Good Morning, everyone. I'm Sean Laaman, the Australian Healthcare Analyst here at Morgan Stanley. I'm joined on stage from ResMed, Mick Farrell, CEO, and Brett Sandercock, CFO. So welcome, gentlemen, thank you for your time today. Maybe just to kick things off, you know, the pandemic hopefully well in the rear vision mirror by now. So how would you describe the patient volumes and the market growth compared to 2019 as a jumping off point?
Yeah, so, good question, and, so we, we're looking very much at the patient flows and using 2019 as the base pre-COVID, and we're seeing triple digits, so, you know, 100, 105, 109, 115%, all the 140 countries that we're operating in. China, we had the, most recent, you know, shutdown part, which was sort of 6 to 9 months ago now. But even that's sort of flowing through the system.
So, you know, across the 140 countries we're at, we're actually at a patient flow level that if you took the market growth rates that we were seeing in 2019, which was mid- to high single-digit growth of market demand for flow generator devices, and high single-digit growth rates of market growth rates of the masks, we're seeing that or slightly above that across the markets. Obviously, given our number two competitor is still out of the market right now, we're achieving, you know, higher double-digit growth. But the market growth is still solid in that, you know, single, mid-single digits for devices and high single digits for masks. And with the replenishment work we're doing, actually seeing a little bit above that.
Sure, sure. Thanks, Mick. You had, as you mentioned, some very solid growth numbers over the last few quarters, and it's been a little difficult for us to define what true market growth is, given that there's probably some growth in some of the smaller competitors to fill in the void vacated by Philips. So sort of how many quarters of really that excess growth do you think might be left before you're facing tough comps and you're back to whatever the market growth is?
Yeah, well, I mean, if you, if you look at the sort of the S curve of the share taking that we primarily and others have taken, it's been over the last number of quarters. It's hard to say exactly where that levels out, but it'll be over, you know, during this FY, as we get towards the end of it, that we'll get back to market-level growth. But the patient flow is the part that we really look at, and, you know, adherence, and replenishment. So those three factors are really important. And we've actually, on the demand gen side, been investing in social media and driving patients into the funnel. Actually, some of the competing therapies and some of their work in advertising actually drives patients into our funnel as well.
And even all this work around pharma and their work on obesity drugs is driving patients into the funnel.
Mm-hmm.
Market's, you know, laser focused on will that impact 2030 or 2040 TAM. We're actually seeing patients get activated into the healthcare system. And when a patient shows up with symptoms of, or, you know, questions about a sleep apnea therapy, the low cost, high efficacy, non-invasive therapy is the primary focus. And so we actually, I think, can benefit from demand gen across some of these alternate therapies and new drugs.
Sure. Sure. Thank you, Mick. And maybe just to move away from the top line a little bit. So, you know, last quarter, there was a small miss on gross margin compared to consensus expectations, which Street seemed to over-obsess upon. Personally, we think it's probably a transient issue, and we kind of put it down to two main areas, you know, the high cost of components that were procured when there were shortages around, and still running trailing off of that inventory. And the second one is you've done such strong growth in devices, you know, over mass, that they've had that adverse mix effect. So how should investors think about those two threads and the outlook for margin going forward?
Yeah, look, clearly, we had in the last quarter, in Q4, we had outperformance of our U.S. sales. We were, you know, taking a lot of share and competitor out there. And so on, on the geography mix side, we had outweighed it into the U.S. And then on the product mix side, we had a lot of CPAP and APAP, which is our lowest margin device, versus the Bi-levels S, ST, STA, or non-invasive ventilators or adaptive servo ventilators or life support ventilators have significantly higher margins. And so the outperformance in the U.S. geography, outperformance in that product mix, did dampen gross margin. But it was interesting, the delta in that quarter was only 30 basis points, but the delta that I think investors were laser focused on was actually 30 basis points of foreign exchange-
Hmm
... From parts and pieces we'd bought, just the Singapore dollar to the euro, to the Australian dollar, to the U.S. dollar in 9 to 12 months ago, that was flowing through the, you know, excess inventory we'd bought to deal with the excess demand that we were seeing over this period of time. But yeah, as you said, those are all going to mitigate the excess freight costs and component parts, particularly on electronic components, semiconductors that we worked desperately to get and did get, and get to the market to achieve, you know, 30% year-on-year growth in devices in Q4. Those costs were flowing through the system, so that hit the GM percentage.
But I want to say really clearly, it was great gross profit dollars that we have and for free cash flow that we generated, that we're reinvesting in the business, reinvesting in R&D, and reinvesting in, marketing and SG&A to get patients and keep that demand gen going when we're, you know, post the recall phase. And the other thing is, obviously, we had the low comps that a year ago, people weren't in New York at conferences, people weren't traveling around the world, and costs are through the roof to get people. And so I think all of those factors came in, and as we look through FY 2024, that we're, you know, just throughout halfway. Well, just over halfway through our Q1 here, we see GM leverage opportunity to come back into the business.
We're going to have costs go down on our COGS. We're going to be better at controlling the SG&A growth and R&D growth. And we're also going to see, I think, really strong demand for ResMed products and get the mix shift back to more masks on replenishment to keep our vents you know driving through there and continue the growth.
... Sure. Thank you, Mick. Are there still any restrictive influences in the supply chain? You know, whether it's a com procurement of-
Yeah, not really in terms of limiting our ability. We've got the capability to take care of the whole market demand right now, and we are taking care of the whole market demand in the device side and on the mask side. So we don't see any particular supply chain constraints that are there. The costs that were there and were excessively high, you know, 9, 12 months ago, are not there either. And so on, you know, the spot buys and what we're getting for forward contracts on freight are very good, but we still, you know, have the high cost of components that we bought 9, 12 months ago, and contracts we signed-
Mm-hmm
... 9, 12 months ago when no one could get semiconductors. So those are working their way through the system. So there's still, you know, some sort of hangover, if you like, from the crisis of the supply chain crisis Post-COVID. But the patient flow is back.
Mm-hmm.
The costs are coming down, and we see, we see GM leverage opportunities as we go through the FY.
Sure. Sure. Thanks, Mick. And still on the product mix, so you've seen this really strong growth in the installed base, you know, due to, you know, not only your own growth, but the Philips recall and the opportunities afforded there.
Yep.
Is it realistic to expect at some point we're going to see a significant upsweep in consumable sales off the back of that expanded installed base?
Well, I mean, you know, if you look at our mask growth over this last FY, you know, there was no major competitor out of masks.
Mm-hmm.
We've been competing in a three or five-horse race in the mask side, throughout the whole, you know, Post-COVID supply chain crisis and on, and we didn't have a supply chain issue with the LSR that goes in to make our, our masks. And so I actually think we've been achieving some pretty solid mask growth rates, and that is due to us, yeah, being there with the installed base, being there to provide the devices, but then setting up, you know, sustainable long-term replenishment models with patients. And in the U.S., you know, we're using Brightree, we're using myAir to engage the patients directly. We're using AirView, so our, our cloud-based solutions to engage either the physician through AirView, the patient through myAir, and the HME through Brightree.
I think that sort of digital engagement of the whole ecosystem has driven really good replenishment levels, and it's sustainable.
Mm-hmm.
I think another... Well, and, and in our other markets around the world, outside the U.S., where maybe it's a cash pay market-
Mm
... or a different type of reimbursement model, we're optimizing how that looks as well. It's interesting to see that in, you know, consumer-driven subscription markets, patients engage just as well or even better than in reimbursed markets. We're getting more sophisticated as to how we reach out and leverage myAir, the direct communications tool, to a patient, particularly in a cash pay market, to engage them in replenishment. The final factor I'll talk about is that COVID, for all the awful sufferings that the world had through it, the blessings that we saw in the respiratory medicine industry was people care about respiratory health and respiratory hygiene. They are engaging more with their replenishments, understanding the importance of treating their sleep suffocation, but also replenishing that tubing, that mask, that it can get dirty, could have infections.
I think that sort of secular uptick in replenishment is there. There's a secular uptick, people caring about respiratory health, respiratory hygiene. Subscription models are engaging more. The digital's engaging them more. I do think that our replenishment and masks business is gonna be very sustainable as we, as we move forward.
All right. Thank you, Mick. Shift gears a little bit to the Card-to-Cloud strategy, which worked very well for you, in response to chip shortages in the market-
Yep
... and more so in the U.S. It probably led to some softness in some of the other markets like France, and I think maybe Korea. So you maybe talk us through the way out. What does the curve look like? Where are inventory sitting on Card-to-Cloud? Are chips freely available, and have markets like France rebounded now that there's access to direct cloud connectivity?
Yeah, so we are through the communications, you know, semiconductor crisis there, and we're able to get, you know, 4G, 5G chips as we need it. And actually, some of the reduction in electric vehicles and consumer product sales has freed up some capacity there. Obviously, we're using, you know, 45, 60 nanometer. We're not using the 1, 2, and 5 nanometers that you're seeing on the consumer products and electric vehicles. But the upstream capacity of wafer and so on has been freed up, and so we're... Yeah, we're not constrained there at all. The Card-to-Cloud was really a pivot during the last FY.
Mm-hmm
We were able to pivot quickly, primarily for the U.S. market, with this excess demand, take care of patients. We've passed that, and we are down to de minimis number of sales-
Mm
... being from a Card-to-Cloud. So that it's good because it was a tactical pivot. The strategy for us is to have 100% connectivity into every device we sell. We're back to that, and we have that engagement. And it's, it's interesting to see... You know, I used to get up at these banking conferences and talk about the 7 million patients that use myAir, and they're using it every day, and they're really into it. We know when they're clicking on it. We know when they open the app, but were they really engaged in it? We had a little outage just during this last quarter, and I have never been so hammered in social media, on Twitter and LinkedIn, because people needed their therapy, and they weren't getting it every day.
So that gamification of the consumer into their therapy, they're treating it like a Fitbit or a Whoop device that they wanna see after that exercise. But for us, it's sleep. We've gamified sleep for the consumer, and they wanna see their data every day. So when we talk about engaging the consumer and, you know, engaging the patient in their therapy, it's really there. So I think that 100% connectivity being back there on the chips and available globally there is really important for us, and it's really back to our 2030 strategy and what we're trying to achieve, which is, you know, help people sleep better, breathe better, and live better lives well away from the hospital.
Sure. Still related to that question and maybe extending it a little bit. So can you spell out to our investors the differences between the S10 and the S11, and how are you going through that launch phase, and what have been the market experiences so far?
Yeah, sure. So the AirSense 10 platform we launched, you know, 2016, so it's, you know, 7 years old. Still the second-best platform in the market, you know, head-to-head with competitors during this crisis. So we're running the AirSense 10, as well as the brand-new AirSense 11 that we launched just in the last 12 months in the U.S., and just in the last quarters to some markets in Europe. And, you know, I see, I think Australia and New Zealand launched a couple of weeks ago, and so we're getting through Europe and Asia Pacific, you know, as we roll forward. And, you know, we're in 140 countries, they all have different regulatory cycles and launch cycles.
But for the major markets, we have launched the AirSense 11, and we're selling both platforms in parallel. We used to pretty rapidly ramp down, like the S9, we pretty rapidly ramped down when we launched the AirSense 10. This time, we're actually keeping both platforms going in parallel. The differences are, you know, the AirSense 11 is lower cost and higher price, if you look at the economics for those in the room. But if you think about it from the customer perspective, it's far more engaging. It has a touch screen, it has engagement, it talks to the consumer, it talks to the patient, it walks them through the setup process. It has a Care Check-in, it has a concierge, it engages and communicates with the consumer.
We think, and also has the ability for pretty engaging over-the-air upgrades, if we wanna upgrade the software to the firmware and engage with the patient. So I think that level certainly, the economics are beneficial, and we're gonna launch that. But far more important than that, we think, is the clinical benefit. We're seeing. So I was talking about myAir before, the patient app. The uptake rates on that in our AirSense platform was sort of 20% to 30% of patients would download the app, get the QR code, and engage in their therapy every day. We're seeing more than double that rate of consumer engagement with the AirSense 11.
So we think it's not only good for the economics of the business, it's far better for the long-term clinical outcomes for the patients, which will lead to lower costs, you know, better quality of life, lower cost to the healthcare system, and, you know, benefits. So it's a win for the patient, the provider, but also the payer, and ResMed. So we're gonna be launching that throughout this FY and the year after into every country, and I think that's a tailwind in terms of GM. I think it's also a tailwind in terms of our ability to have long-term, sustainable mask growth rates with that level of engagement. You know, consumer engagement leads to consumer adherence, which leads to better outcomes, but also greater trailing revenues.
Sure. Thank you, Mick. Change gear a little bit again. So major competitor having a recall and a lot of inbound that I get on, what day are they going to be back in the market?
Right.
I don't know. But what would be your response to that question? When do you think that major competitor might be back, and what do you think the market... Or how will the market be shaped? Do you think you'll retain share? Do you think there'll be an impact on price? How do you think it plays out?
Yes, so look, Philips have been out for 2 years and 3 months, roughly, of the market. So we've annualized any sort of, you know, initial sort of part of that S-curve. We're now, you know, working through, you know, between us and the other players who are actually in the market. We are the market. So that, yeah, they have to sign a consent decree, and then they have to work with the DOJ on that, but then they have to work with the FDA as to when they're allowed to sell new product into the market. And I think it'll take a long time.
Historically, you know, even if the starting gun was, well, you can go and sell on Monday, they've got to, they don't have a sales force, they don't have a group, so they've got to build that back up again and work their way through. And I think it'll be a slow S-curve to come back from the number five position, if you like, to number four, to number three, number two, to even think about challenging number one. And I look at it, we were winning this battle with them in 2019. We were taking share and growing faster than them.
We've now had two years to further embed AirView with physicians, myAir with patients, and just show that we lower costs, we improve outcomes, we are the best partner of choice, and we have the number one and the number two platform in the market. So as they come back, they'll have to earn their share from the bottom up, and I don't know when that's gonna be. You know, two years ago, they said it would be 3 months, 6 months, and it just kept rolling. New CEO came in and said, "It'll be 6 months," and now he stops saying. So I don't know, but I think that's a good question for them. But for our perspective, it's almost irrelevant because we're looking forward between the 936 million people worldwide.
Well, those data are from 2019. Let's call it, with, you know, aging and growing populations, just over 1 billion patients worldwide with obstructive sleep apnea at a clinically significant level. We're less than 20% penetration in the U.S., less than 10% to 15% in Europe, and less than 5% penetration in Asia. Our competitor isn't one of those other players. Our competitor is ignorance, lack of awareness and education about the importance of sleep suffocation. And, you know, I know we're gonna get onto the drug therapy stuff, but I actually think it's great to see new drug therapies coming after the metabolic syndrome, whether it's obesity, diabetes, or cardiovascular disease, because it brings patients into the funnel and gives them a chance to be treated for all their comorbidities, including obstructive sleep apnea.
Sure. Thanks, Mick. So, so on to obesity then. So we know in the medical literature that, that OSA is often associated with obesity. We have a bunch of clinical studies in progress, with one specifically examining, I think, semaglutide, SURMOUNT- OSA, and the impact on the severity of, of OSA through weight loss by that drug.
Yep.
So, how do you think that might shape the way that OSA is diagnosed and treated, and how do you potentially swim that tide of uptake of such drugs?
... Yeah, well, look, you know, broadly, ResMed has always been about long-term health. And Professor William Dement from Stanford, may he rest in peace in Heaven, but he was the founder of the field of sleep medicine in the '50s and '60s and '70s at Stanford, and he called it the triumvirate of health. Good sleep health, good nutritional or diet health, and good cardiovascular health. Those three together and how linked they were together. And ResMed's always been focused on all three of those areas and looking for partners to help with that. And so I see this new class of drugs, the GLP-1s, you know, I think we're two years into the launch of Wegovy, right? So you've had an obesity drug out there for two years.
But you know, I look at it and say, if they're able to achieve 10, 15, 20% weight loss with a new therapy, that's a really good thing for the world. I think that actually could be a really good thing. If you believe the MAY study, the 500 to 600 patient MAY study showed some cardiovascular improvements. That's really good as well. So I actually think these are good things for the world, and we've been watching that for two years with Wegovy on obesity. By the way, we haven't seen any slowdown of patients coming into the funnel the last two years with those obesity drugs out there. We've actually got a registry that we're following over 17,000 patients who are using GLP-1s and positive airway pressure.
We haven't seen changes in adherence. We haven't seen dramatic changes in lack of replenishment revenue, and. But we're watching very closely, you know, that cohort and making sure that there's a partnership there. But I look at it and say, well, if it's good, you want patients engaged and caring about their chronic diseases. You want them thinking about weight. You want them into the system. So if a patient shows up at a primary care physician's office and says, "Hey, I saw this, you know, new drug out there, I wanna get treated for this weight loss drug or this weight loss drug," they're activated into the healthcare system.
You know, the 80% patients in the U.S., the 90% in Europe, and the 95% in Asia that we're not getting yet, the undiagnosed patients, they're not activated into the healthcare system. So a new class of drugs to get patients in, I think, is actually a net benefit for us. We've been watching the two-year experiment with one of those drugs. Look, and the other part, I... You know, the analogy, I look at this and say, Well, you know, I've been with the company 23 years this year. So when I was just 3 or 4 years in, I was running the new business development group. We were looking at cardiovascular disease, neurological disease, and there was this brand-new surgery which was just coming out in the early 2000s, bariatric surgery.
It was an existential threat for ResMed. Bariatric surgery, it's gonna kill the business 'cause everyone's gonna get stomach staples and take these, Roux-en-Y was the non-staple one, and it was gonna take over. We're like: Okay, well, let's focus this. We partnered with bariatric centers. We were just launching AutoSet, which was our adjusting positive airway pressure versus CPAP, continuous positive airway pressure. And so we were, we're thinking: Well, this is a new way to launch AutoSet into these bariatric surgery markets. What we found is the patients had 40% to 50% weight loss reduction, so 400-pound male to 200-pound male, BMI of 35 to 29 post-surgery. Pressures on the device, right, the AutoSet pressures, we're tracking them before and after and tracking clinical sleep apnea before and after.
By the way, after surgery, 50% weight loss, BMI high 20s, the prevalence of obstructive Sleep Apnea on post-treatment patients 6-12 months after was triple, triple the general prevalence in the market. So very high prevalence still post-surgery. Because the causes of Sleep Apnea are craniofacial. It's the distance between your tongue and your uvula. It's age. We all lose some level of soft tissue, which is the uvula and muscle, which, whether it's your bicep or your tongue muscle, it loses some strength over time. So age is the third factor, risk factor. And the fourth is gender. You know, sex, if you are male, you have a high propensity all the way through your life until menopause, and then the female prevalence catches up and is the same.
So, gender is a factor, and then obesity as well. But look, I look at that and say, with 50% weight loss reduction, triple general market prevalence, if you think of the 1 billion and the 8 billion in the world, that we are seeing post those surgeries, I think this is about half as good as surgery in terms of the weight loss, but far more convenient-
... Mm-hmm.
-to take a pill or have an injection versus to go through a, through an invasive surgery. So I think it'll be lots more people taking it, but lower weight loss reductions. The only actually published study on this is a study called SCALE. So it's 2016, and it's with a GLP-1, and they were specifically looking at obstructive sleep apnea and AHI in that study. And they had a reduction in the AHI, but the clinically significant obstructive sleep apnea in the residual pool, post GLP-1s at the end of the study, was 94% of the patients that had obstructive sleep apnea at the start also had it at a clinically significant level at the end.
So we look at it as actually it's a net positive for the company because it's gonna activate the 80-90% of patients who aren't in the healthcare system. It's the duty of a primary care physician to assess when a patient shows up, who's overweight and is at risk for hypertension, for cardiovascular disease in general, for diabetes, and for sleep apnea, to look to treat those and to treat them with the lowest cost, most effective, least invasive device. So I actually think that net-net, as we look to 2030, 2035, this will be a positive for us. If you look at the market, they're not agreeing, right? The last 45 days, there's a 30% reduction in our value.
I think there's 20% upside overnight, just if you run the numbers on those analyses. But look, go run the numbers, do your own models. We're gonna go. We're gonna keep growing, gonna keep driving patients into the funnel, gonna keep growing our device revenue, mask revenue, and our software as a service revenue, and keep leading the market and getting the 1 billion people worldwide who need our help. And if you think 5% or 10% of them might get treated by a drug, okay, there's 20% upside.
Yeah. Well, thanks, Mick. And maybe just to move forward to the, if I can tease out of you, the upcoming SURMOUNT- OSA study, and-
Yeah.
Trying to give us a feel how, how we should interpret that when the study results come out. So, for example, like, clearly, we don't know yet which way it's gonna go, but assume that 15 AHI is a level of where you get reimbursed, and you had someone with a apnea-hypopnea index of 20, and they go on drug, and it falls to 10. So still a clinically significant level of Sleep Apnea, but how do you think insurers might think about that kind of outcome?
Well, so in the U.S., the clinically significant level is over five for treatment.
Right.
So if you're over five with any symptoms, you can get treated. And, yeah, so look, if you look at that, that study, my bet, if you look at that drug, they're achieving, I think on the weight loss side, 15% to 20% weight loss reduction. So if you run the bariatric analysis, they may, you know, achieve some reduction in AHI, probably a reduction in the positive airway pressure that's required-
Mm-hmm
... to keep the airway open. But the probability of eliminating, you know, clinically eliminating and treating and curing sleep apnea is gonna be very low. And it's gonna be, you know, I don't know. We'll wait and see. The data will come out, you know, within the next year. But maybe if it's half the weight loss, you could... You know, it's not exactly linear. You could say it's half the reduction that bariatric surgery-
Sure
... achieves in the U.S.A, so the residual is triple, you know, the prevalence of a general market population. What will the residual be on treated patients? Will it be slightly above that? Probably. Will it be in line with it? Possibly. But I look on that as that's still a huge number of patients that are out there to be treated. If the 936 million is the prevalence from 2019, if it's 1-1.1 billion now, and that gets reduced by 10%-
Mm.
Stretch it, 15%.
Mm.
So, so there's only 850 to 900 million people worldwide we have to engage and get into the system, and if coming in for that drug means they're in, and then there's a residual prevalence of triple the general patient population, that's an activated person in the healthcare system. So look, the, the drugs have been out for obesity for two years, and during all the COVID crisis and all this, we haven't seen a reduction. We're back above 2019 levels of patients coming in the funnel. So I look at it as, I think the activation's above the reduction in TAM, and, and over the next 15 to 20 years, you'd never see us getting to that end TAM-
Mm
... because it's just so hard to get to the 1 billion people worldwide. It's activating the patient. It's helping them realize, 'cause they're in an unconscious state, that they're suffocating, getting them to believe their bed partner when they tell them, "You snore, you stop breathing." And all that work we're doing to activate consumers and patients, I actually think if you believe the $1 trillion in value that's went to these pharma companies, and they invest that in DTP advertising, get in the channel, and get treated for... We're gonna see patients come into the funnel. And if it's as effective as bariatric surgery or some of the alternatives like dental, the hypoglossal nerve stim, that we're investing in. We already have a dental product.
Mm-hmm.
We've invested in actually the drug therapy , which is targeted at— ResMed's an investor in that. A different approach, but a drug therapy as well, and we're an investor in a hypoglossal nerve stim. ResMed stands for respiratory medicine. It doesn't stand for CPAP company. And if we can get you treated with one of those alternatives, if you fail on CPAP, we're going to do that. And we have, you know, 2 million patients a year coming into our funnel. The best adherence we get when the doctor uses AirView, the patient uses myAir, and you're fully engaged in the digital healthcare ecosystem. The published data is 87% adherence, which is awesome.
I mean, you talk to a pharmaceutical company, you talk about 87% of patients taking that pill, that's off the charts, all the digital engagement we're doing. But let's round it up. Some patients, some customers are better. Let's call it 90% adherence. That's still 10% of our patient flow that we can't get adherent to the lowest cost, lowest security, most effective therapy. We have then a patient flow that we can direct over to dental, we can direct over to drug therapy, or we can direct over to hypoglossal nerve stim. That's, I think, an opportunity that's not even... People aren't even thinking about, but we are, and we're investing in those, in those substitute therapies.
My net-net on this is, I think it's a net positive for patients into the funnel, and there will be another alternative treatment from Big Pharma with their big advertising dollars. You know, the more noise, the better about obesity, cardiovascular disease, and Sleep Apnea, because these three chronic diseases are incredibly impactful on the world, and I think this can be a lot of patients who have better quality of life, longer lives, and treated better when they come through the medical system.
Yeah. Thank you, Mick. I did have a couple of questions for Brett, but we're out of time, so maybe I'll take these offline. My apologies, Brett. No problem. But that might be time to wrap it up. But is there any comment that you'd like to leave us with, or you're happy parking it right there?
I'm happy parking it right there.
Okay.
Thanks a lot, everyone.
Thank you.
Enjoy the rest of the conference. Thank you.