ResMed Inc. (RMD) Earnings Call Transcript & Summary

Music has gone off. So that's my queue. Afternoon, everyone. Welcome back to the afternoon sessions. My name is David Low. I cover health care out of Sydney for JPMorgan. With us this afternoon, we have ResMed, CEO, Mick Farrell. So Mick is going to present for about 20 minutes, and then we'll do 20 minutes of Q&A. A quick reminder, there is the digital conference book if you'd like to ask questions online, but there will also be a mic and it's probably easy to use the mic if you're in the room. Over to you, Mick.

Great. Well, thanks, David, and good afternoon all. Go through the disclaimers there from our legal team. So what's ResMed? ResMed is aimed -- ResMed stands for respiratory medicine, but ResMed also stands for residential medicine, treatment and care, where you live and preferably in your own home. And our total addressable market includes our core market of sleep suffocation, as I call it, or sleep apnea as the physicians call it, which is around 940 million people worldwide. But it also includes chronic obstructive pulmonary disease or lung disease, which is 480 million people worldwide. And we've added on some capabilities in cloud connected inhalers for asthma. So that's 330 million people worldwide in that addressable part of our market. And most recently, in the last quarter, we bought an app for insomnia treatment called Somnio and -- from a company called Momentor in Germany, riding some of the digital health applications, digger and deeper in the German market. And that's 880 million people worldwide who have difficulty getting to sleep. If you add all that together, it's 2.5 billion people, around 30% of the world's population that is treated by 1 of these 4 very prevalent and chronic diseases that ResMed is looking to treat. One of the things I'll talk about as we go through this presentation is our focus on data and particularly big data, taking 12.5 billion nights of medical data that we have in the cloud and looking to extract value customers, whether they're patients, providers, physicians across the board. This slide highlights 2 studies that we've recently previewed and published. The one on the left-hand side of your screen called the ALASKA study, I don't know why it's called ALASKA. These key opinion leaders take those little acronyms for it. It was done in France, and they used the U.S. state. But it's 170,000 patients. And what it showed is patients who are on our therapy or CPAP adherent therapy versus patients who are nonadherent to CPAP. They found a delta within 365 days of 39% in mortality difference, so an increase of 39% survival for patients on our therapy. I've been with the company 22 years. And we've always said internally that our treatment, CPAP is a case of life and death. I can now say definitively, it is with an equals of 170,000 behind that. In addition to saving lives, our therapy also saves money and saves on chronic disease development. And so 2 stats up there, we saw a 25% reduction in the incidence of hypertension and a 23% reduction in the incidence of heart failure amongst the CPAP-adherent group. And we can go on in terms of costs. The study on the right-hand side of the screen, again, looks at those 12.5 billion nights of medical data and overlaps them now with available medical data in the U.S. And we were able to show on the left-hand side, of the studies in France and the U.S., we're able to show within the first year, a reduction of over $3,000 per patient in the study in terms of total medical costs. So that's well below the cost of diagnosis and treatment with our therapy. So the payback period less than 365 days in addition, reductions in hospitalizations and ER visits. What are the global trends and why do I think that, that total addressable market that we're after is sustainable and addressable and a big opportunity going forward? Well, none of these things like Jamie was just talking about there over lunch, these are trends that are global. We are seeing chronic health diseases, chronic disease management become one of the biggest issues. It's 80% of the total cost of our sick care system worldwide. It's not truly a health care system because we wait until you're really sick with a chronic disease and then we treat you in expensive high-cost areas like ERs, ICUs, CCUs and emergency rooms. But our aging population and the increase of that chronic disease is a trend that just continues. We're increasing our health care spend as a percentage of GDP. We're here at a health care conference. We don't want that to keep going up. That's not sustainable. Here in the U.S., it's 18%, 19%, almost 20% of our GDP, $1 in $5 of the economy is spent on health care. It's not sustainable that, that grows faster than the economy, but it is doing so. Similarly in Western Europe. Labor costs I mean, not just in this 7% inflation environment, but even before that labor costs in health care have been skyrocketing over and above other industries and staffing shortages. It's hard to find people to work, whether it's in respiratory therapy or just in the general health care system. And there's an ongoing need for care where people live outside the hospital. All of these trends, actually, I think in these last 2 years, this is the first time, by the way, it's great to have an in-person audience here. It is so much better. The last 2 years, I was staring at this little blank screen in my home office. Thank you to people for being here. And -- but what we noticed in that awful crisis is that, yes, you can run a public global company from your bedroom, like there are some amazing things you can do in terms of digital health, remote health, remote hygiene. One thing we did find is that the importance of respiratory diseases and respiratory hygiene was taken to another level. People realized a communicable disease like COVID can kill you. And therefore, diseases like lung disease, COPD, respiratory disease or sleep apnea or respiratory disease are more important. And we saw rates of people even just renewing their masks and chewing in accessories in terms of respiratory hygiene pickup and a secular rate, and that stayed that way since then. But the digital health trend, the ability to get screening diagnostics and treatment for not just sleep apnea, but many chronic diseases in the home has really picked up. We think that those trends of digital health, respiratory health and hygiene and treatment outside the hospital are ones that have been proven during COVID and will only accelerate as we move forward. So what's our strategy to address this? Well, look, we believe in a patient-centric future, we believe in a digitally enabled future. And we believe -- and it actually looks modest when you think of the 2.5 billion patients I talked about, but we believe that we can change over 0.25 billion lives in the year 2025. In the last 12 months, we changed 144 million lives, giving someone either a device or CPAP and APAP or bilevel or ventilator or a full mask system or an app that they were using to treat their COPD, their asthma or their insomnia. And we want to increase that volume at double digits every year through 2025 so that we can touch and improve 250 million lives by 2025, not just in our core market of sleep apnea, but also in COPD, asthma and other chronic conditions like insomnia. In addition to that, we have a Software as a Service business that I'll go into in quite a lot of detail later on in the presentation that talks about how we are running software for out-of-hospital health care. We're not trying to compete with an Epic or a Cerner, but we are sort of becoming a little bit of the Epic or the Cerner or the Allscripts for out-of-hospital care, whether it's in a skilled nursing facility, home health, hospice, private duty home care, life plan communities and home medical equipment and beyond. Well, how are we going to execute on that strategy? A big part of it is our investments in digital health. If you think about it, those 19 million devices that we have in 140 countries are cloud connected nodes in a digital health ecosystem. Every day, every morning, someone wakes up from their CPAP. Their data go to the cloud. Often they get it themselves on their own app, they check it and the gamification, if you like, almost like the TikTok approach or the Instagram approach of addiction of social media. I like Jamie's point there around please get off it if it's too addictive, but in the digital health overlap with that gamification, we're able to drive incredible engagement of our patients with their care through the myAir app. And we actually see that when you combine a patient on myAir, the digital health app, a doctor using AirView, which is our cloud connected system, the doctors can access their patients' data. We see adherence rates go from sort of typical industry, pharmaceutical or med tech industry adherence rates of 50%, 60%, which is what you see in the peer-reviewed literature in the last 20 years in sleep apnea. We increased that to 87%. We get almost 9 out of 10 patients wearing our device for the whole night. And that is, by far and away ahead of any of the competition in our space. But even when I present at health care conferences, I have folks from -- my fellas over at pharmaceutical companies say, I would love to be able to achieve 90% adherence after a prescription of my inhaled pharmaceutical. Can you do that with your Propeller app? And we think we can. We think we can apply all that learning from sleep apnea over to COPD, and I'll talk about that a little later in the presentation. But this slide also shows that not only those 19 million nodes and the 12.5 billion nights of data but also the knowledge that we have of patients in out-of-hospital health care and how we can seamlessly manage patients through those episodes of care and health care ecosystem track the patients, improve the patient's outcomes, lower costs and provide better long-term longitudinal care. And the 3 main things we're trying to achieve is obviously patient outcomes that we're going to improve not only their quality of life but their quantity of life. Business outcomes, we're going to lower costs for our customers. We see that when our digital health solutions are used, our home medical equipment company customers have labor costs that are 50% below what they were before they were using our digital health solutions. And then there's also operating efficiencies that we're going to bring to the global health care system, like I talked about, the $3,000 reduction within the first year of patient on therapy. These numbers are pretty impressive. They go up every day. We report them every quarter, but 12.5 billion nights of medical data. We have now over 20 million patients on our AirView cloud connected system. I think an interesting part of this is actually the patient-driven one and accelerated during COVID, as I said, but 5 million patients looking at their data on their app and getting access to it. By the way, we provide patients access to their data for free. There's a lot of these talks around who owns the data, the patient owns their data. We are stewards of those data, and we're stewards of cybersecurity, of interoperability and ensuring that those data are available for that patient. But it's an amazing response you get from patients being able to see every day their score out of 100 for how they slept. And people are competitive often with themselves on the golf scores or their tennis game, we'd like to have people competitive with themselves on their sleep and their breathing and it works. So what are the priorities that drive our focus and what are the outcomes we're looking for? Well, I talked about the patient outcomes, but our triple aim is pretty simple. We want to slow chronic disease progression, whether it's a reduction in blood pressure; a reduction in the incidence of heart failure, as I talked about from those studies; a reduction in HbA1c, an improvement in diabetic control; a reduction in body mass index for a patient who's getting treatment and has better in participation in exercise and so on. Secondly, we want to drive a reduction in the overall costs to the health care system. We believe that health economics and outcomes research that we have through our big data differentiate us from other players because we're able to prove that we lower costs to a health care system by overlapping our data with the health care system's own data. And thirdly, and this is really important, and sleep apnea is one of the few industries where you see this. You don't see this in hypertension, but we see a symptomatic relief in the patient. They feel better not just in the morning, but throughout the day. And I think that quality of life improvement is a really important one. That's been a catalyst for our business and will be for not just sleep apnea but COPD, asthma and insomnia. We bring symptomatic relief. So let me walk really quickly through our sleep and respiratory care business. I see I've only got 7 minutes before we want to switch to Q&A, so I'll speed up a little here. Our vision is to create a digital end-to-end experience for patients throughout the value chain. We want to improve the patient experience through digital care. We just launched our 11th generation device, the AirSense 11. It has coaching capabilities. It has 2-way communications. A doctor can communicate with a patient, an AI/ML algorithm that we've created can interact with the patient to drive therapy adherence. We can have over-the-air upgrades. If we need to upgrade software, we can do it. We can provide interaction that way. Our goal is to drive long-term adherence to 90% and above. I talked about a peer-reviewed published article that we have 87% adherence that we did with Kaiser Permanente. I would like to see that 90% across the board with every payer and every provider. We're not there yet, but we can get there. We need to lower the cost of delivery of care, improve health outcomes. But most importantly, we need to show this through economics and through the quality of life of patients because they will make a sustaining business for us and for our customers. People say, are you done? Is it the smallest, quietest and most comfortable device on your 11th generation that you've done? Well, it's not just now about being smallest, quietest, the most comfortable. It's about being the most connected and the most clever. And I think the opportunity for us to leverage artificial intelligence and machine learning, not just in the little algorithms on gamification on myAir, but to really look at the whole health care ecosystem to see where we can improve. We lose a lot of patients through the funnel, even just from the screening diagnostics and therapeutic pathway. We measure adherence from the prescription through to 90 days of therapy. I think we should measure adherence from, I think I have a breathing and sleeping and snoring problem from my bed partner and how many of those patients actually get through to adherent therapy. It wouldn't be 87% to get through there. It would be more like 15%. Where do we lose those 85% of patients in the funnel? How can we make systems and capabilities that can better digitally curate a patient from, I think I have a problem to knowing if I don't treat this problem, I have a 30%, 40% high chance of death, that's a good incentive or I can part have a better capability to participate in life in my vocation, in my family and have a better quality of life. We've got to work on those, and we've got to bring them to the forefront. One of the big opportunities on the payer side that we have is in our second disease state that we treat chronic obstructive pulmonary disease. There's over $1.5 billion to $2 billion per year in the U.S. on readmission costs for COPD. COPD is the number two reason for hospitalization after cardiovascular disease, but it's the number one cause of rehospitalization within those 90 days. And we see payer provider systems starting to pick up on that. We know that we can be a catalyst for reducing those readmissions. I've talked about this unlocking value across the value chain. I won't go into details on that. Our SaaS business, I'll cover this in 5 minutes, and then we'll go to Q&A. We'll have at least 12 minutes on that. Our Software as a Service business includes 3 main brands: Brightree, MatrixCare and our new addition this last quarter at MEDIFOX DAN. So Brightree, think of it as an ERP, a Software-as-a-Service for all home medical equipment company needs. Think of it like an Oracle or an SAP or better than those. The combination of those plus Bloomberg for the HMEs. They get in, they turn on and it runs their business inventory, interaction with payers, providers, revenue cycle management and so on. Brightree also includes pharmacy and infusion. MatrixCare has a number of verticals from skilled nursing facilities, home health, hospice as well as private duty home care and even life plan communities where aging populations are. And our most recent addition is MEDIFOX DAN, which is based -- and by the way, Brightree and MatrixCare are all U.S.-based. MEDIFOX DAN is German-based and is focused around home nursing, home health but also nursing homes, so some facilities there as well. We're the number one strategic player in the world in out-of-hospital Software-as-a-Service. This combined business is around trailing 12 months around $400 million in revenues and growing at very high single digits. And we think MEDIFOX DAN -- we know MEDIFOX DAN will be accretive to not only our SaaS business growth but also ResMed's total growth and our EPS in this first year of the acquisition here in 2023. I'll just give one example. People say, look, how does the sleep and respiratory care medtech or digital health medtech business interact with the Software-as-a-Service business. Are there any synergies? And there are obvious ones on the back end with cloud ops, cybersecurity and interoperability, but there's some front-end synergies too. One of the main ones is if you think about home medical equipment companies and their focus on replenishment of patients on our core therapy of CPAP and APAP and bilevel where there's needs to replenish the device every 3 to 5 years, the mask every really 3 to 6 months and many of the other accessories. We have a product called Brightree ReSupply, which completely automates the process, contacts the patient, interacts with the insurance company and with the patient on co-pays and manages the whole logistics and distribution process. We also made an acquisition of a competing technology called Snap technology that has even pushed that further with the way that it interacts with patients. We actually closed the Snap acquisition just before COVID, and we put it into place and the timing was really good for our customers because patient flow through device setups really slowed down in 2020 and 2021 due to the COVID impact on out-of-hospital care and all patient care across the board and ReSupply was our way for our customers and patients to have more engagement. And we saw incredible doubling of the flow of replenishment to the needs of patients during that time. But home medical equipment is not the only part of our hospital ecosystem that's growing. We believe that all of these verticals that you see on the screen here are going to increase in the number of patients and the number of treatments that happen through them. Hospitals are great places to be if you're incredibly sick with credible acute needs. For the other 95% of health care, we believe you should be treated in the home, or at least where you are living. And we are investing 90% to 95% of ResMed's revenues and profits come from outside hospital health care. And we believe that's the future of health care. And we're investing big there, and we expect good returns. Speaking of returns, this is our really quick snapshot of our 5-year CAGR. We've got a 5-year CAGR of 11% on revenue. These are trailing 5 years and on EPS, with strong leverage there, 400 basis points at 15% CAGR on non-GAAP EPS. I think I'll invite actually, if we could switch to the Q&A section. I'll invite our President and Chief Operating Officer, Rob Douglas; and our Chief Administrative Officer, David Pendarvis, to the stage, and we'll just take questions now. I mean I'll close with this 144 million lives change in the last 12 months. Our goal, volumetric growth, double digits all the way through 2025 and beyond to get that to 250 million lives changed in 2025.

Thanks, Mick. Good job. Kept it just over 20 minutes. I'll start with the question, but if you'd like to ask a question in the audience, there is a roaming mic. There's also the opportunity to put a question on to the digital conference book. So maybe there's one that's given recent history, can I get you to talk a little bit to the supply chain? I mean, supply has been a constraint for the sleep business. Now there are multiple reasons for that. But just how you're seeing things at the moment, is COVID in China an issue that we should be worried about as well? If you could just elaborate a little there, please?

Well, I'll start. And then we have our Chief Operating Officer here, who can talk about all the work we've been doing. But yes, supply chain, obviously, huge impacts the last 24 or 36 months through COVID, particularly in electronic components, semiconductor chips, communications chips specifically. And we've been able to -- I think weather a perfect storm through COVID. We had the implications of the COVID slowdown in patients and then coming back, and we had the implications of semiconductor crisis and coming back. We also had a competitive recall that's been going on for the last 18 months of 5.5 million devices in our space that a competitor has spent the last 18 months plus because they're not back in market yet working on, and that drove incredible excess demand for us, and we had to perturbate our supply chain amidst that perfect storm. I think the team has done a really good job, and we've been able to grow double digit for quarter-on-quarter for each of the last 6 quarters. Very strong double-digit growth to meet as much of the demand as we can have out there, but there's still excess patient demand. And we see that as a humanitarian emergency, and we're doing everything we can to source more and more semiconductor chips and we're having some good success, Rob?

Yes, absolutely. And in fact, we should be a very good customer for the semiconductor industry because we're predictable and we can forecast our volume increases, and we see the patient inflows years out. And so part of the things we are doing are extending our commitment times with them up to many years. In fact, our normal setting, we know the electronics industry has always feast or famine and they go through these cycles. And our typical inventory settings and risk management policies would have seen us through even this one had not, we had a competitor drop out of the market. And all of a sudden, we had a 50% increase in demand. We saw the suppliers actually help us in. Some gave us some commitments, not all of what we needed. But then we saw decommits come through as other demands came through that had more, I guess, cloud with the semiconductor manufacturers. That seems to have settled down. The consumer product demand has dropped off a bit but our technologies are more in line with what the auto industry demand. So we're really competing for supply capacity with the auto industry. And as that looks like it's not got great volume growth for short term ahead of it. That should help us as we go through. There was also a commentary around the impact of China. At the moment, China has been a challenging thing. And actually, when we -- early in the COVID pandemic, when we saw the depth of our supply chain through so many countries, we realized some of the risks that we were taking there, and we put some things in place in there. And so we're less reliant on China, particularly for Tier 1 suppliers than maybe other -- maybe you might expect us to be. And also what's happening now in China with the rapid move in COVID going through. And even in our own teams that are operating there, we've got a really good business in China. Most of that team have had COVID in the last few weeks. So -- but what do we think is happening in the suppliers is that, yes, they're getting affected by COVID in their teams, but it's not lasting that long. And so given the current configuration of inventories and that doesn't look like it's going to be a problem for us in China.

Yes. And the net is we're seeing increase every quarter sequentially and our ability to supply more and more devices and take care of more and more of that unmet demand, and we're getting closer and closer to meeting total market demand. We're not there yet, but every quarter, every month, every quarter, we're getting better, and we're going to see sequential growth throughout the fiscal year and beyond.

Great. If there are questions in the audience, just please raise your hand. We've got one here at the front.

Row 1 and Row 5, it looks like.

Just a quick question. How do you compare your CPAP solution for apnea to the implants?

So the question, if you didn't hear it online is, how do you compare CPAP therapy to implantable therapies for sleep apnea? I'll take the question even broader and say how do you compare CPAP treatment to all substitute therapies, all others that may be there. I would actually say CPAP is number one. The backup to that is APAP. The backup to that is bilevel PAP. So there are 3 layers of actually positive airway pressure therapy that would be my first 3 lines of defense. All of which, when used appropriately, you can get your apnea hypopnea index or your suffocation index below 5 to normal territory. If you fail on that, right, and I was bragging earlier that we get to 87% adherence, which is amazing, rounded up, call it, 90% adherence. That means still 10% of the patients that we go through that whole process with aren't adherent on our therapy. I think for those who fail positive airway pressure therapy, the next line of defense would probably be a 3D printed dental device such as -- we have a product called Narval, which is the number one provider in Western Europe and Northern Europe. It's almost as effective as CPAP, not quite as, but it's almost as effective, and that will be the next sort of clinically most effective therapy. And then if you fail CPAP, APAP, bilevel and then dental, I would say probably the next substitute therapy coming down the pipeline is going to be a pharmaceutical treatment, a company called Apnimed out of Boston has just presented their data. We're an investor in Apnimed and that has around 47% of the patients, about a 50% reduction in Apnea-Hypopnea Index and so it's able to do that with a pill for some of the phenotypes of patients. And if you failed all those 4 lines, I think then surgical at a very high cost $20,000 plus cost would probably be the third or fourth line of therapy. We're an investor in a surgical opportunity called Nyxoah and I know there's another public company out there now in that space as well. But I think it's -- there will be niche therapies because they're not as effective and they're more costly than the positive airway pressure therapies. Thank you for the question.

Thank you. I'm a big nerd. So since we're in Silicon Valley, it's actually very refreshing and exciting to see all the advancement of your business in SaaS, AI and big data. My question is, compared with other big tech companies in Silicon Valley and other big medtech like Medtronic, Boston Scientific, who are just starting their AI initiatives? What's ResMed's unique advantage on AI, machine learning and SaaS compared with tech and medtech companies?

Yes. No, it's a very good question. And I think you've got to know what you're all the best in the world at and what you're very good at. What we're best in the world at is treating respiratory medicine and doing residential medicines. So sleep apnea, COPD, asthma, insomnia as well as software for out-of-hospital health care, HME, home health and hospice. And we have the highest number of medical devices that are cloud connected in the planet. I love my friend, Mike Mahoney, but I've got more cloud connected devices than Boston Scientific. We do. We've got 19 million, 20 million 100% cloud connected with medical devices, 12.5 billion nights of data. But big data is useless on its own. It has to be extracted to create value. And that's what you're talking about, AI and ML and our ability to convert those big data into actionable outcomes for a patient, for a provider, for a physician or for others. And I think digital health is a marathon. And I think we're in mile 1 or kilometer 1 for those listening from Asia, Europe and so we've got a long way to go in this. But I can tell you, we are ahead of our competition in our space. We're engaging with other companies. So in Silicon Valley, we partner with Alphabet, company Verily. We have a joint venture called Primasun. So we're combining Google engineers and their capabilities with a seamless end-to-end pathway for sleep health and sleep and respiratory health. But we're also working with the AI and ML providers directly within our data, and we're hiring our own. But there's a long way to go in this. And I can tell you that already that we have algorithms running and encouraging patients to use their therapy, it's just the start of where we're going to go with this. So I think there's so much we can do to lower costs, improve outcomes and find interoperability across the value chain. Dave, did I miss anything on that?

No. I think you got it, but it's certainly the case. One of the unique aspects that we have is we're not just relying upon our analytical capabilities. As Mick said, we have our own data sets within our specialized fields. So we have both the hardware that continues to collect the data as well as the algorithms that can then derive the insights on that data and having that combination of your own proprietary data sets is probably the main advantage that we have to use those tools with that.

Yes. Not only you have impressive big data strategy, you also have impressive data to back up that strategy.

Right, right. A lot of people have the strategy without the data.

Any other questions from the floor? All right. Another one for me then for the team. I mean Philips has obviously had a recall, and that's been a pretty dramatic event for the industry. Can I get you to talk a little bit about how you're planning for Philips' return?