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spk09: Welcome to the Q1 fiscal year 2021 ResMed earnings conference call. My name is Cheryl and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Amy Wickham, Vice President of Investor Relations and Corporate Communications. Amy, you may begin.
spk10: Great. Thank you, Cheryl. Hello, everyone, and welcome to ResMed's first quarter fiscal year 2021 earnings call. Thanks for joining us. As Cheryl said, this call is being webcast live, and the replay, along with a copy of the earnings press release and the quarterly results presentation, will be available on the investor relations section of our corporate website later today. On the call today to discuss our quarterly results, are our CEO, Mick Farrell, and CFO, Brett Sandercock. Other members of management will be available during the Q&A portion following our prepared remarks. During today's call, we will discuss some non-GAAP measures. For reconciliation of non-GAAP measures, please review the notes to today's earnings release and earnings presentation. As a reminder, our discussion today may include forward-looking statements. including but not limited to expectations about ResMed's future performance. We believe these statements are based on reasonable assumptions. However, our actual results may differ. You are encouraged to review our SEC filings for a discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements made today. And with that, I'll now turn the call over to Mick.
spk03: Thanks, Amy, and thank you all for joining us today. Since this COVID-19 pandemic began in January, ResMed has produced hundreds of thousands of ventilators, providing the gift of breath to people in need in 140 countries worldwide. We continue to support frontline respiratory medical professionals, healthcare providers, patients, and our teammates, ResMedians, so they are all safe and healthy. We also continue to provide ventilators as local, state and national healthcare providers are facing second and third waves of COVID-19 cases and associated hospitalisations. Thankfully, the magnitude of these hospitalisation waves and thus the need for emergency ventilators is decreasing over time. In our core markets, the patient diagnosis trends in sleep apnea, COPD, asthma and beyond are steadily increasing, as well as prescription therapy flow from those diagnoses. Growing numbers of people are returning to healthcare systems, including primary care as well as specialist care. We are seeing more healthcare systems come back online through telehealth and in-person visits. Overall treatment capacity as well as capacity utilization rates of those systems are both increasing. We have seen a steady, sequential, what we would call U-shaped recovery of patient flow to primary care physicians as well as then to specialist physicians across the 140 countries that we serve. This is just as we forecast 90 days ago on our Q4 earnings call. We expect this same patient flow growth trend to continue throughout fiscal year 2021. In my remarks today, I'll provide a high-level overview of our Q1 business results, and then I'll hand over to Brett to walk us through further detail. I will also review progress towards our ResMed 2025 strategic goals, including execution highlights against our quarterly as well as our annual operating priorities. Today, we have reported high single-digit growth in top-line revenue and strong double-digit growth in both net operating profit as well as earnings per share. These results speak to our team's ability to nimbly pivot to meet short-term needs for emergency ventilators while also investing for the long-term growth in our core markets of sleep apnea, COPD, asthma and out-of-hospital medical software. Our investments in research and development for digital health technology have accelerated these last nine months as we see increasing demand from patients, physicians, providers as well as healthcare systems as they embrace digital health through remote patient engagement as well as population health management technology. During the first quarter of fiscal year 2021, we generated over $144 million of cash, allowing us to return $57 million of cash as dividends to our shareholders. At the same time, though, we have increased our research and development investments at double-digit rates, including investments in digital health clinical research, as well as hardware and software innovation across both our medtech and our software-as-a-service businesses. We have a very full pipeline of innovative solutions that will generate both medium and long-term value for customers with an industry-leading intellectual property portfolio of over 6,000 patents and designs. Our digital health ecosystem is an important competitive advantage for ResMed that offers integrated care to drive superior clinical outcomes, to drive better patient experiences, and to drive lower total healthcare system costs. We now have over 7 billion nights of respiratory medical data in our cloud-based air solutions platform. We've provided over 12.5 million 100% cloud-connectable medical devices to customers, and we have over 14 million patients enrolled in our AirView software solution. During our last earnings call, I discussed how COVID-19 has accelerated the rapid adoption of digital health technology around the world, including a recognition of the value of remote patient monitoring, virtual diagnoses, and the rapid evolution of digital reimbursement models. We have seen much greater collaboration between the medtech industry and governments globally. Not just in ventilators, but well beyond. An encouraging example of this was just a few days ago when the US Centers for Medicare and Medicaid Services, or CMS, announced that it will be maintaining current reimbursement rates in our product categories in January 2021. This is great news, and in part it is due to industry feedback that it was inappropriate to make unnecessary changes, particularly during an ongoing COVID-19 public health emergency, and really importantly, that current rates were appropriate for the services being provided. We have also seen governments in Germany, France, Japan and across the US adopt models to facilitate digital health and remote care that will be important not only during this pandemic but well beyond. This is better healthcare at lower costs leveraging technology. These trends support ResMed's 2025 strategy, and we believe that the accelerated adoption of digital health solutions represents a significant medium and long-term tailwind for our business. These three trends, one, the increased importance of respiratory medicine, two, the increased importance of digital health, and three, the increased importance of out-of-hospital healthcare, will all help ResMed meet and beat our goal of growing volume at double digits from 2020 through 2025 and improving over 250 million lives by 2025. Let me now highlight a few examples of innovation and execution in support of our strategic priorities. Just a recap of our strategic priorities. A, to grow and differentiate our sleep apnea, COPD, and asthma businesses. B, to design, develop, and deliver world-leading medical devices and digital health solutions. And C, to innovate and grow the world's best software solutions for care delivered away from the hospital. In our core market of sleep apnea, we introduced our latest mask innovation in September. It's called the AirTouch N20. This innovation is the first nasal mask with a memory foam cushion. As a patient myself, I'm happy to say that this is ResMed's softest nasal mask ever. The memory foam technology of the AirTouch N20 adapts to the curves and contours of the person's face, creating a personalized fit that is designed to increase comfort and to make it easier for the patient to adhere to sleep apnea therapy. The adherence rates for ResMed solutions are the best in the industry, and it is innovation and technology like this new AirTouch N20 that helps get us there. Our MAS portfolio is crafted to offer physicians market-leading options for prescribing for each patient, to enable home care providers to successfully fit the patient the first time every time, and to satisfy the desires of the ultimate customer. That's the person who suffocates each night with sleep apnea. Our focus on innovation to meet customer needs will never end. We are innovating with smaller, quieter, more comfortable, more connected, and more intelligent solutions every day. We have an exciting pipeline ahead. Let me now turn to a discussion of our respiratory care business, focusing on our strategy to deliver better care for COPD and asthma patients worldwide. During the June quarter, we launched in Europe an upgraded version of our AirView cloud-based remote monitoring software, specifically designed for our ventilation solutions. This solution called AirView for Ventilation provides remote monitoring capability, allowing clinicians to quickly access clinical data from ResMed ventilation devices wherever they are, and to allow them to more easily triage and prioritize both chronic needs and acute needs for ventilated patients. This completely reimagined platform transforms the management of ventilated patients, allowing doctors, nurses and all clinicians and care providers to ascertain powerful patient insights from huge respiratory medical data sets. Adoption of the AirView for ventilation solution has been rapid and strong. Our team was really thrilled to deliver for our customers during the COVID emergency with this solution, but the value that is being provided by AirView for ventilation is ongoing for physicians and healthcare systems. We are making digital health part of the standard of care. During the quarter, we expanded the reach of our market-leading propeller health technology, specifically through our partnership with pharmaceutical company Novartis. During the quarter, Novartis announced the launch of two new once-daily medications to treat uncontrolled asthma in Japan. These products are called Enazer and Atectura Breezehaler. In this market... Patients using either the Enasair or the Breezehaler manage their uncontrolled asthma will be able to acquire a Propeller technology sensor from physicians and then enroll in our Propeller digital health platform. The benefits of the platform are tremendous. The offering is a simple and convenient way to better live with sleep apnea with a fully integrated digital experience with no incremental cost to the patient. It's great to see our Novartis partnership expanding to include now both Europe and Japan leveraging our world-leading propeller technology. Let me now briefly review our out-of-hospital software as a service business. During the quarter, our SaaS business grew in the mid-single digits year on year, driven by continued strong uptake of our HME resupply solutions. The COVID-19 market dynamics continue to impact the patient census volumes, particularly at skilled nursing facilities, and new patient admissions have remained under pressure. We are maintaining our forecast that the SAS market growth rate will be in the mid-single-digit range for the portfolio verticals that we serve for fiscal 2021. We expect the portfolio to return to high single digit growth as hospital and other outpatient surgery center discharge rates return to normal. We continue to invest in research and development for our SAS businesses so that we continuously improve on our market leading solutions in home medical equipment, skilled nursing facilities, home health, hospice, as well as private duty home care and life plan communities. As this portfolio of SAS verticals returns to high single-digit growth, ResMed will continue to be there, with our R&D resulting in leading Brighttree and MatrixCare branded technology solutions, allowing us to better serve customers and therefore to not just meet, but to beat that market growth rate. A year ago we announced that ResMed would begin collaborating with Cerner Corporation to help clinicians make more informed treatment decisions to control costs and to deliver seamless care across healthcare systems from the hospital to the home. We have now integrated our MatrixCare branded home health and hospice platform with the electronic health record or EHR system from Cerner. I'm excited to let you know that we've expanded our relationship with Cerner to new offerings and have now entered into a new value-added reseller arrangement with Cerner. This establishes our Bright Tree technology as the preferred solution for Cerner's home medical equipment, pharmacy, and home infusion customers. This development is the next step in the ResMed-Cerner relationship and will lead to better interoperability, it'll lead to enhanced provider capabilities, and it'll lead to an improved patient experience. Overall, this partnership is performing above expectations for both ResMed and Cerner. We anticipate opportunities to deepen and expand this collaboration to involve our core markets of sleep apnea, COPD, and asthma disease management over time. Stay tuned. In summary, the SAS portfolio is performing well and remains an important driver of our digital transformation of healthcare in settings outside the hospital. 2020 has been an unprecedented year for companies across every industry. The fundamentals of our ResMed business, however, remain strong and we've maintained growth through this crisis, through breakthrough innovation, through investments in recurring revenue businesses and effective execution in our operating excellence programs. COVID-19 has accelerated digital health adoption, as well as awareness of respiratory hygiene and respiratory health. The importance of respiratory medicine, the importance of digital health, and the importance of healthcare delivered away from a hospital. These trends are present during COVID, but they're here to stay. Before I hand the call over to Brett for his remarks, I want to once again express my sincere thanks to more than 7,500 ResMedians, that's what we call ourselves, around the world for their perseverance and strength, hard work and dedication during unique, once-in-a-century circumstances. You have allowed hundreds of thousands of people around the world to get emergency ventilators and to have the gift of breath, while also keeping focus on making sure we have the best technology and solutions now and in the future for sleep apnea, COPD, asthma, and all those who need world-class care outside the hospital and preferably in their own home. Thank you all. With that, I'll hand the call now over to Brett in Sydney, and then we'll go to Q&A. Brett, over to you.
spk07: Great, thanks, Mick. In my remarks today, I will provide an overview of our results for the first quarter of fiscal year 2021 and some remarks on our FY21 outlook. As Mick noted, we had a strong quarter. Group revenue for the September quarter was $752 million, an increase of 10% over the prior year quarter. In constant currency terms, revenue increased by 9% compared to the prior year quarter. Revenues for the first quarter were favourably impacted by continued demand for ventilated devices and accessories. We estimate that the incremental revenue benefit from ventilated devices and related accessories derived from COVID-19 demand was approximately $40 million in the first quarter. Additionally, we experienced strong mask revenue growth in both our domestic and international markets. However, we did observe continuing headwinds in the sleep device market. Taking a closer look at our geographic distribution and excluding revenue from our software-as-a-service business, our sales in US, Canada and Latin America countries were $403 million, an increase of 9% over the prior year quarter. Sales in Europe, Asia and other markets totaled $257 million, an increase of 15% over the prior year quarter or an increase of 10% in constant currency terms. Byproducts... US, Canada and Latin America, device sales were $197 million, an increase of 6% over the prior year quarter. Masks and other sales were $206 million, an increase of 12% over the prior year quarter. In Europe, Asia and other markets, device sales totaled $176 million, an increase of 16% over the prior year quarter, or in constant currency terms, an 11% increase. Masks and other sales in Europe, Asia, and other markets were 81 million, an increase of 12% over the prior year quarter, or in constant currency terms, an increase of 8%. Globally, in constant currency terms, device sales increased by 8%, while masks and other sales increased by 11% over the prior year quarter. Software as a service revenue for the first quarter was 92 million, an increase of 6% over the prior year quarter, On a non-GAAP basis, SAS revenue increased by 4%. During my commentary today, I will be referring to non-GAAP numbers. The non-GAAP measures adjust for the impact of amortisation of acquired intangibles, the purchase accounting fair value adjustment to matrix care deferred revenue, and the fair value adjustment of equity investments. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our first quarter earnings press release. Our non-GAAP gross margin improved by 30 basis points to 59.9% in the September quarter, compared to 59.6% in the same quarter last year. The increase is predominantly attributable to favourable product mix and foreign exchange rate movements, partially offset by increased costs associated with logistics and procurement costs, together with typical declines in average selling prices. The cost increases largely reflect the impact of COVID-19 and our rapid ramp up of ventilator production. We saw elevated air freight costs relative to the prior year, but these are tracking sequentially lower, particularly as we rebalance from air freight to sea freight. Moving on to operating expenses, our SG&A expenses for the first quarter were $159 million, a decrease of 5% over the prior year quarter, or in constant currency terms, SG&A expenses decreased by 7% compared to the prior year period. SG&A expenses as a percentage of revenue improved to 21.1% compared to 24.6% we reported in the prior year quarter, benefiting from cost management and reduced travel as we worked through the uncertain COVID-19 environment. Looking forward, we expect SG&A expenses in Q2 to be broadly consistent with the prior year period, and then in the second half of FY21 to increase in the low single digits relative to the prior year period. R&D expenses for the quarter were $55 million, an increase of 14% over the prior year quarter, or on a constant currency basis, an increase of 12%. R&D expenses as a percentage of revenue were 7.3% compared to 7.1% in the prior year. We continue to prioritise our investments in innovation because we believe our long-term commitment to technology and product development will deliver a sustained competitive advantage. Looking forward, we expect R&D expenses to continue to grow year over year in the high single digits to low double digits, reflecting our commitment to innovation through the economic cycles. Total amortisation of acquired intangibles was $20 million for the quarter and stock-based compensation expense for the quarter was $16 million. Non-GAAP operating profit for the quarter was $237 million, an increase of 24% over the prior year quarter, reflecting strong top-line growth, expansion of gross margin and well-managed operating expenses. On a GAAP basis, our effective tax rate for the September quarter was 17.4%, while on a non-GAAP basis, our effective tax rate for the quarter was 18.5%. Looking forward, we estimate our effective tax rate for the full fiscal year 2021 will be in the range of 17% to 19%. Non-GAAP net income for the quarter was $185 million, an increase of 37% over the prior year quarter, Non-GAAP diluted earnings per share for the quarter were $1.27, an increase of 37% over the prior year quarter. Our GAAP diluted earnings per share for the quarter were $1.22. Cash flow from operations for the quarter was $144 million, reflecting robust underlying earnings, partially offset by increases in working capital. Capital expenditure for the quarter was $14 million, Depreciation and amortisation for the September quarter totaled $39 million. During the quarter, we paid dividends of $57 million. We recorded equity losses of $2.3 million in our income statement in the September quarter associated with the Verily joint venture. We expect to record equity losses of approximately $3 million in Q2 and approximately $5 million per quarter in the second half of FY21 associated with the joint venture operations. We ended the first quarter with a cash balance of $421 million. At September 30, we had $1.1 billion in gross debt and $635 million in net debt. Our debt levels remained modest, and at September 30, we had a further $1.2 billion available for drawdown under our existing revolver facility. In summary, our liquidity position remained strong. However, I also want to highlight that in these times of uncertainty, we are maintaining a disciplined approach and we are tightly managing expenses, cash flow and liquidity. Today, our Board of Directors declared a quarterly dividend of $0.39 per share, reflecting the Board's confidence in our strong liquidity position and operating performance. Turning now to our FY21 outlook. At a high level, we are now seeing minimal COVID-19 generated demand for our ventilators and do not expect any incremental benefit in Q2 and beyond. Additionally, we expect to see a continued year-on-year headwind for sleep devices in Q2 in response to temporary reduction in the diagnosis of new patients. However, at this time, we continue to forecast a sequential improvement in sleep devices through the course of FY21. Masks and accessories have continued to demonstrate resilience and growth over the past three months, reflecting the insulating value of the large patient-installed base. We expect to see continued year-on-year growth of our mask portfolio in FY21. Of course, like many other companies, we continue to experience significant uncertainty in the current environment, and as a result, our forecasts and possible future revenue outcomes remain dynamic. And with that, I will hand the call back to Amy.
spk10: Great. Thank you, Brett. Let's now turn to the Q&A portion of the call. I would like to remind everyone to please limit yourself to one question, and if you have additional questions, you're more than welcome to rejoin the call queue. Cheryl, let's go ahead and start the Q&A.
spk09: Thank you. We will now begin the question and answer session. If you have a question, please press star, then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. As a reminder, we ask you to please limit yourself to one question. If you have another question, you're welcome to hop back into the queue. Once again, if you have a question, please press star 1 on your telephone touchtone phone. Your next question comes from Chris Cooper of Goldman Sachs. Please go ahead. Your line is open.
spk11: Hi, good morning. Could you please, I mean, you mentioned at the start the announcement from CMS this week. Could you just confirm your interpretation of where we stand with competitive bidding now? I mean, the wording seemed to suggest to us that the structure of the bid as it currently stands is not working as they intended. Is your expectation at this stage that we just move on to the next three-year cycle with competitive bidding, or do you think they'll try and rerun it ahead of that?
spk03: Thanks for the question, Chris. And look, the one thing we know is that January 1, 2021, the rates will remain where they are. And it was great that CMS listened to feedback from the industry. And it wasn't just around COVID. It was really around the fact that reimbursement rates, currently as they are, are fit for the need. And if you read through the detail, the CMS actually said that through the process, they found that they weren't going to have any savings, as they put it, which meant, from my perspective, that we've reached sort of market equilibrium in terms of where things are at. Now, that's my interpretation, but Dave Vandava studies this far more detail than I do. Dave, do you want to give some more color and thoughts around the CMS announcement these last few days?
spk18: Sure. So, Chris, yeah, our... view of the probable outcome here is you've got a three-year run at least until January 1, 2024 of these current rates plus inflation adjustments on January 1 on each of those years. Those are in the competitive bid areas. In addition to that, CMS has got a proposed rule out, which if they finalize, would add a continuation of the 50-50 blended rate in rural areas. Those are both really good outcomes for our industry. They provide stability. They provide rates that these folks can count on. And they allow for any willing provider to be able to provide in the markets. Now, you know, you can always find legislative opportunities for the administration to do different things, to come in earlier, to change things up a little bit. So is it possible? Sure. Is it likely? We don't think so. So, you know, we're going to be basing our plans on a continuation of these rates going forward with the caveat that governments can always, you know, do things that are unexpected and subject to their own control.
spk11: Is there any risk that the commercial payers begin to take things into their own hands slowly and move ahead of Medicare?
spk03: So, Chris, the private payers were already ahead of CMS on this and had been sort of on a mark-to-market basis doing things at their own rates before competitive bidding started back in the mid-2000s, during it and after. And so I don't think it's a risk. It's a guarantee that private payers are looking for market rates. I think what's great about this one, because it's so public, versus those sort of private negotiations that happen, is that we've seen a public statement of an equilibrium reached between, you know, the bids that came in and the fair price that is appropriate for the provision of these services in the statement. So that's something that's new as part of it. But, you know, look, it's a complex web. We sell in 140 countries worldwide, not just one. We watch CMS, but we also watch the rest of the world, and we want to make sure that Reimbursement rates are there for our channel, but really importantly, that we get to the 936 million people worldwide who suffer from sleep apnea.
spk11: Got it. Sounds like a great outcome. Thank you. Thanks, Chris.
spk09: Your next question is from Sean Lemon of Morgan Stanley. Please go ahead. Your line is open.
spk04: Thank you. Good morning, everybody. I'd like to just ask about the sustainability and that suppression in SG&A growth. It seems like a very good outcome. If you could talk us through that. I know we've got guidance for fiscal 21, but if you could talk us through that, that would be really useful, Mick.
spk03: Yeah, thanks, Sean. I'll start and I'll hand over to Brett for some more detail. Yeah, look, excellent control. Obviously, travel costs are incredibly down. We have 75%, 80% of all the ResMedians worldwide selling in 140 countries working from home. And we've had a really smooth transition to, you know, 4,000 or 5,000 people working from home and feeling comfortable doing so. And we are opening up our offices as appropriate in Europe, Asia, and the Americas as appropriate. as, you know, cities, states and so on allow us to. Look, you know, when we get to the other side of this pandemic, and, you know, that's a long time potentially with a vaccine and treatments that are efficacious, I do see some of those costs starting to go back up again, but they will be also, you know, concomitant with opening of healthcare systems that will be associated with the opening up of those economies. And so I think, you know, we've done a really good job in bringing expenses down. On SG&A, you know, 7% reduction year-on-year for the quarter to $159 million for the September quarter. But if you look closely, we also increased our R&D spend. We increased by 12% constant currency our R&D spend And that's $54.5 million for the quarter, and you annualize that, that's a really good $200-plus million that we're going to put into digital health technology, artificial intelligence, machine learning, improvements in smaller, quieter, more comfortable, more connected, and more intelligent systems. systems that can keep people breathing out of hospital and well taken care of. And so we are going to continue the investments in R&D and drive those through this crisis. And we are going to take the savings on SG&A now and be ready to reinvest in marketing and sales and growth and that SG&A as appropriate when the revenues start to come back. I hope that all makes sense, Sean. It's not just a one portfolio play. It's all part of a larger piece.
spk04: No, thank you. That makes a lot of sense. Great result. Thank you.
spk07: Here's Matt's question. Sure. Sean, it's Brett. The only thing I'd add is that's a good summary from Mixer. There's not too much more to add there. But, I mean, clearly we're not going to have negative SG&A every quarter. And I've got in the back half the kind of low double digits. And so that low double digits, mid-single digits is probably what we've consistently done. So really our aim is we want to leverage SG&A relative to revenue growth. So that hasn't gone away, but we want to continue to do that in the medium to long term as well.
spk04: Great. Thanks, mate. Thanks, Brett.
spk09: Your next question is from Gretel Janu of Credit Suisse. Please go ahead. Your line is open.
spk13: Thanks. Good morning. So just at the last result, I think you mentioned that in July you saw low single-digit revenue growth. This does then imply quite a sharp acceleration in growth in August and September. So can you give us some more colour on, you know, the incremental performance on a month-to-month basis as well as to how you performed into October?
spk03: Thanks, Gretel. It's a great question as we sort of model the kinetics of the recovery across our 140 countries. And, you know, as we look at it, and, you know, obviously I look at daily numbers, not just month to month and beyond, but there's a lot of sort of noise when you go down to a lower level of abstraction. You pull back and you look at sort of that quarter-on-quarter trend, what we're seeing is sequential growth across the group. And, you know, let's look at three big countries. You know, and I think I talked about this 90 days ago, Gretel, but Germany is sort of, I would say, our leading country in terms of how they're opening up their economy. We are seeing 85%, 90-plus percent of the pre-COVID population patient flow, and in some parts, 90% to 95% of the pre-COVID patient flow. It's through telehealth, it's through digital medicine, it's also through some in-person visits and in-lab tests. And so we're really at a very high point of recovery. And even with Angela Merkel closing restaurants and bars here in November, we do expect health systems to remain fully open during not just November, but on an ongoing basis, because People need to get their primary care. People need to get their respiratory care. If they're suffocating, they need treatment for their sleep apnea. If they have trouble breathing, they need help for their COPD. And so we're seeing that in a really good case in Germany. If you take China, you know, another big market we talked about last quarter, sort of at the 50% of pre-COVID levels. This quarter, China is now already at 70% of pre-COVID levels. patient flow across a very large country, but that portfolio of different cities and states is now at 70% of pre-COVID, so a significant improvement from last quarter. And here in the United States, it's really a story of 50 different states and their approaches, but they vary from 60% to 80%. if you think about it, of the pre-COVID patient flow. And so an average of around 70% here in our biggest market in the United States. So you take that all and you see, yes, there is pretty strong sequential improvement. It's not a dramatic sort of V-shape. We're back to January 1 or December 31, 2019. But every week, it does get better. Every month, it does get better across the portfolio of countries. Even with the second and third waves in the Northern Hemisphere, with the coming flu period, we expect to see sequential improvement in the flow of sleep apnea, CMPD, and asthma patients into our system.
spk13: Okay, thank you very much.
spk09: Your next question is from Margaret Katsura of William Blair. Please go ahead, your line is open.
spk01: Hey, everyone. Thanks for taking the questions. I just wanted to follow up a little bit about the drivers, like you said, of new patient ads and the sleep improvements that you're seeing. I understand the 90%, 70%, 70% of pre-COVID levels, but how much of that is being driven by sleep clinics reopening relative to home sleep testing? meaning is home sleep testing accelerating and would that be a more sustainable trend as we go forward two, three years from now that PCPs are adopting this and you can get a steady trend of new patient ads from there?
spk03: Yeah, Margaret, it's a really good question. I'm going to hand to Jim for some further detail on this. Across the world, we're seeing homesleep tests, homesleep apnea testing picked up over time. COVID-19 has been an accelerator for that because it was the only choice during the severe lockdowns. And as we get to the other side, it is lower cost and has equivalent sensitivity and specificity from the technology that's out there. But Jim, what further color do you have on that?
spk16: Thanks, Mick, and thanks, Margaret. It's a great question, and it's a very insightful question. We don't have perfect data on this. But the data we do have, and both the concrete data we have from sort of looking at our own devices that are used and also anecdotal data from the market, very strongly suggest that home sleep testing across most of our markets has become a much higher percentage of testing. And to your point, I do think that that is sustainable. I think what we're seeing is a shift in practice. Patients certainly prefer it, and I think a number of clinicians are seeing that it's an easier way for them to diagnose, and they're certainly using home sleep testing and remote testing serve their short-term patient needs, but as it gets adopted, I think we will see that practice remain, you know, very sustainable. And so, you know, in a market like France, we were already at, you know, something like 90% home sleep testing. We don't have perfect insight, as I said, but we do think home sleep testing in the U.S. market has hit a very high percentage of tests, and we think that that will stick in
spk03: The one bit of color I'll add on there just to tag on to what Jim said, Margaret, is Germany, where there was actually quite a strong resistance from some sleep physicians to adopt sleep apnea testing. They were skeptical of the efficacy, the practicality, and could they really make it work. And because the shutdowns were very strong in Germany during the peak of the crisis in March, April, It was the only way they could diagnose. The doctors then got used to it, and to Jim's point, I think on the other side of this, you know, France will move up a little bit, but Germany will move up significantly in the percentage of patients with home sleep apnea testing as those doctors found that it was not only, you know, had high sensitivity and specificity on a clinical level, but it also had good outcomes at lower costs.
spk09: Thanks, guys. Your next question is from David Lowell of J.P. Morgan. Please go ahead. Your line is open.
spk06: David, you may be on mute. Yeah, no, no, I was just getting the mute off. Thanks very much. If I could just go back to the ventilators. I mean, what I understood from what was said that there was a $40 billion boost coming through there and that we really should expect that that's pretty much done now. So that normalises. And if we adjust for that, it would imply that the device sales growth was significantly lower. Just wondering how... I mean, are we at the point now where device sales ex-ventilators can start to grow given how strong the recovery seems to have been through the quarter?
spk03: Yeah, David, it's a really good question. I'll hand to Brett for some further detail on it after my remarks. But look, you know, we've seen, we saw incredible sort of, you know, $30 million in the March quarter, you know, triple-digit millions of dollars in June quarter, and as you noted, $40 million in this September quarter of what I would call emergency ventilator sales as part of the crisis. You know, it may not go to precisely zero this quarter, but it won't be as high in the December quarter as it was in the September quarter. And, you know, hopefully, as we're seeing these second and third waves, the magnitude, as I said in the prepared remarks, is lower of the second and third waves in terms of the impact on hospitalisations and reaching that sort of peak ICU, peak ventilator capacity. And so, you know, on a humanitarian basis, I hope we're right in that prediction that it goes very quickly down. We are seeing sequentially from the June quarter to the September quarter improvements in the number of patients coming through, the prescriptions coming through, and therefore the devices that we are selling on the sleep side. We expect that improvement to continue through the December period. And so, you know, as you look through the fiscal year and you think about sort of modeling how that's going to happen, I think you can model a steady increase in the sleep apnea devices and, you know, the sort of what I will call secular uptick in masks and accessory sales that was driven by, I think, respiratory hygiene and the importance of getting a clean mask. was not a one-time thing for the March or June quarter. You saw it was sustainable. As we predicted, it was sustainable here through the September quarter, and I think it's sustainable through the December quarter. I'm a patient, and I know how important it is and how exciting it is, frankly, to get that new mask, to get that new cushion, and to establish it up. It's like a brand new car smell, and you get addicted to saying, wow, respiratory health is important, and that is You know, one thing, through the suffering of COVID-19, it's almost a blessing that we've seen people realise that sleep apnea, COPD and asthma, respiratory health is incredibly important, and keeping your device clean and keeping your mask clean is incredibly important, as well as accessing data digitally has been incredibly important. So we think all of that will be there, and that's why we talk about this strong sequential increase, steady sequential increase throughout fiscal 2021. Brett, any further colour?
spk07: Yeah, thanks, Mick. I mean, it's good. No, I mean, Dave, you're right. Obviously, year on year, we saw declines in sleep devices, but we saw a pretty strong sequential improvement from Q4 to Q1. And then going forward, as Mick said, we do think we'll see that sequential improvement. Now, you know, does that end up in Q2, Q3, increase or decrease? Time will tell, but certainly we're seeing that nice sequential increase week to week, month to month, which gives us, I think, a lot of confidence of sleep divisors improving throughout FY21. I think that's the main thing we're looking at, is that nice, strong sequential increase, and I think that'll give us a lot of confidence.
spk06: Just on topic, I know I don't want to ask a second question, but, I mean, I take $40 million off devices. I see negative 1.6% growth for the quarter. So it looks pretty close to flat there, and I presume that's indicative of where CPAP's at relative to the same time last year.
spk07: Yeah, there'll be some... Yeah, I mean, there's constant currency adjustment, things like that, but certainly decreases were single-digit decreases.
spk06: OK, great. Thanks very much for that. Very helpful.
spk09: Your next question is with Leanne Harrison of Bank of America. Please go ahead. Your line is open.
spk12: Hi, good morning, all. Just following on from Margaret Case's question, thinking about the initiatives that have been put in place as a result of coronavirus, including telehealth, home sleep testing, can you give us some indication of how the reimbursement works for that? With home sleep testing, for example, are patients more likely to be out of pocket? And do you think that the reimbursement for the likes of telehealth will remain?
spk03: Leanne, it's a great question, and it talks to how sustainable is what we were talking about earlier, Jim and I, around homesleep apnea testing being adopted. In general, the costs for homesleep apnea testing are significantly below for the payer, the employer, and the ultimate provider. payer is the person who works for that company or pays the taxes in that country. So the numbers of the costs are significantly lower, often an order of magnitude lower. And so therefore, the co-payments, if you're part of, say, a US plan like I am, we have co-payments, the co-payment is proportional to the cost. And so therefore, an order of magnitude lower. So it is lower cost. And the question that physicians always had is, is it better care or at least as good care at lower cost. And I think what we saw through COVID-19 where people who hadn't adopted home sleep out there testing as well were forced to adopt it because it was the only way they could diagnose patients. They found, wow, the sensitivity and specificity from that clinical peer-reviewed article does happen in my practice, in my state, in my city. And so lower cost, as good outcomes, we saw great adoption. And I think that drives... ongoing growth of it on a sustainable basis. You know, as Jim was talking to earlier, I think countries that were X move to Y, where Y is above X, and we can't predict exactly what that permanent change is going to be. We just know it's going to move up because the momentum of economics and good clinical care just drive it that way. So, you know, I don't know, Jim, if you have any further color to provide on that from your last response on home sleep apnea testing.
spk16: I just would completely reiterate what you said. And as a reminder, let's say U.S. market, if you're a consumer and you have a health plan and you have a 20% copay, if a typical lab test is $1,500 or $1,800, you're out of pocket on that at 20%. If a typical home sleep test is reimbursed at, say, $250, $200, you're much lower out of pocket. And so for consumers, the barrier is much lower to do a home sleep test. Most consumers would prefer a home sleep test. And so that's why I think we'll see it remain sticky. Now to telehealth, which I think was the second part of your question, some of those reimbursements have been done on sort of an emergency basis. The question is will they persist after the emergency situations are declared non-emergency? There are a number of reasons to think that they will. I think that they've been very successful. And, of course, the industry is lobbying very hard to put some of those things in place, both with government payers and with commercial payers. And so I think that most payers have seen telehealth to be pretty successful in terms of driving coverage and also driving that cost of care. So we can be optimistic about that, and I think the whole industry is working on it.
spk03: Yeah, and I think there's actually been a sort of public-private partnership during COVID-19, as we all made the ventilators and partnered with the government to do so, that we have partnered on digital health, bringing, as Jim said, bringing the emergency use authorisation capability for that. There were actually codes that CMS had for digital health that were being underutilised in 2019. They brought them out early, I believe, in 2019. And even in 2018, we're doing some trials with them, and they were actually upset at CMS that the digital health codes weren't being utilized enough. COVID-19 drove an acceleration of that, and I think it will allow, again, the same thing as home sleep apnea testing applied to telehealth and all remote patient care. It's better during COVID times that you not go to that clinic because you won't get as exposed. Not to that hospital, you won't get as exposed. It's also better during normal times if you can do stuff at lower cost with better outcomes and not having to go to that hospital, not having to go to that clinic if you can do it from the comfort of your own home. And as Jim said, the consumer prefers lower cost and at their own home, and that's all of Red's Med's strategies to give that healthcare where you want it.
spk12: Thank you.
spk09: Your next question is from Matthew Michan of KeyBank. Please go ahead. Your line is open.
spk19: Great. Thank you for taking the questions. Hey, Mick. I'll keep this one simple. Can you just give us a sense of when propeller health can become more meaningful to the P&L?
spk03: Thanks, Matthew. Good question. Propeller health is early phase in terms of the technology. It's certainly having a huge impact in getting major multi-hundred billion dollar pharma companies to adopt it with their brand new technology. you know, prescribable drugs, particularly in the asthma space in Europe and Japan, you know, as to when it becomes a material part of, you know, ResMed's P&L and I'm breaking it out on a quarterly basis, it's going to be a while for that. And, you know, so it won't be in here in fiscal 2021. But as we look to our 2025 strategy over these next five years, I do expect that that type of digital health solution is going to be a double-digit part of ResMed's delivery and that I will be talking about it on a quarterly basis, not just through milestones of pharmaceutical company releases with lead products and brand new, not generics, but high-end prescribable products. I think that we will see this go well beyond where it started just here in asthma. It'll go across COPD and there are literally billions, tens of billions of dollars that could be saved in keeping COPD patients out of hospital with better adherence to their drugs. Our work has shown that we can improve adherence rates by up to 58% and lower total costs of of emergency visits and emergency costs by 25%. But look, it's a great question, Matthew. I'm not going to predict the exact quarter and timing, but I can tell you that over the next 20 quarters, it will become a significant part. We will be calling it out because it works, and pharmaceutical companies know how to do things at scale, and when they start to see that it improves the outcomes for their patients, that their doctors are happier, and most importantly, that the patients are happier and out of hospital, lower cost, better outcomes, it's going to take off very quickly, exponentially. Excellent. Thank you.
spk09: Your next question is from Saul Hassan of UBS. Please go ahead. Your line is open.
spk05: Good morning. Mick, can I just ask you, I don't think it was in your prepared remarks, but you did preview the Loomis HFT device at the ERS conference this quarter. Can you talk to, I guess, a bit more detail as to where you see that device sitting in within the portfolio of the ResVet offering and when we might expect to see that device commercialised? Thank you.
spk03: Yeah, I'll provide just a little overview and then I'll hand to Rob Douglas, our COO, to provide further. Look, what we've seen during COVID-19 is a variety of different products and solutions that have been used for patients from oxygen, to high-flow therapy to full non-invasive ventilation and then full invasive intubated ventilation. So I think there was some good exposure to what high-flow therapy can do. With COVID, because it can provide some of the particles to move around hospitals and so on, HFT did not get as frontline exposure. on its therapy as fully intubated ventilators. But we think it gave some good exposure and has accelerated a little bit. Yeah, this is very early days with high flow therapy, but it's a technology that we've put together on some of our existing platforms with great intellectual property and great opportunities for growth over time. But Rob, do you want to provide some further detail on what we're doing with Loomis HFT?
spk02: Yeah, sure. Thanks, Mick. So, yeah, we think HFT is clearly a valid treatment. and got some very interesting use cases. Again, you know our strategy is out of hospital and it hasn't been strongly studied in those types of environments so really it's more part of a long-term play to see how HFT might fit in with our long-term strategy. It's a trial, it will take its time to enrol patients. These respiratory device trials in the home setting are generally pretty tough to do. and take the time. So we won't be reporting out of that super quickly, but it's certainly a very interesting area for us, and we think we've got some good solutions.
spk05: Thank you.
spk09: Our next question is from Shiraz Talia of Oppenheimer. Please go ahead. Your line is open.
spk17: Good afternoon, everyone. Thanks for taking my questions. Mick, one question from my side. The SAS unit is now growing at single digits. Can you help us understand the structural dynamics that could possibly push the segment back to double-digit growth? Is there price elasticity of demand? Are you looking at OUS adoption? Are acquisitions the key? Just help us frame this segment in particular, you know, for the next 12, 24 months. Thank you.
spk03: Thanks, Suraj. It's a great question. So software as a service, our SAS division is 12% of our revenues. It's a really important part of our long-term growth to apply our digital health technology capability outside the hospital and in the seven verticals you're in where We're a market leader in the top one or two of each of those categories. As I noted in the prep remarks, Siraj, we've seen a slowdown of the flow of patients into hospitals and therefore out of hospitals to skilled nursing facilities in particular, as well as nursing homes and others. And we do expect that that sort of, if you like, recovery will take some time. And that's why I sort of said that the markets that we serve as a weighted average portfolio growth will grow in those sort of mid-single digits throughout this fiscal year. We expect to meet that and beat that where we can. And then as we get to, you know, beyond the sort of 12-month timeframe, I do think there's opportunities for those markets to get to the high single-digit growth. And with inorganic plays, there are opportunities to get to low double-digit growth across that portfolio. Look, we never accept market growth. We want to meet it and beat it. One thing we are doing in that division as well as in our core sleep apnea, COPD and asthma groups is we're investing in innovation. We have great... And the beauty of software-as-a-service innovation is you're talking... between sprints and then getting an MVP out there to provide solution to customers. And so we have seen some really good innovation come into play to help people deal with COVID-19 that have helped them sort of through this crisis. And we think that when we get back to the sort of normal flow through hospitals and ASCs of patients getting discharged into the out-of-hospital post-acute network, we will start to see the census pick up and therefore the revenues pick up as the... the number of patients in that setting picks up over time. And so, yeah, look, we have a leading position. We're going to do well in the mid single digits. We'll do well in the high single digits. And over time, as we add inorganically, we can push even beyond that.
spk09: Your next question is from David Bailey of Macquarie. Please go ahead. Your line is open.
spk15: Thanks very much. Morning, Mick. Morning, all. Mick, you sort of touched on the resupply coming through, expecting that to continue into the second quarter. Just wondering if you can talk a little bit about how you're seeing that opportunity over the medium to longer term. Do you think there's further opportunities on the resupply? And then within that mask and accessories as well, just whether you think some of the new product launches are driving increased share for ResMed? That'd be great.
spk03: Thanks, David. Yeah, that's a two-part question, so I'll have a go. Actually, you know what? I'm going to hand the whole question to Jim Hollingshead rather than do half of it.
spk16: Over to you, Jim. Thank you for the question, David. I mean, we think we've been obviously quite pleased with the dynamics of resupply through Q1. We expect it to continue in Q2. And actually, I do think what's going on, especially probably globally, but the dynamics of resupply are really a specific U.S. market where resupply is reimbursed. And we think what's going on is that, A, patients want new, clean equipment. They're more sensitized to that because of the pandemic. And, B, our HME provider customers have realized that that's an avenue that's both better for the patient and better for patient care, but also better for their own business. So we think that dynamic should stay. One thing, and we had a question earlier about competitive bidding. One of the good results out of competitive bidding being delayed for some period of time is that it won't change mass reimbursement. And so we think that with the competitive bidding re-announcement, it maintains the economics of resupply as they exist in the U.S. market, which is our biggest resupply market. And that's one of the reasons we think that the dynamics for that part of the market will persist through, I think, at least the fiscal year. I think that it will remain robust. So we've got a change in customer behavior, a change in patient behavior, both of which tend to resupply, and then stability and reimbursement. And I think those are really key points. On market share, we have the broadest and most effective portfolio of masks and accessories on the market. With our range of products now and with our latest launch of the AirTouch N20, our line is complete across our range of masks, and we can provide a certain fit for every patient with the right mask every time. None of our competitors come even close to what we offer on the market, and we feel really good about our shared position and our ongoing innovation.
spk15: That's great. Thanks, Jim. Thanks, Nick. Thanks, David.
spk09: Your next question is from Andrew Goodfall of MSP Marquis. Please go ahead. Your line is open.
spk08: Thanks very much for taking my question. Just thinking about the quarter, just wondering if you saw any DME restocking effect in the quarter, and also if I could just ask you to talk to Oxygen whether that was still getting some tailwind with COVID.
spk03: So first question about restocking, second about POCs. Look, Brett, do you want to take something with regard to the restocking and talk about inventory levels from queue on queue? And then, Rob, do you want to have a go at the oxygen question? Over to you, Brett, first.
spk07: Yeah, sure, Mick. I mean, typically, on the whole, DMEs, they don't hold too much inventory. So I guess they've got... You know, they typically buy pretty regularly. I'm not sure. I mean, as volumes come up and patient flows come back, obviously there's orders coming in the system to support the patient flow coming back, and we're seeing that sequentially. But I'm not sure they're really restocking for, like, huge orders. They'll restock as the patient flow comes back in a pretty orderly fashion. And obviously we're seeing that through our research. and then sequentially what's happening there. But I wouldn't say it's characterised by significant restocking orders. I think that's a more steady flow that we're seeing coming through. OK.
spk08: So a reasonable match-up with sort of return of patients to return of orders?
spk07: Yeah, I think so, because they don't like holding a lot of inventory, so they will typically do... They can get inventory quite quickly from the manufacturers and that they'll typically operate... Obviously, they need enough inventory, but I think the patient flow will drive their order patterns.
spk08: That's great. Thank you. Andrew, just on POC?
spk02: Yeah. Hi, Andrew. Yeah, our POC program sort of just continues as we have. You know, we continue to learn. We've still got our products in their sort of product launch phase. process and post that. And, you know, we continue to learn and we're sort of still making adjustments and experiments of how to get the right patients to the right providers for the right treatment there. So it's, you know, it's very much a sort of a long-term thing for us on that.
spk08: So no particular call out on COVID around that? No, not the material to our overall business. Thank you very much. Really appreciate it. Thank you. Great results.
spk09: Your next question is from Anthony Patron of Jefferies. Please go ahead. Your line is open.
spk14: Thanks. And maybe just a couple on math questions on vents and NIVs and just comments in relation to COVID cases and NIVs going forward. And so when we back out the $40 million from devices and you sort of bake in patient flows and core sleep, I'm just wondering, again, the math doesn't quite get there to low single digits. So I'm wondering if pricing in particular firmed up in the quarter, that can kind of get you there, or other respiratory was better. And then again, the comment on NIVs going forward, you know, potentially not being a driver, just wondering why that would be considering, you know, where the case counts are going.
spk03: Thanks, Anthony. Yeah, look, it's a complex equation and there are so many moving pieces with second and third waves as regards to the global pandemic. So, you know, all we know about every prediction that's been made the last nine months is they're wrong. So we don't know precisely what the needs are going to be through these second and third waves. And, you know, last quarter we were a bit worried. muted about what we thought would happen this quarter, and then we had $40 million worth of sales in the September quarter. But our best projections of the sort of epidemiology and the sort of, you know, humanitarian model that we put together of the flow of COVID-19 around the 140 countries that we treat, and within the big countries, specifically in some cities and states that we're looking at, We don't think we're going to reach a state where there's going to be hospitalisations like we had early January, February in Wuhan and then February, March in Milan and then March, April in New York where you reached 100% capacity and literally ran out of ventilators and ran out of ICU beds for those ventilators. Our best models show that the magnitude of the second and third waves are actually reduced significantly. in cities in China that we've seen second and third waves, across Singapore where we've seen them, and in some parts of Europe where we're already seeing them. And so we're just being realistic that we don't expect sort of those emergency use ventilators to be at the sort of magnitude. And you can actually see that it went from a triple-digit millions in the June quarter down to 40 million in the September quarter. it'll be significantly reduced here in the December quarter. I'm not saying it'll necessarily be de minimis, but it might be. And, look, our job is to focus on our core market and the coming back of that. And what we're seeing is our investments in digital health we've made these last five years and how we're the market leader there have incredibly well set us up for the growth in that. And so... I think as you start to look at modeling ResMed, looking at a year-on-year is going to be a very difficult and complex equation, which I'm not sure you'll ever get to the right answer, even us, until the numbers are in on it. What we can look at is Q-on-Q, quarter-on-quarter sequential sleep apnea, COPD, just across those devices portfolio, across those masks portfolio, from Q1 to Q2, Q2 to Q3, and Q3 to Q4. We're going to see sequential increase in the sleep devices. We're going to see sequential increase in the sleep and COPD masks and accessories as we go through that quarter. So complex equation, yeah, down sort of in the single digits year-on-year devices, but hugely complex equation with tailwinds and headwinds. Look at Q1Q and you start to see the positive trend of what's happening as we're opening up and as economies are opening up. working out how to run digital health and home sleep apnea testing and remote COPD diagnosis and prescriptions for asthma, and getting patients onto platforms like Propeller, like AirView for ventilation, like AirSense 10 and its AirSolutions platform. And that's where we're investing, and that's where, frankly, our technology will win. Thanks again.
spk09: Your last question will come from David Lowe of J.P. Morgan. Please go ahead. Your line is open.
spk06: Thanks. Thought I'd cancel that one. But just one last question. We got some reports that some of ResMed's masks were in back order through the quarter. Just wondering if you could talk to that, what might have caused it, how significant it was. And I guess I'm trying to understand whether it was demand driven or whether there was any supply issues there. Please.
spk03: Thanks, David. Yeah, I believe it was demand-driven. As you saw, we had really good numbers in the quarter. But, Jim, do you know any details of across the sleep business?
spk16: Yeah, without trying to go mask by mask, most of the back orders that we faced were demand-driven. There were some logistical issues as well in the supply chain. We've had also some domestic shipping issues, little things here and there that have been an issue, but it's almost all demand-driven.
spk06: Perfect. Thanks very much. I'll let you finish up. Thanks, David.
spk09: We are now at the 75-minute mark, so I will turn the call over to Mick Farrell.
spk03: Thanks, Cheryl, and thanks again to all of our shareholders for joining us on this call. I'd like to take the opportunity here at the end to thank the 7,500 ResMedians, many of whom, almost all of whom are shareholders as well, for their dedication, hard work, helping people sleep better, breathe better, and live better lives outside the hospital in 140 countries. Thanks for what you do today and every day. Thanks especially to our ResMed heroes who are going to our plants and production plants, our distribution plants, our tech services centres, and actually, because you have to touch physical product, not being able to work from home, thank you for following all safety procedures and doing that really well through this crisis. I look forward to talking to all of our shareholders here in around 90 days. Amy, I hand over to you to close out.
spk10: Great. Thanks, Mick. Thank you all again for joining us today. If you do have any additional questions, please don't hesitate to reach out to Investor Relations or to me directly. As previously mentioned, all of the documents, along with a transcript and a replay of our call today, will be available on our website later. Cheryl, you may now go ahead and close our call.
spk09: This concludes ResMed's first quarter of fiscal year 2021 earnings live webcast. You may now disconnect.
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