ResMed Inc. (RMD) Earnings Call Transcript & Summary

Good afternoon, everybody, or good morning or good evening, depending on where you are. My name is Joanne Wuensch. I'm the U.S. medical technology analyst. Very pleased to have with us today CEO, Mick Farrell from ResMed. As many of you know, ResMed is covered by our Australian analysts John Deakin-Bell. Today, I'm the moderator. So let's just get started.

Nick, the industry is dominated commentary, at least, is dominated currently by the Philips device recall. In John's memory, this is about a 3.5 million units, which recalled and a key question to start off this discussion is how are the customers coping? And how are the physicians coping with this impact?

Yes. Well, I believe the latest data, Joanne, is -- John was right about 2 months ago. I think our competitor updated to 5.2 million devices that have been so far registered as part of that recall. And the current time frame is from June 2021 through to December 2022, so an 18-month period of time. And so to your question, it's a big impact on the doctors, the providers, the whole ecosystem. And so it's been really tough. I think the hardest hit in an event like this with 5-plus million devices affected are other patients. And with a global semiconductor shortage, it's difficult to get the flow of product that can be there. ResMed was the #1 player. Before this happened, obviously, ResMed was the #1 player globally in sleep apnea and respiratory care provision. We have to be the #1 player and the #2 player by market share to cover the needs. And we just simply, with the supply chain shortages, particularly around electronic components and semiconductors, can't keep up with all the demand of #1 and #2 share. We're doing incredibly well. I mean you saw our numbers growing. Our devices were up 16% year-on-year in the last quarter of the December quarter. But it is a challenge, the toughest hit are the patients where they've been affected. Fortunately, many patients have been advised by their doctors to continue using the device as long as they're not seeing black particulates and to continue, therefore, using masks and getting treatment for the suffocation because that's a lower risk than the risk of the impact. But on the other hand, getting these patients their replacement devices, our competitor is laser-focused on that. They're out of the new patient market. ResMed is laser focused on the new patient market, being the #1 player in as much the #2 share as we can cover.

And on your most recent earnings call, you called out $300 million and $350 million of incremental device revenue, talked about most is being weighted. It looks like towards the fourth quarter because you can't get the components. Do you have an update on this? I mean how do you think about it progressing throughout the year? Is this a step function in terms of availability? Or does it become a step function of just simply being #1 and being #2 at the same time is not easy.

Yes, it's not. And so as you know, Joanne, you followed us for a decade or more. We don't provide guidance. We never really have because we expect sell side does their job and buy side does their job and we're just really focused on running our business rather than -- market to market on decimal points of an EPS or revenue. But for this year, given the perfect storm of COVID recovery of patients coming in, of component shortages coming in and then our competitor recall. There were estimates on the sell side from $50 million in incremental revenue, up to $950 million in incremental revenue for the fiscal year 2022, which as you know, for us is July 1 through to June 30. So we said, look, let's just place with our best estimate of what we think it will be, the incremental revenue above what our current output from previous growth forecast was. And so we placed that at $300 million to $350 million in revenue for this fiscal year 2022. In Q1, we had about $85 million. We said $80 million to $90 million, but the median point there is $85 million. And then for the December quarter, we said $45 million. So we sort of bracket it at $40 million to $50 million. It's hard to get the exact number. We know what our forecast was to get the exact number of incremental device revenue. And then as you said, just doing the math on that, that means that if -- as we said, the March quarter is going to be tough as well, like December, and components start to free up in June, September and December, that puts quite a lot of it. Not so much a step function as a sort of -- it's almost like a use sort of ramping up. And then as we go into fiscal '23, we think that will continue to rise in September quarter and December quarter. The reason that we feel good about components opening up for June, September and December calendar year 2022 is that we started a lot of projects, Joanne, sort of reengineering our AirSense 10 devices, reengineering our supply chain to get new suppliers for existing parts. And then, of course, going to our current suppliers and just begging and pleading for more, which is tough in a crisis. But that combination of -- oh, and fourth, ramping up our AirSense 11. Let's not forget, we launched the AirSense 11 into the United States market, just 4 or 5 months ago. And that's only in the U.S., but that's ramping up as well. So all 4 of those give us confidence that with the reengineering parts, reengineering suppliers, going back to suppliers for more and adding AirSense 11 that we can free up supply for June, September and December calendar year 2022. And so we're still sticking with that guidance of $300 million to $350 million. It is back-end weighted on that Q4. But at this point, we do see a freeing up of some supply given all the mitigations that we kicked off, almost like the starting gun on the marathon went off June last year when our competitor announced the U.S. recall and global field safety notices.

But based on those comments, it does sound as if it will continue into fiscal year '23, if they can't supply it.

Yes. Look, I think let's see when our competitor first announced this in June, they said, hey, it will be 12 months from approval and that's imminent. So everyone calculated in, they'll be back in the market in June '22. On their September call, they said, hey, we just got approval in August, so 12 months from now, so that September 2022 will be back in the market. Then on the December call, they said, hey, it's 12 months from now, the number has gone up, so it's December 2022. So it's almost like a bow wave that was always 12 months out for those 3 announcements from them. I don't know what their March announcement will be. We'll wait and see. We've run scenarios that they come back as early as September this year or December this year as they're currently saying or even March 2023, probably more likely to delay to March than move forward to September. And so we're looking at all those scenarios. Look, as your first comment, the altruistic part here is we want them back because of the patients and the needs of the patients who get diagnosed and coming through and being less altruistic and more focused on Adam Smith's invisible hand, we want them back in the market because we get a 60% attach rate of our masks on their devices. And so there's mask revenue for the taking there as well. But if they are delayed further, we're going to get more and more parts and pieces and then create the great digital experience for the customers that we get, the end-to-end digital play on the AirSense 10 or the AirSense 11 all the way from therapy set up to management to ongoing resupply with Brightree resupply with Snap and with myAir for the patients and AirView. And Joanne, I'm pretty sure you've seen this study, but we are now achieving 87% adherence at 90 days when the patient uses the AirSense platform, the myAir's technology and the doctors using AirView, those 3 together. And that's from a study with over 100,000 patients in it from our Medix cloud. We now have over 10 billion nights of medical data in our cloud system and over 15 million 100% cloud connectable medical devices out there, actually 16 million right now.

So I'm going to spend a little bit of time on new patient adds. And it appears that they are not being diagnostic or at least prescribed devices. Is this a pandemic impact? Where have they gone? How do you identify them, bring them back into the system?

Yes. So there's a little bit of the sort of post pandemic flow of patients coming through. I mean I think we're estimating -- and look, we sell in 140 countries. Even if you just take this country and the 50 states within it, there's a spectrum between openness and closeness of society and systems post-COVID peaks and so on. So our best estimate is we have somewhere between 85% and 100% of pre-COVID patient flow, taking sort of calendar year 2019 as the baseline there. So somebody between 85% and 100% of that pre-COVID patient flow. And it's sort of steadily increasing across our portfolio of 140 countries. And so every quarter, that sort of just moves up a little bit and that sort of puts the range. There are some countries above triple digits that are just -- they've just found ways to have COVID clean protocols in the labs, they've adopted home sleep apnea testing on scale, and they're ahead of where they were in 2019. There are some that are sort of at 85%. That sort of gives you the range. So that's a factor 1. Yes. Factor 2 is with supply chain constraints, it's hard to keep up the demand as it comes through. And then Factor 3 is obviously, there's limited supply across the whole industry, given that the #2 player is out for at least 18 months that they've said. So all that comes together to mean there's a bit of a perfect storm for patients coming through. So 1 thing ResMed is not focused on right now is marketing demand gen at the consumer patient level. We're focusing our work on experimentation and pilots around demand gen rather than driving it at scale. And we're really focused on just doing everything we can. Our major focus is on our supply chain team now. And I can tell you, they've done some amazing things to reengineer and requalify, validate and verify new suppliers, to revalidate and verify new parts and pieces. It's a little different. I think in some of the car companies like Teslas being able to prove it a bit faster because they have less constraints around the small 3, 4 and 5-nanometer chips. We've got a larger chip set. It's an older chipset and so it's harder to reengineer actually the older components. But we're able to do it, and we're getting there. And every quarter, I can see getting better throughout this calendar year. March is going to be tough, but we're going to start to free up in June and certainly, September, December and really drive that forward. I think what's happening now with patients who get diagnosed as they're being told, hey, you got a diagnosis and your setup is in 4 weeks or 8 weeks. I want to get that back down to 4 to 8 days versus 4 to 8 weeks. And we're going to get there throughout the calendar year.

And so when mask sales were up 8% in the second quarter globally, is that this dynamic of what you're discussing? Or is there something else that attributed to that?

Yes. Well, so there's tailwinds and there's headwinds. The headwind, obviously, is that the #2 player is out, and so we're not able to keep up with all the share. So the first time fit of patients with new masks on new patients has a headwind there. And there's some sort of tailwinds associated with the fact that this time a year ago, we were more shut down than we are now. So there's a little bit more flow of patients. And the other tailwind, which is we're driving very actively sort of blowing on our own sales, if you like, is the fact that we're moving at scale on ResMed ReSupply and on Snap technologies. And so our ability to help DMEs drive resupply has been incredible. And both those technologies supply in the U.S. We've also been working internationally. Our international mask revenue growth was 11% in constant currency for Europe, Middle East, Asia and Rest of World in the quarter. And so we're not just using ResMed ReSupply and Snap Technologies, which is the sort of the strong 9% growth you saw in Q2, but we're driving it in the rest of the world as well. So we're finding ways in these omnichannel markets, consumer channel markets to engage people. I think one last tailwind there is that COVID-19, as we were talking about in the prep room there, Joanne, has impacted so many families, so many people. Everybody knows about respiratory diseases, communicable respiratory diseases. Everyone realizes that treating respiratory diseases and respiratory health and hygiene is important. I think that's been a step up, a permanent step-up in awareness of the importance of replacing the mask, the accessories that humidify the tubing because people say, wow, COVID is so communicable we know about this disease, we know it causes death and certainly hospitalization. I want to avoid that. Why wouldn't I pay $20 of the co-pay for this new $200 mask replacement 3 times a year or 4 times a year versus once a year or twice a year. So I think that's a good tailwind. And that doesn't go away. When we start to get on the other side of this, we start to get the new patient flow pickup. ResMed picks up the device side, I think we can start to see mask growth maintain and even move up from where it is.

So against that backdrop, let's talk about 2 other things. One is on the device side, maybe new competitors or smaller competitors trying to get into the market, does this give them a little bit more of an opening in the door? And then how does it impact pricing?

Yes. So look, I mean, obviously, with #1 player driving everything it can to take the #2 share, #2 player being out, that does give room for #3, 4, 5... to start to pick up share. And these are mostly private companies. I don't think any of them are public. And so they'll be talking, hey, we've doubled our sales. And so they've gone from 1% share to 2% share may be that player. Maybe someone's gone from 4% to 6% share. But the way I look at the low-priced players, many of these players, we've been to being with for 20 years. And how we've been out competing them is a smaller, quieter, more comfortable device that's actually more connected and therefore, more cost effective because we're able to lower labor costs. We lower the labor costs of setting a patient up on a ResMed CPAP as compared to an alternative player that's not got all the smarts that ours does by 50% labor cost reduction. And this is peer-reviewed published evidence we've been able to show. 59% labor efficiency improvement for those markets that have sort of a captive sort of government-run medicine with a fixed number of employees who actually have a higher throughput for the same number of employees. So we've proved those data in the U.S. and Europe and elsewhere. And so we really have that strong advantage. I can tell you, every single device we have that's available is sold immediately. So we get a chip, gets through the factory in Singapore and Sydney, gets on a plane and that we probably charter these days, I'm not kidding. Flying it to Singapore, flying it to -- from Singapore, sorry to Atlanta, our big manufacturing distribution center here in the U.S. and then out that door and off to a customer. When Philips come back, so Joanne, we actually haven't seen move on pricing actually with supply constraints. Some of these smaller players are holding pricing and even increasing prices. Our approach has been pretty much to hold pricing steady. Certainly, we have the AirSense 11 is priced at a premium and some older masks at higher prices, just given the constraints of supply chain and so on. We put a surcharge too, Joanne, on our products because, as I just mentioned, costs are up, sea freight's up 2x, 3x, 5x cost if you can find the sea freight available, and air freight is up multiples as well. And so we put a $12 surcharge on every single device we sold from January 1 this year. We put a EUR 12 surcharge on every single device we sell in Europe and rest of world on that as well. And so what we're trying to do is cover some of those costs and share some of those costs with us and our customers. And look, with the price of bread, milk, gasoline, everything going up, and supply chain constraints around everything, our customers understand the situation, and they sort of expected the surcharge. And so look, what I'll say is, yes, some of the lower-priced players are taking some extra share at the low end, we're taking the share at the high end. And -- but we're not actually yet able to meet the Philips. When Philips comes back, and we presume that's in the December quarter here, we think the simplest place to them to go is after those other players, the smaller players where they can say, hey, we've got cloud connected too. We're almost as good as ResMed and we're better than you. And I think that's where they go when they come back and try to take the share from the smaller players first. And then 2023, it's game on again with ResMed and Philips. And by the way, we were winning that game. It's like we're playing a soccer match and we're Liverpool, they're, I don't know, AX or something. And we were beating them 7-0 before they left the field. They've left the field for an injury time out or something, and we're still playing the game against the other players. When they come back, we'll play the game that we were winning at the start. We've been taking share the last 7 years in devices, not because of anything other than our devices are smaller, quieter, more comfortable, more connected. But really, what we were doing to empower consumers, patients with their own data. We have over 4 million patients using the myAir app. We have doctors on masks with 16 million, 17 million patients doing population health management, managing populations of patients, and we are working with payers and payer providers to show that we can overlap de-identify data with huge databases. And Joanne, we're publishing data. We published a study just this last quarter called the ALASKA study. I don't know why it's called ALASKA after a U.S. state because it was done in France, but it was an overlap of the 10 billion nights of de-identified data and the French Social Security, think Medicare French Social Security health care system. And we took over 140,000 patients, and we took CPAP adherent patients versus non-CPAP adherent patients, 70,000 in each cohort. We showed a 39% death reduction, mortality reduction in the CPAP adherent group, 39% reduction in death. So I've been saying this for years, Joanne, but CPAP treatment, sleep apnea is a case of life and death now. It is peer-reviewed published evidence, and it's coming out -- it was presented at ERS, European Respiratory Society, that's coming out in a major journal in the coming months. So I don't think I'm allowed to say which one, but it's just been accepted for publication. So ALASKA study look out for it. First, longitudinal real-world evidence study showing 39% reduction in mortality, huge, huge for our industry.

So I want to spend a little bit of time talking about AirSense 11. Clearly, an unusual time to launch given the pandemic and the recall, talk us through the launch marketing plans from here.

Yes. Well, Joanne, in a normal front, and you saw the launch of the S8, the S9, the S10, that's all we've been talking about for this fireside chat, right? I mean 25 minutes in, we were just been talking about the new products. So I'm glad we got at least 5 minutes here at the end, but you're right to focus on supply chain, COVID, competitor recall because that's what's impacting the industry right now. But when the fog of war clears and we get to see the other side of the field here, we're going to say that AirSense 11 was an absolutely phenomenal launch. It's only launched in the U.S. I actually am personally using the device now. And last night and every night, I've had using it for the last month or 2. My wife questions, is it on? It is that quiet. And that's even relative to our market-leading AirSense 10. The AirSense 10 device was the best in market against the DS1 and the DS2 from our competitor and all the others. The AirSense 11 has taken that to the next level. So it's not just smaller, quiet and more comfortable and more connected, there's an intimacy, I'd say, with the device. It has a touch screen, a color touchscreen on the device, and it almost brings sort of iPhone-like communication ability with the patient there right on their bedside table. And it's certainly very much encourages you through sort of cared check-in and personal therapy assistant and this interaction to personalized care and personalized medicine right there on the bedside table. And the really interesting fact is that it helps you connect to not only the smart screen on the device, but your smart phone. And so with the simple bluetooth connection and beyond, we're able to now have an uptake rate. And you remember, when we launched the AirSense 10, we're really excited because we've got around 25%, 30% of the time, patients would sign into the myAir. And forever in our industry, getting consumers engaged in their care was the hard part. And we saw that, yes, 25%, 30% take-up with myAir on the consumer app on the AirSense 10. We're seeing more than double that. We're seeing 60% plus uptake of patients signing up to myAir with AirSense 11 in these early phases. What does that mean? Well, going back what we talked about earlier, if you have the patient on an AirSense device, the doctors using AirView and the patients using myAir, you get 87% adherence, almost 9 out of 10 patients adherent every night on their CPAP. I mean, pharmaceutical adherence is what? 50%, 60% on a prescription. And we're talking about a medical device, you have to put a mask on we're at 90%, 87% adherence. That's what's really exciting about the AirSense 11. It's not just the device, it's the ecosystem it creates. The doctor connecting on AirView, the patient connecting on myAir and that amazing platform there. So look, early days, first 6 months, unusual to be launching during a pandemic. But during this calendar year, we're going to ramp this up, and it's going to go to other countries all around the world, if we're going to ramp it up for supply, but also for the amazing innovation that is the AirSense 11.

Talking about another new product, Propeller. Can you give us an update on the customer trials and if there is a path to market for this.

Yes. Look, I know we get into the 11th hour here. Obviously, I'll try to do the 3-minute version of Propeller.

We actually have a little bit more than 3 minutes. So you can -- we have -- yes, we do.

Okay. Great. Great, we must be going to -- not just to the top of the hour, but maybe 15 on. So I'll give you the 5-minute version, then Joanne.

Give a 5-minute version.

Look, when we bought Propeller, we talked about it being an early stage company, and there was really a real option play to get us from Stage III and Stage IV COPD, where we play already with our ventilators. So with our AirCurve and Lumis ST/ST-A and with our Stellar and our Astral product, we play with all sorts of respiratory sufficiency, including Stage III and Stage IV COPD. But sort of our holy grail was always can we get early to these patients. Large volume of patients with COPD are Stage I, Stage II using their pharmaceutical -- inhaled pharmaceuticals to treat their COPD as prescribed by their pulmonary doctors. So Propeller are in there, if you like, to get early with those patients. Really interesting data that we've seen and peer-reviewed and published around increasing adherence and lowering risks of hospitalization and actually lowering hospitalization rates with our Propeller technology. And so for those who aren't familiar with it on this chat, the Propeller technology is a cloud-connected inhaler. So it's a cloud-connected chip that monitors the patient through an app, the Propeller app. And we're able to show whether the patient is using their preventative but also their emergency medicines and track where they are, how often they're using it. And sort of apply the same sort of gamification techniques and technologies that we use on myAir to encourage adherence up to 87% on sleep apnea. Our goal is to drive that very high double-digit adherence on inhaled treatments for COPD. So early phase in this. But what I can say is we have a number of pharmaceutical companies signed up, that's almost like the air cover that you need to then go in, but the ground trips, if you like, that we're sending in here are our contracts with payers and payer providers and health systems. And that's where we're working right now. We're working with a number of payers and payer providers. And so what I'd say is we're in the pilot mode right now proving to payers and providers that this technology will improve adherence and lower costs and lower outcomes. This will be material to the business by 2025. But in the sort of this fiscal year '22, '23, '24, we're really building up the evidence and going payer by payer, state by state and then country by country to show that we can achieve all the great work that we've done in the pilot trials and the clinical trials. So it's a longer-term development cycle. This one is a marathon, not a sprint. But I can tell you, the mile markers will be approval by pharmaceutical companies, but more importantly, approval by payers and providers who really make the decisions as to what their constituents do. And then once we've got that, then we'll be doing the marketing that we do so well to pulmonary doctors to show that this new therapy device for ResMed or the cloud connected inhaler called Propeller is their best solution for risk management of COPD patients in Stage I and Stage II. And to complete, if you like, our ecosystem have taken care of COPD patients, not just Stage III, Stage IV, but sickest time avoiding hospitalizations but in the early phases of their treatment and give us that sort of consumer intimacy and doctor care there. So early days, some good signs on pharma, some really good signs on payer, but pilot phase at this stage and then sort of slowly ramping up and then hopefully some sort of step changes in that '23, '24 time frame to be material to our business across our COPD range by 2025.

So another question. Software as a service. So that improved in the quarter. MatrixCare has been impacted by the pandemic. Can you talk through what the post-pandemic growth will look like?

Yes. So our SaaS business on the Brightree side, actually did really well through the COVID-19 pandemic. We purchased Snap Technologies fortuitously, just February we closed, actually, I think it was live due diligence because it was before it picked up February 2020. And so that has been great because not only as we said earlier, respiratory health and hygiene needs of the consumer went up. So their propensity to say yes to a new set of masks and accessories. I apologize, I got an old school phone I got in the background, updating myself. But on the MatrixCare side of the business, where we have hospice and skilled nursing facilities, there was a big decline in census rates as we talked about throughout sort of calendar year 2020. And so those have started to pick up as census rates have come back in skilled nursing facilities and hospice. And the other parts of MatrixCare, home health has really been growing. Well, people do not want to go to hospitals for care. They want to have home health, private duty home care and life plan communities have really been picking up while skilled nursing facilities and hospice for census were coming back. So you saw in the last quarter, 7.8% growth on our SaaS business year-on-year in the December quarter. And we've said we expect to be exiting calendar -- sorry, fiscal year 2022 here at high single digits. So sort of maintaining that high single-digit growth on the SaaS business. And we think there's a path to really maintain that and get double-digit growth with leverage and the net operating profit line to contribute to the business. And even to push revenue to the really high single digits and maybe even cross over to double digits as we get to '23, '24, '25. We put in a new lead, Joanne, for our SaaS business, Bobby Ghoshal was actually formally the Chief Operating Officer over at Brightree. So he's a great COO over there. After our acquisition in 2016, he went straight in there, he was there for 2 years. Then he came back and was the Chief Technology Officer for all of ResMed for the last 3.5 years. He's now back in the SaaS business as the President of the SaaS business. And yes, first quarter end already driving up 200, 300 basis points, hitting that 7.8% growth in December. I think he's going to help that team achieve that as we exit here fiscal '22 at high single digits and then really push for sort of double-digit growth in NOP and even push to the highest ends of single-digit growth in our SaaS business. I think there's a huge opportunity for ResMed as the only really strategic public player here across out-of-hospital Software as a Service to really lead in the future of medicine. The future of medicine, as COVID had shown us, isn't in a hospital and an ICU or CCU. There are communicable diseases there. There always were, but it's made it really miserable with COVID-19. You can catch all sorts of things, the normal flu, other communicable respiratory diseases, staph infections and all that in hospitals. You should only go there when you're really sick, and you really need surgery. For the rest of the time, you should be at home at a lower cost, lower acuity setting. And the best low-cost, low acuity setting is your own home. That's where 95% of ResMed's revenues and profits come from. It's where our sleep business focuses, our COPD business we just talked about. It's on the go with the inhalers at home with the ventilators. And of course, at home with CPAPs and APAPs. And SaaS, again, 90% of that is out of facility in home where you live care. So ResMed stands for respiratory medicine. It also stands for residential medicine, which is treatment where you live. And it differentiates ResMed from other med tech and other health care players.

So is SaaS -- you've talked about the strategy outside the United States. How does that proceed? Are you closer to this?

It's interesting. Yes, SaaS, there are Software-as-a-Service technologies and players outside the U.S. market. I mean certainly, we look in different parts of Europe and Asia at the players in that space, and we think to ourselves, when should we expand internationally as well. So that's always on the horizon. I have nothing eminently to announce right now. But I can tell you, we definitely look -- as we think about expanding our SaaS business, we look at the organic growth that we're achieving, 7.8% last quarter, pushing high single digits as we exit the fiscal and potentially beyond. Some of that will be inorganic growth. I mean, obviously, we bought Brightree in 2016, we bought MatrixCare in 2018, 2019 with the close there, and we keep our eyes and ears out for other M&A opportunities. But look, organic growth is the best path for ResMed, but there's some really interesting sort of tuck-ins and add-ons that we keep our eyes and ears open for both within the U.S. and outside the U.S. in our SaaS business. So nothing to announce there, but we certainly keep our eyes and ears open. And one thing we've proved with some tuck-ins there were closing Snap at the end you can do due diligence in the COVID world. You can do a lot of the meetings on virtual. But I do want to meet the management team live. And being quadruple vaccine, with 3 Pfizers and the flu shot, I'm very comfortable to go out and meet people for the final due diligence rounds. And so that's always potentially on the cards there as well, Joanne, but nothing to announce right now.

I think that's a perfect spot for us to end. And so Mick, thank you for joining us today. It's a pleasure to see you, hello to your family, and I look forward to seeing you soon.

Great, Joanne. Thanks a lot for the discussion. Great questions.