ResMed Inc. (RMD) Earnings Call Transcript & Summary

Welcome, everyone. Thanks very much. Let's make a start. So thanks very much for coming. For the next session here, we have Rob Douglas, the COO of ResMed, and we're also joined by Amy Wakeham, the Chief Communications and Chief Investor Relations Officer, I believe, is a new title. And for those who don't know me, I'm Chris Cooper, the health care analyst that covers ResMed here at Goldman Sachs. Rob, if you don't mind, let's just pass over to you just for a very brief introduction of yourself and to the company.

Yes. Thanks for coming. I'm Rob Douglas, President and Chief Operating Officer for ResMed. At ResMed, we're mostly known for our sleep apnea therapy business. Sleep apnea is a condition affecting early 1 billion patients around the world. And even though we've been going for over 30 years, we've only just got started really in finding and getting all those patients on treatment through the health care systems. We also have other businesses. We're very strong in ventilation and chronic care ventilation for treating typically COPD patients. And we also have a very strong business in a SaaS software business. And basically, we run the operating system for many out-of-hospital care providers, which happens to include the providers of our sleep apnea therapy as well. We have a long-term history of growth, and that really reflects the fact that our actions and our industry's actions continues to find more patients around the world. And as I said before, we've barely got started, and we've got a strong outlook for further growth in all of those businesses.

Okay. And apologies to start with this, but we've all been on the edge of our seats a little bit during the second quarter of this year, waiting for the outcome of your competitors' consent for [ decrees ]. Perhaps you could just share your latest expectations with that and I guess, to the extent it's relevant the results of the testing last month as well.

Yes. So ResMed's far and away the market leader in the sleep apnea therapy business, which is the provision of [ CPAP ] devices and masks for patients. And actually prior to the recall of our competitor, we were very much still the market leader in there. And so now for well over 2 years, our #2 competitor has been out of the market. And there's been a crunch through that in terms of having to coincide with a cyclical electronics downturn, and it's taken us a while to be able to build all of the volume that the industry needs. We're very close to that at this stage, and we have our products on -- available for order for most of the products, not our latest version, it's still on customer allocation process. But anyone who wants to order connected to AirSense 10 office, we're able to supply it, so in a very strong position there. Our competitors, it's a little bit hard to know what's happening. And so I have to move into the realm of speculation to answer your question around the -- what's happening there. But we have no additional information and negotiation of consent [ decrees ], which will have something to do with Philips agreeing with the FDA and the U.S. government around how they should be operating as a medical device manufacturer to supply into the U.S., could have a range of implications. And you could speculate that those implications could range from not much to being quite devastating to their ability to reenter the market over the next few years. So we don't know. In fact, our view is that it doesn't make a lot of difference for ResMed when they come back. We are today a market leader, but we have competitors, and we're competing with those competitors in the market. We've gained a lot of share. Our strategies and tactics should preserve that share, and there's no way we're going to give up share easily. And whether Philips are in the market or not, it just depends on whether we have 2 or 3 or 3 or 4 other competitors in the market. With regard to the question on the test results that they announced recently, for me, personally, they weren't particularly surprising, partly because we do and have been doing biocompatibility testing on phones and various materials for decades. And so I think that it's positive for patients saying that things weren't as risky as they originally thought. The question is why did they originally think that they were risky? And why hasn't the work been done before those products were on the market would be my view. So -- but generally, it's absolutely true that [ CPAP ] is the safest -- one of the safest therapies that you could get. And if the manufacturers are doing the right thing, it should remain safe that way. And so we tend to be encouraged that the testing came that way.

And just to follow up on your point on market share there, so one of the more frequent conversations we're having with investors at the moment, I guess, is around their reentry into the market. And I guess they've demonstrated an ability to increase supply, and they do have the potential to be more aggressive perhaps with price. I guess, what gives you confidence that they don't decide to effectively buy their way back into more market share through price?

Well, I think they'll -- as I said, it's always been a competitive market. And I think actually, for ResMed, our view of the market is that there are so many patients that if we're going to get those patients on treatment, health care payers, insurance companies and governments around the world really aren't going to want to see the cost to patient increase. And so I think the industry strategy is that it's a volume and leverage play around that. Our other competitors are competing on price, and Philips traditionally have competed on price, and we've done just fine with them. Our view of that is that you've got to look at the overall value and actually the overall cost of delivering that value if you're a provider. And so having products that work, that are connected, that have really efficient workflow systems around them to get better outcomes in terms of patient adherence, and we published data showing this. And then with masks that when you open a mask, it's more likely to work on a patient than a different mask, all of those are incredible value-creating things. And so it's not just a simple price play. It's [ definitely ] a factor, and we've got to be cognizant of it and aware of it, and we'll continue to optimize. We're actually looking forward to sort of more stability in the outlook for devices because it will let us get back to our usual continuous improvement optimization processes around there.

You mentioned that the supply of your own end products has improved materially. I mean that's obviously been something that held you back, I guess, through the earlier phases of the recall. AirSense 11, you alluded to being still on allocation. Can you give us an update there for when that's going to be freely available? And I guess what are the raining pinch points across the supply chain at this point?

Yes, it's just multiple factors. As we -- usually when we launch a new platform, and this is historically, we'd run the old platform at full speed until we can switch in major markets, which -- very quickly to the new platform. It's just more efficient if we can run single platforms. And people used to track our launches by watching closely our inventory levels. And so being able to run the Air 10 and the Air 11 in parallel has actually been very good for the risk management and how we operate around the those launches. And also, there are premium features and premium value in the 11 that we're able to earn some of that premium for. The actual timing of the Air 11, I can't give you an exact date on that at the moment. It will happen sometime over the next sort of few quarters or so around there. But at the moment, the Air 10 is still a really strong product and performing really well. And many of the software improvements that we put in, which is part of the basis of competition now on our AirView and our myAir apps, as we introduce those enhancements and improvements to the software system, they apply to the Air 10 as well. So it's still an incredibly competitive and high-performing device.

No other pinch points across the supply chain regarding the other products outside of AirSense 11?

It's a lot better than it was a few years ago over the past. I think things have stabilized. We have to keep a careful eye on materials. We have to keep a careful eye on electronics. And so the actual interesting thing around this is that for the last -- for 30 years, ResMed was a demand-driven organization. And so our basic strategy was drive awareness and support the provider industry and create the patient awareness so that the patients are coming in, then we'd forecast to meet that demand. When our competitor dropped out and we had an immediate like 50% uplift in demand, we've switched to being a supply-driven organization. We had been this with ventilators earlier in the COVID period as well. So what we could make is basically drove what our sales were. And so that's a big, big change, and it's actually no simple thing to switch back and get everything completely balanced around there. So it's a lot to do with our systems and our forecasting systems. And those forecasting systems then feed into our supplier base and give them a long-term outlook of what they need to be providing for us. And getting that back in balance is probably the right way of looking at it.

So on the demand side, can you give us a sense of waiting lists across the system at the moment, particularly in the U.S.? I mean, some of the channel checks we've been doing over the last few weeks would suggest multiple months, in some cases for some of these lead positions to see people and diagnose people, that would be up there with amongst the longest ever. At what point does that become a problem? And how pervasive is that as an issue?

Yes. I mean we wouldn't -- I wouldn't say that today, looking out, that there's a major problem or sleep lab waiting list. There may be some channel checks. It's never been something that you'll get into tomorrow. Usually, the demand has always outstripped capacity, a challenge to build at all. But our view of our industry is that if you're thinking of it from a patient's perspective, the patient has a pathway that they go through, starting off with being a consumer who maybe is not happy they're sleeping very well or their bed partners telling them they're snoring and occasionally stopping breathing. And then they'd go to a primary care physician, who, hopefully, would be alert enough of the risk of sleep apnea and refer them to a sleep specialist, who would see them and then schedule them into a lab. And I think that might be the one you're talking about there. And then there's a very high pretest probability, actually, if people referred to the lab and then referred to a provider over an [ USB ] HME industry, but it could be a home care company in other countries. And that provider would set you up with a -- set you an appointment and then look after you and then work with you to get you adherent to treatment and then put you on to an ongoing mask resupply program that [ bill ] your insurance. So actually, all of those interactions and transactions have bottlenecks. And if any -- if we work and resolve any one of those bottlenecks, we immediately hit another one. And so we have to work on all those fronts. And that's actually why you don't see in our industry inflection points have changed the growth rates. You actually see us knocking away bottlenecks that sort of lift the growth rate, keeps and sustains the growth rate over time. And I think that will continue to be that -- I doubt that sleep lab capacity today is a big bottleneck. There is another buffer earlier in the COVID period when the sleep labs were all converted to respiratory wards, then there was more uptake of home sleep testing, which can compensate. And hopefully, testing is a very, very solid diagnostic process as well.

Where are we on home sleep testing now? I mean as you say, it sort of grew in prominence by necessity at the start of the pandemic. And perhaps, it's moderated a touch. But are we back to the levels of pre-COVID sort of prevalence of home sleep testing versus more formal diagnosis?

Yes, pretty well. Maybe it's a little higher, still, in some countries, where it wasn't well accepted, it got more accepted and has stayed at a high level. Varies by market, in France, it's probably 80% of its home sleep testing. And by the way, the reimbursement is the same for home or in lab. In the U.S., it's probably a bit less than 50%. And we really need sleep specialists to be driving the industry and doing the right thing by patients. And so they're really the ones making those calls between how much is in lab and home test. There's definitely the role for the in-lab testing for the right patients. And so I think that -- the propensity of those businesses to continue to invest in the diagnostic business, I think, will continue because it's just so many patients.

Another question we're fielding a lot at the moment from investors is on the potential threat or not of the GLP-1 class of drugs, which are clearly showing a lot of benefit. Are you seeing any erosion at all of the kind of mild end of your markets from lesser prevalence of obesity at all?

No. I mean our device business -- device sales grew like 40% last quarter. It's very hard to see anything in terms of that. Our view of those drugs is that they are a wonderful thing. It's great to have those options for patients. Sleep apnea is a very complicated condition. There's a lot going on. And obesity is a contributing factor, but it's absolutely not the only contributing factor. And then if you look at the levels of obesity versus the physiology of individual patients, there are many, many sleep apnea patients, more than we can manage at the moment. So actually having some people have their obesity improved by the medication may make them better CPAP patients, better patients to be on CPAP. And clearly, for some patients, it will mean they don't need it as well. But we wouldn't be able to measure it. We're having similar discussions with this years ago in [ bariatric ] surgery first came out. And people would say, "Oh, that's clearly going to be a threat to your business," but you wouldn't have been able to measure that or detect that. Many bariatric patients really still need a CPAP. And then the issue of the long-term impact of those medications and how they work and what their impact on the sort of broader health of the community will be, I think, is still to be determined and including the cost of them as well. So it's pretty early days, but our view of it is it's probably not a major threat to our business and may actually have some synergy in it, particularly in terms of collaboration between CPAP providers, and there'll be more treatment options for our surgeons [ FYI ] our sleep specialists.

And just on the subject of pharmaceuticals, so there's an oral therapy in development at the moment for [stroke ] sleep apnea developed by [ Apnimed ]. Now you've taken a stake in that business, which you disclosed to us at the result in May. Could you just give us your thoughts on the sort of potential opportunities that, that could provide and what the expected timeline is from here?

Yes. I mean it's just in part of our strategy, is where they're probably the largest and probably, I would unbiasly say, the most creative strategic in the sleep area. And pretty well, most people with ideas in the area will be talking to our teams around that. And it's not uncommon for us to invest in alternate treatments. We also -- we actually own a mandibular repositioning business in Europe, which works really well, given the structure of the relationship between the dentists and the sleep specialists in the countries that we operate in. We're also -- and we've disclosed a holder [ NOX ] which is a second-generation stimulator. And our view is what we know and care about is treating people and treating their sleep apnea. See, perhaps totally the gold standard, but the other treatments are viable and makes sense. My engineers' perspective of most of the alternative treatments is if you look at the clinical end points for the trials for approval of most of these is they're looking for a 50% reduction in AHI, which is great. And if your AHI is 30 and you reduce it to 15%, that's a wonderful outcome. But in most markets, that's still a level that should be treated with CPAP. And so CPAP still probably the lowest-risk, the best outcome treatment and the lowest-cost treatment [ than ] pretty well of all of these. So we see a role for these other alternative treatments. And so our investment in apnea, that is actually totally on those lines, and we'd have expertise that we think could be relevant to them, given our understanding of the market. You do hear a lot in the markets around stimulators [ uninspired ], who I think have done a really good job on their clinicals and doing well. You've, no doubt, seen their advertising campaigns. My opinion is they don't really need to be demonizing CPAP in their advertising. They're actually part of an ecosystem that will only drive more patients into the overall system.

Might just pause there for a moment to see if there's any questions in the audience at all. Okay, Rob. So back on to your own business then more directly. So another thing that's obviously been heavily impacted by lots of temporary factors, let's say, is the gross margin of ResMed, now currently some way below where I think some people would have expected it to be by now. There's a lot of factors that feed into that directly, of course, but perhaps just a simplistic question, if sales mix were to normalize tomorrow, would gross margin be at pre-recall levels above or below? And perhaps some quantification of what gets us there, if the answer is below.

Yes. I think the way of -- we always talk about our gross margin is it's a headwind/tailwind story in any given quarter on its trajectory. Our sort of headline of it all is we actually believe our gross margin can be a lot better than what it is. And we'll be working on improving that. But we do need to do the work there. Then in terms of the headwind and tailwind, it's a matter of are we running faster with the tailwinds and the headwinds of the day. And so the last few quarters, we've had a massive headwind because our earned margin -- gross margin on devices is lower than our company average, and our earned margin on masks is higher than our company average. It's just the structure of the way those devices and products work. And so if we have like 40% growth in devices in a given quarter and 15% growth in March in a given quarter, that's a very big headwind to overcome. And we would expect -- we won't be growing at those rates in devices. We'll anniversary those and probably revert to more to a more industry normalized growth rate between those. But we still will have a much bigger share of devices than what we had before all of this came on. So then we'll have to introduce our tailwinds to margin, which are all the continuous improvement exercises. Some things will normalize out over time. So freight, there's still a lot of high freight cost in our inventory. Our ability to sort of optimize costs with our suppliers. When you're begging for components, it's no time to be asking for price declines with your suppliers. And in fact, our customers have the same thing with us. So we actually think we've got actually a very good roadmap for our growth continuing getting back to expanding our gross margin, and we should see that pan out over the next 2, 3, 4 quarters.

So over the -- just to clarify, so over the next 2 to 4 quarters, you expect to get back to something close to pre recall...

We expect to see our margins continue to improve. We're not -- we actually don't give guidance on the exact numbers of the gross margin. So Amy, you can clarify for me there. But no, we expect us to continue to see it improve. And our aspiration will be to improve it back to that.

Okay. And then below that line, so operating leverage is a feature of the business that we saw drive a lot of value for shareholders, I guess, over the last sort of 10, 15 years or so. I mean, the period there pre-COVID where you were taking out 100 basis points of SG&A as a percentage of sales each year. Then COVID came and sort of muddied all that, and then there's been a major recall in the industry. So I guess the question is, as these things continue to wash through and we get back to somewhat more normal operating conditions, do we return to a period where you can generate those degrees of operating leverage again?

Yes. As I said, we believe we are a volume leverage business. We've got so many untreated patients. Our SaaS businesses have got really great capacity for scale as well. So we believe that we can operate and plan our business to a sales growth that's higher than our operating cost growth, and we'd look to get back to that. During the pandemic, it has been pretty difficult to measure that through, it's been a very choppy period. And early in the pandemic when all travel ceased, and there was no in-person marketing, that saw a big cut in our SG&A. But that then, gradually, is building back in, and we try to build it to a sustainable but lower level. And we'll absolutely be looking to drive that leverage back through.

Okay. Another feature that's been necessary, I guess, that we've seen over the last couple of years is inventory build, quite material inventory build. So I think the more recent guidance from Brett was along the lines of that's now stabilized and could even begin to taper down at this point. So we should, therefore, expect a lot more operating cash to come through the business. I guess the question is, what are the plans for this additional cash flow? And I know that I'd like to come on to MEDIFOX in a moment, but there was a large acquisition that was announced this time last year, which took up some of that cash as well on the debt repayment side. Is the priority now to pay down some of that debt? Or is there anything else that you'd like to do with that cash?

Yes. So the -- just to comment on the inventory build, that inventory build was pretty well deliberate as we saw the shortages and the opportunities in the demand in the industry. And so only some components were short. So we were trying to make sure when we broke through those bottlenecks, we didn't hit other ones as well. And our industry level is elevated beyond what we would need to run the business efficiently. And so we should see that gradually start to normalize as we use that. And as we commented, that will have a positive impact on cash flow. In terms of uses of cash, maybe, Amy, you want to comment on that?

Yes. I think -- thanks, Rob. Certainly, the focus is bringing down the debt balance. I mean, Chris, you know, Brett, he's pretty conservative and so wanting to bring leverage back down. So that will certainly be a big focus. We were able to generate quite a bit of cash in our third quarter and pay down a bit of debt. So there's -- that will be a focus. We're always kind of keeping an eye out to see what opportunities are out there. And we're not looking for the next big acquisition. But again, we also don't get to control the timing of when things come on to the market. [ Some things ] being in a position where we could spend money, we would. But again, I think our focus would be more on tuck-in type acquisitions and then continuing to make sure that we've got cash to pay the dividend. We're very proud of the fact that we've been able to continue to pay the dividend even through the COVID period. And then I think, considering a buyback at some point in the future, that's been off the table since the [ MatrixCare ] acquisition. But again, it's really the focus of bringing down the debt balance.

And just on the inventory, actually, just on the subject, Rob, if you don't mind. So the card-to-cloud system was something that was deemed necessary at the time, and it certainly appeared so from the outside. Now, it appears far less necessary. Could you just give us an update on where that is? And how much of that inventory balance is perhaps associated with card-to-cloud?

We stopped manufacturing the card-to-cloud last year, last calendar year. And we had, in some markets, incredible enthusiastic uptake for it. In others, it was no, we actually -- we so much need the digital workflows that we can't go back to what it was prior to -- the world was prior to 2014. But we saw good demand. We were able to match our build with the underlying demand quite well, and there's not material inventories of card-to-cloud. Okay, It's some, but it's not a major factor.

Okay. And yes, I mean, Amy, I felt as though Brett maybe hinted a bit of a buyback at the last quarter of the last...

Yes, [ so no ]. I don't think -- our view hasn't changed in terms of kind of priority, but it's on the table.

Sure. Okay. But you could have a fairly -- we've got a solid cash flow. You can probably forecast view of our cash flow. And so there's enough debt there to use that for a while.

Sure.

Perhaps on MEDIFOX then, I mean it was a year ago today that this deal was announced. I remember speaking to Nick about it at the time, very excited. Could you just give us maybe a progress update on how that's all gone and the prospects for that business, looking forward?

Yes, we're very excited about it. We're really excited to being a global company to be able to align our SaaS strategy and corporate strategy with that global viewpoint. Everything we've learned about MEDIFOX as we've operated has met or exceeded our expectations, actually. And so it's a very solid team. It's a really good business. And for the ResMed, the therapy supply business, you have a very different relationship when you're the sort of business operations supplier for your customers. So we have a deep insight and very strong relationships across our SaaS business, and that's just particularly true in Germany as well. Integration plans have gone well. We've got a really strong team leading it. And we're excited about it. And no doubt, saw in our last results the sort of performance that we're seeing and so far, it's looking good. And we think that's an incredible capability add to global corporation, but also giving us capability for appropriate investments in either other SaaS businesses or other bolt-ons, as Amy said. And now we can then -- when we do these bolt-ons, we can actually leverage them across more suppliers. And just to comment on bolt-ons on SaaS businesses, these SaaS businesses are all API-driven, in an extent we're often partnering with other solution providers who are solving some particular problem that we haven't got to in our roadmap yet. And then there'll be an integration or perhaps it's because a customer would rather that solution -- and so when we do those bolt-ons often, they're really already integrated, and we may even be already selling the product before we do them. So they're great bolt-on acquisitions in that area.

The other therapy area that your company has spoken about a lot over the last 3 to 5 years, perhaps, is nasal high flow. Clearly, the majority of that opportunity today is in the hospital setting, but you would like to expand that use in the home setting. Could you maybe just give us an update on where we are with that, please?

Yes. So our overall strategy is we're the leader in now the hospital care, both in therapies and in the management solutions for that. We've been involved in high-flow therapy for a long time, and we've had nasal cannula-style products on our website, those products that we sell for many, many years. COVID and the emergency that it created really was a great opportunity for more people to see it and get more experience to it. And our other competitors have done well with that in the hospital market. It's not our strategy to go after that hospital market at all. But we do have really good high-flow therapy products that we're using in trials at the moment. And our strategy is let's use them in trials in particular markets, create the evidence and the work practices for them for use in the home for long-term care, particularly of COPD patients, and earlier in the care continuum than they might need ventilation or anything like that and hopefully be able to improve the quality of life and longevity of COPD patients over time. It's many years still for being material for us. And at best, you'll see some clinical trials report out in the interim.

How long is the interim? Is that a 1- to 2-year comment?

At least.

At least. Okay. Yes, demand gen is something that you and particularly Mick have been talking about now for a couple of years. You have this JV partnership with Verily. It is a material below-the-line cost that we see in your P&L. And so far, we haven't seen, at least from the outside any sort of discernible progress in terms of what that's delivered. The commentary from Mick is, as and when you want to, that you can turn on additional demand generation initiatives. Could you maybe just, I guess, first of all, update us on when we can expect more specifics to be disclosed? And secondly, maybe just some quantification would be helpful in terms of what we're dealing with here.

Yes. So our view of demand-gen programs, and remember earlier, I talked about that sort of patient pathway and the bottlenecks through it. Demand-gen of patients is one of those things that we would turn on it, we actually -- order of $300 million of R&D is our spend rate. We have numerous projects in there around demand gen and projects around other parts of those bottlenecks. The one we did with Verily was a joint venture and had to be disclosed as a joint venture. And so it's just one of many things that we have going in there, and we've learned a lot from the Verily partnership and the company [ premise ] that is now operating. We are still in the state of -- as I mentioned, we had like 40% growth in devices last quarter. It's not as though we need to go out and be putting money into campaigns driving demand just at the moment. That will switch very quickly, and so we have to be finely balanced. And then the experiments that we run, actually do have a shelf life as well. So we've got to sort of balance those types of things for it. And so I think -- and again, you'll see demand-gen that will turn on strategically in a way that supports our continued growth of the market and our business, which actually are very close to each other at the moment in terms of what they are.

Okay. Final one in the final 60 seconds. Just an update on the competitive bidding programs and whether there's any possibility that that's going to come back on to the agenda in the near term?

I might turn that to Amy.

Yes. So everybody probably knows the competitive bidding program that was run a couple of years ago was essentially put on pause for most of the categories in our space, I think, except for 1 or 2. There's been some recent news around, I think, that -- those particular categories, but around the respiratory space, there really hasn't been anything. I think it's understood that if competitive bidding were to come back, there would need to be some changes in the way the program was run. The outcome last time was that reimbursement prices would have increased. So if you run the same program, the expectation would be that you'd have the same outcome. And then the way the program runs is they'd have to propose new rules, give the industry an opportunity to comment, run the program and then put things in place. So would essentially, even if they weren't up to announce something today, it would be a multiyear process. So we look at it as a period of stability for the next several years. We remain very close, our government affairs team is closely monitoring the situation, but we're not hearing anything that is coming onboard anytime soon.

Okay. Rob and Amy, thanks very much for joining us today. I appreciate the update. Thanks, everyone, for joining.