, to now, Brightree resupply these last 4 years. We've really ramped that up since we bought Brightree. And as you saw just before COVID, we completed, actually, in-person due diligence. Because it was pre-COVID in February -- January/February, on Snap Technologies out of Nashville, Tennessee, and that is now incorporated into our Brightree offering. And all of those together, I think yes, have some really good legs. So a combination of all the above, Gretel, and a complex equation to calculate exactly what's happening year-on-year or Q-on-Q, but we do think that there's sustainable growth in the masks and accessories because of all the technology we're doing on push, but also consumer pool has moved up and made a permanent change on that. And that impacts installed base and new patients coming in.

If I could add on to that, Gretel, there's a self-reinforcing element to this because we did some research a while back through the data that's in our AirView system. And looking at over 100,000 patients, demonstrated that patients who are on an automated resupply program actually have to have higher levels of adherence. So the levels of adherence are over 70% versus 60%. So if you get more patients onto an automated resupply system, they're more likely to stay adherent, so therefore, they're going to get the benefit of the therapy for the long term, which is really good for them and good for the health care system, which lowers cost. Obviously, there's a flywheel benefit to us and our customers as well, so it's a little bit of a self-reinforcing benefit.

Yes. So on average, how many masks are people currently getting per year in the U.S.?

So it's interesting. We don't release detailed numbers and forecast for our business. We don't go down to that level. We do know, actually, not just by geographic area, but by customer and -- who's doing a great job in this. As Dave said, this is an overlap of altruism and the profit may have been good clinical outcomes. Because if you're driving a patient onto an adherence program, the HME can make more money, ResMed can make more money. But the health care system actually saves costs because they're actually driving adherence rates up. And we know that for every hour of adherence to CPAP, you reduce the total health care costs for that patient, including diagnosis and therapeutic costs, by 7% for those first 7 hours of sleep. And so there is a reinforcing sort of flywheel effect that can come on to the business. The only number that we've talked about publicly, Gretel, is about five, six, maybe plus or minus years ago, the OIG I did an analysis, just for the 30% of the U.S. a market that is CMS to say, "Gosh, is there abuse from the HMEs? Are they overfulfilling like they've given diabetes supplies in the '90s, masks and accessories?" And what they did the analysis on, the number I remember on that, was the full mask systems that OIG at the time was allowing 4, 4 full mask systems per patient per year. And the number that they calculated it was either 1.7 or 1.9, but it was below 2. So below 2 on the per-mask -- full mask systems per patient per year. And so they walked away and said, okay, well, there's no one pushing above our maximum or sort of doing anything silly. The numbers certainly moved up from there in terms of what has been achieved, but there's still headroom to grow up until maximums allowed by insurance. And frankly, as a consumer, you pay your own 20% co-pay, so there's a decision process. You don't just say, yes, immediately, everything is free. You say, okay, "Do I want to buy this?" For instance, in a country like Australia, where there's no government reimbursement at all, it's 100% of consumer decision as to how often I get a new mask. And so that replenishment question, which did move up -- replenishment did move up in a consumer-driven market like that significantly. It's a 100% consumer decision, which for me is the purest of it. But even with a 20% co-pay, that consumer decision comes into it. Our job is to help people understand how a clean mask drives better adherence, drives better outcomes for you. Certainly, the logic of cleaner lungs is there. COVID has helped us with explaining that story. And I think there's a lot more runway to go in terms of bringing this around to different geographies. You look at ResMed resupply, Brightree resupply and even the latest Snap Technologies, that's all within the U.S. market. And so there's opportunities to take that to cash pay markets, to other markets around the world to just make sure that even if it's in France, where there's a government mandate of 2 masks per patient per year, do we know that everyone gets their full requirement of 2 masks per year? Let's work with our health care providers in France to make sure people get what the governments are making sure in their legislation that they do get. And so I think there's a lot of opportunity for us to bring that technology in different markets and to empower the consumer to make a choice around their own good health.

Yes. So just on that, are you planning to expand your SaaS business outside of the U.S.? Or would you kind of look to address those problems in other ways?

Yes. So it is interesting. There are SaaS health care, out-of-hospital health care software providers in other markets in the world, but they're very different. The U.S. is, I would say, a pretty advanced industry in the area of SaaS for out-of-hospital health care. I think in the other 140 countries we do business in, there's quite a lot of, sort of, in-hospital software that's being used. And our partner, Cerner, who we worked with in our core market of the U.S. for our SaaS business, is in the international area. But even if you look at them, and they've been in this game for a long time in the hospital space, still, 80-plus percent of their revenues and profits are in the United States. And so the software -- the health care software market is U.S.-influenced. But certainly, for us here at ResMed, we don't have to wait to drive for-profit SaaS businesses. We can take those, sort of, mask-enabling technologies and some of the consumer-enabling technologies to a market without looking to charge the consumer, just using that technology. Like we do, frankly, with our myAir solution. We don't charge consumers. We just empower them with their own data about their own sleep apnea health. That does increase adherence, and it does mean that they will buy more masks. But we don't ask them directly or encourage them directly. We just empower them to -- here's your health data. Here's why you should use Sleep App more. It will be healthier for you, you'll have better sleep, you'll have a better lifestyle and lower impact of some of these comorbidities, and we can do it through that front as well. So you might see us move software before we move Software as a Service in a for-profit area. And we've already done that. I mean, we launched AirView for ventilation in the midst of this crisis in Europe. That's a software provision in Europe. We didn't say to the pulmonary docs in Europe, "Hey, we're going to charge you for this during COVID." We said, "Here is a great capability of AirView." And then, yes, that does drive adherence to ResMed's devices and more masks and accessories, and hopefully, greater share for us because our technology then is better than the competition in our cloud-based system.

But in terms of your technology, from the resupply perspective, most of that is via the DME and via Brightree. So I guess, is the infrastructure in rest of world available there that you can actually move some of that technology over?

Yes. Look, I mean, it's not just copy and paste. And for instance, in Germany, where there's a very strong home care provider network, and in fact, we're vertically integrated there, it will be sort of physician heal thyself. Why don't we just take our Brightree tech and put it on our own home care group in Germany. And actually, we have an internal business challenge competition every year we call VentureTHON, where ResMedians can come up with their own ideas for how to innovate our tech or someone else's tech and do things differently in the company, or in new markets and so on. And one of the VentureTHON projects was to just copy and paste that. It got to the finals and it didn't win because it wasn't just a copy and paste. It actually is completely different, taking care of a patient in the German home care provider system, different laws. And in fact, different laws by every state in Germany, different protocols, different reimbursement areas, different interactions with an insurance company, different requirements around paper and factors and certain things in Germany that's just required. And so it's not as easy as just saying we're going to do that. But just because it's difficult, it doesn't mean we won't do it. It's just finding the right time and the right approach and which country to go with, what we can do with empowering consumers as much as what we can do to leverage the great HME channel we have in the U.S. We don't have to look at applying that same technology. We can be innovative and say, "Well, how could we inspire people in Singapore? Well, that will be different. Why don't we use the GDP app that we already have and talk to them through that rather than try to create an HME network and apply Brightree?" And say, "Well, why don't we look at the 140 countries and say, well, what's best there to empower a consumer to be able to get their own mask replenished as often as they want, and they feel is appropriate for their needs?"

And then so let's move on to the SaaS business now in a bit more detail. I guess, the Cerner opportunity seems like a big opportunity. Can you just explain a little bit more in terms of when we will actually see some tangible benefits out of that partnership that you have?