ResMed Inc. (RMD) Earnings Call Transcript & Summary

Good morning, everyone. Welcome again to day 3 of the William Blair Growth Stock Conference. Really appreciate everyone being here. For those of you that don't know me, my name is Margaret Kaczor. I am the research analyst here at William Blair & Company who covers ResMed. I am required to inform you that you can obtain a complete list of research disclosures or potential conflicts of interest at williamblair.com. Now we're very pleased to have Rob Douglas, President and COO and Interim Head now of Sleep and Respiratory Care Business; as well as Dave Pendarvis, Chief Administrative Officer and Global General Counsel, with us today. Again, I offer a couple of sentences maybe before throwing it over to Rob. But it's been a very eventful few years for the sleep apnea market. Frankly, beginning with what seemed like an acceleration going into COVID, then COVID happened and then there's a huge demand for ventilatory support products. And then one of your competitors left the market or at least had a voluntary recall, so you're trying to catch up with demand there. And then you had the chip supply issues. So a lot going on right now, one way or the other. But even though the lack of chip supply has been a little bit of an issue in terms of being able to serve patients as much as demand, for us, once these issues are resolved, we really think that ResMed will see a durable competitive advantage for potentially several years, whether that's from a brand perspective, whether that's from a bolus of patients that, frankly, aren't getting the care that they need and what they deserve. And so those patients will come back into the channel and hopefully provide accelerated growth again coming into the marketplace. And then beyond that, just as a big picture push for ResMed, for us, what's always been impressive is this is probably the only real company that I know in my coverage in med tech that has been able to monetize both the digital and SaaS components of the business. And ultimately, for us, that's the future of med tech, and these guys are years ahead of some of their peers. So with that, I'm going to turn it over to Rob as well as Dave to provide a little bit more color, and then maybe we'll have time for a question or 2 at the end.

All right. Thank you, Margaret. And thanks, everyone, for joining. It's great to be here talking to you. It has been an eventful few years, and I will, later in this presentation, provide some commentary around how we're seeing those events and where they're going in the future. In the meantime though, I just want to give you a recap of our strategy and how we see the opportunity in the markets that we're in. So the -- we like to lay out our strategy with this picture. Now a lot of this is around how we communicate with our teams and with all of our stakeholders. But our #1 metric is the number of people whose lives we help. We're totally purpose-driven, totally mission-driven around this, and it really helps us build a great team and a really steady vision through all of these challenges that Margaret was talking about before. And our real purpose is we're focused on helping people live healthier lives and staying out of hospital. There's plenty of companies around with great technology, helping people shorten their stays in hospital and do well in hospital and all of that, but our positioning is we're looking at solutions and therapies and ways of really keeping people out of hospital and keeping them healthier for longer. We're known for sleep apnea. We also focus on COPD, other respiratory conditions. I'll talk more about sleep apnea. Over the last 5 to 6 years, we've invested in SaaS businesses, and these software-as-a-service businesses are providing really the patient management and the workflow management for providers of out-of-hospital care. And it's very much integrated with our vision that the therapies we provide are targeted out of hospital, and the software businesses that we're on are targeted at managing those environments out of the hospital. Very much a technology orientation. And you'll see we've been early adopters of connectivity, early adopters of digital solutions. And that's meant we have this tremendous asset in terms of data and knowledge around what's happening in the markets. And we're just getting started on using that data to really optimize outcomes, provide the evidence that we need to show that our treatments are the best way to treat these patients. And what's more that our treatments actually cost health systems less to apply than it does cost the health system to treat the consequences of the diseases that we manage if they're left untreated. I mentioned earlier, we've got a very strong team. The interesting times also include the whole issue of the COVID times and remote work and how all that happens. We have a very strong philosophy around the flexible teams and being purposeful about what the teams need to do and how they work together. We've always been global. So we've been heavy Zoom users probably since Zoom was first launched, actually, more than 6 or 7 years ago. And so we didn't miss a beat when we moved into that. And as far as we can see, our productivity has been strong through all of that. We're very much focused on the medical values of the company. And we're actually using our data, and we've been able to greatly accelerate our ability to increase the standard of knowledge or the state of knowledge in the industry. And typically, we'll go to our industry scientific congresses that are attended by respiratory specialists and sleep specialists. And we're generally producing the most high-quality research at those seminars. And in fact, recently, one of the key opinion leaders in the sleep space did a year-end review. And I think he -- half the papers he cited were actually funded by ResMed or actually authored by ResMed. So we're really using that data now to drive the science and the environment that we're in. In terms of that strategy, our sort of key execution pillars, we're looking at growing the market. The thing with -- particularly with sleep apnea or sleep suffocation, we call it, it's a really common condition. I don't talk to anyone now that doesn't know about it, that doesn't have a relative with it or a friend or have it themselves. And so it's -- we actually think it probably affects about 1/4 of the adult population to some degree. And not all of that quarter needs treatment, but absolutely a lot more than the current treatment levels need treatment. And so we're in this incredibly underpenetrated market. There's nearly 1 billion patients. There wouldn't be probably more than 40 million patients around the world that have been -- tried to being treated. It's still just a massive opportunity in our core business, and that's before we even start to think about COPD in those markets, where there are challenging treatment conditions and difficult to get out-of-hospital standards of care, but there are over 380 million COPD patients that we could help improve their lives as well. I've mentioned earlier, digital innovation is so key to where we're going. That's always our first point of thinking, and we've got so much data that we're able to drive results that just connecting the device produced an uplift in adherence. That is how much people, once they start using our treatment, stay on it. It's not quite 90% now, but it's close to it. And that was an uplift from around 60%. That's actually better than nearly any other optional treatment or optional long-term therapy that you'll find. And so these respiratory therapies are used by patients, and they're a key part of their life. And then I mentioned earlier, we're focusing on transforming out-of-hospital care. This process of providing long-term care to people is a difficult environment. The #1 problem for all these businesses is actually, at the moment, staffing and getting people that aren't paid high wages to really provide good care for patients. And actually, technology can really be a big help for that. If we make the life better for those staff, we make their documentation loads easier, we make sort of management and planning easier. And so there's still -- there's a huge opportunity in these out-of-hospital settings to make these changes. Now I just wanted to think -- talk a little bit more about what we mean by this integrated health care, and this example is really in our sleep environment. And we think about -- everything we do, we think about sort of the patient pathway, how the patient goes through from being just a consumer onto long-term treatment that's changing their life. It's not a simple process. It's a long, long pathway. The first thing is awareness and how do you become aware that you're potentially a sleep apnea sufferer. One way would -- talk to me, and I'll give you some advice. But actually, the most common thing is it's a bed partner complaining about your snoring or your gasping or waking up. And so often, it's a threat. It's like if you don't sort this out, this isn't a good future for the relationship. That type of awareness would generally prompt queries to primary care, and we hope that primary care are aware enough around the signs and symptoms of sleep apnea to know that that's a condition that they should be referring on to sleep specialists. Sleep specialists will then refer you to a test. Now that may be an in-lab test or a home test, depending on preferences and capacity. But there is a lot of testing capacity in the market, and that's grown steadily over the years. From there, you'll get referred to a home medical equipment provider or different versions of this around the world. But the home medical equipment provider will set you up on therapy, get you stable on therapy with the right equipment and the right mask, and then sort out billing for you and then move you on to long-term care and keep you on therapy treatment over time. And that long-term adherence is really important. And we actually see that -- take a long-term view of it, that's a real disease management process that currently, there are a lot of parts of the health care system. And our digital strategy is really to enable sort of integrations between all of those steps in the pathway. Actually, there's bottlenecks or potential bottlenecks in every step of those. And in a sense, this is a summary of our commercial and marketing programs and our technology programs because we're looking for technology solutions that ease the handover and management within each of those steps. We're looking at commercial programs to make sure that businesses can traverse and support across all of those. And it's really ripe for technology drive on that, and we're seeing really good success in that. We're far and away #1 product leader. For physical products, we've got the best. Up until middle of last year, the AirSense 10 was the best device on the market. Now it's the second best because we've launched the AirSense 11, and it's going really well. But we have the #1 and #2 products in the market. Traditionally in this market, we would obsolete an older platform as soon as we could after launching a new platform. But I'll come in a minute to talk about some of the market dynamics of why we're not doing that now. And we've got both of these products in the market and going really well. We're particularly excited about the AirSense 11. We launched it in the U.S. last year, and we're just launching it in Europe as we speak. But it's been a significant part of our volume in the U.S. over the past year. And one important thing that we're seeing is that with the improved patient engagement and ease of use and integration with our other digital solutions, we're seeing that patients who use the AirSense 11 are much more likely to pick up myAir, which is the patient engagement app, that helps patients acclimatize to treatment and learn how to use their treatment. And in fact, in using the app and the videos and the intelligent support from that, they become much less likely to call back to their providers. So it's better for their provider because it eases their workload. And in fact, they're much more likely to hit their compliance targets in a shorter time as possible. So there's -- it improves billing times and improves the number of people that are in billing. It's really good for the providers. On the AirSense 10, we were impressed that we had 25% of the patients taking up myAir. On the AirSense 11, we have over 60% taking up myAir. It's a phenomenal change. Our mask portfolio, we've got the best mask portfolio in the business. And we continue to innovate, and we've still got great ideas as how to upgrade these particular points in the portfolio and also add new elements in terms of how we view the segmentation. So really for that, in terms of all those solutions, we've got great stuff for patients, for providers and for payers. We actually have that today. We've got really good data showing that we've got a great ROI for treating patients, and I'll come to that. We're easing the life of payers and most importantly, for people who's life is affected by sleep apnea, we're actually changing their life and helping them live much better lives. And again, talk to your cab driver or your Uber driver or anyone like that, it won't take you long to find someone who's using sleep apnea. And they will tell you that it's changed their life. They will also tell you ways in which it could be better, which is another really interesting thing about our business is that even at this stage and with the changes that we're driving, we're not done on the technology front. We've actually still got good innovation that we can introduce and invent in order to improve really the life of the patients. And going forward, we have really strong plans for each of these entities in the whole health system. Briefly, our SaaS business, really, you can think of our SaaS businesses as the electronic health record and workflow tools for providers of out-of-hospital health care in various different settings. We started originally with Brightree, which is the provider of those systems for the home medical equipment industry. Obviously, we had to have firewalls and all that type of thing from the traditional ResMed business. But actually, by integrating Brightree well with the AirView workflow systems and those types of things, we can really make it a good experience for providers setting up sleep patients with ResMed equipment. But we also make the rest of their business much better as well in terms of how they manage their workload, how they schedule their staff, how they get their even logistics operating, how they manage their warehouses. We're really helping across the board. It's the operating system for the industry, and Brightree very much has a major market share in those industries. MatrixCare is doing the same in these other out-of-hospital care settings, but our share positions are different. We are higher shares in skilled nursing, which actually has been one segment that's been challenged most by COVID. And I don't need to go into it, but there are many political issues around what was happening in skilled nursing homes during COVID. And there, our sensors-based business is affected by the people's reluctance to go into nursing homes at the moment. We are seeing that recover, and it will naturally recover. But pretty well all of these other settings are really growing strongly in really good positions, and we're well positioned to take share in those markets. I ended up with a few more slides than I expected here. So the net of all of that is we've got the best data of anyone in the industry. As I said, we've got nearly 20 million patients in our AirView system. We've got so many cloud-connected devices out there, and all of these devices are connecting every night and bringing data in. And we're well over 11 billion nights of data. And we're actually able to use that data. We can tokenize it and anonymize it and match it with other sources of data, and we're now actually able to match utilization data of how people are handling their sleep condition with all-cause health costs and all-cause health outcomes, in particular, health systems and countries. So in France, for example, with Ns of well over 100,000, we're able to match -- we are able to compare CPAP people who have been diagnosed with sleep apnea. People who use their CPAP versus people who did not use their CPAP, and we showed a significant improvement in survival rates for patients who use their CPAP. It was a 40% difference roughly. Now these are all published studies, and they're right in this presentation on our website, but I won't dive into them. We've just published another one showing actually a dose response measurement. So for every extra hour that you use your CPAP up to 7 hours, you have something between a 5% and 10% reduction in utilization of health care expenses. And again, these studies are done with Ns of 6 figures or more, huge numbers of patients. They're real-world evidence. They're not randomized control evidence, but we actually think this real-world evidence, particularly at the health economic scales, is really providing really good data for us. So all of that nets into a very strong track record of performance. We've had really consistent revenue growth and even better earnings growth over the past 5 years. And we -- in terms of our markets and where we're going, we're still barely just getting started. And so this strong track record, we're very proud of. So we've got a strong vision. We've got really all the product assets that we need that we're able to really take a consistent view across the out-of-hospital health care experience. We don't think other players are positioning like this. But our tools all really improve the patient experience. We're keeping patients on treatment for longer. We're actually making it lower cost to find and set up a patient, and then we're providing much better health outcomes. And we're proving all of this with data right through their measurable health outcomes. This is great. Our challenge, obviously, we have to get the health systems to listen to this and understand it and explain it. But when you've got the types of power of data that we have, you really can't argue with it. Now I did want to talk a little bit about recent events, and Margaret gave a nice recap of that. It has been interesting times. When the COVID pandemic hit, pretty all the sleep labs in most hospitals were turned into respiratory wards. And so there was a big headwind on new patient diagnosis. It did go into -- it did move to home sleep testing a bit, but we'd expect that to sort of normalize. In most countries, not in all countries, it is relatively normal around that. But early in the COVID thing, the pandemic, the only treatment available was in ICUs with patients on ventilators. Now we make home care ventilators for COP -- chronic COPD patients and others. We don't target selling our products into hospitals, and they don't look like hospital ventilators. But actually, they're very good at keeping people who need urgent ventilation alive. And because we make home care ventilators, we'd make more than nearly anyone. So we saw huge demand for ventilators through that period. And we had to really adopt guiding principles around how we were going to meet the demand in terms of how we would allocate products and how we'd look after patients. And so we set up those guiding principles, and our teams executed towards that. Things then started to normalize. We saw that the electronics industry went through one of its typical cyclical boom-and-bust cycles in terms of available volume generally caused by a mismatch of investments and unexpected uplift in consumer demand, not to mention electric vehicles and telephones and all of that. And typically, our systems would manage that. It's actually something that happens all the time, although not to the extent that it's currently happening. But that's why we have inventories and all those types of things. And we wouldn't have seen an industry shortage and perhaps wouldn't have had people asking us about supply chain issues had we not had a competitor recall come up where in April, there was an inkling of an issue on the competitor's financial announcement. And in June, there was a recall that basically went to all of the patients of this competitor. And they are the #2 in the market, saying, "Please stop using the device and talk to your physician." The physician didn't really have much advice what to do, and many people did keep using their device. But the competitors stayed and said, "We're not going to supply any new patients until we've completed the recall, which should take about 12 months." Actually, subsequent announcements have extended that out but still talking that the recall will finish around the end of calendar 2022. But what that has led us to see a huge uplift in demand, where we've tried to meet the demand for #1 and #2 in the market. In the face of those supply chain constraints, actually, we can't. And we -- but we can uplift some, and we'll try to give some indication of where we thought that would be, although it is challenging because what's happening is this term called de-commits, which have always been a feature in supply chains. And again, we haven't had to explain what they meant before. But basically, it means someone's promised you a delivery of products, either it could be next week or it could be over the next 12 months, and they de-commit from that and say, we're only going to give you half of it or none of it. And they can come out of the blue. And actually, we've been managing a higher-than-normal rate of de-commits, coupled with a competitor recall that sucked all of the inventory out of our systems and out of all of our customer systems as well. And so there is a huge shortage of devices. So at the moment, we joke that our head of our supply chain, it's our Chief Revenue Officer, because what that person builds, we sell in terms of devices as soon as we can. Of course, we have to navigate the freight challenges that COVID introduced as well. But pretty well, we feel we've got a good handle on managing this. It is still uncertain times in things like China lockdowns and what that means for the supply chain are challenging for us. But our team, we've got a really strong team and we're able to jump on these issues. And when we see a problem or if we predict that there might be a problem, we will revalidate component alternatives, we'll do design changes. One major design change that we did, we only launched a few weeks ago. It was at one of our main components that was challenging. It was the comms module. And this is shared technology with what's in cars and telephones and things like that. We have different protocols around the world, and we had some significant de-commits on that. And so we introduced the device in Air 10, which is a very high-end APAP device with a card to cloud. So we're going back to the -- how it used to work before the AirSense 10 was launched. We're using a media -- a smart media card to collect the data and use that for proof of using the device. And we're targeting that at specific customers. Actually, there are new entrants in the industry that have been supplying similar products like that at price premiums -- significant price premiums to us in the shortage situation. So we think it's much better if our quality products are doing that. And that's, as I said, only launched a few weeks ago but getting good reception and should actually help ease some of the challenges that we've got. But looking forward, we do expect that these supply chain challenges will continue. But our teams should be able to sort of keep steadily but slowly and with some potential volatility on a result-to-result basis, but continue to improve that through. We think if the competitor calls their recall end around early '23, that could be plus or minus 6 months, probably won't be minus. After that, there will be a patient backlog because as we think about it, and if you know someone who's waiting for a CPAP now, their HME will have told them it's somewhere between 2 to 6 months. Actually, we think the backlog is probably somewhere between 2 and 10 months and growing. And once that the recall situation ends, there's going to be a lot of work to get all of those patients in the backlog through the system. And so we expect some sort of mismatch of supply and demand possibly extend a year or even 18 months beyond that recall. So we're in this situation for a long time. We're managing it with guiding principles, and our key guiding principles are focused on patient and patient acuity, so the patients that need our treatments the most. So we're prioritizing ventilators, bilevel machines, adaptive servo ventilators and then APAPs. We're focusing on providers who can get good outcomes for patients, so they're the ones using our digital solutions. And it is the ones using our -- that we have a business relationship with. And we've had to have an allocation policy to allocate to those providers. And then we're -- as the industry leader, we're actually being very disciplined and thoughtful around on every way we're conducting ourselves in the industry. We've been thoughtful and disciplined around pricing, although costs are a factor, and we have had to introduce a surcharge and other changes. But we're actually taking the view we're in this for the long term. And our view is once these sort of short-term perturbations are over, the actual return to long-term steady growth, enabled by breaking the bottlenecks in the patient pathway, will see us resume our pathway, continued market leadership and continued access to millions and millions of more patients as we go through. So our mission to improve 250 million lives we think is actually the right metric to be communicating. And we're doing well on that going through, and our teams are continuing to focus on this. And we're very proud of what we're doing. So back to you, Margaret.

Yes. Thank you. Any questions from the audience? Otherwise, we're running up on time. So maybe just one second since I've got you and given the announcement with Jim moving on to Insulet, any changes or any updates around what that could mean for strategy for ResMed? And how do you look at the businesses you're the interim head right now?

Yes. So Jim has done a great job for ResMed. He joined ResMed as our Head of Strategy, as our first Head of Strategy. And strategy is probably his strongest leg. So I think we have a really strong strategy. Naturally, we're in the process any way of refining the strategy. And for 2 reasons, one is 2025 is not that far away. And we would be giving our teams and everyone a view of how we're thinking further out refining that. And then the current dynamics of market changes and that are very significant. And so we do have teams looking at refining strategy, but there's nothing broken in there. We have a very strong team that know how to run. And in fact, the thing is we just didn't have a lot of notice. And if we had more notice, we probably could have done an internal appointment with the correct process without needing to announce me as interim. But as interim, I've been really impressed with how the team is going and what they're doing.

Fabulous. Well, we are 30 seconds away, so I'm going to call it right now. Really appreciate everyone being here in the audience. Thank you to Dave and Rob, and we're going to head to the breakout room for more Q&A. That breakout room is the Maher room. Thank you, guys.

Yes. Thanks, everyone.