ResMed Inc. (RMD) Earnings Call Transcript & Summary

We are ready to go. Thanks, everybody, for joining. I'm Lee Hambright, U.S. medical devices analyst at Bernstein, and we are thrilled to host Mick Farrell, ResMed's CEO. We are scheduled for a 50-minute fireside chat. Just a reminder, you can submit questions anytime through a pigeon hole, or you can raise your hand and we can get them in that way. So Mick, we really appreciate you joining us. Thanks for being here.

I'm happy to be here.

So you've served as ResMed's CEO for nearly a decade. Very happy to welcome you here to SDC. I think we'll jump right into Q&A.

Maybe just starting at a very high level. You participated in 2 related but very different businesses, masks and devices for sleep apnea and respiratory care on one hand, and then Software-as-a-Service on the other hand for out-of-hospital health care. Maybe you can just set the table for us by giving us kind of a 30,000-foot view of those 2 businesses.

Sure. Well, I'll give you a little bit of history of the company, and I think you'll put it in context, the 2 main sort of segments we're in now. The company was formed in 1989. It was a buyout of -- a management buyout, MBO of technology from Baxter Healthcare. So as my dad and 8 others, entrepreneurs, for AUD 1.25 million. So it's like only 900 million -- I mean, USD 900,000 real. And not a bad return, 1989, $1.25 billion to $30 billion, plus or minus, where we are now. But it was technology primarily around continuous positive airway pressure from University of Sydney. So we started out -- actually, the technology that was the best of the inventions was masks. And for the first 10 years of the company, '89 to '99, we were known as the world's leader in respiratory masks for sleep apnea and just providing that. And really, in the late '90s, early 2000s, we created the smallest, quietest, most comfortable continuous positive airway pressure devices or CPAP devices. So we became known as the mask plus device company. It was sort of the evolution that ResMed not only made the sort of trailing revenues, if you like, the razor blades, we then also made the devices, the razors that were part of that, and we really became that in early 2000s. And then a pivot from there, we bought a ventilation company in Europe called Saime in the early 2000s. And that's when we stretched from just sleep apnea treatment to sleep apnea and respiratory insufficiency. So think COPD, neuromuscular disease, ALS, and then became really a sleep and respiratory care business. And then around 2012, we've been experimenting on it, what I call the bleeding edge of technology around digital health for about 10 years to wave pages, a whole bunch of different sort of sneak in net tech and stuff in the early 2000s. And we decided to do what we call the reverse Amazon play, or I call the reverse Amazon play. And that was -- Amazon was a software company that created 100% connectivity in the Kindle to then sell more software books. We were a hardware company, sleep apnea, respiratory care devices and masks that put 100% connectivity into every single device we made in the AirSense 10, we called it then, 2014 launch, to then sell more masks and devices through that software. So we're a software-powered med tech company. And really that software lowered costs for the channel, improved outcomes for patients and drove more sales to the core business. And so that's what got us to become, I think, really the world's leading digital health-driven med tech company. And then 2 years after that, I'm looking at the company, I'm 3 years into the gig as CEO, and we're now the world's leader in digital health and med tech, and we're spending all this money on software engineers. They get the best bean bag, the best televisions, the best -- when we went to the office, best coffee, best everything, very expensive part, but it's all a cost center. It's enabling digital health, it's selling the hardware, but it's the software was a cost center. And there were companies right next door to us that we were paying money to get market share data, to understand our channel in home medical equipment. And they were running a Software-as-a-Service business, same software engineers, same back end, same cloud management, same cybersecurity, privacy and interoperability capabilities. But it was actually making money directly from the software, and that company is called Brightree. And so we've been partnering with them for a while. I knew the CEO very well. And we made the decision in 2016 to -- the market cap of the company at the time was $8 billion. So we made a 10% bet of the whole company, $800 million investment in Brightree in 2016. And that's what really created those 2 segments that you brought up. And I look back now, 5, 6 years on to that investment and the market cap of the company has gone up to $28 billion, plus or minus. Could I sell Brightree for $2.8 billion tomorrow, as a SaaS business standalone? Absolutely. Would I? Absolutely not. The synergies we got in not only being a digital health or med tech-driven medical device player, but also a SaaS company, have created incredible differentiation for ResMed, not only in our channel knowledge, buying technology that can actually drive trailing revenues of the core business, but also the learning that we get. Our Chief Technology Officer, she sits -- she came to us from ADP and Amex and Amazon. But she sits across the SaaS business and the other. So they look like separate segments, but actually the interaction between our software teams and technology teams are really strong. And it allows ResMed to not only be the leader in digital health, but also in what we call out-of-hospital software. We're not competing with Epic and Cerner and Allscripts for our digital health play in SaaS, it's all out of hospital. So think home medical equipment, skilled nursing facilities, long-term acute care, life plan communities, private duty home care, et cetera.

Excellent. That makes sense. So we'll circle back to SaaS in a minute.

Okay.

Maybe starting with the core business, the masks and device business, maybe can you just talk about the basic business model here in terms of how the buying decision works? What stakeholders are involved and then kind of what the flow of money looks like?

Yes. Well, absolutely. And so we sell in 140 countries worldwide. The company was started in Australia. We're now obviously based here in the U.S. I live in California. But we sell in 140 countries worldwide, but I'll talk about -- a big geography for us is the U.S. I'll talk about that flow and what the sort of patient flow looks like there. And I'll give some sort of summary of the other 139 countries. I don't want to bore you. We're only 8 minutes in. But in the U.S., it's primarily a B2B play in our Sleep & Respiratory Care business. We do have shop.resmed.com, and so we say we're selling directly. And we have interactions with cpap.com and easybed.com, a whole bunch of retail players as well, but it's primarily a B2B business. And so how a patient finds out right now is their spouse, sees them snoring or stopping breathing. Often, they Google this, go to WebMD, talk to their primary care doctor. And we're really working on this to create a more seamless digital end-to-end play. And we have a partnership we can talk about later with Google's assisted company, Verily, around this digital identification, engagement and enrollment. But right now, that's how it happens, either the patients or the person or their bed partner notices these symptoms: snoring, stopping breathing, suffocation at night. Sleep apnea is -- the Greek word apnea, without breath, not many people know Greek. Suffocation, everyone can understand that. You stop breathing multiple times per hour per night, sometimes hundreds of times a night. The trouble is you're in sleep states, you're unconscious and you don't know about it, but your bed partner does. They hear the snoring. They hear that. And then they hear this. So this is the one I always ask the bed partner. They hear this noise. I could do the full 10 seconds. There's 10 seconds medically to be in apnea. I did 4. But imagine that your bed partner, right, you're hearing the snoring and then you hear that stop, oh my God. And then it wakes you up. So it just destroys the sleep of both the patient and the bed partner. And this impacts -- it's not like this is a rare disease. This impacts 936 million people worldwide at a clinically significant level. And if you add on COPD and asthma or other markets, that's another 600 million patients, and that gets to a total addressable market of around 1.6 billion people, or 1 in 5 people in the planet that need respiratory medicine, respiratory medical help. But just taking sleep apnea, that core of the core business, it's almost 1 billion people worldwide. And so yes, so the flow of the patient is you get there, either spouse-directed or bed partner-directed or self-directed. I go through primary care referral to a sleep specialist, whether do a home sleep apnea test, which is becoming more and more prevalent, particularly because of COVID, accelerated hugely well over 50% of the diagnosis now in the U.S. of home sleep apnea testing. We go to a sleep lab, they find out how many times you suffocate. They show you the data. They show you where your blood oxygen went to. And the reason you don't die of each individual apnea is because you have this fight-or-flight response as a human, the wooly mammoth surgeon, epinephrine, norepinephrine, adrenaline into your body, your whole heart rate picks up and then you open up the airway and you turn over. You don't notice anything. You think you're sleeping fine, but you've basically been running a marathon all night. So you wake up tired. Your kind of cardiovascular system is spent and so on. So we present this data, or the doctor presents these data to the patient, and then a prescription for the first-line therapy, which is continuous positive airway pressure. And about 50% of them -- I'd say 50% to 60% of the time, the doctor makes that call as to what product you're going to go on because of the clinical data or the clinical need. And maybe around 30% of the time or so, the home medical equipment provider sort of fine tunes that. They get a generic script, and they fine tune it. But more and more patients are taking an active role, finding out what therapy is out there, finding out if there's a competitor, which there is right now under a recall that impacts their brand name and [indiscernible]. And then that combined decision leads to a purchase of a device. And now, this is a treatment for life. It's not a onetime cure. It's a treatment. And that means you get the device and then you're on, for us, a system where we're going to be doing remote patient monitoring. We now have 17 million, 100% cloud-connected medical devices on people's bedside tables all around the world. And from that, we now have 11.5 billion nights of nights of medical data, how you slept, how you're breathing, any apneas, any mask on-off or mask lag events. And we're using that big data, that billions of nights of data, to turn it into actual information, whether it's just the patient with their myAir app and patients, now 4 million of them, look at their data every morning. Like you might look at a Fitbit or you might look at some other wearable to track you. This is how you slept. It's a wearable that you're wearing for 8 hours, hopefully, at least, 7 hours every night that you're sleeping. And we're tracking all your parameters and giving you a score out of 100, and call it a myAir score, and we're using gamification. And we're not trying to get you to look at another TikTok or do another Snapchat. We're trying to get you to sleep better and your breathing better and your overall health better, and we're able to do that at scale. So that's sort of the process of going through to the end. But now that I'm on a roll, I have to talk about the fact of what we use the data for at a high level. We just published some data. When I say we, I mean, 7 key opinion leaders from Grenoble, Stanford, University of California, San Diego, Sydney University. And what they did was they, these researchers, we call it medXcloud. Our Chief Medical Officer, Carlos Nunez, is pulmonary critical care medicine, anesthesia, physician. We call it medXcloud, and they overlapped the 11.5 billion nights of data with the French social security medical system. So think Medicare for all in France, about 90% of people use government-run medicine. And so we use de-identified data from our database, overlapped it with French medical outcomes: mortality, morbidity, hospitalizations and so on. What they showed, over 140,000 patients -- now this is a trial that if we've done it in a standard randomized control trial format, would take 7 years and $100 million. This took 7 weeks, and I won't say the cost, but it wasn't -- it was the digital investigators, really, for those 7 weeks. And they were able to show CPAP-adherent patients. So out-therapy, adherent to therapy longitudinally over 2 years, and CPAP-nonadherent patients, patients who wouldn't or couldn't -- or we couldn't get them over the line to adhere to the therapy. And the separation of the survival chart between the 2 was 39%. So I used to get up at JPMorgan or Bernstein and say, in my head, CPAP is life and death, but I can't say that. My lawyer now let's me say that because I have 140,000 data points and P is less than 0.001 on this study. So I'm only 99.999% sure that CPAP is life or death. But now the French government is, too. And it's not just the Minister for Health, it's the Minister for Economics, too. We show that we reduced death rate by 39%. But you don't just die of sleep apnea. You have a heart attack or a stroke, you go in and out of diabetes, COPD, overlap syndrome and you're in and out of hospital. So we actually showed a double-digit 20%, 25% reduction in hospitalization and all-cause hospitalization and all-cause hospitalization costs. So whether it's Adam Smith or Hippocrates, both of those helped convince the French government to save money and to save lives that they would then create differential reimbursement for a cloud-connected sleep apnea therapy system like ResMed's and a non-cloud-connected system to help the distributors and people in the environment move that way. So the French system is similar to the U.S. one, where you go through that, primary care referral specialists, digital health and then remote patient monitoring. To give a quick summary of some of the other markets. We do omnichannel sales. So for instance, in Australia, where I grew up Australia, New Zealand, Singapore, parts of the U.K. and some parts of Europe, we have -- there's no government reimbursement, for instance, in Australia, ironically, right? The therapy was invented there by Professor Colin Sullivan in 1981 at University of Sydney. The government says, they pay the doctors to diagnose. They say, "Good luck." It's like social Darwinism. Good luck. If you can afford therapy, pay for it. But you've got this life-threatening disease, good luck. And so we've been there for -- whatever, 30 years, the company has been in Australia. So we said, okay, if the government is not going to do it, how about consumers will do it? And so we bought a cpapaustralia.com. We own -- we sell in pharmacies, chemists, we call them. We sell pop-up stores at equivalent of Nordstrom, like Myer. And we also sell through traditional channels, doctors and through home medical equipment networks. And through that omnichannel, we've got incredible engagement with the consumers. And so there, the purchasing decision, whereas I said, it was 50% doctors, 30% providers in this country, so 80% medical establishment, 20% consumers. It's flipped around the other way in an omnichannel market like that, where it's 80% of consumer decision and 20% influence from the doctors and the dealers and so on. We're successful both ways because when we talk about the customer at ResMed, I think customer with a capital C. And the customer is the patient, the person who's suffocating primarily. So this has to be small, quiet comfortable therapy. We search out the invisible mask and the silent CPAP, and it has to be digitally engaging for the patient, but it also has to work for the provider. We have to lower costs. We lower the cost when they use our digital system end-to-end. We lower the cost of setting a patient up on ResMed therapy versus competition by 50%. 5-0. So that gets a provider's attention. And then for the doctors, but also for the patients, we use the technology to drive up adherence rates. And people, when they -- I didn't show slides today, but when they see the therapy, it's a mask. You have to get a pneumatic stent to keep your tongue off your uvula, which is a small amount, maybe 1%, 2% of atmospheric pressure, 10, 20 centimeters of water. But to do that, you have to wear a mask. And it can be as small as a P10, which I wear every night, sits on your nose like this. Or if you're a mouth breather, you need one that goes around your nose and mouth. And so it doesn't look sexy when you see the patient on it. And people say, "Gosh, your adherence rates must be awful." And I said, yes, if you don't use all the technology, it's awful. It's just like pharmaceutical adherence, 6 months after a heart attack. And I'm sure everyone in this room who's followed the pharma industry knows these studies. But 5 years ago, post heart attack, free prescription, New England Journal of Medicine study, free prescription post-heart attack, what do you think the adherence rate was at 6 months? Someone in the room? Any guess, throw out any number between 1 and 100.

40%.

That's close. Another number?

20%.

20%. It was 50%. This is free. Free medicine that's paid for by the study. You just have to show up to the pharmacy, pick it up and take the pill. 50% adherence. That's the base adherence of our industry. So despite the difficulty, the difference between taking a pill and putting a mask on and leaving it on for at least half of the night every night to be called adherent, we get 50% adherence because we have symptomatic relief if we do nothing of the tech. It's like the adherence rates in the 2000s. Our substitute therapy competitors, and we're in that space too, they say, "Oh, that's the -- it's only 50% adherence." It's not. Because when you add myAir for the patient, AirView for the doctor, and you integrate to the health care system, this is peer-reviewed published data from Kaiser Permanente, we're able to show 87% adherence. So just under 9 out of 10 people wearing that device every night for the rest of their life. And that is what we target for, and that's what we go for, to drive that adherence straight up. It's good for the patient, keeps them out of hospital, saves money. It's good for the doctor because they know the therapies going through. And it's good for ResMed and our shareholders because they continue to buy the masks, tubing accessories for life instead of razor blades [indiscernible].

I saw some eyeballs light up when you suffocated on stage a few minutes ago. We'll be taking orders at the door.

Yes, absolutely. Look, I'm here, and I can cover the cost of the flight if we just get 10 seats. I'm kidding. We're actually under supply chain constraint now, so I shouldn't be selling. I should just be talking to Intel, TI and AMD and others to give us more semiconductor chips, which I am.

So let's talk about the -- we'll get there in a second, but let's talk about the TAM for a minute. You mentioned 1 billion people around the world with sleep apnea. You add another 700 million, if you include COPD and asthma. So penetration is still really low, 2%, 3%. So how -- what have you done right to get to that penetration level? And then what are the big barriers that you need to break through to really start to penetrate this huge opportunity?

Yes. So it's a good question. I'll split up the 2 because we've got a high penetration in the market we've been in for 3 decades. I'll be really sad if 3 decades in, we're only 2% penetration. But our core sleep apnea market, the 936 million people with obstructive sleep apnea worldwide, we're probably somewhere around 15% -- 10%, 15% penetrated here in the United States. It's probably the highest penetration in the world. There's 50 million to 70 million Americans who have obstructive sleep apnea. We've probably got 10% to 15% of those on therapy. So 85% of the opportunity left here in the U.S., our biggest market. Western Europe, I'd say it's closer to 10%, 8% to 12%, depending on the country, but let's call it 10% on average in Western Europe. And then for Asia, Latin America, we combine those 2 together, growth markets, we're less than 5%. And in some geographies, China and India, less than 1% because, really, the health care systems there are focused on hospital systems and cardiovascular moving through the chronic diseases. So they're starting to tackle diabetes, sleep apneas on the radar screen, but not at critical mass yet. So it varies from sort of that 1% to 2% number you were saying, really, in sleep apnea in our growth markets, to 10% in Western Europe and maybe 15% here. I mean even here in the most developed markets, this means 85% of people suffocating every night don't know about it. So we should be selling CPAPs by the door at conferences. But one of the challenges is because you're asleep when it happens, we have to partner with tech companies and wearables and others to help someone know what's happening because it's not symptomatic in front of you. A heart attack, it happens, you go to the hospital. Stroke, you see it. Diabetes, you collapse or go to a hospital with sleep apnea. All the suffocation and all the complications are chronic, and they happen while you're in an unconscious state. So it challenges us in driving that penetration up even faster. On the COPD and asthma side, that other 600 million patients, there's different therapies that we have for that. We have ventilation, cloud-connected ventilators, for end-stage COPD. And then we have what's called high-flow therapy. So think the nasal cannula but without the seal. And high-flow air and humidified air, which can untrigger the breathing in a COPD patient that's stage II, stage III COPD. And we also have a technology we call Propeller, which is cloud-connected inhalers for the COPD medicines, the pharmaceuticals that people inhale to help them breathe in stage 1 and stage 2 COPD. In that market, yes, we're less than 1% penetrated overall in that patient group. It's early days. That business will be more and more material as we go towards 2025, 2026 for us, but we're moving along.

Great. When you think about diagnosis and awareness building and market development, you mentioned that Verily partnership. Can you just talk a little bit about what you can do on that front to help get people in the funnel?

Yes. Well, I mean, if our biggest competitor is ignorance, then how do you overcome ignorance? Ignorance isn't lack of educational knowledge, it's just a lack of awareness about a fact. And so how do you help someone understand that they're suffocating at night, and you do that through information? So yes, our partnership with Verily formed a joint venture about 3.5 years ago, and it's called Primasun. And Jonathon Lobbins, the CEO, came to us there from Edwards and Medtronic. And I also spent some time in tech, before that, IBM. And what we're doing there is really combining what I'd call 2 elements. The first element is identification, engagement and enrollment of sleep-concerned consumers or sleep-concerned spouses. And that group are the ones who are out there saying something is going wrong here with me or my bed partner, and I need to find a solution. So today, 1 billion times in this 24 hours, someone will Google something and try to find some information. How many times do they type in my bed partner snores, my husband snores, my wife snores, my wife stops breathing, we now know. And we know within this metropolitan statistical area, we know within that. And right now, if you Google that, you'll probably see the picture of the latest CPAP, the AirSense 11 from ResMed, or our latest mask, the F30. And showing a device or a mask, it's just not what you want to -- thank you, again, in the second round, he's doing that. So [indiscernible], we'll find out what it says here. But even my bed, is it CPAP.com or somebody selling the latest and greatest here. Jumping to therapy is the wrong path there. What we want to do in identification, engagement and role is, within that MSA, take care of it and say, let's have them find a path to better sleep and better breathing. And in fact, let's help you rule out sleep apnea for $99. With a home sleep apnea test that will be delivered to your home, digital end-to-end, you don't have to do anything. The data will go to the cloud. It will go to the pulmonary doctor, and they will know whether you have sleep at or not. We'll rule it out for you. So sort of changing the game from a jump to therapy to a -- let's find a path to better sleep, better breathing and how you can get there. So that digital end-to-end flow, it sounds sort of theoretical. It's not. We -- even though we're in a supply chain-constrained environment right now here in 2022, we know we'll get out of this, and our competitor will come back online after they recall of 12, 24 months, whatever. We're going to need to turn demand gen on. So we're doing lots of experiments in this right now. We just got our first 100 patients all the way through that funnel. So it's from typing in my bed partner snores, going and putting demographic information for that -- maybe for that spouse or that they're doing it themselves, getting a home sleep apnea test, getting a positive diagnosis, getting a prescription, getting a digital remote patient set up, remote patient monitoring. So we had our first 100 patients all the way through this. So we know the customer acquisition cost. We know what it takes to get them on that sort of digital end-to-end play. And we're obviously not going to turn that now, but we're supply chain constrained. But when we're ready, we know how and where and when to do it. So that's sort of the first part of that joint venture, which is identify, engage and role. And we're partnering them with the doctors and with the home care providers to make sure that we get good care all the way down through that. The second part -- and by the way, the JV will pay for itself. We split out the numbers every quarter of what we put into it. The JV will pay for itself by moving up our growth rate by just 50, 75, 100 basis points from our core growth, which is mid- to high single digits before COVID has accelerated since then, but -- and we'll talk about that. And so that would pay for the JV in itself, just digital end-to-end identification, engagement, enrollment and then management of patients. The second part of that JV, which is just probably more interesting in the long run, is Verily is not just doing a vertical around sleep apnea and COPD with ResMed. So I call it -- we don't have a data lake at ResMed, we have a deep data well. It's very deep, 11 billion nights deep, but it's in sleep apnea. Now what time we went to bed, what time we woke up, how many breaths you took, but we don't know if you have diabetes. But the other partnership in Verily does. So Onduo is working with Dexcom, and they've got all the diabetes data. So the idea -- the long-term idea is we're going to identify, engage and enroll people in this chronic disease, take care of them. But why aren't we working across the system to say, well, it's not just a person with sleep apnea, it's a person with multiple different chronic diseases. And if you have a sleep apnea and type 2 diabetes or sleep apnea and COPD, it's called overlap syndrome, or sleep apnea and obesity and type 2 diabetes, metabolic syndrome, that's called, we can manage the whole person. And I think that value of helping the physicians in those different specialties, the pulmonary doc, the cardiovascular doc or the gastro doc; and then the health care system, whether it's Kaiser Permanente, whether it's Intermountain Health, whether it's Geisinger or whether it's the Government of Finland that we have a 5-year contract to manage all sleep apnea and COPD patients. We can help them save lives and save money across multiple disease states. So I think that chronic disease management interaction, despite that sort of Teladoc, Livongo up and down on digital health, where people over frothy overpaid, come back to us. There is value in this digital health and chronic disease management across the board. We're playing for the long game on that. Pay for itself on just get the patients in and make sure we can get paid for all the investments for identification engagement enrollment just because we're 85% of the opportunity in front of us got to do it, but then go for sort of that next phase, which is combining across not just our chronic disease state, which is ResMed stands for respiratory medicine, sleep apnea, COPD, asthma, but also combining with all those other chronic diseases to keep that person out of hospital and on a path to better health.

Great. Thank you. So we've got a couple of audience questions about the recall, as you'd expect. I don't think we need to get into the details of the safety issue in particular and why it's not a concern for ResMed. But -- maybe can you talk a little bit about what the market share picture looked like before the recall, what you hope it looks like after the recall and what you can do to maintain those customers that you've captured during the recall period.

Yes. So it's -- I mean, it's a good question and very pertinent where we're at now. So for those of you who didn't type the question in or who aren't following the sleep apnea, respiratory medical segment that closely -- so what happened was April last year -- so ResMed is the #1 player in sleep apnea, COPD, asthma treatment worldwide in respiratory medicine, and also residential medicine, which is the SaaS business. So ResMed stands for both respiratory medicine residential medicine. April last year, we're the #1 player. The #2 market share player who I'm told not to mention our competitors' names, so I'll just call it company P. ResMed's the #1 share, the #2 player company had a -- well, announced in April last year that they had a quality issue with their CPAP, APAP and ventilators, and they were going to stop selling to providers. They didn't tell providers not to sell on, but they just said, well they were going to stop in April, mid-April last year after their earnings call took a EUR 250 million hit and just said, we're just not selling for a while. We've got a quality issue. We sat there and went, wait, quality issue and you're stopping selling in med tech? Okay. And so we -- from that -- that was sort of the starting gun of us ramping up our supplier to know that this was going to be crazy. So this time, last year, which was April, May, June quarter in 2021, we had just incredible growth of sales of our CPAP, APAP and ventilators as they weren't selling through distributors. Two months later in June, June 14, they announced a U.S. recall, took another EUR500 million hit and announced global field safety notices, which, in many countries, is the equivalent of a recall. So FSN, but in the U.S., was a full-fledged recall with the FDA. And so what that meant was we had to be not only the #1 player, which we already were, we had to cover as much of #2's share as we could. And it's become, for us, a pretty much a humanitarian crisis because there are just patients that are getting these diagnoses and coming through that would have gone through a channel and found their path to therapy, that we're maxing out our complete share and then taking a big chunk off of that #2 player share. Now #3, 4 and 5 are trying to do what they can, but from very small bases. And so even if they double, they go from 2% to 4% share, they're just really not taking a material context. And so without going into detailed shares, I'll take the exact -- an example customer. If an example customer was, let's say, 55% ResMed, 35% company B, company P, and 10% other then we have 55% got 65%, 70%, 75%, we get to wherever we can max out our production. Last quarter, for instance, we were up 130% on the year before, so 30% growth in our U.S. Canada and Latin America device business. So you can do the 1.3 math on whatever share you take in each customer. We can't take -- can't help them 100%. But for the ResMed loyal customers who were maybe 80% ResMed, 15% company P and 5% others, that 1.3x gets them a lot closer to being able to be stable state, steady business. And so how we prioritized, really, the allocation that we've been doing these last 9, 10, actually 11 months now, really, since their recall started, is we've been allocating -- because we're getting allocated semiconductors because, frankly, that's the right limiting step on our manufacturing. We're allocating based around patient acuity, so sickest patients first. So our ventilators like Astral, ventilators, so life support Astral, noninvasive ventilator Stellar, Lumis and then adaptive server ventilators than APAP, bilevel APAP, CPAP. Anyway, you can basically think of it as devices that treat from the most severe COPD life support needs to overlap syndrome, which is both central sleep apnea and then obstructive sleep apnea. And that's good because we're taking care of the sickest patients. It's also good for our investors, because the highest margin products are the highest security ones. Second prioritization that we've done is to take care of existing suppliers and existing contracts with existing providers. And so if you were buying X from us in 2019, that's the multiple that we start from for the allocation. And so that's sort of biases towards customers that were more oriented to ResMed just by its nature, but we're fulfilling contracts. And then with all the flex capacity, we increase as much as possible. So if it's 30% extra, we do 30% extra across the board based upon what your purchases were before. So that's sort of where we're at. And a lot of the questions from the sell side are going to be, well, you're capturing all this amazing share, how are you going to make sure you keep it? And I'm like, well, this is like -- I don't know, I follow European football. So I'll use a soccer analogy I'm sorry. I don't have an NFL analogy. But it's like we were winning 3-0, Liverpool versus Real Madrid. This is my dream. It didn't happen, but we were up 3-0 before half time, and then they just left the field. They've left the field. They've been taken off by the referee for a little while. We've got an open goal. So we kick another goal so it's 4-0. We're winning anyway before. So people say, well, this year, you keep -- you're going, how are you going to keep it? Well, we're winning with the smallest, quietest, most comfortable devices and the best digital end-to-end. We're lowering costs for the providers by 50% and driving outcomes in the patient for up to 87%. Our strong hypothesis is no one wants 1 supplier for sure. But in each and every customer, we'll move up our share. If we're 80% before, we'll be 85, 90. If we were 40 before, we will be 60, 70. If we were at 20 before, I don't know if that customer will be around because of 24 months is a long time to go on 25% capacity, but it will be at least 35, 40. And so there'll be some permanent upshift in our share in each of those just because of Adam Smith, we're taking our costs out. And because of Hippocrates, we're giving better outcomes for the patients in the medical side. And to add on to that, I think the brand name where we kept quality, we've kept cybersecurity, we've kept privacy, we've kept trust, and we have done recalls before. We did one in 2007, '08 on a product called the S8. I was running the marketing team at the time. We built up inventory. We did the patient note first, not a financial note first. We did the provider physician note, second; provider note, third. Then we added up the cost to do an earnings call, that Friday, that Thursday and said, this is what it's going to cost, and this is how long it's going to take us. And we did the same around SERVE-HF on a cardiovascular one. I remember showing an academic cardiologist, the data on SERVE-HF. So it was 2014 -- yes, '14. I was a year into my CEO gig. And I showed the -- this academic cardiologist the data, and we're going to do a recall on the Adaptive Servo-Vent product for this heart failure is like, wow, you're going to release all those datas? I was like, I said, yes. And he said, you know what's going to happen tomorrow? I said, yes, market cap is going to go down $1 billion. We're about $8 billion at the time. And I was almost exactly right. Went from $8 billion to about $7.2 billion. And he said, "No, tomorrow, your reputation with academic cardiologists like me who think that public company research like this gets shoved under the carpet when it was a neutral outcome with a potential hasn't, we published it, and put it all out there and put out a global recall. And cardiologists went down and sat and they could have a discussion with their patients. So, look, here's the risk -- and here's the upside, right? You've got this better quality life from those, but there is a risk of some cardiac death if your ejection fraction is less than 25% and so on, have real discussions. I look forward to the prescriptions we're getting from academic, not just cardiologists, pulmonologists, anesthesiologists. The trust that ResMed is going to do the right thing is incredibly important. Our assets are probably what, $5 billion, $7 billion and the market cap is $30 billion. That means there's $23 billion worth of trust, and we've kept that throughout 33 years, and that's where we invest. And so how are we going to keep the share. It's through the technology, through lowering costs through improving outcomes, through trust in that. And what I love is the FDA has already been through our Atlanta facility, San Diego facility, they'll be in Sydney, they'll be in Singapore. And 2 clean bills of health, I look forward to more because it keeps you honest and keeps you there. But I think there's a lot to it. We'll see. I want our competitor to come back in the market because I prefer to win with the team on the other side of the field, and I think they will. And it'll be good for patients. And in the meantime, we're going to do everything we can to get the patients on therapy.

On supply chain. This is the big constraint right now, it's mostly chips, right? Maybe can you just talk a little bit about where we are there and where the biggest bottlenecks are?

Yes. So a lot going on in supply chain. And for those of you following every industry, you're seeing this from the automotive industry to consumer products to us here in med tech. And I was with a number of my fellow CEOs on the call with Secretary Raimondo at the White House, she's Secretary of Commerce, and really asking her not necessarily to go to the Defense Production Act, which we did during the ventilator crisis with the Trump administration. We had the DPA put in, and we've got parts and pieces prioritized for our ventilators, and we're able to get those through. But we just wanted to talk to her about DPA as a backup, but can you please spend some time with these large semiconductor manufacturers and say, -- do we need one more electric car, one more Tesla? Do we need one more smartphone, one more iPhone? Or do we -- and by the way, Tesla takes 1,000 chips per 1 car. You know there are multiple in that little supercomputer in your pocket. We need 2 chips for a ventilator, 2 chips for a CPAP. So we can get 500 CPAPs or 1 new Model 3. But so we're out there asking for not only that top down from government to help influence it, but we're doing work with every single one of our suppliers to increase that. We're actually a small part of their volume. We're talking about going from 0.1% to 0.15% of their output. But look, there are contracts, the supply chain constraints across the board. What I can tell you is if our competitor didn't have this recall, look at what we did last quarter. We were up 1.3x, 30%. We would be just fine if it wasn't for this extra perturbation. So it's not just COVID recovery, supply chain crisis. It's a triple whammy of black swan events. It's the recall on top of that. But look, I look at that and say, "You know what, you don't get to choose the situations." And I don't get a lot of sympathy from my fellow CEOs saying, "Oh, poor me, you've got infinite -- almost infinite demand." But we're out there talking to every supplier. We're reengineering our parts to say, okay, from that supply from getting new part. We're going to new suppliers and getting existing parts and new parts. And we're also actually redesigning our products. We just launched a product this quarter that we're currently in called AirSense 10 card-to-cloud. And it's a little bit of strategy, right, where I said the reverse Amazon, 100% connectivity. This still has 100% tracking of the data, but it's the old SD card technology, sneaking in. So the patient has to then take the data, take the card to the provider, they put in an encrypted reader end-to-end. It goes to AirView, it can go into all their back-end systems, but it's just not done on a daily basis. No one is going to be sneaking that every day. They go to the doctor or the provider every 30, 60 or 90 days. But we're doing that as a tactic to say if we're constrained on that 3G, 4G comms chip, let's go back to an SD card, Bluetooth and whatever we need to get the data to the cloud and to allow the full enablement of all that strategy. What I can tell you is that really good results there in the March quarter. What I've said is on the last earnings call is that from March to June, June to September, September to December, we're going to see incremental growth of our device business across all that. And not -- we don't give detailed guidance. I won't get into details of exactly what that looks like. But it's going to grow. And sometimes, it's 3 steps forward, 2 steps back. I never heard the word decommit up until the last 2 quarters. I didn't know that was a word. I don't think it would have been easy word. It happened between commit and something else, but decommit. But we're able to actually withdraw all the engineering projects and the reconfiguring of products, doing it with full validation, verification through full quality system analysis and submissions through all our quality systems, so that when we bring the product to market, it's going to be good and it's going to last. And so with all that, I can say, yes, despite the craziness happening in semiconductor supplier, we're going to be able to power through this and continue to grow and take care of patients. And I think with the backlog of patients, we're going to be supply constrained for a while. But as we break that open, there's going to be pretty extraordinary demand for our products over the next 12, 24, 36 months. And then we're going to go back to that IEE: identification, engage, enroll, both digital and through the physician channel to make it happen.

Excellent. So a question from the group about the Apple Watch and wearables. Demand is not your problem right now. But once we get beyond this supply constraint, I suppose the question is, can -- there's obviously increased interest in wearables for personal health. Can the wearable actually tell you that you have a problem or that you need -- might need one of these devices? And then more broadly speaking, is there a consumer market for these devices that -- for people who aren't necessarily indicated for sleep apnea? And do you need reimbursement for that consumer market? Or does experience like Australia tell you that maybe you don't?

Yes. So well, firstly, on the wearables, I think it's a great question. And we -- obviously, we're partnered with Google. I talked about the Verily partnership, and they bought Fitbit, and we've worked very closely with Apple. And I love the fact that there's a wearable watch that can do a lower quality, but an EKG equivalent. And lower quality, but pretty decent SPO2, so pulse and oximetry analysis. And not as good as our technology, we have actually a radar and sonar technology that can, from your phone beside your bed give you a sleep score. So how were you sleeping and breathing through sonar and radar, nothing touching your body, no wearable, but non-wearable. And that's technology out of our Dublin research technology team. But we don't have as many risks as Apple does, right? Like ResMed has the most cloud-connected medical devices in the planet of any med tech company. Apple probably has the most wearable watches out there. I love it. And I actually see it as a quantified self, they used to call it in the digital health early days. But the idea that people, you as a person, get access to your physiological data and can learn about how you sleep, how you run, how you exercise, your blood glucose, even pulse oximetry and your heart rate and even heart function through the EKG, I think it's amazing. And yes, we're partnering with all of the above. And what we're trying to do is make sure there's a separation really of church and state here. I think church in the medical side of where it's a medical device, 510(k), you can make a medical diagnosis from a ResMed diagnostic, right? ApneaLink Air is a medical 510(k) product. You get a prescription from that. It's a medical diagnostic. And then I'd call it almost like sleep wellness or overall wellness. And yes, we're partnering with the tech companies. And I do think the technology is pretty good to have, what I would call, if you -- and there will be, screeners on these devices to say, what we used to call it, we had a consumer product. We spun it off in the SleepScore Labs, but it was called SP+. We did it for like 2 Christmas seasons and had a little buzz, but it was a different business. So we're in med tech, not consumer tech. But I did love the fact we called it risky breathing, and it was enough to get people into the channel. It would just help them understand how you stopped breathing a bunch of times last night. And you had a really restless sleep. You got low, slow-wave sleep, virtually no REM, rapid eye movement, which is where your brain regenerates, slow wave sleepers where your muscles and body regenerates. So if you don't get either, you're a poor human. And sleep apnea patients get no REM sleep, because REM sleep always happens in the second half of sleep. And these people are suffocating worst in the paralysis state, where your brain shuts off here. Movements, you don't act out your dreams during REM, but that's where you get the most suffocation. But no, those wellness products and those sleep-concerned consumers, it's going to be one of the best. I don't need the demand yet, but it's going to be one -- I think one of the best ways to drive demand is people being aware of that unconscious state of sleep and how well they're doing. It will help with insomnia. It will help with sleep health, but it will also help identify sleep suffocation or sleep apnea as well.

Great. Talk about recession. I think investors are increasingly worried.

I only got 3 minutes to go, why you want to depress everybody?

We'll come back around to something fun at the end.

Okay.

So people obviously increasingly worried about the direction the economy is headed. Some of the more consumer-oriented med tech companies have really suffered. Maybe can you just talk a little bit about what the patient pay element of this is, and how you might anticipate the business performing through a recession?

Yes. So the best analogy I can give here is during the global financial crisis of '08, '09, '10 when there was -- much more serious than there is now. And who knows where we're going, this 7%, 8%. Who knows where it is, inflation and so on. Clearly, there's a possibility of a recession. In the global financial crisis and in serious long-term recession there '08, '09, '10, go back and look at ResMed's financials through that. We not only grew, we grew incredibly well through that. And I think the analogy I'll give, I alluded to it earlier, but if there's a recession and you have the choice between buying a $1,000 iPhone 14 and a $800 CPAP for your dad or yourself, right, you stop buying the $40,000 Tesla and the $1,200 iPhone. There really was very little elasticity in people not buying the medical product. And in the U.S., it's mostly insured business, so it's 20% of that with your co-pay and even under a high-deductible health account. We really saw very little reduction. In fact, we powered through '08, '09 and '10. So if there is a slowdown, I actually think consumer-driven med tech where we are will power through better than certainly pure consumer or other consumer-driven decision areas. It's the best analogy I've got. And we've seen that lack of elasticity in the south there. I hope it's not. I hope we have a smoother landing. Because -- I hope there's just a little prioritization, the semiconductors for outside of the industry to keep up with this extraordinary demand. But who knows where it will be. But if there is one, we're actually a very good bet through a time like that.

Okay. Last one.

Yes. I guess something positive, last 50 seconds.

We didn't get much -- I'm talking about Software-as-a-Service business.

Oh, yes.

So about 12% of your business now?

Yes.

I think if you would have lined up med tech companies in 2010 and said, which one of these is going to have a SaaS business, people probably would not have picked a sleep apnea company. But you have one, and it's growing. What's the vision for it? How much of the business can it be? Can it grow faster than the rest?

Yes. Well, this is my 30-second response. It's an incredible pivot for SME because it leveraged all our tech capability from our core med tech business, where we're running software anywhere, and we now have a full-profit SaaS business in Brightree and MatrixCare, out-of-hospital care. What differentiates ResMed from other med tech and other health care is that other med tech and health care sell into the hospital system. I call it the red ocean, fighting for limited dollars in a sick care system. 90% to 95% of ResMed's revenue, profit, EBITDA all the way down is in out-of-hospital care. Sleep apnea treatment is all out of hospital. COPD, the ventilators, out of hospital, and a wheelchair on the bedside table. And our Software-as-a-Service is all out of hospital care, so we don't compete in that. We're the only strategic investor in software for out-of-hospital health care. There's no other player doing it. And I think it's actually very logical that ResMed stands for respiratory medicine and also residential medicine, medicine where you live. And we've been very successful the last 6 years in it. We're not done. There will be organic growth, maybe some inorganic growth that allow us to continue to grow and be the world's leader in not only sleep apnea, COPD and asthma, but also health care software for out-of-hospital care, residential medicine.

Very good. Excellent. Thanks so much, Mick, for being here. We really appreciate having you here.

Yes. Thanks a lot.

Thanks so much.