ResMed Inc. (RMD) Earnings Call Transcript & Summary

Hello all, and welcome. My name is Lyanne Harrison, and I'm Bank of America's health care analysts here in Australia. Today, we are fortunate to have with us Rob Douglas, Chief Operating Officer of ResMed; and David Pendarvis, Chief Administrative Officer. Hi, Rob. Hi, Dave. Thank you for taking the time to speak with us.

Hi, Lyanne, thanks for that.

It's good to be here.

Yes. Lyanne...

I wanted to tell you -- sorry, can you hear me?

Yes, you go, Lyanne.

Okay. Why don't you start, Rob, I understand you've got some opening comments, why don't you take us through in terms of ResMed. Obviously, we've had fourth quarter results in the Investor Day yesterday or the Investor Day last week. Why don't you take us through some highlights from that.

Sure. Thanks, Lyanne, and thanks, everyone, for joining. It's great to catch up virtually. And as I said to Lyanne, it's not the same as flying to London for this conference, but it's really good that we can get together. So ResMed is market leader in treating chronic respiratory conditions, most notably what we call sleep suffocation, but also medically known as obstructive sleep apnea. We also treat chronic obstructive pulmonary disease, known as COPD. These are hugely underserved markets around the world. We think there are 936 million sleep apnea patients and 380 million COPD patients around the world. And in all markets, they're pretty well less than 20% penetrated. And in many markets, much, much less than that. So in terms of market penetration, we're still just getting started even in our core markets. Several things about our approach really position us well to be market leaders and continue winning in this. We're very focused on innovation, and we have the best, most quietest, most easy-to-use devices in our treatment. We have the best quality. We really focus on quality, and we've got very strong systems and management around the high quality and really robust safe performance of the products. We've got a unique culture in ResMed, a real can-do culture and we get things done, and we always are proactive and keep going. So we believe this will really position us to continue to win. We're leading the world in digital health. We've made huge investments in terms of internal capability and in terms of device and connected capability as well as infrastructure capability. And we have the largest network of cloud-connected medical devices in the world. We've got great patient engagement apps that make a huge difference to patient outcomes and actually patient adherence to our treatments. We've got market-leading software solutions that really change the way that providers can manage patients and that lower cost get much better outcomes, and we've got data to prove that, and really innovative analytics solutions around these sort of that are helping all players in that whole end-to-end pathway for the treatment of these chronic diseases. We're helping all players perform better, leading to better outcomes for the patient. We're transforming out-of-hospital care at scale. We've got really great partnerships going on. We've got our really strong SaaS businesses, where we're running operating systems and EHR systems for providers of care in these chronic situations. And for us that some of those are emerging businesses, for other ones such as Brightree, they're really, really strong market leader businesses. We're executing to our 2025 strategy to improve 250 million lives. And we believe that our patient-centric innovation and high-quality approach as well as our digital approach will really position us to execute that strategy well. In very interesting times in the last 18 months, not only with just the background of the pandemic and the impact that's had on the way the world works, and we've adapted really well to the changes in those around the world. And operating-wise, most of the company is running really without missing a beat through all of this. We had huge demand for ventilators last year. We're able to respond to that and save many, many lives. And this year, we've had a competitor recall that has meant that one of our competitors has effectively withdrawn from the new patient market for a year or so, and that's created a lot of shortage in the market, and we've had to really change our process, which is driving demand and fulfilling it to actually being in an allocation process. But what we have learned through all of that is that our principled approach really stands us well in that. And our principal approach starts with put the patient first. And so we're always looking to provide for the most critical patients and making sure that as we provide therapies and treatment, we're providing it to people who are going to look after patients well and manage patients well. Other parts of our principle, obviously, we do business with our long-term partners. We'll be very responsible on pricing and that type of thing. We're really trying to make sure that we're setting up the industry for the future when these challenges are over, and we have really strong long-term patient growth through there. So Lyanne, that's a quick summary. There's a lot going on. I'm sure you have a lot of questions to get into specifics here. And also Dave Pendarvis is here to help answer questions.

Okay. Thank you, Rob, for that summary. As you mentioned, there is a lot going on. If you had to pick 3 things about ResMed that you're most excited about over the next 2 to 3 years, of all those things that you mentioned, what would they be?

It's always hard to limit yourself to 3. But let me have a go then. So the -- really, the underserved market is still the issue. So our core business of treating sleep apnea patients is really one of our most exciting markets and the changes that we're introducing there. And then we'll get to these in questions, but we're introducing changes like augmenting the channel approach. We've got changes in specific markets, where there's been reimbursement changes and greater adoption of digital technologies. These digital technologies are going to continue to improve the outcomes. We've got a large investment in AI and ML. I'm using the data that our devices gather, I'm using that responsibly and pairing it with other data that comes on and using that to create solutions that provide better outcomes for patients. We're really only just getting started with that. The launch of the AirSense 11, which we brought forward to help us deal with some of the capacity shortages in the industry is really exciting. And that's a real whole new digital platform that will be accelerating the rate at which we gather data and accelerating the rate at which we're able to interact and communicate with patients as they use this therapy. We should see that accelerate the digital solutions space as well. Our SaaS business is a really exciting -- running these operating systems for these care providers is a really great thing to do. It's very leverageable businesses. And once as the pandemic issues wind down and things normalize in these chronic care settings, we'll see those businesses really start to accelerate well. Yes, there's a lot of exciting stuff going on. We are looking forward to the -- to doing a little bit more in-person contact with our customers and with our team around the world as hopefully, travel restrictions will ease sometime in the next year to let us do that. But I think we can just really accelerate everything here.

Okay. Thank you very much, Rob. So just to let the audience know, you can send in questions via the Veracast portal or if you prefer, you could send it to me at [email protected] or bofa.com. I've also got a number of questions sent by our Australian clients. Obviously, it's very early in the morning here. But let's start with the AirSense 11, Rob. Obviously, that's just been recently launched. It's new and exciting. Can you tell us a little bit more about the technology that's in the AirSense 11 and how that differs from the 10 and what you'd expect to get from that technology that will support ResMed's growth?

Yes. So in terms of its basic technology, we continue to improve the basic therapy provision of the device and the ease of use of it. And so it's super, super comfortable to breathe on, connects really well with all of our masks and other masks. The humidification system is really comfortable and the control of the air temperature that you breathe in is really, really good. From a usability perspective, it's very sleek. It's got a high resolution kind of touch screen on it that actually because of the comms platform that's in it now, it's not really just a data center. It's a node in a 2-way communication system, and we are able to -- I don't know, possibly treat it more like a smartphone than just a text device or something like that. And consequently, we're able to add new value and add new features over time with it. We're able to interact with patients. We already found during our controlled market launch, which we've been doing since earlier this year, that's a controlled launch where we have specific customers that take the device, and they help us track very carefully what's going on in the device and fill out surveys for it and all of that type of thing. But out of that, we saw a huge increase in the uptake of our myAir digital patient engagement app through that solution. And if that sticks through the long-term use of the device, that will lead to even greater increases in ongoing adherence and long-term usage of patients. So we're really, really excited about this. It's really a comms platform with a really good therapy device on it as well.

And where does the pricing sit for the AirSense 10 -- or AirSense 11 versus the AirSense 10?

So in our world, we don't get too specific about pricing. Pricing is quite local depending on local costs and reimbursements and models like that. And it is constrained by reimbursement, of course, as well. But typically, when we launch a new platform, that underpins the sort of the pricing and there'll be less discounting and all those types of things on a new product. With the Air 11, it's quite a different launch strategy though than what we typically have where what we'd have is we'd have a big inventory build of the old product and a big inventory build of a new product to risk manage a country-by-country switchover from selling the 10 to the 11, and that would be a big switch over. However, given that we're in a really dramatic industry shortage time, it's actually quite a good thing for us to have 2 platforms that we can manufacture at rate and increase capacity. So we're actually able to increase industry capacity by running those 2 platforms in parallel. So we're not doing a switchover from product -- from old product to new product directly, we'll be running both products in parallel. We'll be very market selective as we launch so that we can sort of optimize volumes in markets. And with that, we will be launching the Air 11 at a premium. It's a smallish premium, and I won't go into the exact details of what it is. But it will depend on per customer bases, all about pricing terms.

Okay. And why don't you -- you mentioned in your opening comments about augmenting the channel. Can you tell us a little bit more about that?

Sure. So we have different channels all around the world in different countries. And the one we talk about a lot and get asked a lot about is the home medical equipment provider channel in the U.S. who do a really good job of managing patients and managing the complexities of billing, especially Medicare, but also all the private billing as well. And their job is to interact with sleep labs and get referrals from sleep specialists for patients to come and then to look after and service those patients long term. And we see a long-term future for that business model. But if we're going to get to these 936 million patients around the world, we may well need to augment that with other channels as well and channels that can, in a sense, create more demand. And so we had some discussion around pharmacy chain and particularly in CVS in the U.S. where they have got a strategy around having a chronic care management inside their outlets with their health hub strategy. And in any chronic care management situation, managing sleep is really important. So they do want to have a sleep management capability there. And we think having patients able to walk into the pharmacy and see ResMed promoted there and awareness of sleep apnea is good for the traditional channels and also creates a whole new channel as well for that. In other countries, we have run this multichannel model, notably in Australia, where we have both brick-and-mortar retailers that are ResMed branded. We also have a traditional wholesale channel to other retailers. We have very strong e-commerce and we also have pharmacy channels. And we underpin that with promotion of ResMed brand and also promotion of importance of good quality sleep in the media there and on typical promotional channels. And that's had a very good impact outcome on that for the -- both for ResMed and for patients and for the whole, everyone in the industry that's there as well. So that's a learning of it. In other markets, we have different go-to-market strategies. But generally, as we move on, on that penetration curve and get away from being very small penetration, we are looking for other models to augment that penetration.

And if you could touch on that CVS partnership that you mentioned there. How should we, as the investment community, be thinking about it? Is it, it's in terms of the -- the terms that you have with CVS, is it similar to that you might have with a large national HME?

Yes. I mean I wouldn't get into too many specifics in there. Obviously, dealing with a national retail pharmacy chain that has an outlet within a few miles of every person in the country is different from dealing with HMEs in terms of the systems and the reporting and the forecasting and all of those processes. We've had to invest in those as well. But what I would say is that our thinking is the lifetime value of the patient, as we think about someone who's going to be on a long-term CPAP treatment and getting their masks refreshed as appropriate and maybe future having machine, additional machines or whatever, our view is that the lifetime value of those patients is pretty similar across these channels.

And then if you think about, I guess, the entire -- I guess, the entire landscape on CPAP diagnosis, some awareness diagnosis to setup some delivery and then the follow-up after that. Outside of the current manufacturing constraints, once that's resolved, where does the key challenges for growth lie in your view?

Yes. It's a good question, Lyanne. We've really always described that pathway, which you've just sort of outlined, sort of it's awareness, that's primary care referral, it's a specialist referral. It's lab or home testing. That's referral to a setup and a trial of CPAP and then billing and then a long-term adherence with continued mask refresh and ongoing support and management. And there are bottlenecks potentially at all of those points. And so it's a little bit of a long-term project. You fix one bottleneck and you immediately run into the next one, so you've got to adjust that, then you run into other one on that. And so it's a continual process of optimizing that pathway. Our view with our digital solutions, our partnerships, particularly the technology partnerships, our clinical knowledge and our ability to actually build the financial case that it makes sense for health systems to treat sleep apnea -- it makes financial sense for health systems to find and treat sleep apnea rather than pay for the consequences. We have activities in all of those across the board, and we keep sort of pushing away at each bottleneck. And I think the net of that goes back into the long-term steady growth that you see. We will steadily grow the number of patients under treatment. We'll steadily grow the rate of new patients coming into treatment. It's got to be coordinated across the whole insurance, payers' ability to pay, diagnostic resources, provider management resources. All of those factors have to coordinate. And so I think we -- that really both explains and provides an outlook for our future view of future steady long-term growth of the market.

So if we could move on. Obviously, I touched on the manufacturing constraints currently. Unsurprisingly, I've got a lot of questions that have been fed into me about your competitor recall. So I'll start with, obviously, ResMed put out some guidance to the market of $300 million to $350 million in terms of upside or potential upside from the recall. One of the questions I had was, what -- I guess, could you explain, I guess, what the assumptions are behind that revenue estimate?

Sure. One of the -- the supply chain bottleneck is primarily in terms of longer-term electronic components. And let me explain that in the electronics industry, it's a sort of cyclical thing, and they have shortages of particular components every few years. A few years ago, we were urgently made in shoring up our supply of ceramic chip components, for example. And then when the pandemic started and a little bit of disinvestment or lack of investment on the supplier side and then an uptick in home consumer goods and with an overlay of the auto industry on it, there's a big shortage of chip components. And -- but for us as a customer of that supply chain, we're a very good customer of it, not the least because we're providing life-saving products that make a real difference to people's lives, but also our products will last a long time in the market compared to many of these other products. And also, we can forecast and see our growth in future business. So we have long-term forecastable business for these suppliers. And so they quite like that, and we have a good relationship with them. And unfortunately, we didn't -- we couldn't forecast sort of an event of a competitor pulling out of the market due to a recall. So then we had to go back in and renegotiate volumes through all of that. The $300 million to $350 million really is our best estimate of how much additional supply we can pull of those critical components to build into products. In terms of our own manufacturing capacity, we just commissioned a large new factory in Tuas that's got multiyear capacity for us. And our manufacturing strategy of being an assembly house for these devices of really functional competent components from good suppliers means that we can flex and ramp that rapidly. And we've often made use of that capacity capability in the past. But without the components coming in, it's difficult. So the component situation is dynamic. Something could look fine now and not be fine in a month's time and we'd have to work around it or maybe do a quick design change or something like that and recertify that, do all those. There's heaps of work going on for our team. And the $300 million to $350 million really is the net of all of the puts and takes of how we think we can do in terms of increasing that volume. It's pretty robust. But as we said in our -- Andrew Price, who's our Head of Global Operations based in Singapore is on the usual position of really being our Head of Sales because he's determining what we can sell based on what we can supply. So it's purely supply limited.

And so one about on the supply or the manufacturing side, obviously, the recall was announced back in June of this year. How much has ResMed increased its output since then? And what can we expect for the remainder of this calendar year or this financial year?

Yes. I mean there was some notification a few months before that, Lyanne, around the recall.

Yes. Around April.

Yes, when the competitor put a provision and -- in their financials and actually outlined the scope of the problem. We probably had more insight to decipher what they were saying. So we were aware that there was going to be shortage. So we did ramp everything up as we could then. But really, the $300 million to $350 million is defining what we think in terms of a run rate through the year. It probably will be skewed. We think our supply situation will be better in the third and fourth quarter of the fiscal year than the first and second. And -- well, I haven't really put out like -- unlike we did with ventilators, we haven't put out a specific number to say this is how many we'd do. And you have to understand, it's a very challenging time for our customers who have got patients that they can't service. It's actually not good for the industry that there will be unsatisfied patients, unsatisfied demand through it. And we actually hope the competitor can get going as soon as possible to alleviate the situation. But we believe that we can lift our volume enough to add that sort of $350 million -- $300 million to $350 million worth of revenue on to the results.

And where does inventory levels sit? So obviously, you said you started ramping up production from about April of this year. Has inventory levels run down? Are you being able to replenish it at the moment given ramp-up of manufacturing? Or is it pretty much what you make just goes out the door?

Yes. I mean we've got a lot more demand than we can meet short term. Typically, we do need inventory. There is a complication as well in the freight world where with the cessation of commercial air passenger travel, airfreight is rare and expensive. Now usually, we've had that available at a reasonable cost to take 8 weeks out of our supply chain instantly. And we do do a bit of that with that. Sea freight is also quite challenging and port blockages and things like that are making freight a challenge. So in a sense, they are just like headwinds that we have to manage through all of that. On the other hand, we were sort of in an inventory build position, looking at launching of a new product. So we're using that. I'm not sure when we announce our quarterly results, how you'll see that inventory position. But there'll be headwinds and tailwinds around that inventory as well. Some of it will be challenged by freight. It will be optimized by huge demand and our ability to use that inventory that we've been building for product launches.

Okay. And I've got a question that's coming via the Veracast portal. It's, what proportion of your market share gains would you assess to be sustainable over the long term?

Yes. That's a very, very interesting question. I think our view is let's take a principled approach. Let's do the right thing by patients, do the right thing by our provide customers around the world, be as transparent as we can and let everyone know what we're doing and what we believe, only make commitments that we can deliver to them and live up to. We think if we do that, we think if we do expose people to the value of the digital solutions and the better outcomes that can be achieved at a lower operating cost for providers around the world, there's no reason why we shouldn't sustain market share increases. But that said, there will be -- competitors will come back in. They won't walk away from the business. They've got an infrastructure and relationships and a reputation through there. And so it may well be that, that sort of market share gain in the short-term one is sustainable. We may do better. It's a little bit hard to be specific. Dave, I don't know if you want to weigh in on that.

No, we really don't know is the short answer. We do believe that some of those gains will be sustained. There's also factors that go on, which is a lot of our customers want to have a second supplier. This particular incident shows you want to have multiple suppliers. And we're hopeful that we'll be the first supplier, the primary supplier. We think our quality systems have demonstrated that you ought to rely on us and trust us. But a lot of our customers will want to have a second source supply, both to keep us honest in negotiations as well as to just assure themselves of multiple sources of supply. So we won't get all of it. But as Rob said, we do the right thing, we conduct ourselves in the right way. And we see how customers and patients react to the AirSense 11, which we're truly excited about. I mean it's sort of unfortunate that this recall has overshadowed the great values of the AirSense 11. But as we get that deeper into the market and more patients and customers react to that product, we're hopeful that, that on its own to be able to sustain some market share gains.

And in terms of -- obviously, you mentioned your customers there. With the shortage in the market, how are you allocating supply to whether it's amongst the DME community, HME community or across different countries?

Yes. We've got a really strong team of very senior people working on it in a sort of a TMO approach really focused on this because the critical question is to how to do it. And we want to do this to our principles, right, which is put patient acuity first, which actually means where we could prioritize to ventilation and that we will and then by levels and ASVs and then APAPs as well. That's critical. We want to make sure that we're supporting -- and I said some of this before, supporting providers that really do a good job looking after patients and they'll be the ones we know and have strong adoption of digital solutions and we have existing business with them. So we're allocating to that. And we're -- our aim is to be able to allocate to those people an increase from their historical levels. We're looking to that. We're aiming to be totally fair in taking that approach across geographies. So we're not prioritizing any one geography over another. There are variations that happen in that in terms of we've got some products that are built for a specific part number in some countries, but you haven't got ones for other countries. But notwithstanding that, we're doing everything we can to allocate fairly across geographies and fairly across our customer base. And then with what's left, we'll also then allocate to new customers that are coming to us wanting supply because they haven't got it from anywhere else.

Okay. And another question that came in around that allocation and more so on pricing. So understanding that ResMed is not increasing its list price during this period. But is there any change in the dynamics with respect to discounts that might impact your overall prices on average overall?

Yes. I mean I think there's a lot going on here. Much like for us with our suppliers, particularly in the electronics, normally, you'd expect sort of an ability to negotiate ongoing price declines with those suppliers. That's off the table at the moment when there's such so many shortages around there. And I think consequently, also with our customers, they'll -- I mean we've got many contracts and agreed rebate programs and all those commitments, we have to live up to all those commitments, and we absolutely will. But beyond that of adding new discounts in and stuff like that, we probably won't be doing that. And so yes, you're quite right. We're not changing the price of any of the existing products. The Air 11 with its added values that it creates, we think, deserves a premium, and we will be putting that on as a premium in the short term.

Okay. Okay. I might move away from that discussion on recall given that we've talked about it quite fully now. A question that has been asked is around clinical research. And what are the findings from the RECOVERY-RS study, which was released last month, has shown that CPAP therapy is more favorable to conventional oxygen therapy. Has ResMed seen any potential benefit from the NHS' recommendation to use CPAP as the main form of treatment for COVID patients in the U.K.?

I don't think we have. But Dave, do you have a comment on that one?

Yes. I mean that was a pretty specific survey to COVID patients who were in the hospital. And hopefully, we're going to see that hospitalization that need for acute care lower. I think CPAP is though commonly used in certain hospitals for treating acute cases of respiratory insufficiency and just the need for oxygenation. And so while that study was encouraging, I don't -- it hasn't led to a big change in clinical practice that we've seen in the U.K. so far. I mean I think it's probably more underpinning a continuation of practice that are already there.

Okay. Thank you. And appreciate that some of these questions will jump -- yes.

Sorry, Lyanne, I was going to say, there was a very significant study released last week at ERS that's worth highlighting that was a study of French patients, hundreds of thousands of French patients, and looking at patients that had stayed on their CPAP treatment versus patients that tried it and gave up. So in a sense, what you had was 2 cohorts of diagnosed and preliminary treated patients, but then some who stuck with their treatment and some who didn't. And what we found in this study was retrospective but a super strong real-world evidence was that the survival rates were something like 40% more for patients who stuck with their treatment over a course of 3 years, really significant. So it's just more evidence that staying on CPAP saves your life. And those types of chronic illnesses over longer term will make a lot more difference to us than the acute ones, as Dave commented, in the whole sort of issue of what sort of chronic management of COVID, it's still very early days yet.

And what studies can you, I guess, point us to so that -- whether myself or the listeners can look forward to that might come out the next, whether it's 12, 24 months that might make a difference for the market?

Again, I don't actually have the road map of our studies. What we have been doing is that typically at every ERS, you'll find that we're involved in 10 or 20 studies, and we've got a really strong medical affairs team now with a really great set of relationships and also really good access to data. And so not only is our data incredibly powerful, it's very deep around sleep and the data we get from how people are using devices and those interactions. But when we can partner that with data that's also got all-cause costs and things like that, that actually could provide very strong economic evidence showing that it is lower cost to treat sleep apnea -- define and treat sleep apnea patients than it is to treat the consequences. There was recently a nice publication just doing this was -- was actually based on a study that we'd supported showing that you've got better outcomes for patients on mild -- with mild sleep apnea if you kept them on treatment. And so we're looking to see expansion of treatment coverage in the U.K. to those mild to moderate patients. Dave, did you have more on -- any more on that?

No, no, I think you've covered it. I mean, again, what you'll continue to see, Lyanne, is an ongoing mining of the data that we're collecting and particularly when we can marry that up, as we did in the French registry study, with other health outcomes, it creates a very, very powerful set of data. And so that's one of the main benefits that we're able to do from the data that we're collecting every night. And so you'll see more and more real-world data-driven studies as opposed to small numbers of patients in sort of a controlled clinical trial.

Thank you. And let's just move on to the SaaS business now. Obviously, we're coming up to the end of our time. But on the call or on the Investor Day call last week, there was a mention of acquisitions multiple times during the call. Can you provide more detail on where the -- where ResMed is targeting in terms of acquisitions, whether it be -- will it all be in the SaaS base? And then what areas are you looking to focus on?

Yes. So broadly speaking, Lyanne, our acquisition strategy is, we are looking for things that help facilitate our overall strategy. So absolutely, it's not just SaaS. But probably there's likely to be more activity in the SaaS area as we build out that business. And notably, the SaaS business is U.S. only at the moment, and we're a global company. So we are interested in extending that capability. We like bolt-on acquisitions, particularly in the SaaS world. Many of these companies, we have partnerships with, either reselling them, us -- reselling us or us reselling them or adding on a technical capability to our product offering that we don't have, and they're very good targets for acquisition because we know them really well. We know how to technically integrate them and can really add value quickly in a snap at the chatter and that we have a couple of examples around that. That said, in terms of sort of specific market areas that we've got in our SaaS chronic care management area, we've got no glaring gaps in the U.S. area, but there are a few chronic care settings that we don't serve that we could maybe add some value to. So there could be options in that as well. And then in other countries around the world, it's always easy to augment our distribution and channel capacity with these acquisitions as well when we do that.

Okay. Thank you very much. And that brings us to the end of that time. For those who have sent questions, I apologize if we haven't got to it, but I'll follow up with you later in the day. Thank you so much, Rob and Dave, for your time in speaking with us. Are there any closing comments that you'd like to leave us with?

Thanks, Lyanne. It's great to catch up. As you see, these are incredibly interesting times since the COVID pandemic has really accelerated some of the themes that drive our 2025 strategy. Obviously, importance of respiratory health, the importance of staying out of hospital and the importance of digital technology and the adoption of digital technology have all been accelerated by that. So we're working hard to get our strategy aligned with that acceleration and keep driving forward.

Thank you very much.