ResMed Inc. (RMD) Earnings Call Transcript & Summary

Okay. Good morning, everyone. My name is David Bailey, part of the health care team at Morgan Stanley, joined today by Mick Farrell and Aaron Bloomer from ResMed. Welcome to you both. Great to have you here. Before we begin, there are some disclosures. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Thanks very much again for coming today. Great to see you in person. Topics wise, we might go through growth, competition, GLP-1s, margins and strategy as broad topics. We'll see how we go in 35 minutes.

Yes.

Maybe just to begin, as we look back over the past 5 years, Mick, very strong growth across the business from a revenue perspective. U.S. devices, I did the calculation this morning, 15% per annum growth over fiscal '21 to '26. I think it would be good just to understand a little bit what you're seeing from a volume perspective in terms of patients coming into the system, some of the drivers that you're sort of observing as to either pulling people into the funnel, and...

Yes. Well, it's good to start on growth because we're a growth company. We're a growth story. What we're seeing in the market is very strong and steady growth. We talked about in our earnings call a couple of weeks ago, and we actually gave guidance for the first time. We've listened to you, our investors, and you asked for that, and we talked about 5% to 7% growth across the business, including removal of $75 million for Astral. And if you added that back in, that would imply a sort of organic growth was around 130 basis points of Astral. That $75 million. It will be 6.3% to 8.3% growth guidance on the top line. We also gave bottom line guidance that implies some pretty strong leverage through the P&L down to EPS in the low double digits. So yes, when we think about growth, we think about patients, right? And so what's our total addressable market, it's 1 billion people worldwide who suffocate every night. So that's the prevalence of our core obstructive sleep apnea market. We also add on 800 million who have insomnia, and we add on 400 million now who have restless legs syndrome, and we'll talk later about M&A, but we acquired Noctrix, a company that makes the world-leading restless leg syndrome treatment, noninvasive, completely reversible drug-free therapy as well. And the other part of our TAM is 480 million of chronic obstructive pulmonary disease patients. You add that all together, that's 2.7 billion people worldwide who have a sleep health or breathing health disorder and need our solutions, our health care technology, at-home solutions. And so with that as our TAM, our goal is to -- that's 1 in 4 people on the planet, is to continue to grow steadily. And we've talked about growth of devices, America sleep devices, in the mid-single digits and growth of the masks and accessories and other parts of our business in the high single digits. Our goal is to meet and beat that every quarter through demand gen, demand capture, demand curation. And there's some pretty big megatrends that are actually supporting growth, to your question around growth, from big pharma bringing people into primary care like never before for the glucagon-like peptides, they're coming into PCPs. And we're educating those PCPs on if they have obstructive sleep apnea, you have to buy a script for the gold standard, which is CPAP, APAP and bilevel therapy. So we're seeing that come through. The other big trend on growth is consumer tech. We talked 2 years ago here at this conference, I think, about Apple just came out with sleep apnea detection on their Apple Watch 2 years ago, following Samsung on the Galaxy Watch. The rumor is that Samsung's Galaxy Ring will have sleep apnea detection before the end of this calendar year. And we have formed a strategic alliance with Aura, who's a major player in the wearable space on the ring side. And before their IPO, I think in their S-1 document, ResMed was mentioned as a partner around sleep health. So growth is strong, mid-single digits on Americas devices, high single digits on Americas masks and other, and pretty strong growth in rest of world as well.

We think through some of the part of the pathway from patient diagnosis to therapy, we have noted an increased proportion of home sleep testing, which makes things a little bit easier. But I'm sort of wondering if there's anything else that ResMed is sort of focusing on converting patients from that diagnosis into therapy, either through initiatives -- internal initiatives and/or acquisitions helping support that patient pathway, making it a bit easier to get through the funnel on the treatment.

Yes. No, it's a really good question, David, because we think about the whole sort of value chain from sleep-concerned consumer, part of that 2.7 billion total addressable market, all the way through to screening, diagnosis, treatment, management and being on therapy for life, which is where ResMed focuses our time. To your point, this isn't just us going out there and advocating for work. We've done some internal development work, but also some acquisitions. So I'll talk about 3 of them. We acquired a company called Ectosense, and they make a fingertip sized home sleep apnea test called NightOwl. So it just fits around your finger, think like a Band-Aid size, around it, Bluetooth to your phone. In the day, go to the cloud and go to the sleep doctor. So Ectosense and the product NightOwl. We also made an acquisition of a company called Somnoware, which is software for the pulmonary physician to have seamless workflows for them. And the third acquisition or partnership that we created is to understand that whole value chain and put all the part pieces together is tying into our Brightree model and tying into our sort of overall ecosystem and creating a smooth pathway for the patients. As we see those acquisitions happen, we've actually got to form partnerships and understand the channel better. I talked earlier about primary care physicians seeing a whole lot more patients coming in. We're now educating and we've had interactions with 95,000 primary care physician continuous medical education or CME episodes, with 55,000 unique clinicians. And most of them are primary care physicians. And that is reeducating, if you like, those people around gold standard treatment, writing prescriptions for CPAP. But making it really easy. And how do you make it easy? That leads to the third acquisition. We bought a company called Virtuox, which runs a home sleep apnea testing protocol. And the goal there is to create the Amazon one click for that primary care physician, because they're dealing with everything, from headaches to tinea, head to toe. When they identify sleep apnea, they need the one click, and with Virtuox, we have that. They can refer them to the #1 home sleep apnea testing protocol, which is Virtuox, and they can get screened, diagnosed, get an independent diagnostic and testing facility approach with the numbers. If it's positive, they can refer to a board-certified sleep doctor within that state to write a prescription, can be virtual or in person. And then the patient can be sent to an HME and be taken care of. So as you think about that, demand generation from big pharma or big tech that I talked about earlier, our job is to do the curation and conversion all the way to prescription for gold standard therapy: CPAP, APAP, bilevel. Then making sure they get to a good DME that can get them on therapy. And then our goal then is to keep them on therapy for life and make sure they have masks and accessories and are well taken care of.

I think just adding on to that, 2 of the biggest growth opportunities I see for ResMed over the next mid to long term, is, one, is that middle of the funnel. So Mick just talked about all these new patients that are coming in, whether it's through primary care through the consumer tech companies. How do we help convert them, right? And partner with our HME partners in a country like the U.S. here. But making it more of a consumer-like experience like the Apple, the Amazon experience that Mick talked about, that makes it easy for that patient to be able to go on and start and then stay on therapy. The second big thing is we've got millions of people around the world that are loyal ResMed users every single night, helping them sleep. How do we make sure that we're getting them the latest, up-to-date masks when they need it every couple of months, the latest up-to-date devices. We've had AirSense 11 now in market for over 5 years. How do we make sure all the patients around the world who are eligible can get an AirSense 11? And eventually when we launch our new platform as well. And so how do we just make sure that all of the loyal users that are using our devices are taking advantage of all the opportunities for them to use it as often as possible.

Some follow-up questions here. All those initiatives sound great. I suppose the question is how far progressed are you in those initiatives. So thinking through the acquisitions, where is the opportunity for PCP, education, all that sort of stuff, and will support incremental growth over and above that mid-single digits? So that's probably one question. And just following on the masks and accessories piece, is there further opportunity for resupply from where we are now?

Yes. Look, as I said, we -- our goal is to meet or beat that mid-single digits every quarter. I think what we are seeing, if you look at just last quarter we reported, we had 8% growth in devices -- sleep devices in the Americas. And if it's mid-single-digit growth, take the middle of that 5%, that's 300 basis points of extra growth that we're able to drive. Our goal is to meet or beat that mid-single digits every quarter. It's an ongoing game. And it's not done. There are so many patients coming in. And if they come in because of an ad with Shaquille O'Neal or Eli Lilly saying, don't sleep on OSA, they come in with a goal there to the primary care physician. Our education is to make sure that primary care physician does the right thing and writes that script. But you can't guarantee that that person does go and get that set up for CPAP, APAP, bilevel. We did very well in Q4. Our goal is to do that in Q1, Q2, Q3, Q4 in and out every time. To the question around growth on resupply, and so we're not done with that. We're fighting all the time. On the resupply and engagement, if you like, as Aaron was talking about with our installed base, which is a huge part of our business on masks and accessories, 80% plus we've talked about in the past is around getting that patient motivated to come in and get a new fresh new mask every 3 months, or a new tubing or a new tub for the humidifier. We're doing very well with Brightree resupply. We've added Snap technology, which is an automated resupply approach. And we actually launched Snap Light, which is a resupply approach for people who don't -- HMEs who don't use Brightree, which is our sort of management system, our Oracle or SAP, if you like, for the HMEs. But for those who aren't on Brightree, Snap Light is able to drive resupply. So all that together, David, means that I think we can meet and beat that high single-digit growth on masks. We beat it in Q4 on masks and we beat it in Q4 on devices, but it's an ongoing game of fighting for that referral, making sure they come through, and then contacting the patient. One last thing I'll say on the resupply is we're now over 10 million users on our app, our portable app called Myer. And so 10 million users have downloaded ResMed Myer, many, many millions of them every day will check their Myer score. And you wouldn't think that these people would be that engaged. We're not like Meta where we make them addicts to their approach on Facebook or Instagram. But we are gamifying that. And it's quite interesting when you look at that, we added on to Myer our generative AI product that we call Dawn. and Project Dawn is like dawn, the sun rising, not a person. But it's generative AI that has 37 years of respiratory medical knowledge. So all of ResMed's knowledge is in this generative AI, all the published and peer-reviewed public literature and sleep and respiratory medicine, and all the tips that you have about what good sleep comes from. So drinking 5 glasses of water a day actually helps you sleep better, cardiovascular exercise of 30-plus minutes 3 to 5 times a week actually helps you sleep better. Those types of sort of general sleep health tips are in that. We put Dawn, which had just been on resmed.com and available for anybody, we call it the digital sleep health concierge to help people work through that screening, diagnosis, treatment pathway, we put it on myAir, which is sort of like where the sleep nerds are checking their data every day. And we thought, well, just an experiment, let's see how many times people engage with this generative AI, very knowledgeable sleep expert. We only put in what quarter or 2 ago, a quarter and a bit, 1.5 million inquiries to date. These are people on therapy engaging. So to your question around resupply, is there more to do to engage the installed base? There's a lot more we can do. And we're going to track that because little changes such as that probably drive up adherence. We've got peer-reviewed published evidence. They're just reaching out to a patient to talk to them about resupply. Whether or not they get a resupply or new mask increases adherence. And so engagement with the installed base and driving that. We're not done with it. And I think this new tech, particularly generative AI, is going to engage consumers like never before. And I look forward to a peer-reviewed published evidence that shows that engaging like that actually drives up adherence clinically as well. But we're early days in that journey.

Very good. Maybe just to round off the revenue piece. So guidance for the first time, top line. Maybe just thinking through the volume versus price equation to the extent we can, just comments there?

So as Mick said earlier, we guided for the first time, we guided to 5% to 7% on a core constant currency revenue basis. But as Mick alluded to earlier, we do have about a 130 basis point headwind coming from the field safety notice of Astral. So you strip that out, you're almost at 6.5%, 8.5%, so squarely within that high single-digit growth that we've talked about. ResMed's philosophy has and will continue to be that we're going to get the vast majority of our growth coming from volume. We believe that volume is the way to drive sustainable, durable revenue growth over time. We do that through a lot of the initiatives Mick talked about. We do that through product innovation that we continue to bring to our customers and to our patients. And so pricing in times of an inflationary environment like we're in right now is a lever that we can and will pull. But it's a small portion to the overall growth that we're seeing from a volume perspective.

Maybe we will just jump to margins, if we can, to ask. And then I'll jump to the most frequent questions I get around competition and GLP-1s. But maybe just on the margin piece, what are you seeing? Where is the inflation coming from? So oil linkage is one thing, potentially around plastics and resins, that type of thing. Maybe the other part might be on more of the component side, printed circuit boards. So can you maybe talk a little bit where the pressure points are coming from a cost of goods sold perspective?

Well, first, I'll just take a step back. And I think it's important to recognize just the tremendous work that the supply chain team at ResMed has done. Over the last 3 years, we've expanded our gross margins more than 500 basis points over that time period. And so just tremendous work. The productivity pipeline that they have, and I've seen firsthand, we have operating reviews and cadences around this every single month, it's really, really impressive to see. But we're not immune. We're seeing inflation. Two key areas that we're seeing inflation. One is just on freight, fuel and logistics. And so obviously, everything that's happening with the Iran conflict is having a material impact on how we distribute products around the world. We are doing things like, for example, by moving more of our distribution network and manufacturing here in the United States as well that will help mitigate that over time. But it's an overtime type of thing, right? So that's one big area. And then the second is just on electromechanical components. And so again, the medical technology community is a very small purchaser of these components. And a company like ResMed, no different, right? And so we don't have the same purchasing power of some of these consumer electronic companies, or AI and tech companies do, and particularly on some of our older devices. Like on AirSense 10, which has been out now for more than a decade, we're seeing pretty dramatic cost increases that we're having to incur. Again, we're doing everything we can to offset them, but we are passing on a very modest price increase to help offset some of that.

And just on that component piece, do you think it is a cyclical element? Or is it something more structural around certain technologies being stepped away from? Is the demand for AI taking away from -- so is it sort of a -- I suppose the question is, is it more of a cyclical thing? Or is it potentially a bit more structural as well?

I think it's both. I think it's definitely more acute right now just given the supply constraints that exist. But I also just think again, with more and more of the demand going to the AI companies, I definitely think that we are going to have a smaller purchasing power. And it's again, why? We're so focused on our productivity pipeline, driving margin expansion, making sure that we're driving cost savings initiatives with our supplier base as well, doing things like Kaizen events and having cost-out initiatives and expectations with our suppliers on an ongoing basis. These are all levers that we have, that we can pull to be able to help offset some of that.

Yes. And I mean the net of all of that is that we are going to see low double-digit basis points improvements in ResMed's gross margin every fiscal year through 2030. We're remaining with that guidance. So we're going to deal with all these headwinds on freight and components, very modest price increases. But as Aaron talked about, the supply chain team we have is very sophisticated and has a productivity pipeline. Like we've always had a really strong product pipeline, and we still do, smallest, quietest, most comfortable, most cloud connected, most intelligent devices. We've now got a productivity pipeline in our supply chain to be able to overcome these other aspects. So we'll be able to achieve that gross margin accretion on an annualized basis.

And as I look through my model, so I think you said first quarter could be a bit below the PCP, so 62.0 1Q '26, a little bit below, but then you're guiding for double-digit for the full year. So progressive increases over the years. So I suppose the question would be, is part of that price, is the productivity as well, just so getting through to gradual gross margin improvement over the year? So is it a combination of those 2 things getting you to the double-digit increase for full year '27?

Spot on. So when you think about our productivity pipeline, it builds quarter on quarter-on-quarter. The inflationary impact that we have, and we saw it exiting Q4 and we saw a slight sequential decline quarter-over-quarter Q3 to Q4 in our margins, as an example, as a result of that. And so that's one. And then two, pricing, we just started to implement price increases here in Q1. And so there's almost no impact on top line revenue or gross margin from a pricing perspective in 1Q. That will build as we go into Q2, Q3 and then in Q4.