ResMed Inc. (RMD) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to Morgan Stanley's Global Healthcare Conference of 2021. Before we commence for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. With that complete, we welcome today from ResMed, the CEO, Mick Farrell; and Dave Pendarvis, Global General Counsel and Chief Administrative Officer. Thank you for your time today, gentlemen. Greatly appreciated.

Let's jump straight in. And first thing that seems to be at the forefront of investors' minds is the AirSense 11. What's the timing of the launch? What are the features versus the AirSense 10? And how does it fit into the ResMed ecosystem? Thank you, gentlemen, for your time today.

Sean, well, thank you for having us, and great to be here and really happy to give a little bit of a description about our latest 11th generation ResMed platform called the AirSense 11. We're really excited to bring it to market. We think it's -- I mean, we know it's smaller, quieter, more comfortable, more connected and more clever than any of our previous generations and then anything else on the market. In fact, with the AirSense 11 selling in parallel to the AirSense 10, we think we have the best and the second best devices selling in parallel in the market for the next 12 months. We think actually the AirSense 10 is as good or better than even the latest releases from our competitors, and the AirSense 11 is a lead beyond that. There's a lot of features and capabilities that I can take the whole 30 minutes to talk through. But I mean, at a high level, what it does is, again, like when we launched the AirSense 10 and surrounded it with Air Solutions and really created a digital revolution, if you like, a digital disruption in the sleep apnea treatment industry. The AirSense 11 is surrounded by a similar ecosystem that we call Air Solutions 2.0. It has an app that patients can use called myAir 2.0. We already have 3.5 million patients on myAir. They'll all upgrade over to myAir 2.0. But this one has extra capabilities more coaching, more personalized care, there's a personal therapy assistant, there's a personal setup assistant that's actually on the screen. And what comes with the AirSense 11 in the hardware side is a touch screen that has really interesting communications capabilities, two-way comms, if you like, from ResMed to the user. And the other thing that we added on was, obviously, we had 2G, 3G, 4G connectivity on the AirSense 10. And we still have that sort of 4G, 5G plus capability on the AirSense 11, we've now added on local Bluetooth, just make it easier for a patient to get connected to the end of device. One thing that we found with now 15 million cloud-connected devices and 9 billion nights of medical data in the cloud is using those information to create value for the individual becomes easier and easier as we get more data because we're able to use sort of aggregated de-identified data. Obviously, with cybersecurity and privacy taken care of, we're able to use interoperability to get it to the patient's personal health record, to get it to the doctor's electronic medical record and to unlock value never before seen. Final thing I'll say on it, before your next question, is the take-up over the last 7 years of myAir the patients facing out was around 30%. We had about 3.5 million users over a population of around 15 million cloud connected devices. What we found during our controlled product launch was that we had a connection rate of double that 60% plus of the people in our controlled product launch were getting that code, entering in their information and joining the ResMed ecosystem as the ultimate customer, the patient. And that level of customer intimacy is incredible for our industry. It's been a dream of ours for decades to have that level of contact. And when we do that, when the patient uses myAir, we can drive adherence rates up to 87%. And that's peer-reviewed published evidence. When you get 9 out of 10 people using the device, that's good for the patient because they're happy and adherent and not suffocating anymore. It's good for the physician because those sort of adherence rates are just incredible for doctors. And it's good for the health care system because we've proven that adherent patients, even though you pay for the ongoing masks, which is good for the provider and good for ResMed, you get lower cost of care. You reduce the impact of many chronic diseases that are sequelae of untreated sleep apnea. And we -- the last thing I'll say is, we just published a peer-reviewed evidence journal in the Blue Journal, which showed and presented the European Respiratory Society, which is going on in parallel with us right now in Europe that untreated sleep apnea has a 40% increased mortality over treated sleep apnea patients in a retrospective study. So the data are good for us and good for our growth, but it's also good for the patient and good for reducing mortality in that group.

Great. Thank you, Mick. I understand with the AirSense 11, and some of this was covered in your excellent presentation of yesterday, but you have the ability to send data to the patient now, if I understand correctly, with the AirSense 11. So maybe what -- if you could describe what you see as some of the benefits and advantages of doing that for investors? And the second one, I understand is also upgradable software capabilities. And maybe the same question, what are the advantages for the patient?

Yes. Look, I mean we did have some level of sort of two-way comms, if you like, with the AirSense 10. We were able to do some software upgrades and some capability changes on the back end of the device and the software. What we didn't have was direct communication ability to the patient and to be able to personalize care there on that local screen on the AirSense 10. So we have that now with the AirSense 11. What that means is just, I mean, all the advantages, when I talk about a 60% take-up rate of myAir, and how great that is. Well, there's a 100% take-up of the screen that you use every night. We don't have to ask for that as soon as you plug it in, that screen goes on. So a lot of the AI-ML, the artificial intelligence machine learning algorithms that we use to connect with patients on myAir, which drives that 87% adherence, we're going to be able to apply a lot of those techniques to every single patient because we will be using the screen that they see every night. We'll be able to ask questions about therapy. We'll be able to ask questions about lifestyle because sleep is more than just hopping into bed and getting into this beautiful subconscious state where you regenerate your body and regenerate your mind. It's also a combination of what you did during the day, how much exercise you had during the day, what you ate and how you interacted impacts the other 33% of your life, which is in that sleep well. So we are able to bring a lot of that coaching and feedback and creating a whole sort of wellness part surrounding around the patient that we've done on myAir. We can now do that on the screen on AirSense 11. On the flip side, if there's some issue with software and we need to upgrade software on all our devices, we wouldn't have to do a traditional sort of recall where you'd have to go out and get all the devices, bring them into a tech center and upgrade the software, we'd be able to do that through an over-the-air upgrade as well. So there's great positive aspects on customer interaction and engagement with the ultimate customers, the patient. There's also the ability for a provider to go in and interrogate the capabilities on the device. If a patient says, "Oh, I don't think my device is working well. The HME can actually get codes to go and interrogate the device, do a circuit check, analyze the humidifier, analyze the climate line and make sure everything is working well. So actually patient -- actually, everything is working fine or actually now we investigated and it's not. We do need to bring that device. And all that saves time, saves money and saves efficiency. But the most important thing, I think, is that we get 100% of people on an engagement platform that can drive higher adherence, which after all, when you've gone through all that process of screening and diagnosis, once you get the prescription, you start with therapy and you're keen to go, we want to make sure that we get 9 out of 10 plus people all the way through the ongoing care for the rest of their life.

Great. Thank you, Nick. I guess this may have been one of the really strong investment themes over the next decade. We see we'll be moving care out of the hospital into the home and ResMed seems to be a strong participant in that. Given that we've had the pandemic or probably still having the pandemics, has there been anything or any learnings as a result of pandemic that are providing a further catalyst for care moving out of the hospital into the home and maybe give us a bit of a discussion on that, Nick?

Yes, absolutely, Sean. Well, as you know, I mean, you've followed us for many years that we now have 90%, 95% probably now post-COVID of our revenues and profit coming from out of hospital health care. Every sleep apnea device that we provide, 99% of them go to the hunt, to a bedside table. In the consumer market, they call it the most expensive retail, most expensive real estate in the world for them as a retailer. They want to get on that bedside table. We get on -- we're on 15 million with 100% cloud connectable mode. It's an incredibly valuable real estate and it's incredible -- I think it's incredibly valuable for the whole ecosystem because when you think about it, people don't want to go to a hospital. They never really did. But in this country, where I live in the U.S. right now, sadly, a lot of health care happens in an urgent care clinic or you get really sick and you go to an emergency room or an ICU, or CCU, you have to step down and get treated but it's in a very expensive, high acuity, high cost center, not good for you if you don't have insurance or you have high deductibles, but it's not good for the health care system. It's just the wrong place to treat people, should be for pure emergency care. And I think that shift from high-cost, high-acuity hospital care to lower cost, lower acuity where you live care has been a trend over the last 10, 15 years globally. Particularly in payer provider systems where the payer actually runs the downstream distribution network. And so huge trend, the waves are pushing in that direction and ResMed is riding those waves to the shore. And in fact, we're helping to generate further catalysts for them. The second part of your question was, has COVID, the pandemic had an impact on that? Absolutely. Look, people didn't like to go to the hospital before because there's E. coli in the food, the staph infections literally in the corridors. And now there's a great fear, a known fear that there will be people, very sick people in the ventilation wards with COVID-19 and in the emergency and ICU and so on with COVID-19. And so I think that fear can be a good motion sometimes because it says, okay, well, I don't want to go to the hospital, where else can I get this treatment? How about a Zoom call like this where you can now have your primary care physician treatments go through your signs and symptoms, even have home tests or blood pressure for temperature, for -- in our case, home sleep apnea testing and so on. And that information can then be provided through the cloud to the doctor. And this communication we're having right now could be a physician visit. How much more efficient, saving all that driving, that parking, that time in the office, that wasted time in the waiting room. And I look on the evolution of COVID-19 of not only driving out hospital care, as your question asked, but also driving the importance of digital medicine, right? I mean I just mentioned sort of telehealth telecommunications with the primary care doctor. But for us, in our space, you could actually look at digitizing and doing an end-to-end home model for the whole process, end-to-end screening, diagnosis, treatment, setup, management and ongoing adherent patient. We can do all that in the cloud. We can do all that remotely. We were able to before the pandemic, but that out-of-hospital care trend and that digital medicine trend really picked up during COVID. And the third and final thing I'll say that COVID drove is, COVID kills you through the lungs primarily, right? When it kills somebody, it's usually through suffocation in the lungs where the lungs are overreacting to the virus and building up mucus and blocking the alveoli, and then you get basically liquid form all the way up through your lungs and suffocation. That's why they try ventilation to blow off some of the water and blow into the lungs and sometimes it works and sometimes it doesn't. But when it kills you, it's through the respiratory system primarily, and certainly, that's where you inhale the particles, the little protein layer inside of this little highly contagious biologic sets. And so because of that, that respiratory attack and respiratory killing of COVID, there's been an increase in importance of respiratory hydrogen and respiratory health. And we saw a huge step up just a year ago in the number of masks, tubing, humidifiers that were ordered per person, per year in every country, not just here in the U.S. where there's a reimbursement model that drives it, but in every country, where it's cash pay: Australia, New Zealand, Singapore, U.K., France, where it just has to be provided by the HME. Suddenly, patients were demanding like I need, I know by law, I get 2 masks a year. I haven't had one. I need them. And so France and Germany even where there are limits around that, we saw masks pick up. That hasn't slowed down a year later. So I think that's a permanent change. So those 3 things have been really important to us. Out-of-hospital care trend, as you said, picking up during COVID, digital health taking off during COVID, held steady, still going strong. People are still engaged in the digital and very much engaged in respiratory health and hygiene.

Awesome. Thank you, Mick. Also, on the thing of remote [indiscernible] some interesting stuff going on with that. And could you maybe give investors a picture of the remote patient monitoring piece and how that will fit into COPD in keeping patients out of hospital and maybe give us a sense of what the size of the opportunity is?

Yes, absolutely. Look, remote patient monitoring and I've been focused. It's a great question because I've been focused solely on our core market, our home market of obstructive sleep apnea. Really important, there are 936 million people worldwide who have sleep apnea, and we've done our whole end-to-end play over these last 7 years and solidified our digital health solutions for sleep apnea. But remote patient management, as you said, goes beyond just sleep apnea, and we have now started to create some really good point solutions, I'd say, for COPD, and we're starting to piece them together. So Propeller that you mentioned, is a cloud-connected drug inhaler that we are able to track the flow of both preventative sort of chronic care COPD meds as well as acute care COPD meds. And we actually have the same chronic asthma meds and acute asthma meds. And what we're able to do with that, particularly on the COPD side is increase the utilization of effective drugs that can help the lungs either broncho-dilate or open up the alveoli and create better oxygen transfer for the patient. And so all we're doing, obviously, we're not creating the drugs. We're not doing any of that. That's up to AstraZeneca and it's up to the large companies in this space, Novartis and so on. But what we do is, we help them such as the ERS, this week, where one of those large companies was talking about their brand-new study on the Easi-Breathe inhaler, that was using Propeller technology. And what we're able to do is exactly what I was just saying earlier where we drive up the adherence rates in sleep apnea, we're able to drive up the adherence rates of people in the pharmaceutical industry. I'm going to tell you, over the last several years, when I would present at a CEO conference at one of these health care summits, I often would have a pharmaceutical CEO come over and say, "Well, how are you doing that? How are you getting 87% adherence when at ResMed, you're asking somebody to put a mask on every night?" All we're asking them to do is to take a pill or to take a puff from one of these inhalers which seems a lot easier than 7 hours of wearing a device. And so I'd explain the digital, I'd explain what we're doing. And they always said, gosh, I'd love to recreate it. And I did think to myself, why don't we license this to them. Why don't we sell this to the pharma companies? And then when we found Propeller, we took a minority stake in that after the due diligence, and we've been holding that for a number of years. And as I've said earlier, we actually bought a little early because one of the venture capital firms wanted to liquidate their stake. And so we probably wouldn't have actually been public about Propeller yet because it's not going to be really material for us until 2025. But because at least they got out. We said, okay, let's just sort of bite and let's go public with our COPD strategy. So anyway, you'll see milestones from us. It's not going to be material in the next 6, 9, 12 months. But towards 2025, I think you're going to see some material milestones and we'll keep you updated on that part of the COPD spectrum. The other part -- and since we've got the European Respiratory Society meeting going on right now, there's been some really great presentations from ResMed key opinion leaders and keeping the leaders from universities in Lyon, Munich and ESONN and beyond, great German and French institutions. And what they're presenting is on high flow therapy, ResMed's product is called Lumis HFT. And the box that comes out of actually looks just like a buy level. It looks just like an AirCurve S or an AirCurve ST, the box, but it says Lumis HFT and has the ability to provide fast, high flow, humidified and oxygenated air to the patient, which is high-flow therapy. And what we're seeing is that is a really good treatment for COPD. It was used during this crisis actually in the hospital setting, HFT was used for -- before you intubate a patient, before you put them on ventilation, they will try oxygen and high flow therapy, and it was very effective, actually, in some preventative cases in COVID and that sort of, I think, has accelerated HFT. But we're going to do some longitudinal studies, and there's a little bit of time before HFT becomes mainstream. But I think high-flow therapy will be the second most important treatment for COPD. The most important treatment will be noninvasive ventilation, which we have in States with [indiscernible] ST, ST-A, and our whole Lumis range that we sell as well. And obviously, we have the Stellar and then the Astral for very severe sort of stage III, stage IV COPD, where you just can't breathe without the devices, you have those life support ventilation. But that's really towards the end of life's highway. But anyway, if you think about ResMed now has point solutions in stage I, Stage II with the Propeller; Stage II, Stage III with high-flow therapy; and Stage III, Stage IV with noninvasive therapy and then life support ventilation and it allows us to create remote patient monitoring, remote patient ecosystem. In what's a smaller population, there are only about 380 million COPD patients only, but it's not as big as sleep apnea but the costs of those patients are so high for the health care system that we think the value we can generate from that cloud solution for COPD over these next 5 years will create as much value for payer systems potentially as our core business by 2025.

[indiscernible] there may be a question for yourself or for Dave, but I have to get short term for a little bit. So -- and I thought you addressed this in a very excellent fashion yesterday. But just on -- if you talk us through the global supply chain issues, how ResMed's overcome them? Why you have confidence and what's the opportunity from our competitors' recall?

Yes, Dave, do you want to address that?

Sure. So you take it from the starting point that we've got a very well-integrated global supply chain to begin with. So we get our components sourced into either our Singapore high-volume manufacturing facility or our Australian manufacturing facility. We actually manufacture some of the components ourselves in Los Angeles and in Singapore, we manufacture the motors. We've got headgear. So we've got a pretty integrated supply chain, but we are dependent on certain critical components. Today, those are the electronic chips that are powering this mobile revolution that Mick was talking about that provides a lot of the value of the AirSense 11 and has provided value of the AirSense 10. That's a critical choke point. Our supply chain has got an amazing professional staff there, and they really perform miracles during COVID when we had to substantially ramp what was traditionally a low volume manufacturing line for ventilators, both the critical ventilators of life support ventilation with the Astral, but also the STs and ST-As. And so there, they were able to triple production in a short period of time. And by having to go back to component suppliers, order more components, get them in, get them through a freight bottlenecks that were intense because of COVID, they were able to really sort of flex muscles and now they've got that muscle memory. So today, when we're trying to ramp production, not of the low-volume ventilators, but the high-volume CPAPs, they were able to go back into the supply chain and try to obtain more components and get the freight through the system, get them in and then get those products out the door. We have all the capacity we need. We've recently moved into a new manufacturing center in Singapore that's got enough capacity in terms of size and set up to last us for several years. So that's not really the issue. The issue is, we're trying hard to locate critical components, which in some instance, could be plastics, but in most instances are around these electronic chips. And Nick and Rob and others have been involved in having communications with those suppliers, suppliers, suppliers, suppliers because you have to go all the way back to sort of the foundries where some of these chips are actually manufactured, then they're sold through intermediaries ultimately put into modules. Those modules put into components and those modular components then assembled into our products. So it's a quite complex exercise. But by going to some of these foundries and some of the others trying to persuade them that we know that we're a small volume of their production so they can increase it without doing a lot of damage to others. But at the same time, understand the health care implications of the chips that they can supply us, which is instead of going on to a toy or instead of going through a car or another cell phone, you can help someone breathe. You can maybe save someone's life. And so we get positive responses to those pitches. But nevertheless, these contracts are long way out. So we use our balance sheet. We're able to give cash upfront to try to get component deliveries and try to make predictions that can hold, give firm contracts. So we're using every lever that we can to try to get those critical components. And every day, it's sort of 2 steps forward, 1 step back. So it's a constant battle. We don't want to get in the business of trying to give daily updates of where we're at. But suffice it to say, we've got a professional team that's working very, very hard. They're very, very good. And we're hopeful that when we get into the back end of our fiscal year, so that would be the March and the June quarter of 2022, then we'll be able to have more supply than we have now. Today, we're supply constrained. We're having to make allocations to our customers. It doesn't make our customers happy, it doesn't make us happy. But we're hopeful that we can gradually get out of that as we get into the back half of our fiscal year. And that's the only thing holding us back. I mean there's more than enough demand that can't be satisfied by anyone in the market today. And as mix say, we've got the 2 best flow generators in the market today. So we are trying to prioritize products such as the buy levels and the ventilators because those are going to higher acuity patients, patients who really need help with the work of breathing. And so we're trying to prioritize those. Again, those are smaller volumes, smaller demand and doing everything we can to try to maximize the production and get them into the hands of new patients. So we're not trying to get devices that are replacing devices that are subject to recall, but rather getting our devices into new patients. So we're trying to satisfy that new patient flow, hopefully work through the supply chain on both the component supplies, getting manufacturing volume and then getting those products out into the marketplace as soon as we can.

Great. And your confidence around the $300 million to $350 million revenue guidance that the company has provided, what's the degree of confidence around that? What you're thinking around that number?

Yes. I mean, look, we're still confident. As Dave said, we're not going to give a blow-by-blow. Every week, we get more information -- every day, actually, I get more information about this component and that component. As Dave said, we're not limited on capacity. So honestly, if we get more flow of the rate-limiting component. We know although in our supply chain team, what that is, then that number goes up. Now if that rate-limiting component or another one jumps up, that number can go down. But right at the moment, we're comfortable with that $300 million to $350 million range that we provided on our last earnings call. But what we're saying is, we're not going weekly and monthly updates. Every 90 days, we'll reassess and say where we're at on that for the fiscal year, and we'll just keep that sort of fiscal year number up. Now obviously, we'll get more and more accuracy because 1 quarter down, 2 quarters down, 3 quarters down. But yes, we don't want to get into it day by day. But yes, look, there's nothing material and dramatic to move it strongly up or down in the last period of time so that we change that at this point. But look, I just think it's incredible what's happened due to this competitor's recall. We were always the #1 in the markets that we serve. We serve 140 countries worldwide. But we now have to be the #1 and the #2 market share player for 12 months on new patients. And that's a tough order. If our competitor had given us 6 months or even 6 weeks on a humanitarian basis and say, "Hey, if we look at this [ calling sheet completed, ] we could have done better." But look, we're over 10, 11 weeks into it. I'm really excited that we've been able to accelerate as fast as we have. I wish there wasn't this sort of COVID-19 impact on factories and supply chains and shipping, and even air freight is difficult and expensive. But it is what it is, and we're working through it. And I actually think our teams really learned a lot during COVID are now pivoted on the ventilators and doubling production on the Astral. I think all that learning on our supply chain team and the Six Sigma black belts and their ability to manage supply chain has come to the fore. And yes, we're pretty confident that we're going to be able to achieve that stronger extra growth in revenue. But really importantly, we're going after patient acuity and customer relationships that we think that this market share is there to stay. We don't intend to get share that just goes away the year after. We're very careful in thinking about humanitarian side of patient acuity, but then also very intelligently about existing customers, existing contracts and existing customers, new contracts and really thinking about digital entrenchment, so that we're there for the long haul, which is good for -- providing good for the patient. It's also good for ResMed because it's a sustainable long-term business.

Great. Thank you, gentlemen. Well, we've just hit over the half an hour, Mark. But before we leave, is there anything that I haven't asked you thought I should have or any message you'd like to leave the audience with, before we call a close.

Well, the only thing we didn't cover is our SaaS business. It's about 12% of our revenues and growing well. As we said, yesterday, at our Investor Day, Sean, you were there. We see that growing mid-single digits as a market going up to mid- to high single digits as the market growth. Our goal is to meet or beat that market growth all the way as we go in inorganic as well as organic growth. And so with Bobby Ghoshal, our new President of that division, I'm very strongly excited about his first 3 weeks in the job, but I think there's going to be some exciting growth out of the SaaS part of our business. That's the only thing. And other than that, Sean, I think the questions were excellent. Thank you.

Thank you.

If I could add a brief commercial here, Sean. We've referenced -- both you and Mick have referenced several times our Investor Day, which we just had yesterday, a replay of that is going to be available on our website for anyone in the audience who didn't have a chance to dial into that. The slides, I believe, are already up on our investor website. So I'd encourage anybody who wants to really get a good in-depth view of our strategy, our execution against that strategy from a lot of our leaders, I'd really recommend you go to that website and look at the replay.

Thank you, Dave. I can vouch that it was an excellent day, very worthwhile to go and do exactly what Dave said. Well, thanks, everybody, for listening today, and thank you, Dave, and thank you, Mick, for your participation again. It's been wonderful and we'll speak soon.

Terrific. Thanks.

Bye-bye.