ResMed Inc. (RMD) Earnings Call Transcript & Summary

All right. Good afternoon, and welcome to the last fireside chat of the day for the inaugural Keybanc Life Sciences and Med Tech Investor Forum. My name is Matt Mishan. I'm a senior med tech analyst. I'm pleased to be joined by CFO, Brett Sandercock; and COO, Rob Douglas from ResMed. If you have any questions, there is a Q&A on the -- a Q&A box in the bottom of the screen that goes to me, and I'll do my best to get to them.

So to start it off, Brett, Rob, how would you characterize the transition from December-January surge to kind of February-March vaccine optimism that we're starting to see?

Yes, Matt, I think in terms of the longer-term picture over the last year and through to where we are, we continue to see sort of a gradual U-shaped improvement going on. In different countries, there's actually different levels of short-term optimism and short-term outlook. But what we're really seeing is that gradually, the sleep labs and the diagnostic processes are all kicking into gear. Meanwhile, the other really strong factors, like the mask resupply programs, undoubtedly, factors like people getting their second or their next-generation of PAP machine and those types of things are contributing. So we think we're just going to keep seeing steady progress in the business going through.

I think what investors are still trying to wrap their arms around is the resilience of your sleep business during the pandemic, especially on the generator side and compared to new starts, which were at 70%, 75%, 80% of pre-COVID. Just can you remind us what contributed to that outperformance? And how much can you attribute to share gains?

Sure. I mean, it has been a long-term -- again, putting that in a long-term context, it's a very resilient business. And the thing is that sleep apnea is such a massive problem, and it's still undertreated in so many markets. The fundamentals are there's still a massive market of patients who really need to be treated. And what we've got is a really effective and good treatment going on. Obviously, last year was a pretty -- I don't know, a dynamic year, I just should say. We had -- at this time last year, we were looking at infinite demand for ventilators and trying to manufacture all that we could. Meanwhile, we had seen a lot of sleep labs around the world sort of get turned into COVID wards, because sleep labs are often attached to the respiratory medicine part of hospitals. And the new patient flows were, in fact, limited. But that meant that the providers actually had time and resources on their hands, and they -- many of the sleep treatment providers around the world came through the crisis pretty healthy. But they had time on their hands to start worrying about their existing patient population. We clearly saw that in the mask resupply. No doubt, it was a factor in the generator performance. But then we also saw other factors like uptake in home sleep testing, accelerated adoption of, sort of, digital solutions like remote setup procedures and stuff like that. Some of which actually made it easier than what had been going on in the pre-pandemic world, waiting for a long time for a referral and waiting for a long time into a sleep lab. So there's a multitude of factors going on there. It'd be impossible to pick apart the contribution of each individual one, but it is a resilient business.

How much room do you still have to optimize resupply? And how many of your current patients are on a resupply program at this point?

We haven't broken out the exact number of percentage of patients but what we have in the provider world is really a really good cohort of DMEs, who -- and in other countries with different systems of, really, patient care providers who understand the importance of the mask in terms of keeping patients on treatment. And it's in everyone's interest to keep patients on treatment. In many countries, that's how you get continued reimbursement, it's the patient on treatment. And particularly in the U.S., when you supply a mask, you're able to be reimbursed for that. And we've got ample data showing that if patients are on a resupply program, they're much more likely to stay on treatment. The typical reimbursement rules for insurance in the U.S. allow you to have something like 4 masks a year if you need them and maybe a new cushion periodically, maybe even as often as monthly. And also tubes and head gear and other things like that are -- can also be part of the resupply program. We're not even -- we're probably only just over half of that in terms of average of what actually happens. But there will be some patients who are really well looked after, and they really see the advantage of keeping their gear up to scratch. And there'll be other patients who are not getting any resupply at all, and that's pulling the average the other way. So we've got more work to do to convince particularly providers and then patients that they should be on resupply programs. There are things like co-pays and you have to, sort of, actually need the new mask before you just take it. So we wouldn't expect that we'd ever get near those limits. And any analysis that's been done has shown that we're well under any sort of full utilization. There, it's a little miles away from any overutilization situation. So we'll continue working on it.

Yes. I mean, I'd just add, I agree that we've got runway there. And the improvement in adherence rates, particularly with the digital solutions, will continue to kind of drive that long-term resupply story as well, Matt. So I think that plays out well. And the focus during COVID, I guess, back on the installed base for our customers, I think that's really demonstrated to them the value of the resupply programs. So I think that -- and particularly the digital offerings, and for example, the Brightree offering and how that can be integrated, so I think that does all go well from a kind of a longer-term growth trajectory within resupply.

Does that require -- does that still require a verbal yes or a response or a response back because it gets -- it's not automatic.

Yes.

You can't do an automatic resupply, where it stands to read -- when it needs to be updated, it needs be verbal, right?

Correct. Yes. It needs -- the patient needs to request that resupply.

Okay. So you could trigger the patient to request the resupply with an alert or something. But they'd have to actually call -- they actually have to call in to do it? Or could they do that? Or is that something they can do digitally?

It can be done digitally, and we can reach out and request for the response. But I think Brett brought up a really important point there. It's that when you're on a resupply program, you're more likely to stay on treatment so you become eligible for staying on resupply. So it's actually not only that issue of the ratio of patients that are on resupply, but how many actual patients there are that are staying on long-term treatment. And that long-term treatment adherence is really important.

And how is it -- is resupply just a U.S. dynamic? Or how many international markets could replicate supply programs like you've done in the U.S.?

Every market has its own set of rules and drivers and local -- local things of what's important, why it's important. We have really great strong teams in all these markets around the world. Most non-U.S. markets that are reimbursed, and that's most of Europe and a few other countries, Japan, Korea, around the world, most of those reimburse for a period of care. So our German business, for example, we got a contract for looking after a patient for a year or however long. And then you'll get reimbursed while that patient is in your care and staying on treatment. And that's usually a lump sum type of reimbursement for the device and the mask and the care. And some of those countries, they'll come with a rule that say, if you want to do this, you must supply 2 masks a year. In other countries, they'll have a 1 mask a year rule. But perhaps, the providers understand that they're actually more likely to keep their patients on treatment if they give them 2 masks a year, and there's a return on investment for them doing that, and they'll do that. And the U.S. is pretty much the only market where there's a specific sort of reimbursement amount for the provision of the mask as part of that resupply program as well. So the dynamics are different, but the underlying thing is that if you can keep a patient on treatment, it's good for the patient, it's good for the health system, and it's good for the provider as well.

Where do you think the health care community is at in their understanding of the importance of sleep on health and well-being? I feel as if there's consumer -- I feel we have consumer interest and health care interest is going to converge on that in the next couple of years.

Yes. I mean, the whole sort of digitization and personal monitoring and instrumentation of everything is one of the factors in here and so many devices around now for monitoring your sleep. By the way, we think we have some of the best technology around for doing that. We can do it noncontact with either a radar or sonar type thing. So I think there's an incredible wellness motivation around looking at sleep. And that goes beyond sleep apnea, obviously, but getting the right sleep stages and the right amount of time in bed and not too much alcohol, not too often. And all of those types of things are factors that more and more people are becoming aware of. We think that in terms of primary care, there's increased awareness. And we think primary care is starting to understand that sleep is more important. And mostly these days, when you go into health checks and those types of things, you're actually asked about your sleep and snoring. And we think that primary care understands the risk factors that if you're snoring or have apneas, it's very bad for your cardiovascular system, it's very bad for your metabolic system. And those are issues worth looking at and also referring off to, if need be. And so we've really been on a 30-year journey of evangelizing the importance of sleep and increasing awareness and making appropriate target investments. We're not done, but certainly, it's rare now that you'll talk to somebody who doesn't at least know or heard about sleep apnea. In fact, usually, whenever you talk to somebody, they've got a friend or relative who's actively being treated. And so that -- the awareness is significant, a lot further. It doesn't mean that our business is going to turn all of a sudden into calling on primary care physicians, that type of thing. We think probably the role of the specialists are important. But it's one of those sort of paradoxical things. Sleep apnea is a fairly -- and sleep apnea treatment are fairly straightforward concepts and fairly straightforward to diagnose. But you do need the specialized skills in there for the complicated ones. So there'll be people with all the symptoms of sleep apnea, but in a test, it doesn't really look like they got it or it's only a marginal level. And trying to decipher what's going on there, those take some challenges and call the need for the speciality to look into it.

So the core sleep business, fundamentally unchanged. And it's just a matter of when the new fits recover and get back above and/or at [ 2 ] or exceed previous levels because of the penetration of sleep apnea and the under-penetration of the addressable market. Do you think over the past year, you're now better positioned to kind of reach that large underpenetrated TAM? And it does -- I mean, does the increased adoption of home sleeping tests allow you to better penetrate that TAM, moving forward?

Yes, I think that's a contributor to it. I think if you look at the big factors around the COVID pandemic and what people learned about it, some of the trends we've talked about were people really, really were understanding the importance of respiratory health, because you had this disease that was killing people by breaking the way their lungs work. We had a strong push that people didn't really want to be in the hospitals because they are overcrowded and overburdened and not really a good place to be when they're struggling with how to treat all these patients that were coming in. And also, you had a strong lift up in sort of digital medicine and telemedicine and all of those things. Those 3 trends are actually part of our long-term strategy or what was framing our long-term strategy. And in a sense, they all became more important, and in a sense, accelerated our ability to execute our strategy. Now our vision of getting to the 936 million, approximately, sleep apnea sufferers around the world has to be really driven by that technical capability to get there. And we won't do it all through the traditional methods, and it's just scaling, and it would just cost too much for the health system. So obviously, there's got to be efficiencies and cost improvements through there. But as I said, keeping people out of hospital and accelerating the digital takeup, which we saw quite rapidly, should help us get to that. And we'll continue on that journey towards the long term. We saw, as you mentioned, home sleep testing pick up as a percentage of tests. Clearly, in some markets where it was already established, that was a temporary lift up, and we still have the sleep lab infrastructure there to support patients as needed, but it does show that we can increase capacity that way. There are a few markets which have been resisting home sleep testing. Germany is notable, when actually now, there's sort of structures being put in place that we may start to see home sleep testing being done in countries where there've been very little of it. So that will also really support it as well. But I don't think you see a single inflection point pushing everything. It's more of what we've done, which is steady accretion of patients into the population, increasing awareness, increasing the importance and on it keeps going. Brett, I think you were trying to...

Yes. Well, I was agreeing with that. And I also -- the company acceptance of the digital pathways and how that might look has been, I think, a pretty big change, Matt. And I think we're really well positioned for that. And I've noticed, particularly on around the HST, around the -- investment in the diagnostic area, and it could be by us, but there's plenty of other players as well. It's making it much smaller, much more effective, if you like, kind of opening up that diagnostic funnel. I think that's been quite a big change as well, and kind of we welcome that investment there. I think that, I think, definitely open the diagnosis side. And let's just keep working on opening that funnel and how you access that 936 million OSA sufferers. I think they're going to be the key. But that definitely opening up -- the digital pathways don't go backwards. They'll continue to forge ahead. So from that perspective, I think we are well positioned when we come out of this pandemic.

Well -- what do you think the pushback is around the digital acceptance of home sleep tests? Is it that you bring -- is it like you're bringing in patients that are not staying on the therapy, maybe that are too mild? You're not -- or you're not identifying all of the patients? Like why would they prefer -- outside of the cost and reimbursement, why would they prefer to have somebody go into a sleep lab versus do it at home? What's the tradeoff?

There's multiple factors here. But if you've got established infrastructure and a pathway that you know works, and you've been doing it for 20 years as a specialist, why would you change if it's working for you and it's effective? Now what we have seen with home sleep testing is that whenever it's tested up against a PSG -- so in a lab, you get what's called polysomnography, which is really, you have instruments monitoring your breathing and your movements and your chest movements and airflows but also instruments monitoring all of the electrical activity in your brain as well. And from that, you can get a very clear insight into what's happening in during the cycles of sleep and whether you're having arousals and all of that type of thing. If you're only trying to get to what is an apnea, that is when you stop breathing and you have an airway blockage, the home sleep testing is very good for that. But it's a little bit harder to be 100% sure that a patient's asleep while that's happening. So understood it doesn't -- so you don't really have as accurate baseline of how long you're asleep, but you know about the apneas, which are the bad things as well. But when we test against the home sleep test against PSG, the correlations are extremely high. There's very, very little difference between them. Unless, of course, there's something else going on and maybe there's some other sleep disorder that's causing problems. Or the patient actually needs to be observed because you're not sure they're going to comply with the home testing and all of that. In France, where the reimbursement levels are set the same for home sleep testing and in lab testing, and they're set at sort of around the cost of home sleep testing, which is in order of magnitude approximately less than a night in a hospital in a lab. But where the reimbursement is the same, it's about 80% home sleep testing and 20% lab testing. And that's probably a limit -- the maximum limit of where home sleep testing would ever get to -- would be my guess. But certainly, as we've seen all of these -- and then earlier on, yes, there was some worry that there'd be overutilization if the test was too easy. That's not a great argument when you think about the financial downside of untreated sleep apnea. But we think that home sleep testing will gradually continue to increase as the patient pools increase. And it's actually the labs that run home sleep testing that do really well. And they decide which patients get which test or whether they start with home sleep test and then escalate to lab test or whatever.

That makes a lot of sense where you're concerned about the comorbidities, the very severe cases, and what else might we catch that the lab would catch that the at-home sleep test would not. And I guess, as you move up the case of mild sleep apnea to potentially severe, the more severe cases should be monitored probably in a lab upfront versus the mild cases could catch more earlier on.

Yes, that's all true. But there's also a dynamic at the other end is that, the mild cases that are causing problems that are harder to test are actually also quite a challenge and that may end up in the labs as well.

And then speaking of comorbidity, I mean, you -- when I first think about the Google JV, the Verily, initially, I looked at it as, okay, you're trying to look at it as a continuum of care for a patient that has high blood pressure, diabetes. And you're really trying to put it all together. I'm not sure if that's evolved in a certain direction. It seems like it maybe is -- that the mission maybe of that changed as like you may be doing just a better job of identifying potential patients upfront through like digital advertising?

Yes. I think it's more of the second. I mean, Verily is really well-known for, obviously, for the work they're doing in partnerships in some of the key comorbidities of sleep. And by the way, just an aside, everything is a comorbidity of sleep disorders. It messes up so many things. So -- but our rationale was predominantly around better ways to identify and engage patients and get them into treatment and looking at ways of doing that true digital engagement in an online world. And obviously, we felt we were partnering with the best capability there. And we felt we could bring the best capability in terms of understanding sleep disorder breathing into that as well. So I think the issue probably comes down to in terms of where the -- what's a patient -- patients really want their whole selves treated. They don't want just point solutions. So partnerships with comorbidities and with whole providers are always going to be important. And we think we can bring the best in breed, best knowledge of sleep and partner with Verily. But we also have other irons in the fire as well, looking at ways to expand it. We're still -- we can't afford just single point solutions as we go after all these patients around the world. We've got different solutions around in many other countries. Luckily, they're all -- if their experiment's often small enough that we don't have to broadly disclose them and we can really try things there.

We recently met with Signifier Medical, which is a new company that's very early commercial stage. But it's FDA-approved and believe -- and they believe, and they're going to try and prove out with data that you can strengthen the tongue muscle through neuromuscular stimulation for 6 weeks, and you could stop the progression of sleep apnea. I guess, what do you have -- have you looked at that technology? Is that something which is potentially a threat to ResMed?

Yes. I mean, because of where we are in the market and that, generally, we see most ideas in fairly early stages, and we critically evaluate them and look at the clinical data and all of that. And some of them, we invest in. And we're able to invest in them relatively confidentially and make sure we're across all of these issues. Our fundamental outlook is that alternate treatments are actually helpful for the entire market. And our business is treating sleep disorder breathing and treating sleep suffocation, if you want a better term for it, and improving people's lives that way. CPAP is not the only solution. We've obviously invested in our Narval solution, which is a mandibular repositioning device. So it's a dental prosthesis that pulls the jaw for just a few millimeters enough to open up that airway, reduce snoring and reduce apneas. We've watched closely and invest in many alternate treatments. One recently that actually went public was Nyxoah, a small European company that has an interesting implant technology. We think in all of these, we actually welcome the market expansion approach to it. And we watch closely and we look at the clinical data and follow them carefully. So we see there's actually room for multiple treatments. And that will actually help patients come into the treatment pathway with options.

I want to switch gears to Propeller Health. For people who aren't familiar with it, would you mind like recapping kind of the value proposition of Propeller, like to patients, pharma and the health care system? Because I think it's all 3.

Let me start, and then I'll hand to Brett if I miss anything. But Propeller basic proposition is it's an instrumentation of inhaled medicines. And so if you have asthma or COPD -- let me talk about the COPD case first. It's a long-term -- it's a 20-year progressive, eventually fatal disease. And it starts off with a bit breathless going up the stairs and ends up really struggling for breath. And you have different treatment modalities through that. Initially, you'll get advised to give up smoking and exercise more. Fairly soon, you'll get on to some inhaled medicines of either, sort of, preventive medicines that keep you clear. And sometimes, when you're having -- particular in of case asthma, you may have a rescue or tackle or reliever. In COPD that eventually you end up, you might need supplemental oxygen. Maybe you'll need high-flow therapy to give you more oxygen, maybe you'll need a ventilator because you're barely breathing. And the treatment modalities increase. Now Propeller, on the face of it, instruments the inhaled medicine part of it and has great data showing both in asthma and COPD patients, that if you're monitoring the usage of the inhaled medicine and reporting back to the patient, their carers and to providers how well the patients are adhering to the medicine, you get better, much better adherence and usage of the medicine. And also, you end up with reduced exacerbations. And so you end up with reduced visits to emergency departments and lower overall costs. And so that's a benefit to the patient, benefit to the pharmaceutical companies who are providing the drugs and its benefit to the health systems because it lowers cost. But our underlying strategy is actually a digital patient engagement platform, and we're looking at starting off there but actually staying engaged through that digital platform with the patients through the long-term progress of their disease. And that's really our sort of strategic rationale behind it.

So it sounds like there's multiple different ways that you could potentially commercialize it. And it's either through a -- I don't think the patient is going to pay for it, but the -- you could commercialize it through the pharma company or through reimbursement. But it also sounds like you're -- you look at it as a gateway to more of a -- to a potential long-run patient population. So what is -- you're about, we'll call it, 6 to 9 months into the commercialization stage of this with Novartis, is that right?

Yes. I mean, we have partnerships with several companies. And actually, the important thing about Propeller is that it actually works with -- you don't actually control which drug patients get prescribed, and they're not always the same manufacturer. So Propeller actually works across different manufacturers' platforms as well. But we are in that thing with Novartis. It's early days yet as to how the value proposition is there. And we're still in that sort of learning, experimental phase of commercialization. Brett, did you want to add in on that?

Yes. I mean, I think you covered it well, Rob. I mean a lot of it will be on a per patient, per month subscription-type model in that -- so sort of that digital platform is really important for helping management -- managing that patient is important for the pharma companies and important for the providers, and for the patient and their caregivers, for example. So it kind of gives back continuation of care, I guess, if you're on that platform and finding actually what is the optimal treatment for you. And that platform, the Propeller platform, can accommodate that on that kind of revenue model. And the important thing is adherence to your meds. Because if you have -- if it's uncontrolled asthma or uncontrolled COPD, it's an enormous cost to the health care system. That's why the providers is so interested, right? Because it is -- the economics are quite compelling. But it just -- yes, it just takes time to commercialize that. And we've had, as Rob said, there's some partnerships there, and we continue to work through those. And I think the main thing is keep building that platform and building the number of patients on that platform.

What are the next steps there for the -- I think it's so intuitive. I think it's such an interesting platform for you. I don't mean to harp on it. Like what -- and spend a lot of time like what are the -- what do you think the next steps are for Propeller?

So I think, let me start and Brett, make way into it, please. The -- I mentioned we're in these early commercialization phases. And there are different ways of monitoring. We've still got technical work to do in terms of keeping patient engagement really strong. We've got a lot of commercial work to do, both with the companies but also with providers and also in payers around the world. And so we've really got a really good developing commercial team in Propeller. And I think what we'll see -- again, we'd like to fly under the radar where we can. But you'll see announcements of, sort of, trials and partnerships and programs keep going. And we'll continue to build momentum with it that way.

And then I wanted to ask a question. I'll ask the question on the shift to high-flow therapy. Because I think it flows well -- it goes well with the conversation. So you did pivot last quarter to a focus on -- kind of high-flow therapy as a bridge between Propeller and kind of ventilation. Kind of what's -- I guess what's the time line on building out clinical data for that and a pathway for reimbursement?

So high-flow therapy is a really good treatment and it's really proven well in the current pandemic period as well as effective treatment for acute patients in hospital. And we've known that for a long time, and there's been people working and playing in that. And we've actually had a high-flow therapy cannula available for quite a long time around that. We actually think though, also, it's potentially an important home or chronic therapy. There's still quite a bit of sort of development there to do around the clinical evidence and that type of thing to make the case and also to establish the reimbursement for it in that environment, which is currently not in place in most markets. So that's the type of development program that we know well. But it takes a long time. It's not something that we'd be doing quarterly updates on. For example, generating these data takes a lot of time. Often, you'll need RCTs, that type of thing in that environment. And then you've got to go around and do the hard work of making the case to the payers, to health systems, that it's worth your while investing in reimbursement for it. And so it will take time and the time line, we haven't really put out. We currently have a trial in progress, but it's just one of a starting point.

And then one on the -- one on some costs and inflationary costs. Are you seeing any kind of supply chain pressures as far as commodity costs, shortages? Is there -- is that a concern for you as you progress through the year at this point?

I'll hand that to Brett, I think.

Yes. I mean, it's probably -- it's still -- I think you're still through the supply chain just generally, Matt. You're probably seeing that -- with COVID around, I think that just continues to be an ongoing issue for all companies. And I think it's particularly more acute for us or as acute. So that's kind of the general environment there. And you know there's things like -- there's talk a lot about electronic board supplies and things like that. So things come up. But we've got -- I think that's all in the normal -- it comes up over the years and things like that happen. So I think overall, for us, it's reasonable. But you're still -- the supply chains are not where they were pre-COVID, and there's still work you need to do on that. And we've done -- you've seen us increase inventory levels a little because there's elongated supply chains, even moving parts out of various ports and so on. So there's mitigating actions that we needed to take. But I think that's the commodities inflation. You can -- really, it comes down a lot to supply and demand, and it depends on that. So that you are, as a business, you'd be exposed to that to some extent. But I think for us, that's a relatively modest exposure if I look at that compared to many other companies. So at this stage, we've -- you've got to continue to manage it and look at it closely. But I think from -- I don't see the kind of inflationary impact sort of coming through on our cost side.

Right. It's good to hear. I mean, we could have taken this conversation in 18 different directions. We ended at 35 minutes. And thank you, guys, for supporting the conference and appreciate your time. Thank you.

Thanks, Matt. Thanks for your questions.

Thanks, Matt. Thanks, everyone.