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spk13: Welcome to the Q2 fiscal year 2021 ResMed earnings conference call. My name is Chantal and I'll 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. We'll now turn the call over to Amy Winkum, Vice President in Best Relations and Corporate Communications. Amy, you may begin.
spk00: Great. Thank you, Chantal. Good morning and good afternoon, everyone. Welcome to ResMed's second quarter fiscal year 2021 earnings conference call. Thanks for joining us. This call is being webcast live, and the replay, along with a copy of the earnings press release and our updated investor presentation, will be available on the investor relations section of our corporate website later today. With me on the call today are our CEO, McFarrell, and CFO, Brett Sandercock. and several other members of management will be available during the Q&A following our prepared remarks. During today's call, we will discuss some non-GAAP measures. For a reconciliation of the non-GAAP measures, please review the notes to today's earnings press release and our 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. With that, I'd now like to turn the call over to Mick.
spk08: Thanks, Amy, and thank you to all of our shareholders for joining us on today's call. On this, our first call for calendar year 2021, we are happy to see the steady growth of production, distribution and availability of vaccines around the world. Clearly, we all want to see faster production and wider distribution so that people can be safe from COVID-19 and free to open up their communities and free to get back to their lives. We continue our work here at ResMed to support frontline respiratory therapists and pulmonary physicians, critical care physicians, as well as providers, patients, and resmedians around the 140 plus countries that we operate in. In our core markets, the patient diagnosis trends in sleep apnea, COPD, and asthma are steadily increasing, modestly improving on the trends we saw in the September 2020 quarter. We're seeing this improvement of patient flow even as second and third waves come through northern winter hemisphere nations because physicians and providers are adopting digital health, which enables patient engagement even when people cannot or do not want to meet live and in person. In my remarks today, I will provide a high-level overview of our December Q2 FY21 business results and then hand the call over to Brett for further detail on the financials. I will also review progress towards our ResMed 2025 strategic goals, including execution highlights against our quarterly and annual operating priorities. Today we have published and reported solid 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 once again speak to our ResMed team's ability to work innovatively and deliver results even when facing lower patient activity and little to no incremental benefit from ventilator sales. During the second quarter of fiscal year 2021, we generated over $170 million of cash, allowing us to return over $57 million in dividends to shareholders. We have also grown research and development investments in digital health technology, as well as hardware, software, and clinical research. We forecast increasing digital health demand from patients, from physicians, from providers, and from healthcare systems as they embrace remote patient monitoring and they adopt data-driven population health management systems. We have an exciting pipeline of innovative solutions that will generate both medium and long-term value for our customers with an industry-leading IP portfolio, including 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 healthcare system costs. We now have over 8 billion nights of respiratory medical data in our cloud-based air solutions platform. We have sold over 13.5 million 100% cloud connectable medical devices into the market from ResMed. And we have over 15 million patients enrolled in our AirView solutions in the cloud. With these data liberated to the cloud, we can unlock value for all of our customer groups. We can unlock value for patients through MyAir. We can unlock value for physicians through AirView. And we can unlock value for IBMs, payer providers, as well as private and government insurers for data-driven population health management. That's the future of healthcare. The goals we share with all of our customers are these three. One, to improve patient outcomes, patient quality of life, patient chronic disease outcomes. Two, to lower overall healthcare system costs. And three, to bend the curve of chronic disease progression. To be clear, the spectrum of chronic diseases that we look at here at ResMed are, of course, including our core focus areas of sleep apnea, COPD, and asthma, but it also includes biological systems interaction with cardiovascular disease, with cancer, with type 2 diabetes, with neuromuscular disease, Alzheimer's and beyond. During our last earnings call, I discussed how COVID has continued to accelerate the rapid adoption of digital health technology around the world. We are seeing the recognition of the value of remote patient screening, virtual diagnoses, remote patient management and the rapid evolution of digital reimbursement models in many of the nations that we serve patients. As an example of just one of these, Germany, during the quarter, approved reimbursement for mandibular repositioning devices, including our digital 3D printed dental sleep apnea product called Narval. This is the first time Germany has approved such a product type to treat sleep apnea. In addition, several German states are looking at and experimenting with digital health reimbursement models. These are exciting developments and we expect this will benefit our German business over time. We have also seen other national governments, including France, Japan and the United States, where they've adopted models and taken action to accelerate digital health adoption. Remote health care is of incredible importance during this COVID-19 pandemic, but digital health is also valuable well beyond the impact of COVID because it provides better availability of health care, It provides excellent quality care for patients, and it provides significantly lower costs for healthcare systems worldwide. These trends are key to ResMed's 2025 strategy. We believe the accelerated adoption of digital health solutions represents a significant and permanent shift of the adoption curve for ResMed's market-leading digital health solutions. Let me now briefly update you on our top three strategic priorities. These three priorities are, one, to grow and differentiate our core sleep apnea, COPD and asthma businesses. Two, to design, develop and deliver world leading medical devices as well as globally scalable digital health solutions. And three, to innovate and grow the world's best software solutions for care delivered outside the hospital, and especially in the home. In our core market of sleep apnea, we continue to see sequential improvement in new patient diagnosis trends, as well as very strong resupply activity, both of which have supported another quarter of solid revenue growth that you can see in the numbers we just released. We're seeing 70 to 90% of the pre-COVID patient flow coming through our biggest market in the United States. And to take an example of a European country in Germany, we're already back to 85 to 90 plus percent in some states of Germany of pre-COVID patient flow. Even in countries like China, in our large Asia region, where we saw the sharpest declines at the start of this crisis with very severe lockdowns in Asia and particularly in China, We're now back to already seeing around 70 plus percent, 70 to 75% of pre-COVID patient flow coming through the mainly hospital clinics in our China market. Obviously, the recovery rates of new patients starting sleep apnea therapy may be impacted by the typical seasonality we see in our largest market here in the United States in the March quarter, as a result of insurance deductibles resetting at the start of the calendar year. This is as per normal. This seasonal impact affects devices more than it affects mask systems, given the relative price points of the two categories and the fact that the vast majority of mask revenue is returning customers on resupply programs. The resiliency of our mask and accessory resupply has been strong throughout the COVID-19 pandemic, and we see it as remaining strong through the recovery and strong in a post-COVID peak world. We continue to produce clinical research showing that diagnosing and treating sleep apnea saves money and improves quality of life for patients. This quarter, we are now showing data that treating sleep apnea is actually a life and death decision. The latest data from the European Respiratory Journal, which published during the quarter, results from a 30-year study. The high-level summary of these results were that treating sleep apnea increases patient quality of life and extends quantity of life. It also showed the converse side in that not treating sleep apnea leads to a significantly higher incidence of heart attack, type 2 diabetes, and ischemic heart disease, leading to significantly higher healthcare costs, treating those diseases, and ultimately leading to earlier death. Let me now turn from sleep apnea to a discussion of our respiratory care business, focusing on our strategy to better serve COPD and asthma patients worldwide. Our goal is to reach more patients in our core respiratory care markets, including non-invasive ventilation, as well as life support ventilation, as well as newer areas, including pharmaceutical drug delivery and high flow therapy. We make the smallest, quietest and most comfortable devices on the market and they are all 100% cloud connectable. We continue to see rapid adoption of the AirView for ventilation software solution that we launched in Europe in the midst of the peak of the COVID-19 crisis there about nine months ago. We accelerated the time to market to meet the needs of physicians and patients during the COVID peak and it's proved to be very useful during the peak and beyond the peak. The value being provided through this platform has helped healthcare systems in the markets they're operating in. In short, we are making digital health part of the standard of care for respiratory care, not just in Europe, but worldwide. During the quarter, we decided to exit the portable oxygen market and shut down our concentrator business in that category. We entered the POC market in 2016 as a way to engage with stage 2 and stage 3 COPD patients. Since then, in these last five years, we have acquired Propeller, giving us access to COPD patients even earlier in their COPD disease progression, including stage 1 and stage 2 COPD patients. Additionally, and especially during COVID, we've seen more rapid adoption of high flow therapy that can support some COPD patients. And of course, we have our core non-invasive ventilation and life support ventilation solutions for more severe COPD patients in markets globally already. In short, we don't need POCs to help in our end to end digital health pathway for COPD. Additionally, given no positive changes to POC reimbursement in the latest round from the US government and the economics of our customer acquisition cost versus lifetime value, the POC market itself is not as attractive as it was five years ago. The bottom line is this. We have pharmaceutical drug delivery management through Propeller to support COPD patients in Stage 1 and Stage 2 COPD. We have the emergence of high-flow therapy for Stage 2 and Stage 3 COPD. And we have growing use of non-invasive ventilation and life support ventilation to support patients in Stage 3 and Stage 4 COPD. So in summary, we are very well positioned to help patients, physicians, providers and payers with an end-to-end digital health management pathway for COPD. Let me now review our 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 Brighttree HME resupply solutions. The impact of COVID on surgical procedures and other in hospital and out of hospital visits has impacted discharge rates that particularly affect the census at skilled nursing facilities and hospice. On the other hand, the flow of patients in home medical equipment and home health has been recovering well, even stronger. So as we look across our portfolio of out of hospital care settings, including home medical equipment, skilled nursing facilities, home health and hospice, life plan communities, private duty home care and senior living, we expect that the weighted average market growth rate of these verticals will be in the low to mid single digit range for fiscal 2021. We expect this weighted average market growth rate portfolio to return to mid-single digits and then to high single digits as hospital discharge and ambulatory surgery centre discharge rates return. Our offerings are very well received in each of the verticals that we serve. So we will not just accept these market growth rates, we will look to meet and beat that group market growth rate as we did this quarter. getting a return from our significant investments in R&D within Bright Tree and Matrix Care, and through expansion of our partnerships with hospital-based electronic health record providers. Brighttree continues to innovate to drive resupply growth. Of particular note, the integration and scaling of the SNAP technology is going very well. This has allowed our home medical equipment customers to expand their resupply programs and support more patients with better engagement at a time during the COVID pandemic when they desperately need new innovation, both the providers and the patients. MatrixCare has also introduced new technology. We introduced new voice-to-text technology at the point of care, which helps address caregiver shortages, which are ripe during COVID, by enabling better and more efficient workflows for the customer, while also delivering a better experience for the ultimate customer, who's the patient. Our expanded relationship with Cerner is progressing very well. We are now Cerner's preferred solution across home health and hospice, as well as home medical equipment and their pharmacy and infusion businesses. Our increasingly important relationship with Cerner is leading to better interoperability for providers, our mutual customers, and an improved experience for patients. We anticipate opportunities to deepen and expand this collaboration to sleep apnea and COPD disease management with these partners over time. Clearly, 2020 was an unprecedented year for companies across every industry, and there was much suffering around the world. However, we see some blessings during all that suffering. Importantly, we here at ResMed, we were able to be there during the emergency. We were able to pivot our whole team and our whole business to provide over 150,000 ventilators during the peak needs of the pandemic and get them to where they needed based upon a humanitarian epidemiology model. Additionally, COVID has highlighted the importance of respiratory health. COVID generally kills people through arts, through acute respiratory distress syndrome. And it's awful, but that has raised the awareness of respiratory hygiene, respiratory health, and the field of respiratory medicine. The crisis also showed us the importance of digital health. and has accelerated the awareness and adoption of technologies that can be used for remote patient screening, for remote patient diagnosis, remote patient setup, as well as remote patient monitoring and management. We have seen this crisis drive the importance of healthcare delivered outside the hospital, and that's where ResMed competes for more than 90% of our business, and it's where we add value to customers and where we win. We have seen an ability to bring digital technology that we've been inventing and developing for over a decade, digital screening, digital diagnostics, digital therapeutics and digital health management of patients. With over 1.5 billion people worldwide suffering from sleep apnea, COPD and asthma combined, we see incredible opportunities for greater and greater adoption of these scalable technologies. We are poised to continue relentless innovation and development, as well as to provide the global scale that's needed to drive this technology to the 140 countries that we operate in and beyond. Before I hand the call over to Brett for his remarks and then we get to the Q&A, I want to once again express my sincere, genuine gratitude to the more than 7,500 ResMedians whose perseverance, hard work and dedication during the incredibly challenging circumstances of 2020 allowed our partners in healthcare to save the lives of many hundreds of thousands of people around the world with emergency needs for ventilation, literally giving the gift of breath and the gift of life to many during COVID. I also thank you for the rapid pivot back to our core markets and our core purpose of helping people with sleep apnea, COPD, asthma, and all those who need world-class care delivered well away from the hospital and preferably in their own home. Thank you. With that, I will hand the call over to Brett in Sydney, and then we'll move to Q&A. Brett.
spk07: Great. Thanks, Nick. In my remarks today, I will provide an overview of our results for the second quarter of fiscal year 2021 and some remarks on our FY21 second half outlook. And let's note that all comparisons are to the prior year quarter. As Nick noted, we had a strong quarter. Group revenue for the December quarter was $800 million, an increase of 9% over the prior year quarter. And in constant currency terms, revenue increased by 7%. Consistent with our prediction during the Q1 earnings call, we derived minimal incremental revenue from COVID-19 related demand in the December quarter. 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 $427 million, an increase of 5%. Sales in Europe, Asia and other markets totaled $281 million, an increase of 17%. were in constant currency terms, an increase of 10%. By product segment, US, Canada and Latin America device sales were at $205 million, an increase of 1%. Masks and other sales were $222 million, an increase of 8%. In Europe, Asia and other markets, device sales totaled $188 million, an increase of 16%, were in constant currency terms, a 10% increase. Masks and other sales in Europe, Asia and other markets were 93 million, an increase of 18%, or in constant currency terms, an increase of 12%. Globally, in constant currency terms, device sales increased by 5%, while masks and other sales increased by 9%. Software as a service revenue for the second quarter was 92 million, an increase of 6%. On a non-gap basis, SaaS revenue increased by 5%. 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, restructuring expenses, the purchase accounting fair value adjustments and matrix care deferred revenue, litigation settlement expenses and the fair value adjustments of equity investments. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our second quarter and its press release. Our non-GAAP growth margin improved by 20 basis points to 59.9% in the December quarter, compared to 59.7% in the same quarter last year. The increase is predominantly attributable to manufacturing efficiencies, favourable product exchanges and foreign exchange rates, partially offset by declines in average selling prices. Moving on to operating expenses. Our SG&A expenses for the second quarter were $169 million, a decrease of 1%, when in constant currency terms, SG&A expenses decreased by 3%. SG&A expenses as a percentage of revenue improved to 21.2% compared to the 23.3% we reported in the prior year quarter, benefiting from cost management and reduced travel as a result of COVID-19 restrictions. Looking forward, we expect SGNO expenses 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 10%, or on a constant currency basis, an increase of 7%. R&D expenses as a percentage of revenue were 6.9% compared to 6.8% in the prior year. We continue to prioritise our investments in innovation because we believe our long-term commitment to technology, product and solutions development will deliver sustained competitive advantage. Looking forward, we expect R&D expenses to continue to grow year over year in the high single digits, reflecting this commitment to innovation. Total amortisation of acquired intangibles was $19 million for the quarter and stock-based compensation expense for the quarter was $15 million. Non-GAAP operating profits for the quarter was $254 million, an increase of 16%, reflecting strong top-line growth, expansion of gross margins and well-contained operating expenses. On a GAAP basis, our effective tax rate for the December quarter was 14.8%, while on a non-GAAP basis, our effective tax rate for the quarter was 15.2%. We continue to expect our effective tax rates for the full fiscal year 2021 will be in the range of 17% to 19%. Non-GAAP net income for the quarter was $206 million, an increase of 17%. Non-GAAP diluted earnings per share for the quarter were $1.41, also a 17% increase. Our GAAP diluted earnings per share for the quarter were $1.23. During the December quarter, we closed our portable oxygen concentrated business. We recognised restructuring expenses of $13.9 million associated with the closure. Going forward, the cessation of our POC business will have an immaterial impact on both group revenue and earnings per share. We do not expect to incur additional expenses in connection with this activity in the future, and we have adjusted for this one-time expense within our non-GAAP results for the quarter. Cash flow from operations for the quarter was $170 million reflecting robust underlying earnings, partially offset by increases in working capital. Capital expenditure for the quarter was $35 million. Depreciation and amortisation for the December quarter totaled $41 million. During the quarter we paid dividends of $57 million. We recorded equity losses of $2.6 million in our income statement in the December quarter associated with the Verily joint venture. We expect to record equity losses of approximately $5 million per quarter in the second half of FY21 associated with the joint venture operations. We ended the second quarter with a cash balance of $256 million. In December 31, we had $826 million in gross debt and $570 million in net debt. Our debt levels remain modest. At December 31, we had a third of $1.4 billion available for drawdown under our existing Resolver facility. Our Board of Directors today declared a quarterly dividend of $0.39 per share, reflecting the Board's confidence in our strong liquidity position and operating performance. Our solid cash flow and liquidity provide flexibility in how we allocate capital. We have focused on paying down debt as well as ensuring we have cash reserves to support the company through the uncertainty caused by the ongoing pandemic. Going forward, we plan to continue to reinvest the growth through R&D. We will also likely deploy capital for tuck-in acquisitions such as SNAP, which was completed during the third quarter of fiscal year 2020. We intend to continue returning cash to shareholders through our dividend program, and we may also resume our share buyback program sometime during the calendar year. This program having been on pause since our acquisitions of MatrixCare and Propeller Health in fiscal year 2019. Turning now to our FY21 outlook. At a high level, we are seeing negligible COVID-19 generated demand for our ventilators and do not expect any incremental benefit in the second half of FY21. Note, as a reminder, we recorded $35 million in COVID generated ventilator revenue in our March quarter last year, and 125 meaning COVID generated ventilator revenue in our June quarter last year. Masks and accessories have continued to demonstrate resilience in growth over the past three months, reflecting the insulating value of the large patient install base and the success of our resupply service offerings. We expect to see continued year-on-year growth of our mask sales in the second half of FY21. Notwithstanding continued COVID-19 challenges, we continue to expect a sequential increase in new sleep patients, which should support our device sales as we move through the second half of FY21. However, we typically experience a small seasonal sequential decline in revenue from Q2 to Q3, largely attributable to the reset of deductibles and health insurance plans in our US market. We expect this trend will also be apparent in FY21. Of course, like many other companies, we continue to experience significant uncertainty in the current environment, including the potential disruptive impacts of ongoing restrictions imposed in many of the countries we operate in. As a result, our forecast and possible future revenue outcomes remain dynamic. And with that, I'll hand the call back to Amy.
spk00: Great. Thank you, Brett, and thank you, Mick. Chantelle, let's now go ahead and turn to the Q&A portion of the call.
spk13: Thank you. We will now begin the question and answer session. If you have a question, please press star and the number one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. As a reminder, we ask that you please limit yourself to one question. If you have another question, you are welcome to hop back into the queue. Once again, If you have a question, please press star, then number one on your touchtone phone. Your first question comes from Margaret Katzer with William Blair. Your line is open.
spk11: Hey, good afternoon and good morning to you, Brent. Thanks for taking the questions. Maybe the first one for me, just to hit it off, you guys mentioned that there were negligible vent sales this quarter. So does that imply that this is a good revenue base now for our model to grow off of for that core sleep business? And the reason I ask is if it does, and vent sales went from $40 million last quarter to none this quarter, it actually does imply that the sleep business is doing quite well. So any details would be great. Thanks, guys.
spk08: Thanks for the question, Margaret. And, yeah, clearly, in the December quarter, we had, as we predicted, sort of de minimis ventilator sales, a little bit in northern Europe, perhaps, but not material across the group. And as Brett said in the remarks just now from him, and I said as well, we expect no sort of COVID-related ventilator sales throughout the rest of the fiscal year and beyond. People have enough... in the hospitals, which is great. And so, yeah, look, it does start to form a good base when you look at the core business of sleep apnea, COPD, and asthma patient flow. I mean, as we said, the seasonality usually from Q2, December quarter, to Q3, March quarter, related to the US market on deductibles and so on. But for the other 139 countries we're in and across the portfolio, it's a good base to start to get that slow and steady improvement in the patient flow in this new digital health-driven world Margaret, of patients going to primary care, you know, on Zoom and telemedicine and getting referrals to their specialists and coming through the pipeline. And so we think it's better for the long term, but it is, you know, slowly and steadily coming back from that base. And, yeah, as we said, sort of in those numbers of the percentage flow of patients, as best we can see it, we saw improvement from September to December. And so you noted that in taking out the event sales over that 90-day period as well. Thanks, Coach.
spk13: Your next question comes from David Bailey of Macquarie. Your line is open.
spk01: Yeah, thanks. Good morning, Nick and Brett and Amy. Just interested in actually how you've seen adherence levels over COVID-19, whether you've seen a pickup over the last sort of calendar year and an extension of that, any sort of relationship that you've been able to to Gana from between resupply and adherence levels. Any comments there would be interesting.
spk08: Yeah, it's interesting. We've certainly seen sort of modest sort of single-digit improvements in overall adherence as we look at the big data, and we're actually doing... a whole bunch of research on this to understand the kinetics and dynamics of COVID-19 on the market. I think really early stage in March, April, there was a lot of things going around that maybe using a CPAP would bring more virus in the room if you have other people in the room. So there was some fear and uncertainty and doubt in that early period. But I think that was all covered over by doctors saying, listen, if you get treated for sleep apnea, it's actually preventative in improving your lungs and lowering impact and severity of COVID-19. And again, look, there's so much clinical literature out there in terms of the general press, but through the scientific data, we're able to see people are adhering, you know, those who are adhering are adhering more and sleeping more and using the devices more. And David, to your point, they're participating more in those resupply programs. They are seeing the importance of respiratory hygiene and respiratory health. And, you know, when they get a text response or an app click and a chance to say, yes, I want that new mask, I want that new tubing, I want that new humidifier, they're clicking it at much higher rates and getting closer to, you know, frankly, what they should have always done, which is keeping respiratory hygiene at top of mind. So, you know, I would say modest improvements in overall adherence and more significant improvements in the probability that a person says... ..who is adherent says, I want to get that mask, with that copay, I want to get that mask now to get resupply. And in cash markets, same thing as well. So it's a really good question, David. It's a complex equation, and we're working through all the variables. But yeah, modest improvement in adherence and really good improvement in mask resupply, as you saw in the numbers, as well as you saw in the health of the patients.
spk01: Thanks, Nick.
spk13: Your next question comes from Leanne Harrison of Bank of America. Your line is open.
spk12: Good morning, Nick and Brent. Just a question. I'm trying to understand the trend in these charts. I guess the recovery rates you quoted for your key markets do not appear to have improved much compared to the rates you quoted at the last result call. Can you give us some color on what you're hearing in relation to the pipeline, in particular physician access and sleep testing, whether it be in the lab or at home for your key markets, particularly as COVID cases surged in November and December?
spk08: Yeah, Leanne, it's a good question. And like David, it's complex because there's 140 countries, you know, all adopting digital health at different rates and all having different sort of, you know, national rules around, you know, retail and restaurants as well as how you get back to life and back to healthcare as well. Healthcare has proved pretty resilient, I think, because people know it's an essential industry and, you know, The data that I shared earlier around truly life and death decision of using your CPAP or not for treating sleep apnea, I mean, it's incredible to have those data in the hands of our physicians worldwide as they're driving adherence. It's one thing to be doing a digital telemedicine call with a patient over Zoom or a secure network. It's another one to say, listen, using this device will save your life as well as improve your quality of life. And so the numbers are plus or minus 10% anyway. and that's why the ranges are so broad. But, look, yeah, the US key market is somewhere between 70% to 90% of pre-COVID patient flow, as best we can measure it by Apnealink air usage, by AirSense 10, sort of air solutions activations of new devices and reactivations of resupply devices. And it's not perfect data, and it's different in all the 50 states just in the country that I'm living in here, between California and Massachusetts and Florida, very different areas of opening up of their whole economies on local and state regulation. But that range is pretty broad, but it's pretty accurate in terms of the patient flow through. And that's why I think you've seen people really participating in mask and accessory resupply programs, but a slowdown, obviously, of new patient starts. And to your point about the kinetics of it, yeah, from the September quarter, I think we've moved up, you know, sort of somewhere between 5% and 10% in each of the key markets I talked about, U.S., China and Germany, as examples for America's Europe and Asia. So that's, you know, 5%, 10%, you know, 500 basis points plus improvement in the quarter. You know, it's not this V-shape. We're back to 100% December 2019 again. But, you know, it's a slow, steady sort of U-shape improvement in the flow of patients, which we think does then... over time flow through with all the systems and all the restrictions and the portfolio of 140 countries through to patients getting set up and started on their lifetime of therapy on sleep apnea or COPD therapy.
spk13: Your next question comes from Sol Hadassi with UBS. Your line is open.
spk09: Good afternoon, Mick. Good morning, Brett. And sorry, good afternoon, Amy, as well. Just a quick question on rest of the world sales, Mick, or ex-US sales. So strong growth rates both across flow generators and masks. Just trying to give you a bit more colour, if sleep therapies are still sort of recovering back to, as you said, 85%, 90% in some regions, just what else drove that very strong growth rate across those two product categories? And was there any tender timing, for example, in AsiaPak that maybe contributed to that strong growth rate?
spk08: Thanks for the question. So I'll have a little bit of a go at it and then hand to Rob Douglas, our COO, beside me here to provide more detail. Look, as I said, there was some modest sales of ventilators in Western and Northern Europe during the quarter. That'll flow into the devices number. at plus 10% their constant currency, and then the masks at plus 12% constant currency. Again, this is Europe, Asia, and, you know, the whole entire rest of the world. So we're talking, you know, 135-plus countries. And so, Rob, do you want to have a go at summarising that all for Saul succinctly?
spk05: Yeah, let's just cross off the last point, Saul. There wasn't any tender changes or issues in any of those markets particularly. But across the board, it was... really interesting. We sort of had strong performance in many, many countries. Usually the countries are varied and some are strong and some aren't so on a given time. It looked like there was pretty good, strong performance, and we think the same underlying fundamentals that we've talked about, particularly in the US market, were applying at different scales on these markets. And so in many small markets, we saw the uptake of the digital solutions being really strong. And in fact, underpinning that in our own technology base, we've had actually a really good performance from our technology teams in meeting those digital requirements in each of the different countries. And then there was just really sort of patient demand for making sure their treatment was up to scratch, really good. We saw those dynamics across the board. The whole issue of the resurgences didn't seem to have quite the effect that you might have thought because I think the health systems have learned that they actually didn't need to shut down everything in the health system and they knew what they could do. keep open, and so then the diagnosis processes and that kept going on. As Nick said before, things aren't yet back to fully open and normal, but the whole system's striving to get there, and additional things like uptakes in home sleep testing in some markets have been supportive as well. So it's really our whole suite of solutions is supporting a market that needs to treat these patients that's kept us going.
spk04: Thank you.
spk13: Your next question comes from Matthew Newton of KeyBank. Your line is open.
spk08: Hey, great, and thank you for taking the questions. Hey, Nick, a quick one for me. What is the pushback from the payer community on closing the gap in reimbursement between at-home sleep testing and lab-based tests? Thanks for the question, Matt. You know, look, I think the payer community, you know, and it varies. And I'll take the example of the United States where it's probably, you know, 25% government reimbursement, 75% if you like, and I'll slip out near a field of private payers. They're all very supportive of both in lab and homes without near testing. If you look at this country, you know, pre-COVID was probably about 45%. home sleep apnea testing versus 55% in lab. I think that's moved up very significantly during COVID. Obviously during the peak of the lockdowns, it went very high. And it'll probably level out somewhere in that, you know, 50, 55, 60% range of the diagnoses being home sleep apnea testing. Payers, you know, often have deltas of, you know, I think it can vary from, you know, $250 for a home sleep apnea test and $750, $800 for an in-lab test, just relative to the cost of it. Obviously, for the payer, they would want, if it's, you know, clinically equivalent patient and good sensitivity and specificity of the data and good patient outcomes, and patient satisfaction as well the payers care about, they would flow towards home sleep apnea testing where they can. But, look, I'll hand over to Dave Pendarvis to add any more further color on that dynamic.
spk02: Yeah, Matt, at least in the U.S., you know, there actually are some pretty straightforward dollar investment and time requirements that go into reimbursement for a lot of payers. And the fact of the matter is PhD equipment is a lot more expensive to purchase than more expensive to operate, and it takes more time from both the physician and the facility. So that's what they're looking at more so than necessarily the incentives that are driven by the lower cost of home sleep testing and the higher reimbursement rate of PSG. We certainly support good PSG when it's appropriate for the patient, and there's a lot of sleep labs that have invested a lot of capital. They invest a lot of time for their staff in that, and it's important that they be reimbursed adequately. So, you know, they both have their place in the market. But I think it's generally those sorts of things that go into their reimbursement decisions, not necessarily what outcomes they're trying to drive.
spk03: Thank you.
spk13: Your next question comes from the line of Andrew Goodsell of MST. Marky, your line is open.
spk14: Oh, thanks very much for taking my question. Just looking at your margins, obviously, mass growth outpaced flow generated, so I can see there's a mixed effect. Could you sort of talk to that mixed effect, but also expand on your comments on average selling price decline?
spk07: Brett, that's for you.
spk14: Thank you.
spk07: Sure. Thanks, mate. Thanks, Andrew. Yeah, I mean, we had, if you looked at it year on year, it was 20 basis point expansion. So it was kind of a moderate expansion. So the moving parts that I talked about and those impacts are pretty modest or pretty small overall. The mix pretty much is there, kind of that strong mass growth that's going to underpin that product mix. If you looked at year on year, a little bit of benefit from FX, but pretty minor. And then on ASPs, again, it's... I'd characterize it as a pretty benign environment from a pricing perspective, and it's probably reflected in that pretty small movements in the gross margin year on year.
spk14: So the ASP is pretty modest that you flagged it?
spk07: Yeah, if you look at it in a historical context, I think it's a pretty benign environment for us relative to historical trends. Okay.
spk14: That's fantastic. Thank you.
spk13: Your next question comes from the line of Sean Lamon of Morgan Stanley. Your line is open.
spk04: Thank you and good morning, Mick. I have a question on the exit of the PAC business. If I get this right, and I think I've got it simplistically right, but please correct me that you think you've got those mid-stage COPD patients covered already through non-invasive events and there's better reimbursement and maybe there's better clinical outcomes But, Mick, is there any sort of change in the thinking about how the funnel might operate to get to those patients and service them with noninvasive events with Propeller? Thanks, Mick.
spk08: Yeah, Sean, it's a great question. And, yeah, you're right. Look, what propeller, you know, that acquisition is about 24 months old or so. You know, so what that allowed us to do is to get to patients much earlier in the COPD development cycle. It's really stage one. COPD where you have that shortness of breath climbing a flight of stairs and you go to see the primary care doctor and talk about it and they do the diagnoses and find out that you do have some lung dysfunction and you know this broad category called chronic obstructive pulmonary disease you get put in that bucket and there's many different types of therapies that the doctor can go to but a lot of them are those pharmaceutical therapies up front. And those inhalers, you know, are not used as prescribed when they're just given a prescription, the same as when a pill is prescribed for high cholesterol or blood pressure. You know, the adherence rates are very low in the general population, you know, 50% plus or minus. And with Propeller Health, we're able to drive those adherence rates up double digits on a relative basis and drive to incredible adherence rates that the pharma industry just hasn't seen in respiratory medicine. And so Propeller technology is really exciting. It's really new. We have major global pharmaceutical companies partnering with us in major markets, driving that early days. But we think that allows us to get to stage one, stage two patients in a very significant, scalable way and to get them on that sort of end-to-end, digital health journey in COPD. As they progress to stage two, stage three, they sometimes get prescriptions for high flow therapy, oxygen and ventilation, right? And so we're there with non-invasive ventilation and life support ventilation, which is really stage three, stage four. And in that sort of crossover phase from the pharmaceuticals to the ventilator, both oxygen and high flow therapy are used. High flow therapy is newer and more scaling and we think more related to our core business and the core devices we make. and it allows us to treat the patients and take care of the patients. And so PSCs just became an additional one that wasn't as important in that end-to-end journey and certainly didn't have the sort of margin profile or the growth profile with the changes in reimbursement to allow us to have the same growth opportunity that we have in non-invasive ventilation and life support ventilation. So that's sort of it in a nutshell.
spk04: Got it. Thank you, Nick.
spk13: Your next question comes from Gretel Jenny of Credit Twist. Your line is open.
spk10: Thanks very much. Can you talk a bit more about the future pricing environment in the U.S.? I know you said it's benign currently, but, you know, in the quarter we did have the announcement of two key DMEs merging. So do you expect great ASP price declines going forward than this benign environment that you're currently in?
spk08: Thanks for the question, Gretel. I'll hand that to the president of our global sleep and respiratory care business, Jim, over to you. Jim, you may be on mute.
spk16: Sorry, can you hear me now? It's a terrible, terrible way to enter the call. Thank you, Gretel, for the question. Thanks, Mick. I think that what we've seen this year is benign is maybe too soft a word for price, but I'll go with benign. You know, we've had a pretty stable pricing environment, I think, in anticipation of the market was anticipating the competitive bid rates. And then, of course, competitive bid got delayed. And obviously, the ADAPT Health acquisition of Airacare. creates an even larger customer for us. They're a very important customer for us, and we enjoy a very good relationship with them. I think both with that move and then with ongoing trends into the year, we should see something that looks like a more normal pricing environment, I think, in the second half of the fiscal year and going forward. And it'll be a little bit different by market, as it always is, but I would expect it to be kind of back in a more normal trend.
spk10: Okay, thanks very much.
spk13: Your next question comes from David Lowe of J.P. Morgan. Your line is open.
spk06: Thanks very much. Look, my question is just on the software business. Nick, I think you commented that Brighttree delivered most of the growth, the matrix care, et cetera, facing more of a challenge from the pandemic. Could I get you to elaborate a little bit? I mean, how much growth did you see through Brighttree and what's driving that? And I guess most importantly, can we maintain that growth in that part of the software business?
spk08: Yeah, thanks for the question, David. And, yeah, clearly, Brighttree had strong growth driven by the strength of our home medical equipment customers and their ability to pivot their businesses to mask and resupply and their great adoption of Brighttree Resupply, sort of our core resupply software there, but also the Snap technology acquisition that we closed almost exactly a year ago. We were doing due diligence a year ago and closed it sort of later on during this March quarter. And so those two technologies have been very well adopted. But look, in addition to that, our Bright Tree team, you know, it's a significant double digit percent of their revenues in R&D. They've delivered a whole bunch of innovation, some COVID related management opportunities for their HME customers, as well as other innovative ways to grow their business. So that's allowed the Bright Tree business to support HMEs and really help them survive and thrive, you know, in the early stages and later stages of COVID-19. And it's a great help to the industry. And I'm really proud that ResMed and Bright Tree was able to deliver that. On the matrix care side, yeah, it's a tougher story because, you know, their verticals that they operate in were more severely affected. Skilled nursing facility census was down, you know, high double digits, you know, at the peak of the crisis and still is down year on year in terms of the number of patients in skilled nursing facility. operations and that impacts MatrixCare's census rates and ability to grow. In addition, hospice affected similarly. On the other hand, home health has been a growth light within the MatrixCare area and the addition of our MatrixCare brand, but it's healthcare first, Bright Tree and MatrixCare technology. It's all combined under the MatrixCare brand has been growing really well. And Naveen and his team, the VP who's driving that, has seen incredible growth in home health and hospice. And I think if you look across that portfolio, sort of the guide that we give, because you can go through all the verticals in detail, is that we think that weighted average market growth rate is low to mid single digits right now. You saw we grew 6% in the quarter. So we're growing a little bit ahead of market, taking a little some of those verticals. But as the weighted average market growth rate goes to mid-single digits, we're going to look to meet and beat that. And then when it gets back to high single digits as the flow of patients from hospitals and ambulatory surgery centres picks up, we will then see skilled nursing facilities hospice and all the verticals pick up their census rates and get us back to those sort of growth rates and beyond over time. So, David, it's really sort of related to the whole recovery of the economy and really related to the hospital, you know, what people are calling elective surgeries. And I think if you need a heart valve or a new hip, It's hardly elective when the pain or the probability of death starts going up. And I think healthcare systems are really starting to address that and get their patients back into care. So we should start to see those recoveries over time.
spk06: Great. Thanks very much.
spk13: Your next question comes from Mike Knapson of Needham & Company. Your line is open.
spk03: Yeah, thanks for taking my question. I guess I just wanted to ask about the decision to exit the POC market. I know you made some comments on that in the prepared remarks, but I'm wondering if you could just elaborate on that a little bit. I guess what I'm wondering is, you know, was this really a market issue? Do you think the market's just not attractive? Are the margins on the products too low relative to your other products? Was the product that you had to kind of start with just not competitive enough, or were there other reasons for exiting this market? I guess what I'm getting at was this a product issue, a market issue, or both?
spk08: Thanks for your question, Mike. You know, I said what I said in the prepared remarks in the question before. Maybe I'll hand to Jim Hollingshead for any further detail. I mean, you know, we have the end-to-end play with all that we have in our core capabilities of propeller, high-flow therapy, non-invasive ventilation, and life support ventilation. But, Jim, any further detail you want to share for Mike?
spk16: Yeah. Thanks, Mick, and thanks, Mike. I think it's, you know, Mike, if we're balancing sort of market versus, you know, our portfolio is the way I would frame it. I think it's a little bit of both. So if you look at the market, you know, we've thought for a long time that POCs should be reimbursed. in a better way in a differential way because they create a lot of value for patients they allow patients to be mobile and to get out and about which is actually better for the care but especially in the u.s market reimbursement's always been upside down you know sort of unfavorable to pocs versus stationary and we entered the category knowing that and and uh we're innovating it we actually feel really good about the product um we had we had been developing the product we had a market in the next generation that we were developing but then you see how reimbursement is you know has not changed and in fact has become less favorable And in relative terms, the category is just not that attractive, right? It doesn't have the same growth that it had five years ago when we entered as a category and that sort of thing. And then when you take that line of business and compare it to our overall portfolio in the sleep and respiratory care business, in relative terms, it's not nearly as strong a profile as the other opportunities we have to invest in innovation, right? So we have a fantastic opportunity to continue to invest in Propeller Health, a fantastic opportunity in its early days, but a fantastic opportunity to invest in high-flow therapy, which we think has a really interesting clinical profile and could be of great benefit to patients. And then, of course, as we continue to grow our digital offerings, our R&D portfolio, there are just plenty of places for us to put R&D into other digital offerings and the expansion of our digital offerings. So it's both a question of looking at the market and where that category had evolved since we'd entered with that acquisition, but also just looking at the range of opportunities we have in hand and making a decision to invest in things that we think afford more attractive, both for ResMed shareholders and also for patients.
spk03: That's helpful. Thank you.
spk13: Your next question comes from Chris Cooper of Goldman Sachs. Your line is open.
spk15: Hi, morning and afternoon. Thank you. Most of my near-term questions have been asked. So just given there's been lots of reference to hydrotherapy today, I guess it would be remiss of me not to just ask you guys for a bit more of a sort of comprehensive update on where you're positioned and what your strategy is there. I mean, do you guys have what you need in terms of current portfolio or are there some areas that might make sense from a sort of tuck-in perspective? And just generally, I guess, your views on market growth and how you fit within that over the quarters and years ahead. I mean, you know, the references you made today are indicative clearly of how increasingly important this therapy looks in various respiratory markets, but I'd just be keen to get some sense of quantification from you if that would be possible. Thank you.
spk08: Thanks for your question, Chris. And look, it's a really exciting new area for us. Obviously, we're further down the road on Propel Health, and it's starting to move in the stage one, stage two area. During COVID-19, there were uses of high-flow therapy for patients with low oxygen, and it's always been an area that has been looked at. What we're interested in, you know, ResMed, 90% of our revenues are in the home. We're really interested in home care and the idea of high flow therapy in the home, we think, has a lot of future. There's not a lot of reimbursement, in fact, virtually zero anywhere around the world, so it's a new development area. But we think, given some of the clinical data that are coming out and some of the research we're doing with providers around the world, there is an opportunity to get patients out of the hospital and into the home with high flow therapy treatment. And, you know, as a stepping stone and a pathway to our non-invasive ventilators and life support ventilators, and in combination with our drug delivery system. So, It's, you know, very early days, Chris, not at all material to our business, but it provides that sort of bridge portfolio, if you like, from propeller through to the ventilation side. And we think it was validated somewhat during COVID-19 and some clinical data that we are working with people with around the world says that, you know, as we look towards 2025, we think this will be a good part of our home care portfolio of taking care of patients with high flow therapy.
spk15: Just a very brief follow-up, Mick. So for the home care opportunity to really manifest in the way you expect, do you need reimbursement to become more supportive or do you think that the current arrangements would allow that to happen?
spk08: No, Chris, I think we'd want to see reimbursement models develop because that's how change happens, right? I mean, it's both the Hippocratic Oath and Adam Smith, if you like, that are required to move some areas of healthcare. We've seen that in digital health where, you know, we had amazing solutions for over a decade in the field of liberating data to the cloud and driving up adherence and so on, but it was when we started to see models in the US and France and Japan and now Germany where digital health started to be reimbursed because it is providing care that is of value and then reflecting that for the doctors and the providers and reimbursing that. So, you know, I think reimbursement is a very important part of developing the home care market for high-flow therapy. So, obviously, our research and partnerships with payers, providers and IDNs will be along those lines.
spk15: Very helpful. Thank you.
spk13: Your next question comes from... Suraj Kalia of Oppenheimer and Widener-Gelsen.
spk02: Good afternoon, Mick. Can you hear me all right?
spk07: Got you loud and clear, Suraj. Perfect. So, Mick, a couple of subpart questions related to COVID. Are you seeing any COVID-related shifts in the mask replacement cycle? Now these transient or relatively stickier in nature? And if I could, has COVID identified any manufacturing location re-optimization that would help you all realize incremental margin gains over the next few years? Thank you for taking my questions.
spk08: Thanks, Suraj. I'll hand the first question to Jim around replacement rates around masks during COVID and stickiness of that beyond. And then the second part around global manufacturing to Rob Douglas. So, Jim, you first.
spk16: Sure. Thanks, Mick. Thanks, Suraj. On mask replacement, I think what we've seen all year during the pandemic is a couple of, we've talked about this, I think on this call before, we've seen a couple of dynamics. The first one is, I do think patients are just more attentive to the idea that their equipment might be older. I think there's a greater sensitivity and awareness on behalf of patients to sort of have clean and disinfected reading apparatus. So I think that's driven a bit of incremental demand. And it's an open question as to how persistent that will be. But I would think it's going to be a bit more persistent. I think you'll see patients just more attentive to cleaning their masks and their tubes and resupplying on a regular cadence. But that's speculation. We've certainly seen it this year. I don't know how long that will continue or if it will increase and so on. I think the other thing that, of course, has been happening is In the markets where resupply is a benefit, which is largely the U.S. market, other markets where it is for the provider. But in the U.S. market, I think HME customers have been, if anything, more focused on driving resupply as a part of their business to patients. And so that's been a marriage of two trends where the HME wants to pay attention to resupplying as new patient starts to bend slower and the patient wants the equipment slower. And I think that behind that, in addition behind that, we've had increasing adoption of automated resupply platforms, including our offerings there. So I think all three of those trends have led to higher resupply overall. And I think it probably will persist, but it's very difficult to predict as all things COVID are.
spk05: Yeah, and Suraj, to your question on the manufacturing impact, you know, the whole issue around COVID has been very challenging for supply chains and freight trains all over the world for many, many companies. And I think like many companies, we're carefully looking at the resilience of our supply chain through there. There are other issues going on around politics and trade relationships that we've got to work. Some of these are going to be beneficial, as you talk about, to margins and some will be headwinds. And I think as we continue to scale our business, we should be able to run faster than those headwinds over time.
spk13: We're now at the end of the scheduled time for the call. So I will now turn the call back over to Nick Farrell.
spk08: Thanks, Chantelle, and thanks again to all our shareholders for joining us on today's call. I'd like to once again take the opportunity to thank the 7,500 ResMedians, almost all of whom are shareholders, for their dedication and hard work helping people sleep better, breathe better and live better lives outside the hospital in over 140 countries. Thanks for all that you do today and every day. Thanks especially to our ResMed heroes on the front lines, production, distribution, tech service, customer service, talking to customers and delivering product every day. I look forward to talking with all of our stakeholders here again in 90 days. Thank you. Amy, over to you.
spk00: Great. Thanks, Mick, and thank you all again for joining us today. I know we weren't able to get to all the questions in the queue, so please don't hesitate to reach out to me directly if you've got anything further. And as previously mentioned, all of the documents, along with the transcript and a replay of today's call, will be available on our website later today. Chantelle, you may now go ahead and close out the call.
spk13: This concludes ResMed's second quarter of fiscal year 2021 earnings live webcast. You may now disconnect.
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