Afternoon, everyone. Welcome to the KeyBanc Life Sciences & MedTech Investor Forum. My name is Matt Mishan. I'm our Senior MedTech Analyst. I'm pleased to be joined by Resmed, who's represented today by Rob Douglas, President and kind of COO. I'm gonna start us off, but this will be 100% Q&A, and questions can be submitted directly to me by typing into the box below, under your video screen, and then I can relay. Rob, welcome. Thank you very much for joining. Very much appreciated.
Thanks, Matt.
I'll start us off in a little with the broader questions. How would you compare the current environment, and your level of visibility for the start of 2023, to the last couple of years?
Yeah. Well, you know, comparisons to the last couple of years, are, of quite interesting. They've been an interesting few years. You know, the whole COVID pandemic when the world needed our ventilators, and we had incredible demand for that. As that normalized, we saw, you know, cyclical typical challenges in supply chains, which actually our usual inventory and risk management policies would have seen us through just fine if it hadn't been for a significant increase in demand that came about when one of our competitors, withdrew from the market while they conducted a recall. It has been challenging. Really our business changed from being a long-term demand-driven business where our core strategy was, you know, create awareness and demand of the risks and need for treating sleep apnea.
Meeting that demand, we turned into a supply-driven company where basically what we could manufacture, particularly in devices, was what we would sell. That's, that's a big change. At this stage, we're hoping during calendar 2023 that we'll see an end to that and we'll, we expect to have capability and capacity to meet all customer demand wherever it comes from, as we reach the end of the calendar year. We should be able to reset ourselves back to being that long-term demand-driven business that we've been in.
Could you provide an update around supply chain headwinds with semiconductors and, you know, other component availabilities? I think you previously stated that AirSense 10 was off allocation in the first quarter in the U.S. Kind of were you able to stay in that?
Yes. Earlier in the quarter, we were able to take the AirSense 10 off allocation. Predominantly what drove that for us is that our engineering efforts to validate alternate components work and then the suppliers of those components as well as the suppliers of the previous components all started being able to provide more volumes to us. We've also seen really sort of the outlook or our visibility improve and the rate of what we call decommits, which were always a fact of life in any supply chain. You know, occasionally suppliers can't do what they promised. We saw the rate of that really normalize back to what we normally would expect.
As I mentioned earlier, our usual risk management policies, we always have risks in supply chain and our usual risk management policies of inventory, and alternate components, are really starting to see us through where we have still only minor problems now.
Have you been able to move to an unconstrained supply of connected devices in additional markets outside the U.S.?
Yes. On a whole, that's predominantly where we're at. It's not quite so simple. You know, the U.S. is a very strong market and, you know, we have one SKU per product category in the U.S., whereas in other markets we need obviously often market-specific SKUs with appropriate labeling and things like that, then separate regulatory processes. We have to go through all of those. On a whole, where our AirSense 10 connected is fully available, but there are still some smaller markets where you might hear that, you know, we haven't quite got the volumes yet or the regulatory approvals. They're all in progress and won't be too far away.
Can you help us understand, like, the difference in availability between AirSense 10 and kind of AirSense 11? Like, why AirSense 10 is available, but AirSense 11 is still somewhat constrained? How you're choosing to strategically launch the AirSense 11 in various markets.
The AirSense 11 still is on allocation. What that means is we're in the unfortunate situation of having to tell our customers what they can order from us off that. Based on our planning, the AirSense 11 doesn't have quite as many alternate options for comms chips.
Mm-hmm.
It's also a slightly later generation of electronic components which are sort of have a different demand profile and different competition profile from other industries than the older AirSense 10, which was first launched in 2014. It's just different dynamics. We just have to work through it. Our engineering projects for alternatives will, you know, come through as appropriate. You know, as I say, we should be able to meet all demand by the end of the calendar year. The Air last year, we were able to drive volumes of the AirSense 10 Card-to-Cloud because as I mentioned earlier, connection modules were some of our key constraints. The Card-to-Cloud let us get around that.
Once the AirSense 10 is connected devices off allocation, there wouldn't be a lot of reason for many customers to wanna order the AirSense 10 Card-to-Cloud.
Do you think it makes sense to keep the AirSense 10 and the AirSense 11 both in the marketplace at two distinct price points?
You know, traditionally, we haven't been able to do that. When we've launched new platforms, we've taken the view that everyone would wanna switch to the new platform as soon as possible. In fact, people used to try and track our launches by watching closely our inventory levels, because we'd have to build up risk management inventory of the new product prior to stopping the old product, and then we'd have to manage that inventory. It was quite a challenge. Actually, for us, it was good opportunity for us to be able to launch the AirSense 11 while the AirSense 10 was still going strongly, with that price differential.
Long term, our aspirations would be to get back to a single platform, and, you know, be on a mode where we're maximizing the volume of that platform and able to really optimize both our ability to supply that platform and for our customers, for them to be able to optimize all the workflows they have around the benefits and features and the connectivity of the AirSense 11 platform.
Okay. Thanks for that. Thanks for the hint on how to do channel checks on new product launches now for everybody.
Well, it used to be. That's how we used to do it.
No, it'll be...
Not saying how we'll be doing it in the future.
Hopefully, is it reasonable to think Europe is, and other international markets are poised for an inflection in device growth, like similar to what you saw in the U.S. when you were able to get availability?
Yeah. I mean, you could expect that there's been constraints, and as those constraints ease, then growth will accelerate. There are numerous other factors that make it different. you know, many of these markets, we had tender markets, you know, where they were sort of predefined contracts for volumes and products, they don't change quickly. Many of the other markets are government or public funded or have some sort of effectively capitation type model in terms of how many patients flow through. Then the big challenge in all markets that we've seen since the pandemic is with staffing, and having staffing able to actually treat and activate the patients and get the patients back in and manage them become bottlenecks.
There are other bottlenecks in the system that probably have had, less obvious impact in the, in the U.S. system. I wouldn't particularly be looking out for that.
I mean, the U.S. seems to have its own bottlenecks. Did you happen to listen to the AdaptHealth 4Q call?
Yeah. We had a look at the transcript and, yeah, I understand it, and it's, you know, it's impressive the digital strategy that they're adopting and the approach that they're driving their business. We're really impressed with them.
What did you make of their near term commentary, though? I thought it was interesting around AirSense at all-time highs, but 4Q could have been better. Costs are higher for, like, the catch up, but we think we're gonna get there by 2Q. It sorta seems a little mixed.
I think like everyone in the industry, and us included, we all have challenges where, you know, we've been through some very dynamic times. The being able to get really high quality insight into the supply chains is challenging. There's clear patient demand. We're in a particularly in the sleep business, we're in an industry where there's just a huge pool of patients that as we activate or as they get activated, they kinda come into the system. There are constraints and bottlenecks at all points of the patient pathway. We think about, you know, the patient pathway from awareness through to primary care referral, the sleep specialist referral, to testing capacity, and then HME provider capacity for short-term and long-term management are all potential bottlenecks.
We actually think that our settings around digital solutions to optimize through those bottlenecks and activate and engage and manage patients across that journey are really key. I think, you know, AdaptHealth's-- many of AdaptHealth's commentary I think are really aligned up on that. In the, in the short term, you know, costs are an issue. When you have such uncertainty and sort of volatility in your supply chains, a continuous improvement cost optimization and volume leverage business, which I think we're all in, are actually harder to run, to run to.
Would you generally agree with them that the full patient backlog could be abated by 2Q? Is just that is AdaptHealth, like, ahead of the rest of a lot of other players in the space?
You know, I think everyone has slightly different parameters around that. Certainly, providers, or including ones that we were unable to support because remember, we had our principled approach of putting patients first and business relationships with people who do a good job of looking after patients, led us to have an allocation process that we allocated products to in terms of historical business levels. You know, many of the people who weren't really using our products much, we were unable to support them through them.
Right. I just wanna shift over to Philips at this point. I guess just as an organization and a management team, are you guys just ready for clarity on this situation?
You know, I haven't talked to anyone who's not ready for clarity. The likelihood of getting it, I'm a little uncertain of. I think, you know, it's a very difficult situation. Their commentary around, you know, waiting on consent decrees and negotiating with the FDA and all of those, I think probably mean they don't have clarity. Themselves. Our view of it is we look at different scenarios. The industry is different now. We're a much bigger player. There are other players in there. We think as we, you know, we've taken share, and we think it's defendable share, and we'll actually do everything we can to hold and drive that share and do by doing the right thing by patients and providers. We should do that.
I think it's, you know, your question of clarity, it'd be great to have clarity, but I think two points. One, it's unlikely to happen, and B, regardless of the scenario output, we think our business will be strong through it.
Any recent updates, like since your last call that ended on Philips, anything people are, incremental?
Nothing particularly strong. I, you know, personally, I thought, when they quoted a growth rate over the next few years, it seemed fairly modest to me, in terms of their expectations. I think it's just a very challenging situation for them.
Regarding your commentary that you'll be able to supply the entire market by the end of the calendar year 2023, I mean, does that assume a worst-case scenario for them with the consent decree into 2024? I guess how much flexibility do you have with your supply chain if things were to resolve more favorably for them?
I, you know, I think a few comments around that. Our manufacturing business is a relatively low CapEx business. In a sense, investing in extra capacity isn't out of the question for us at all, and it doesn't hurt us too much. In fact, our typical settings is we have significant burst capacity over our run rate capacity, and you need that because things go wrong, and you want to be able to recover quickly. Provided we have really headwaters of enough components into our own systems, we can run at very sustained rates for extended periods of time. That's really what our capacity is. As our components come in and you'll see our inventory balances have really gone up a lot.
That's been deliberate, to make sure that as we fix one bottleneck, we don't run into another one. We'll have a lot of parts and a lot of capacity. What we'd like to see is that that all normalizes, and we have enough outlook and reliability and enough backups all working well, that we can get back to our more normal setting of optimizing our in-inventory to our traditional days on hand levels, and also start, optimizing our costs and driving that volume leverage cost process improvement benefit that we typically run our business to.
Just speaking, I mean, when you say you could supply the entire market, your supply chain is fairly ready to do that if necessary, and then you have the flex capacity to kind of do that?
That's right. As the parts become available and, you know, we have the right supply chain relationships, and we've put in place a lot of long-term commitments, which frankly are low risk for us, given the growth profile of the business and the number of untreated patients over there.
Interesting. Directionally, how should investors think about masks and accessories growth normalizing in the U.S. and Europe as kind of patient demand is kind of more fully met?
Yeah, I think, masks haven't been through that bust- and- boom shortage cycle. There, you know, there have been various spot challenges around materials and stuff, but typically we've managed that and competitors have stayed in the market. We would say that, you know, both going back a few years when the sleep lab shut down early in COVID, that was a headwind for new patients, which becomes a headwind for mask growth. We recovered from that. Competitor exiting the market probably reduced the number of new patients in the total market, and, you know, we take a significant share of masks off other competitors when they put their products out into the market. That was a slight headwind for growth on there.
I think beyond that, as we've come back, you've seen mask growth normalize. We'd expect long term the sleep business to be a, you know, a solid mid to high single-digit growth business, and masks doing better because of the issue of improved compliance, you improve the number of patients that stay on treatment longer who need masks better. Also our other digital strategies that are coming up to sort of we're not doing it yet, but as we get to back to driving demand, we'll have a lot of opportunities around there driving patients through that, and that'll reflect into masks as well.
In essence, With a mid to high single digit growth rate, you expect a sort of a mid single digit growth rate or mid to sort of some level of growth in CPAPs of generators with excess growth in the masks or accessories as, yeah.
Yeah. I think we'd expect solid growth in CPAP and then excess in masks. Yeah.
Okay. I mean, what do you think that growth of, for CPAPs is? I mean, if you can drive upfront compliance and have a lower dropout rate over time because your penetration rate is still fairly low.
That's right. The, there's nearly 1 billion untreated patients around the world. The U.S. is probably our most penetrated market, but there's still heaps of room to do that. That sort of gets back to our digital strategy and the types of digital solutions and, you know, the tools. Also as we have data come available out of these systems, and we can anonymize it and protect it properly, then we can use it in sort of, you know, machine learning type algorithms for very targeted optimization processes. That, you know, our earlier study showed that these digital solutions in various configurations could show a significant uptick in adherence from the sort of the 60% range to close to 90% range.
We can sort of improve the average through that and even go higher and beyond the 90% as well with these solutions. There's a lot of future technology to come into play.
Well, how much more room do you think is there in better optimizing the level of recurring revenue, like per device in your install base?
Same, same issue. You know, we've talked a bit about the resupply programs, and we've published data showing that if you have a patient on a resupply program where you have some systematic way of reaching out to patients at the appropriate time in that whatever their usage of the mask is, and whatever their insurance is, then you can really keep those patients engaged, keep their masks in really top shape, and you actually get better outcomes in terms of staying on treatment for patients. I think we've got many opportunities in that in many markets, and we still got a lot of optimization to do there. We've barely even started thinking about that in terms of the device lifecycle as well.
What's the patient pushback to that? If you get notification saying it's time to get a new mask, you either like, send, like, click a button or do a quick phone call and you're there. Is it just that extra step necessary for them? Because you have to acknowledge at least that you want that additional-
That's right. You have to acknowledge it. Often there's a copay involved as well, so you need to be-
Okay.
prepared for that. Our data would suggest that it's very positive, positively received, and that having really high-quality, fresh, clean masks is really a good thing for patients.
Okay. I hope so. How should we think about share gains in masks versus competitors, at this point?
I think one thing to point out is that the share dynamics in masks and devices are quite separate. You know, it's not an issue that a gain in device share automatically leads to a gain in mask share or vice versa. Our view is we've historically been the market leader in masks. We are the market leader in masks, and whenever someone goes on that, we're more likely than not to get their that mask treatment regardless of who supplied the device. The share really depends on the quality of the mask and the experience of the provider in setting up the patient and their ability to predict which patients are gonna work well on which masks.
We have a great portfolio of masks and we've got a lot more ideas in the pipeline as well as to how to continue to improve that. We expect that to keep going.
Then just one last one on sleep here. How do you think about the innovations that are going on in kind of sleep apnea? Like the innovation pipeline, you know, outside of what Resmed is doing in CPAPs, where you have Inspire in the back end, potentially an Genio in the front end. As more people look at this market and say, "We're gonna try and enter with some different solutions.
Yeah. Look, our view is that. Well, firstly, Resmed's a sleep therapy company amongst other things, we're not just a CPAP company.
Mm-hmm.
We actually have a really good business in Europe doing mandibular repositioning devices. We haven't really pushed that in the U.S. just for structural reasons in the way the market works. If I go back to, as I said before, there's nearly a billion patients in the world. Most of them are untreated. The best way to get them treated is to have options, and ways of, you know, getting people into treatment and awareness and all of that. We actually think all of these alternatives actually all help and are synergistic with each other between the businesses. I actually think that the advertising campaigns that you see on some of them, where they're sort of using it to put down one form of treatment is not the right strategy.
Mm-hmm.
Not a good strategy. In addition to owning a really good mandibular repositioning device, we also are on public record as an investor in a stimulator device as well. Usually we'd have lots of small investments in future therapies that we don't have to make public, but this, they went public, so they listed, so we ended up on their share register, and it became known. No, we think all of these treatments have a role, and they're sensible. Most of them have in their clinical work an endpoint saying a 50% reduction in AHI. AHI is the index of hypopneas and apneas that you have per hour, the number of times you suffocate per hour, if you like.
You know, our view is if you have a, if you suffocate 30x an hour and you have some treatment that takes that to 15x an hour, that's great and you'll be a lot better off. We still think that people suffocating 15x an hour should be treated. There's sort of different levels of the actual effectiveness of it. there's a patient selection issue in that many of these treatments will work in a subset of patients, that need to be identified. The quality of those businesses depends on the ability to identify those. We think they're all valid businesses and complementary.
Okay. Shifting to gross margin, you know, now that the emergency is coming close to being over as far as being able to supply, you know, we can talk about gross margin a little bit more. Theoretically, would it largely drop through to EPS and free cash flow if you were to be able to pick up 200 basis points of gross margin improvement? I just don't get the sense that you guys are holding back on sales, R&D or capacity investments.
No, theoretically it would. That absolutely would. As you said, there are things like mix and stuff that and currency that we'd take through there. The one thing we have talked about is that we haven't really unleashed our demand gen programs over the past 18 months, 'cause why spend money generating demand when you can't meet the demand you've got? We have been running the experiments and being prepared, and we've got a lot of great data, and that IP won't last forever in a sense. We will wanna get going on those. I don't think they'll change ratios or anything like that in terms of it.
We'd see a fairly good outlook for our ability to return the business to the volume leverage business that it has been for so many years.
Yeah. I mean, assuming that like I'm assuming a lot of those demand levers are digital.
That's right.
Stuff you're doing with like Primasun, and stuff that it doesn't necessarily require again, another layer of costs.
That is correct. Yeah.
I thought it was interesting on last call that you said that you've done a whole lot of work on volumes. Optimization and continuous improvement efforts have kinda largely been on hold. Just, you know, do you know when you can refocus on that?
You know, some of the examples around that is, you know, typically we'd be negotiating with suppliers, and we'd say, "Look, we've got very good outlook for our volume growth, and this is what it'll be next year. We'd love to give you the business, but we'd need a per unit cost reduction for the volume growth in there." When you're in a critical component shortage and supply chain shortage, when you're actually begging for deliveries, it's not the time to make that argument. Really, I guess you're seeing the effect of that.
Then there are other challenges, you know, when you've got a bit of chaos in terms of components coming in and you're not sure, you know, whether your next week's volume's gonna be half your average or five times your average, and you're not actually sure which parts you're gonna have, it's very hard to do the long-term process optimization, that's been a hallmark of what we'd normally do. As we, you know, the earlier comment saying we should meet industry and customer demand by the end of the calendar year, then we'll be able to start getting that regular systemization thing.
Another thing to watch for is our inventory trajectory as we go through that and as we would also be looking to have our inventory back to our sort of traditional days on hand type levels as we can optimize.
Free cash flow improvement, you know, on top of that as well.
Yeah. Consequently. Yeah.
Okay. What is the right way to look at the gross margin trajectory over a multi-year period as kind of mix, especially the mix of accessories and masks sort of improves?
Brent in our last call, you know, said the outlook for the next few quarters is pretty flat. And there are puts and takes on that as we've talked a lot about, you know, product mix of more devices that are lower than the company average margin is a headwind, but it's still great for the bottom line and all of that. I think as we get back to those longer term optimizations, it'll certainly be our ambition to get back to margin expansion through there. The pricing environment, you know, in terms of the long term of it, with a billion patients to be treated, it's probably not gonna stay a price increase market as we would see it.
We should be able to run our volume leverage at a faster rate than that. Really, the sort of fundamental thing is if we're gonna treat all those patients, I think the insurance companies and public health systems will wanna see the per patient cost trend down. Now, our biggest lever on that is our digital solutions and the efficiencies and workflows and better outcomes that we can provide through that. That's why we'll be focusing on those.
Interesting. Okay. We'll follow up on that on the next time we do that. Very interesting. SaaS business, you know, has, you know, quietly returned to growth, you know, 7%-8% the last, like, six quarters. Now, what are you seeing from an end market dynamics perspective in SaaS, particularly around, you know, patient census and staffing?
Yeah. I think you've caught a couple of issues. Obviously, our SaaS business has had a big development with the acquisition of MEDIFOX DAN.
Mm-hmm.
We're really excited about that and how that's looking in the German business. We're excited that as a global company, we now have our SaaS business also on the pathway to being a global business. I think in all healthcare provider situations, staffing is sort of the one, two and three issue just at the moment. The challenge, particularly in many of these out-of-hospital care settings is we've got sort of really looking at using unskilled labor people in situations where we have to provide all the training. We're looking for them to deliver really good patient service and then having them in relatively unsupervised situations. Those are big staffing challenges, and then just getting people is a big challenge.
We actually think our digital solutions can help with all of that. If our solutions make, basically the staff's life better because they're not spending so much time doing paperwork and, you know, going through crazy processes, we can make the training easier, so it's easier to onboard people. While we keep their life better, they're less likely to leave, then, and then be more efficient while they are there, then we're solving that problem on many fronts. That really is part of the big opportunity of the SaaS businesses.
I knew we'd be short on time. I did a question like this. There's a couple of things. Can you place an order of kinda timeframe to materiality, turning on Primasun, high-flow therapy and Propeller?
They're all incredible opportunities for us further out. They're all in experiment stage and trying things out and building up, new relationships and building models, that create value in many different ways. That said, our core sleep business and our SaaS business grow strongly, particularly our North America sleep business.
Yeah.
Timeframes for materiality against that moving target is a very tough one. It's a very tough one to lay out. It's a good way to cover them. We're excited about high-flow, as where that's going, but we have to generate the evidence. You know, that takes time.
Okay.
Yeah. No, they're all great opportunities.
Okay. next time I'll ask you what your favorite is. You'll be like, "They're all my favorite." I can't, I won't say.
We'll see how we go. Yeah.
Yeah.
Sorry.
On Propeller, can you touch on the EMR integration with Epic and Cerner, and why that was an important milestone for that platform?
Sure. Yeah. There's lots of... You know, Propeller creates value in all sorts of ways, and it creates value for providers. It creates value for patients getting them on treatment better. It creates value for pharma companies. It creates value for insurers as to, you know, getting the better patient outcomes. If we can make it, if any of these, the extent that you can make it simple to prescribe and simple to manage, then having the Propeller system on the EHR system that you're already using, which is potential source of prescriptions is really valuable as well. It's really more to the same thing. It just means that less clicks and less work and less intellectual effort is needed to get the patients on treatment, and that should be a help driver for business.
Okay. I'll squeeze in one more. What is your appetite for additional acquisitions this year following MEDIFOX DAN?
You know, we've always described that our M&A strategy is very much focused around, is it aligned with the Resmed strategy and, do we see companies that we can be a better manager of and are gonna be part of a Resmed culture and add to the Resmed culture? As those come up, we have the capability to do that. But we do like, you know, having it sort of steady as she goes and getting a significant acquisition into good shape before doing the next one. But you don't always get to control the timing.
Okay. Excellent. Rob, thank you very much.
Thanks, Matt.
It was fun. Yeah. Thank you.
Thanks, everyone.