ResMed Inc. (RMD) Earnings Call Transcript & Summary

Good morning, everybody. I'm Sean Laaman, the Australian Healthcare Analyst here at Morgan Stanley. A pleasure to welcome Bobby Ghoshal and Rob Douglas from ResMed. So welcome, gentlemen. And maybe to kick things off, Rob, if we can have you make some opening remarks.

Sure. Thanks, Sean. Just a bit of a description for ResMed for you all. We're the world's leading digital tech-enabled medical technology company. We're leaders in all of our markets, and our -- we're best known for treating sleep apnea, which is an incredibly common condition. Our data suggests there's nearly a billion people with sleep apnea. There's only a few tens of millions being treated. So in our core business, we've got huge opportunity. We have data showing that treating these patients actually makes a huge difference in their life. It actually prolongs their life. We have really good data on that now. And that's one of the most impactful and lowest-risk medical interventions that you can have. Our overall strategy is really riding the major healthcare system trends, which is we need to treat chronic disease well and keep people out of hospital. And there's a big trend of keeping people out of hospital. Of course, COVID accelerated all of those trends for us. But in our major markets of sleep apnea or sleep suffocation, we call it, and COPD and other chronic respiratory conditions, we've got great treatments and great ways of doing that of looking after patients. In terms of also keeping patients out of hospital, we've invested a lot in our software businesses. These are SaaS businesses that really provide the electronic health record, patient management and workflow management and business management for providers of out-of-hospital care. And there's -- we see that as totally consistent with our strategy. Our 2025 strategy is we're going to improve the lives of 250 million patients. We're up to about 140 million. We're getting to that strategy well. And we'll actually continue -- we have huge opportunity to keep treating a lot of patients and doing this in ways that really improve patient lives, improve the outcomes. It reduces the progression of their chronic disease, and it keeps them out of hospital, and so it costs the healthcare system less. So there's a strong economic benefit for us to keep growing. We -- like all industries, we've had very interesting times through COVID, where we saw unprecedented demand for ventilation as a treatment for acute COVID. And -- but since then, we've actually seen a strong rebound in our core markets and a competitive recall situation, which I'm sure Sean will ask some questions about that have really changed the industry dynamics and positively for ResMed.

Great. Thanks for that intro, Rob. Greatly appreciated. I know I said we're not going to stay here, but we've got to go there. And that is the competitor recall. So how do you think about the dynamics from the recall, particularly if that competitor comes back?

Yes. So our view of the industry is ResMed's market leader, is the market leader and has been for a number of years, particularly since we launched the connected devices, which has greatly improved our market share because of the value and the reduction in cost and improved outcomes for providers of people who are managing sleep apnea. So that market-leading position, we've retained. When the competitor announced their recall, they defined how much they thought it was going to cost them in sales for their financial year '22, which has just ended. And we had a number of people think "Well, ResMed would get all that share." And in fact, in the normal course of events, we typically would. But it happened to coincide with the cyclical sort of reduction in supply chain availability of electronic components. And so notwithstanding that our factories and our typical investment policies are that we would have capacity to the whole industry demand, not source the components for that. So we actually took maybe 25% of that in terms of their share. Other players have come in to try to fill the gap, but the most profound impact has been on patients where patient waiting lists have ballooned out, and the patients are waiting for treatment. Some of those patients won't wait. Some of the waiting times are very long. And they'll need to be refound back into the system like when the supply crunch happens. So our view is we've taken modest share, limited by that supply chain. But as that supply chain outlook improves, and it is gradually improving now, we're not completely out of the woods. But as that supply chain improves, we will retain the share that we've got, and we'll continue to grow that share. And so really our view is we don't think of this as sort of a recall that will be over one day, and then the market will go back to what it is. There are other new players in the market. We've taken share that we'll retain. And that share really expresses in terms of the business practices of the providers and who -- which of the providers have which share of referrals and all of those. So as I said, the share will be sticky, and we'll be competing in a new environment.

Thanks, Rob. I said I'd get off the topic, but there was another announcement last week with respect to mask and [ pains to magnet ]. Yes, if you could give us some commentary on how should investors think about that issue.

Sure. So if you're a user of CPAP for treating sleep apnea, and many people in the room will be, or if you have loved ones and friends, and many people in the room also have that, you'll know that wearing a mask at night is not easy. It's really one of the challenges we have to overcome with our technology and product designs. And one of the things that people -- we saw sleep apnea when they are asleep, sometimes they want to get up during the night, use the bathroom or whatever, and then put their mask back on at night. And we know it's a challenge. And if you think about elderly people, for example, clipping the mask in is difficult. So a very nice solution to that is to use a magnet for the clip. And so you can basically just unclip it, take it off, do what you have to do, come back and just put them at the head gear near where it should clip in and locate. It's a really neat solution. Many, many of the providers in the industry do that, and our products do that as well. With magnet, they're generally safe, and there's a governing body that defines safe level of magnets that are okay to have on your person. And phones have magnets in them, and lots of things have magnets. iPads have magnets. And so with our products, we test them carefully, and we're well within the limits of those public requirements. But the FDA has asked one of our competitors to have a look at their labeling around that. And so the reason is that they've identified a number of complaints in the competitor's complaint files, and they're investigating that. And a typical complaint may be: I thought something went wrong with my stent, and I was wearing a mask with a magnet in it. So they'll be trying to [ dissect ] that down. From that angle, it would be in the industry, and we believe that the FDA is asking our competitor to improve their warnings and perhaps change the recommendation that you keep the magnet -- our labeling says 2 inches away from the device. And we believe that's perfectly safe, but the FDA says let's make it 6 inches. We can do that, too. And we'll sort of follow the leaders to where they do that. But we say, our complaint rates, we believe, are a lot less than what are reported by the competitor. But we do track these, and it's a responsible thing in the industry to learn whenever there's sort of an [Audio Gap] around that. And if things weren't so sensitive around recalls and the absence of the device products in market at all, this type of thing would something that would happen occasionally on a [indiscernible].

Sure. You mentioned the supply chain constraints, and there's a big patient backlog, and some have to be bought back in the system. If you had unlimited supply chips today, how well do you think the system or the clinical pathway can deal with that accelerated [ throughput ]?

Yes. So the -- we think about, particularly in the sleep business, the patient pathway. And the journey for sleep apnea generally starts with bed partners say, "Hey, you better stop snoring and suffocating or you or me are out of here." And then you'll get a referral to a primary care, who will give you, if you're lucky, a referral to a sleep specialist, who'll give you a test and then a referral to a provider. Now in all of those sort of handovers in the pathway, there are leakages, and patients got out of it. And much of our digital solutions as we're currently using to drive our growth, are actually addressing those leakage points. And so if we have a massive leakage point between positive sleep test and referral to a provider who can set you up, we'll have digital solutions that go out there and find those patients. At the moment, we're not really doing anything that increase -- would increase demand because we've got more demand than we can [ compete ]. And so as that supply situation eases, we'll be kicking off those programs to get back to those patients. But we -- there's no hard data on how many patients are in that backlog. It will be well north of 1 million patients and growing. And so by the time the supply chain does normalize, who knows what that number will be. And so there will be a lot of patients there. And the whole system doesn't have the capacity to treat and manage those patients instantly. So actually, there will be excess demand, even for a long time after the recall is called in at all the supply chain.

Maybe on the connected care issue perhaps somewhat. So the company has made some material investments in SaaS arena, most recently MEDIFOX DAN. I think that most of the inbound -- I guess 90 plus inbound I get revolves around the core sleep business. Yes. I think as time evolves, perhaps more of the inbound will come to SaaS. So sort of encapsulate what the SaaS strategy is about, and what's the M&A strategy, going forward? And when do you think it can really be a material contributor to you?

Yes. So let me just kick off, and I'm sure Bobby will weigh in on that. Our view of the SaaS strategy is totally aligned with our -- really our global 2025 strategy, which is to be -- that the winners in future healthcare are going to be the integrated care providers who are technology-based because they can manage patients better and get the efficiency. And we aim to be the technology provider to those winners in healthcare system and both in the therapy level and also in the patient management level. And so if you think about one of the reasons why we're winning in our therapy market is we have the best patient management. The best way to manage a patient from starting on treatment to keeping them on treatment long time, their solutions for keeping those patients with supplies up to scratch. We have the best app for keeping patients on treatment and motivated and knowing the right thing and actually training them how to use the device and producing the workload on that provider sort of our customers. So we think that makes sense. Our partnership with Brightree started out 5 or 6 years ago. Actually even before that, before we acquired them, we had a partnership with them. And it made sense actually that with knowing the -- being part of the operating system for these customers, we could help them and provide solutions that enabled profitability in challenging times, which the reimbursement picture was very challenging 5 or 6 years ago. So -- and then that business also had doing the same thing for providers of home healthcare. And we saw that we could actually take what we've learned in these other areas and apply it to managing these businesses. And so we acquired MatrixCare, which was in the areas around [ unskilled ] nursing, home healthcare and hospice and aged care settings, and we think the technology makes sense. So I want to be very clear, we're not investing in the SaaS business in order to drive demand in the sleep business. We have so much demand in the sleep business, can't meet it at the moment anyway. These businesses actually will help our sleep business, but it's not the major case for it. They're very strong, growing businesses in their own right and riding a wave, if you like, of that trend of out-of-hospital care. We're always frustrated that we didn't have it yet as a global business. So the MEDIFOX DAN, I'll hand over to Bobby to also answer. But it's a really exciting, really exciting move. Bobby?

I think you covered it well, Rob. At a very fundamental level, if you think about what big problem we are trying to solve, it's very similar in the core business as it is with our SaaS. What is that fundamental problem? Well, it's simple really, people are getting older. There's more people who are older and need more care. There isn't enough funding in the world that's available to help take care of the patients. And I -- very recently, post pandemic, there is a severe staffing shortage. And so really, the way to solve this problem is through technology. And we are hearing that more and more from our customers across all the care settings, and Rob covered -- sort of we started in the SaaS business with the HME care setting, right? And then we added more and more care setting. Now we have perhaps the broadest set of solutions that cater to each of this care setting, HME, skilled nursing, you have home health, hospice. We have assisted living. We have what's called life planning community living. So it's -- if you look at all of these care settings, we have perhaps the broadest. And again, with MEDIFOX DAN now, it's -- we haven't closed the transaction yet, we have announced it. So with that caveat, this will be a global business once we close the MEDIFOX DAN transaction. But what -- the way I see it is we're solving this very fundamental and big problem that the world faces. This population that our customers serve, perhaps, is the most expensive part of healthcare. Think about how much money just the United States spend in taking care of this segment of the population. Probably like $100 billion to $200 billion. The way I see it is our customers today, they trade off between labor costs and technology costs. And today, the technology spend is very, very low, compared to how much they spend on labor, not sustainable. This problem will be solved by technology disruptors. And we are the leading solution provider, whether it's taking care of day-to-day business. So we are mission-critical software solutions, data solutions and services. So we are sort of a full range of "we'll solve the problem for you" for our customers as they face the challenges of today. But we are looking beyond just the problems of today. In the future, it's this segment of population that needs enormous amount of care but need it in a most efficient way possible. So our job, back to the core, I mean, where I see really, it's solving the same problem in a way that we reduce the overall cost of healthcare. We -- now with the therapy solution, our sleep apnea therapy, which I see as an intersection between SaaS and sleep, is one of those ways. And I see in the future multiple ways that we can help this segment of population through our software solutions in the day-to-day but even strategically. So it's something that we take a very long-term view.

Sure. And maybe still on this theme, that balance sheet, very strong and conservative, and proved with acquisitions in the past that the cash flow [ is used to pay ] debt down pretty quickly. Now, on the SaaS side, do you think you have the building blocks in place? Or should we, over the long term, expect some more M&A, if I can ask that question?

Sure. Bobby, do you want to...

Yes. We are always looking at the landscape. As I said, this is -- we are not looking at this as a point-to-point solution or point solutions in each of these care settings. This is an ecosystem play. At the end of the day, with 8,000-plus customers in the U.S. and another 8,000 in Germany once we close the transaction, this becomes a massive ecosystem. And in that ecosystem, our job is to constantly enhance it, grow and enhance the power of the network because our customers demand it. They are more connected. They want to be connected to the referral sources, the hospital systems, the labs, to the pharmacies, everywhere that the care for patients or residents intersects with the healthcare system is another node in this ecosystem. And that keeps growing. So we are going to continue to look at this ecosystem, see where we can bring more value to our customers and where we can, whether it's build by a partner. And I think we'll look at all of the spectrum of all of that where it makes sense. We are a better owner, we will definitely grow the acquisition path. But I think, beyond that also, we have a huge opportunity in partnering well as well as providing our own organic [ solution ].

Sure. Great. Maybe to change gears again slightly, so the company appears to be doing very well with the card-to-cloud strategy in the absence of chip. But maybe just help me understand a little bit better. I think the great leap forward that ResMed made was putting the modem in the device with the AirSense 10 platform and what that meant for consumables. I'm wondering if you've got a bunch of patients on sort of the [ ESD ] card devices. They're going to be a point to essentially swap those patients out for cloud-connected devices, once the chip problem has been solved, in order to sustain the ongoing growth from those patients in ReSupply, if that question makes sense.

Sure. Sean, one of the things we've learned through the last few years of pandemic supply chain shortages, recall shortages and all of that is to have clear principles for our teams to execute to. And so we've been very clear about our principles of managing through this current supply chain shortage. And the #1 principle is put patients first and put the high-security or the most severe or sickest patients first. So for example, that would mean that we would swing our volumes to ventilation if we can or to buy level machines, which are going on sicker patients or ASV, adaptive survey ventilator machines or -- and then APAP. And that patient first one stands us in good stead. By the way, the second principle is let's go with our business partners, so we know we can get good outcomes, and we'll use the digital solutions effectively. And that, in a sense, led us to an allocation policy that we're allocating products, which we've never done before, and we don't actually want to be graded allocation. We would rather have supply. But we allocated, based on historical volumes, so depending on what they've done. We -- and then also, other principle is we take a very disciplined approach. And we're going to do things for the good of the industry, and we're certainly not going on a short-term profit maximize or anything like that. So we had all of that going. You're quite right. Our long-term strategy is around connected care, around us getting that data in real time and using it to improve outcomes. However, earlier this year, we had a significant decommit from one of our comms module suppliers that meant we had to have a look at it and go back to our principles and say, "What is the best for patients?" And actually it's better for a patient to have a device that's not connected than to have no device at all. So we were able to really ramp the volume of that quickly and then find a number of customers who were prepared to do it. Many don't like it because it's more work to use the nonconnected device, more work for their staff. They don't get as good outcomes in terms of supply. And so -- but it's still a much better offering. It's what everyone got 5 or 6 years ago. So it's a decent offering. The thing is the biggest compliance dropout is early in your usage. It does have a long tail in there as well. But the biggest compliance dropout is early in the usage. And so people using card to cloud will have -- probably, they'll lose more patients, but those patients will be lost in not using their treatment. So there wouldn't be a sense in upgrading their machines. Then the other patients who have successfully gone onto treatment, there's no huge case to upgrade that machine. So this really is an economic case to [ go ] back. That will remain a pool of patients on that system and being managed that way until those devices become obsolete and get replaced in the future. But as soon as we can, we'll be going back to connected devices. And our aim will be to meet as much industry demand as possible, but needing to produce a few card to clouds [ if necessary ].

Sure. We know in the U.S. market, the ReSupply model works really, really well and strongly. And outside of the U.S., we saw some reimbursement changes a little while ago now, I think it was 2019, in France and Japan, but then the pandemic happened. But it seemed to us that those reimbursement changes might have -- helped along the ReSupply equation in those markets. Is there any commentary that you can make around those markets and whether we should afford to a better ReSupply equation outside of the U.S.?

Yes. The U.S. reimbursement model actually is that a ReSupply is a reimbursement event. And so there is sort of that case for it. In France and Japan and most other reimbursed markets, the reimbursement is for really managing the patient rather than providing the therapies. And so masks are sort of -- they're part of what you have to do in order to keep the patient on therapy. So the business case for ReSupply is you don't keep a patient resupplied. You like -- you have a higher chance of losing them, and then you can't pay reimbursement for them at all. So it's a different dynamic there. And so the volumes per patient are probably lower, although many of the reimbursement rules "Well, we reimburse you." But you have to give that patient a new mask twice a year, which is roughly around the U.S. average as well. So it's sort of a similar thing. Interest in those markets, you mentioned, for example, with that reimbursement, which also applied to sort of connected care and keeping -- managing the patient well, they're the ones that are very reluctant on the card, more reluctant on the card to cloud, some of the other markets, because it affects their reimbursement [ roles as well ]. So reimbursement really matters. We should see solutions around keeping patients up to date with their masks in all these markets. And we're just getting to rolling them out and developing them at the moment. And they'll have a -- they'll help the market grow.

Yes. Sure. Okay. We've talked about the core sleep business. We've talked a bit about the SaaS business. Maybe one of the future opportunities is COPD. So I don't know, Rob, if you could give us a bit of color on how the setup is looking? COPD, when could it become a material contributor to ResMed?

So we're actually at the European Respiratory Society meeting last week, and our team presented a poster, which will get published soon, really looking at the prevalence of COPD and looking at the emerging data around that. And the current estimate, number of COPD sufferers around the world is 480 million patients. And around the world, COPD is a chronic disease. You may have 10 or 20 years. There are different treatment pathways. There's actually no world-recognized standard of care for that. And so there are a number of opportunities that we see. And some we're already executing well, and some are for the future. The ones we're executing well are noninvasive ventilation, which is used to very -- patients -- very much towards the end stage of that therapy pathway. And it's an accepted treatment, and there's good data showing that it works. But it does take work to get patients on the treatment and to manage them through that. There's another chronic treatment that's emerging that we have products in it, and it's called high-flow therapy. And it's actually gained a lot of traction as a treatment for COVID in the acute space in hospitals, which is really good for it. But as you've heard me say, our strategy is not to be a hospital equipment supplier. And so we're not focusing on that. But what we are focusing on is trials and gathering the data to establish reimbursement for high-flow therapies or long-term chronic treatment. And we're really excited about that. But these trials and getting the data and then having the reimbursement codes change, that's a multiyear project. It won't happen overnight. So today, we are selling high-flow therapy devices in a couple of smaller markets and in the clinical trials and performing well. And then the third area is our investment in Propeller, where we're looking -- really looking at medication management and ways to improve adherence to really prevent a medication usage and also tracking sort of rescue medication usage for inhaled medicines. And we have really good data showing great outcomes. And if we use this tracking device and the associated software and apps, we greatly reduce the rates of presentation in hospitals for acute exacerbation. So there's a strong economic case there. We're building the commercial models in doing that. And we're really in execution mode, under the radar a bit on that on Propeller. But it greatly opens it because I talked about a 10- to 20-year disease progression, and I've been talking about treatments that would happen in the last quarter of that. With Propeller, we'd be talking about treatments that happened in the first quarter of that all on the way through.

Sure, great. We've lost the clock up here, but I'm guessing we've got about 30 seconds left. But is there a message you would like to leave us with today, Rob or Bobby?

Yes. So in terms of the global business, we are really excited about the opportunity for growth. We're still hugely underpenetrated. We've got all the right settings. We've got a really interesting dynamic and -- that we continue to be the competitive leader in. And we're investing -- Bobby, I don't know if you'll wrap a few words. We're investing in our SaaS businesses that are also a great opportunity and should grow faster than the rest of the business, eventually.

Yes, that's a very exciting future ahead of us. I think it's our core business, which has a long runway, and I see a similarly huge opportunity ahead in the SaaS business. Exciting times.

Great. Well, I might call it time there. But thank you, Rob. Thank you, Bobby, for your time today. Thanks, everyone, for listening.

Thanks, Sean.

Thanks, Sean.