ResMed Inc.

Welcome to the Q3 fiscal year 2021 ResMed earnings conference call. My name is Celine 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 Wigham, Vice President of Investor Relations, Incorporate Top Communications. Amy, you may begin.

Great. Thank you, Celine. Hello, everyone, and welcome to ResMed's third quarter fiscal year 2021 earnings call. We appreciate you joining us. This call is being webcast live, and the replay will be available on the investor relations section of our corporate website later today, along with a copy of the earnings release and presentation, both of which are available now. With me on the call today are CEO Mick Farrell and CFO Brett Sandercock. Other members of our management team will be available during the Q&A portion following our prepared remarks. During today's call, we will discuss the non-GAAP measures. For reconciliation of the non-GAAP measures, please review the notes in today's earnings press release or in the appendix of the 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. I'd like to now turn the call over to Mick.

Thanks Amy, and thank you to all of our shareholders for joining us today as we review results for the March quarter, the third quarter of our fiscal year 2021. On today's call, I'll provide a high level overview of our Q3 business metrics, and then I'll hand the call over to Brett for further detail on our financial results. I will review progress towards ResMed's 2025 strategic goals, including execution highlights against our quarterly and our annual operating priorities. A year ago today, when we discussed our March 2020 results, we were only just beginning to understand the scope of the COVID-19 pandemic. Much of our business, particularly in the United States, had not yet been significantly impacted. However, outside the US, countries including China and Italy were already in the midst of emergency needs. We quickly mobilised our supply chain and global operations to address and support ventilation needs worldwide, producing over 150,000 ventilators. We accelerated the production and distribution of non-invasive and life support ventilators and mask systems to those in need. resulting in an incremental $35 million of COVID-related revenue during the March 2020 quarter. I'm incredibly proud of how we quickly pivoted our business to meet that need, providing life-saving solutions around the world so that healthcare systems were prepared with the resources needed to treat patients who are fighting COVID-19. Today, one year later, the countries we operate in are at various different stages of the post-COVID peak recovery process in terms of getting to normal patient flow. We see a range of from 70% of pre-COVID patient flow in some countries up to 90% of pre-COVID patient flow in other countries. Vaccines are steadily rolling out in the United States, the UK and many other countries worldwide. We still see significant impact from ongoing second, third and fourth waves of infection in some countries in Europe, as well as in South America and Asia, and especially right now in the country of Brazil and particularly India. Our team is working with hospitals and healthcare providers in those two countries and beyond for preservation of life, making sure that they have ventilators, masks, and the training that they need to use them. We continue to support the frontline respiratory therapists and the physicians who are there on the ground, as well as providers, patients, and ResMedians throughout the 140-plus countries that we operate in. We're pleased with the steady progress that we are seeing in getting new sleep apnea, COPD, and asthma patients diagnosed. Excluding the $35 million of COVID-related ventilator sales in the March 2020 quarter, our team delivered positive sales growth across our core sleep apnea and respiratory care business this quarter on both a headline and constant currency basis. We forecast a steady improvement trend of patient flow for sleep apnea and COPD and asthma continuing as we move through 2021 and into 2022. We expect this progress to accelerate as global vaccination rates continue. We are encouraged to see that patients, physicians and providers around the world are adopting digital health tools for remote patient screening, home-based testing, remote patient monitoring and ongoing patient management. I'd like to be clear that the ventilation sales that we made in 2020 will be part of our comparables for the next two quarters. In the June 2020 quarter, we recognised $125 million in COVID-related ventilator sales. And in September 2020 quarter, we recognised $40 million in such revenue. Over the coming quarters, we expect to continue to show strong, positive year-over-year revenue growth, excluding these one-time sales from 2020. As we look further forward, we see a clear path to double digit revenue growth in the back half of our fiscal year 2022 across our full business, powered by opening economies and our pipeline of new technology and innovation. Our headline results were impacted this quarter by an accounting reserve we took in connection with discussions with the Australian Tax Office or ATO regarding their ongoing audit dating back to fiscal year 2009. Brett has been leading those discussions and will speak to the details in his remarks. I will make this statement. ResMed pays significant taxes in countries around the world and we operate in over 140 countries, helping people sleep better, breathe better and live better lives well away from the hospital. Brett and his team are working towards a final resolution of these transfer pricing discussions dating back over 12 years with the ATO. So we have taken this $255 million reserve. We believe that resolving these discussions is the pragmatic thing to do for all of our stakeholders so that we can put this behind us and focus all of our efforts on our core mission of improving lives in respiratory medicine around the world. During the third quarter of fiscal year 2021, we generated over $196 million in operating cash, allowing us to return $57 million in cash dividends to shareholders. We also increased our R&D investments in the period in digital health technology, as well as R&D for hardware, embedded software and clinical research, while maintaining financial discipline with reduced SG&A and other operating costs. We are seeing increased demand for our digital health solutions from patients, physicians, providers and healthcare systems around the world as they embrace remote patient engagement and adopt population health management. We are the clear leader in this field with over 14 million cloud connectable medical devices in the market. And our ongoing and increasing investments in digital health innovation will ensure we provide superior value to patients, physicians and providers to be their partner of choice. We don't take our leading market share position for granted. We fight for it every day through innovation. Our digital technologies are a growth catalyst for our business. We have an exciting pipeline of innovative solutions that will generate both medium and long-term value with an industry-leading IP portfolio including over 8,000 patents and designs. We now have over 8.5 billion nights of respiratory medical data in our cloud-based platform called Air Solutions. We have over 15.5 million patients enrolled in our cloud-based AirView software solution. And we also have over 105 million patients managed within our software as a service network for out-of-hospital healthcare. These incredible data assets allow us to unlock value for all of our customers, patients, physicians, providers, as well as private and government payers. Let me take a few minutes to share some recent clinical highlights that show how we are working with researchers to advance the field of sleep and respiratory medicine with these data and beyond. During 2020, an important 30-year duration study was published in the European Respiratory Journal following over 4,500 diagnosed OSA patients to better understand the long-term impacts of untreated sleep apnea. The study showed that untreated sleep apnea leads to high incidence of myocardial infarction or heart attack, high incidence and prevalence of type 2 diabetes, and high incidence of ischemic heart disease. This real-world clinical analysis is showing what we've known for over three decades. Sleep apnea is a public health epidemic that simply can't be ignored. In terms of clinical quality of life improvement from CPAP therapy, the data are also clear. In late 2019, the multicenter randomized controlled trial called MERGE was published in the journal Lancet Respiratory Medicine. The results were that patients randomized to CPAP demonstrated clear improvement in quality of life for CPAP patients versus standard of care, with symptomatic benefits including reductions in sleepiness, as well as improvements in fatigue, and importantly, depression, a key part of mental health. Importantly, these results were evident in both mild as well as moderate and severe sleep apnea. In terms of economic data and a dose-response relationship from CPAP therapy, the data are also unequivocal. In 2019, a study was published in the Journal of Clinical Sleep Medicine showing a quantified dose-response relationship from CPAP therapy. So for every additional hour of positive airway pressure use, there was an 8% decrease in hospital inpatient visits and a 4% decrease in overall physician visits. In other words, treating sleep apnea with our sleep ap therapy not only improves lives, it also saves money for the healthcare system by lowering total healthcare utilisation costs. During the quarter, we saw the publication of a draft technology assessment from the Agency for Healthcare Research and Quality, or AHRQ, here in the US markets. AHRQ sought input and ResMed filed public comments along with comments from many physician groups, sleep apnea patient advocates, provider groups, and beyond. I won't repeat all the details of those public comments, but I will say this. We presented peer-reviewed and published data showing that CPAP therapy improves quality of life, reduces healthcare costs, and even reduces mortality. In short, these data prove that in partnership with our physician and provider colleagues in the market, we are saving lives and saving money for the healthcare system through our medical technology. We have peer reviewed and published data showing that a reduction in incidence of heart attack, a reduction in hypertension, as well as a reduction in the incidence of solid cell cancer tumors. All of these are logical sequelae of the elimination of hypoxia that is associated with CPAP therapy in treated sleep apnea patients. We are encouraged by technical studies completed by the National Institute of Clinical Effectiveness. The acronym is NICE in the UK. Just last month, NICE made public their 2021 draft guidelines that recommend that CPAP therapy, along with telemonitoring, is the frontline treatment option for patients with mild OSA. That would be an expansion of coverage in the UK and also an expansion of the use of digital health technology in that market. Similarly, the ministries of health in France, Germany and Japan have seen the value of digital health in sleep apnea therapy and have begun investing reimbursement funds in the space. It's great to see this expansion of coverage for sleep apnea therapy and digital health around the world as governments see improvement in outcomes and reductions in total healthcare system costs with this technology. While we respect the work of AHRQ, we, along with many other academic research-focused institutes and practicing physician groups, believe that they bypassed a generation of data in real-world evidence that needs to be taken into account along with their own select group of RCTs in the draft report. We are optimistic that the final report, when issued, will reflect the preponderance of real-world evidence and broader RCTs, showing both the clinical and economic benefits of treating sleep apnea with positive airway pressure. Okay, let me now update you on our top three ResMed strategic priorities. These 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 preferably in a person's home. In our core market of sleep apnea, we continue to see sequential improvement in new patient diagnosis trends as we seek to provide solutions for the 936 million people worldwide who suffocate every night. The rate of new patients starting sleep apnea therapy in the US was impacted by the typical seasonality that we see in the March quarter, primarily as a result of insurance deductibles resetting at the start of each calendar year. This seasonal impact affects devices more than mask systems, given the incremental cost of diagnosis and the relative price points of the two categories. We expect sequential growth in sleep and respiratory care as we move past this typical seasonality. We continue to see strong ongoing mask and accessory resupply in the US market and beyond. New patient flow during the quarter was impacted by the recent COVID-related case surges in select countries in Asia and Europe, including two large markets, France and Germany. We see that impact the number of patients going for clinic-based diagnosis pathways in these affected countries. We expect to see these markets reopen along with hospitals as vaccines continue to roll out and as we see further scaling of the remote home based diagnostic capacity. Clearly, the kinetics of opening of these economies and the rate of vaccination rollout are beyond our control. However, we can control our investments in digital solutions for our physician and provider partners, which we are doing at increasing velocity and with scalable systems and processes. More broadly, we are seeing growth in total new sleep apnea, COPD, and asthma patient flow, and we expect to see this improve over time in our portfolio of 140 country markets each quarter. Importantly, our market-leading share position has remained stable across both masks and devices, and we're excited about our future pipeline. We rarely talk about our future pipeline, as those who have followed us for a period of time know, but today I would like to open up the curtain just a little bit on our next generation sleep apnea platform. You may have seen some recent US regulatory filings that we made for our next generation flow generator platform called the AirSense 11. Clearly, there are multiple steps in the process to bring this new platform to global markets, and these public regulatory filings are simply one important step. But we are making good progress. Earlier this month, we started a limited controlled product launch of the AirSense 11 in certain parts of the United States. We expect to move to a broader commercial launch of the platform later this calendar year in the US, and then to country markets worldwide in sequence after that. For now, I can say that as a personal user of our CPAP therapy, I have firsthand knowledge that the AirSense 11 device will benefit patients and their bed partners. And our early data show that the device and software platform combination will benefit physicians, providers, payers, and beyond, and ultimately continue to catalyze ResMed's global leadership in digital health solutions for sleep apnea, and then also accelerate our success in digital health solutions for COPD, asthma, and other key chronic diseases. We make the smallest, quietest, smartest, and the most comfortable devices on the market. Importantly, they are all cloud-connectable with the latest and greatest digital health technology to increase adherence, improve clinical outcomes, and deliver proven cost reductions within our customers' own healthcare systems. Let me turn now to a discussion of our respiratory care business, focusing on our strategy to better serve the 380 million COPD, or chronic obstructive pulmonary disease patients, and the 340 million asthma patients worldwide. Our goal is to reach more patients with our core respiratory care solutions, including both non-invasive ventilation and life support ventilation, as well as newer therapeutic areas, such as cloud-connected pharmaceutical drug delivery devices and high-flow therapy devices. Our respiratory care business benefited in the March 2020 quarter as we sold incremental ventilator devices and ventilation mask solutions to meet growing demand worldwide as a result of the pandemic. During the March 2021 quarter, COVID-related ventilator sales were not material to the global business. However, we are seeing some demand in select countries affected by these latest COVID surges, such as just this month with the surge in India. And we're getting many thousands of devices to those in need. The demand is there in that country. But as in Q3, we do not expect the revenue to be material to our global business. even though the broader impact, particularly with preservation and life in these countries, is clearly priceless and incredibly important to not only our local team in India, but to all of us here at ResMed worldwide. Demand for our core non-invasive ventilator and life support ventilator solutions for COPD and other respiratory insufficiency are experiencing the same steady recovery in new patient flow as in sleep apnea. We are balancing the growth in patient demand there with the supply of ventilators that we made to the market throughout 2020 as customers balance their inventory and their core ongoing patient needs. We continue to see rapid adoption of the AirView for ventilation software solution that we launched in Europe in the midst of the pandemic this time a year ago. We are now seeing that this technology has expanded to regions around the world. The value being provided through this cloud-based software solution has been fruitful not only during the COVID pandemic and the peak parts of the crisis, but it's also valuable on an ongoing value basis for physicians as well as the healthcare systems they operate in. We are helping to ensure that digital health is now the new standard of care for respiratory care. Let me now review our software as a service business for out-of-hospital care. During the quarter, our SaaS business grew in the mid-single digits year-on-year across our portfolio of markets. The verticals include home medical equipment, or HME, skilled nursing facilities, home health, hospice, private duty home care, home infusion, senior living, and life plan communities. Our HME customers are leveraging our advanced resupply solutions, including SNAP technology and Bright Tree resupply, for our existing portfolio of patients. And they are contributing to ongoing growth as the flow of new patients in HME continues to recover steadily, period by period. Over the past 12 months, COVID-19 has had a dampening effect on elective and emergent procedures at hospitals, as we all know, and that has slowed hospital discharge rates, affecting patient flow and ultimately the census rates at skilled nursing facilities, home health, hospice and beyond. As the rate of vaccinations accelerate across the US and the number of COVID-19 cases continues to trend downward in this country, we're seeing improvements in the census rates across skilled nursing facilities, home health, hospice, and across all post-acute care settings. In addition to the solid organic growth that we are seeing in our SAS business, we closed an exciting acquisition just this month. The company is called Citus Health. Citus is a digital health leader specialising in patient engagement solutions for home infusion and specialty pharmacy, as well as for home health and hospice markets. Citus enhances the patient experience and it also improves provider efficiency and reduces the workload for frontline clinicians and caregivers. We are excited to have the Citus team as part of the ResMed family of solutions and to leverage their digital collaboration and patient support platform in our mission to improve patients' lives outside the hospital. I'm very impressed by the breadth and depth of talent at Citus and their passion for patient care. This goes from their CEO and co-founder all the way to the front line. We're very excited to have them join our team and we will be better together. As we look across our portfolio of solutions from Bright Tree to MatrixCare to now Citus, including HME, specialty pharmacy, home infusion, skilled nursing facilities, home health, hospice, senior living, life plan communities and private duty home care, we expect this portfolio, this SAS portfolio of revenue growth to accelerate, increasing from mid-single digit growth that we saw in this quarter to high single digit growth as we move forward. As always, our goal is to meet or beat these sort of market average growth rates, and we continue to take share across the verticals that we're in. We also see opportunity to drive growth through further acquisitions that will augment and add to our existing portfolio of solutions. Our offerings are very well received in each of these verticals, and we continue to see and leverage analytics and the technology that we have across our core business and the SaaS business to help people age in place and minimize or eliminate acute care episodes. Looking at the broader ResMed portfolio of business across sleep and respiratory care, as well as our software as a service solutions, we remain confident in our long-term strategy and our pipeline of innovative solutions. Our mission to improve lives drives and motivates ResMedians across the world every day. COVID has highlighted and continues to highlight the importance of respiratory health and respiratory hygiene. It has highlighted also the importance of digital health and remote care, and it has also accelerated awareness and adoption of technologies that can be used for remote patient screening, diagnosis, setup, as well as remote patient management and monitoring. We have continued to invest aggressively in R&D and innovation to ensure our solutions are best in class and are a catalyst for future growth. With over 1.5 billion people around the world suffering from sleep apnea, COPD and asthma combined, we see incredible opportunities for greater identification, enrolment and engagement of people with our digital health pathways. We are relentlessly driving innovation and development to provide the scale needed to expand the impact of this technology across the 140 countries that we operate in. Before I hand the call over to Brett for his remarks, I want to once again express my sincere gratitude for the more than 7,500 ResMedians for their perseverance, hard work and dedication during these most unusual circumstances these last 15 months. This team has helped save the lives, literally, of many hundreds of thousands of people around the world with ventilators, with these emergency needs. The team has now rapidly pivoted back to our core markets and our core purpose of helping people with sleep apnea, COPD and asthma and for 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 now hand the call over to Brett in Sydney and then we will move to Q&A. Brett, over to you.