Michael Farrell
Chief Executive Officer and Chair of the Board at ResMed
Thanks, Amy, and thank you to all of our shareholders for joining us today. Our first quarter fiscal year 2024 results reflect strong growth across our entire business with double-digit top line growth. This growth was driven by double-digit global growth in the masks category and double-digit growth in our software-as-a-service business.
We also achieved high single-digit global growth in devices even as that category annualizes very high growth in the prior year period. The flexible and agile work of our supply chain, manufacturing and distribution teams has enabled us to provide ongoing global availability of our market leading 100% cloud connectable flow generator platforms.
We have unconstrained supply of our AirSense platforms enabled by excellent volumes of the AirSense 10 platform globally, and fast-ramping approvals, launches and delivery of the best-in-class AirSense 11 platform country-by-country. During the quarter, we accelerated delivery of the AirSense 11 in Japan, and we launched the AirSense 11 in Australia and New Zealand. We have plenty of runway ahead on our pathway to launch in all of the 140 countries where we sell our solutions. We are very proud to be able to support all global demand for flow generators through a combination of AirSense 10 and AirSense 11 platforms. We remain laser-focused on accelerating the production and delivery of the AirSense 11 platform. We are moving swiftly on that front.
Our Masks and Accessories business grew 21% year-over-year, amongst a highly competitive market with all global players on the field in this category. Our commercial teams are doing an amazing job of showing the clinical and economic benefits of the ResMed mask portfolio. Our clinical and commercial teams are also partnering with physicians and provider customers to drive resupply programs directly with patients.
The peer-reviewed and published clinical evidence showing that adoption of a resupply program leads to better patient outcomes is proving itself out in a real-world customer-by-customer. We continue to see strong growth in the U.S. masks business where provider resupply programs can scale, powered by our digital health ecosystem, including AirView for physicians and providers and myAir for patients.
For patients around the world, especially in non-reimbursed markets, we are developing, launching and scaling outreach and subscription programs to help the consumer who is the ultimate customer to take control of their own health and engage directly in refreshing their mask, tubing, humidifier and other accessories. This has been a permanent uptick since COVID-19. People care about respiratory health and respiratory hygiene and they are taking action, and we are supporting them with digital solutions and services to meet their needs.
Before I turn to review updates on our key strategic priorities, I'd like to spend a little time discussing actions we've taken to accelerate profitable growth across ResMed and to power our long-term success. We've taken immediate steps to ensure we're prioritizing the right things to drive profitable growth, and our leadership teams have carefully reviewed opportunities to improve our performance.
We have stopped some projects that were not working out as well as we thought. We've increased investment in areas that we believe will be pivotal to long-term success, such as our digital health tech investments as well as focused hardware and software development. Creating the smallest, the quietest, the most comfortable, the most connected and the most intelligent healthcare solutions in the market. These changes have impacted some of our teams. And this week, we have taken actions that resulted in a reduction of our global workforce by 5%.Decisions like this that impact people are never easy, however, we know that we are doing the right thing, and we're doing the right thing to accelerate our growth and to refocus on our long-term mission. I feel more stronger than ever that we are well positioned with an incredibly long runway of profitable growth and value creation for all of our stakeholders as we move forward.
Let's now turn to a discussion of our three key strategic priorities. Number one, to grow and differentiate our core Sleep Apnea and Respiratory Care business. Number two, to design, develop and deliver market-leading medical technology as well as digital health solutions that can be scaled globally. And number three, to create, innovate and grow the world's best software solutions for care delivered outside the hospital, a feel that we call residential medicine.
There are over 2 billion people worldwide suffering from sleep apnea, chronic obstructive pulmonary disease, respiratory insufficiency due to neuromuscular disease and insomnia. There are millions more that we can support as they navigate the complex outside hospital healthcare system. We believe that healthcare should be delivered in the lowest cost, lowest acuity and highest comfort location possible. Very often, that is a patient's own home. We have a massive opportunity ahead of us to help 100s of millions of people worldwide. Our end markets remain incredibly underpenetrated with many opportunities to add value, reduce friction, lower costs and improve patient outcomes.
Now that we've been able to comfortably support overall global market demand for sleep devices for the last few quarters, we're ramping up our demand generation initiatives. We're investing in marketing efforts to raise awareness and patient engagement across specific global markets. We are leveraging traditional healthcare channels as well as investing in cost-effective direct-to-consumer demand gen campaigns to help what we call sleep concern consumers, find their way into the screening, diagnostic, treatment and management pathway. We will act as a digital concierge to guide patients on that journey.
In terms of analyzing the results of these efforts to-date and ongoing, we are tracking new patient starts in our physician and provider-based ecosystem, AirView, which now has more than 22.5 million patients, as well as the new user starts in myAir where patients themselves choose to participate in their personalized healthcare journey to better breathing and better sleep.
Patient flow into the funnel is at an all time high. We are well above the rates that we saw pre-COVID in 2019 across all geographies, triple-digits across the board. The bottom line is that we are driving strong growth of patients into the funnel. We believe the work that's being done in the pharmaceutical industry right now with obesity drugs will be a net positive for patient flow and patient growth in sleep apnea, COPD and for ResMed overall.
In terms of existing patients in our installed base, we are actively tracking a cohort of many thousands of patients on these GLP-1 medications and LPAT therapy. We are not seeing any significant change in the PAP adherence rates nor any reduced participation in resupply programs versus control groups. These data indicate that there is a cohort of patients on combined therapies in a stable state.
In terms of new patients activated into the funnel, we are seeing the number of new patients activated into the healthcare funnel picking up. We see patient flow is not only strong but increasing. We believe in treating the whole person here at ResMed, including a combination of cardiovascular exercise, diet and nutrition as well as good sleep and breathing. That combination was called the Triumvirate of health by Professor Bill Dement from Stanford, may he rest in peace. And we think a combination of these three elements will result in the best outcomes for patients. It is quite possible that this new class of drugs may become as large or even larger than the cholesterol class or the blood pressure treatment class of pharmaceuticals.
If this is the case, we will see a whole new population of patients activated with their primary care providers, that we may never have seen in the healthcare system. If this comes to pass, we may see benefits for the entire health system and for the people being treated themselves and for ResMed, as more and more people are evaluated and screened for sleep apnea, respiratory insufficiency and other key chronic conditions as part of their primary care evaluations. Our data are showing an all time high of patient flow and that supports this thesis.
Stepping back and looking at the science in the field of respiratory medicine, we have created a forward-looking epidemiology model for our core market sleep apnea, spanning over two to three decades into the future. We have assumed an aggressive case for high market penetration of this new class of pharmaceuticals. We will publish the epidemiology model in our investor deck straight after this call. The model starts using a baseline of the global prevalence of sleep apnea, which was 936 million people in 2015. And this is based on peer-reviewed and published data from the Journal Lancet in 2019. Our epidemiology model grows with conservative population and aging assumptions to a prevalence of around 1.4 billion people suffering from sleep apnea in 2050.
We then overlaid an aggressive assumption for the adoption of this new pharmaceutical class globally. We assumed some of the highest penetration rates that we have seen reported by analysts in the industry with this aggressive and sustained adoption of the new drug class, we forecast that the global prevalence of sleep apnea will still be around 1.2 billion people in 2050.
Now in terms of the market penetration of our PAP therapy into this population, we have assumed market growth from our 22.5 million patients with PAP therapy here at the end of calendar year 2023 using steady-state market growth rates that we saw in the years leading up to 2019. That is mid single-digit growth for devices and high single-digit growth for masks.
With these growth rates, we reached around 109 million patients on our PAP therapy by 2050. That leaves 1.1 billion people remaining addressable market in 2050. Over and above those already on our PAP treatment. We will continue to update our epidemiology model with all the new data as they arise. However, the bottom line is that there remains a huge number of people needing our sleep apnea treatment solutions today and for the next two to three decades and beyond.
While we're proud that we have peer reviewed and published data showing that we can achieve over 87% adherence of patients to our PAP technology, combining our best-in-class med tech hardware with our digital health solutions AirView and myAir. That still means 10% of our patients on an annual basis will need alternatives. We are investing in those alternative therapies, and we are actively working with direct to direct patients who do not adhere to pack that 10%-plus to second-line therapies, such as dental devices, where we have invested and scaled the market-leading 3D printed dental device for sleep apnea in Europe called Narval.
In addition, we have investments in other second-line therapies, including pharmaceuticals, and hypoglossal nerve stem technology. We want every patient who suffocates at night to find a path to good breathing and good sleep. And it looks like there's 1 billion of them we need to help. We start with the highest efficacy and lowest cost therapy, which is PAP technology, where we have very high adherence rates and the best outcomes for patients, and we go from there.
Given this incredible multiple decades long plus runway of growth and as part of our ongoing efforts to improve and streamline that end-to-end patient pathway and to make it easier for sleep physicians and sleep labs to diagnose and manage these patients. We're excited about our Somnoware acquisition that we closed during the last quarter.
Somnoware is software for pulmonary and really all sleep physicians. And it complements our current portfolio of software offerings for physicians, homecare providers and patients, including AirView, Brightree and myAir, respectively. The goal is to ultimately drive greater efficiency and better patient care by helping physicians to take best-in-class care of their patients with increased efficiency and a better overall experience for the doctor and for the patient. We're making progress across several digital health technology initiatives to drive the value proposition of our cloud-connected devices even higher. We are investing in several artificial intelligence-driven data products and capabilities in our Air Solutions ecosystem.
This quarter, we started rolling out a digital product in our U.S. market called Compliance Coach. Compliance Coach is built for home care providers to help them efficiently focus efforts and prioritize outreach to increase patient compliance and ultimately to drive better patient outcomes by helping them meet and beat 90 day adherence goals. The application utilizes ResMed's many billions of nights of deidentified sleep and respiratory care data in the cloud to predict the likelihood that a patient will be adherent to therapy or not. The AI product then advisers and coaches the home care provider to best identify the patients who may struggle and to meet compliance requirements where they can.
So they can prioritize their interventions and outreach to the best probabilities to support patient success. It's early in our rollout program of Compliance Coach. However, customers using the product are excited and engaged and are starting to see results. Watch this space for many more ways that we can work with all of our customers to unlock value from incredible depth of de-identified data using tech like AI and ML for the ultimate benefit of physicians, providers and patients.
Let me discuss the forward pathway stemming from our joint venture with Verily right now that was called Primasun. Based on a mutual agreement between ResMed and Verily, we've made the decision to unwind the joint venture's day-to-day operations. We expect this to be complete by the end of the current quarter. Over the past years of this partnership, we've learned how to leverage technology to better identify, engage, diagnose and manage sleep concern consumers in our U.S. market. We expect to take ownership of key assets of the Primasun developed model so that we can build on the investment and the learnings and ultimately accelerate our ongoing demand generation efforts with sleep apnea patients across ResMed.
It is exciting to take the learning from demand gen work in one project and in one country and to now look to apply that on a global scale across the 140 countries where we provide solutions. Our growing Respiratory Care business continues to be supported by the increased adoption of both non-invasive and life support ventilator solutions in terms of next-gen respiratory care therapies.
We continue to invest in clinical and economic trials for high-flow therapy, we call HFT, with the goal of cost effectively treating COPD in the home. We continue to generate strong clinical evidence and economic outcomes that we believe will support broader adoption of these technology innovations for treating lung disease in the home. We believe this has the potential for future growth for ResMed over the medium to long-term.
We remain focused on addressing COPD as one of the top three chronic diseases for hospitalization and the number one cause of rehospitalization. The prevalence of respiratory insufficiency due to COPD as well as neuromuscular disease continues to increase and we are focusing and developing and plan to offer low-cost, high-quality solutions to address this healthcare epidemic.
Our SaaS business had another great quarter with year-over-year growth of 32%. SaaS business growth was powered by another full quarter contribution from our fast-growing MEDIFOX DAN business in Germany, as well as high single-digit organic growth across our Brightree and MatrixCare brands in the U.S. market. The sustained high single-digit organic growth in our SaaS business is driven by strength in the HME segment and stability as well as increased tech adoption by customers in the facilities segment.
We see a pathway to stable double-digit organic growth across the SaaS business, as well as increased net operating profit performance from this part of our business. The ongoing synergies between our digital health solutions in SaaS and our core business remains strong, and we continue to leverage that through combined management of cloud compute, cyber security, interoperability, tech dev as well as customer-facing synergies, including patient resupply technology in our core business.
During the quarter, we appointed Gregg Timmons as the new General Manager of our Brightree business. I'm excited to support Gregg and Bobby to continue to drive growth in our home medical equipment providers and to help our customers across the U.S. market. This quarter, I traveled to Hildesheim, Germany to meet in person with the entire team from our MEDIFOX DAN business.
The growth in tech solutions for ambulant home nursing as well as stationary nursing home businesses is very strong in Germany. With an aging population in that country and a government that is driving care to be more home-based through their policies and more digital through their policies, we see a long runway for growth with our MEDIFOX DAN team and across our global Software-as-a-Service business.
Our SaaS business remains an integral part of ResMed's growth strategy. This business complements the market-leading software and device solutions we have in our respiratory medicine business and we are well positioned as the leading global strategic provider of SaaS solutions for residential medicine globally. And we have created differentiated value for customers and will drive long-term sustainable growth for our shareholders.
Before we get into a detailed update on our financials, let me say this here at ResMed. We are transforming respiratory medicine and residential medicine at scale. We are leading the market in digital health technology across our markets. As we continue to scale and drive efficiencies in our operations, we will leverage appropriate pricing and cost reductions to drive profitable growth. We're focused on driving top line revenue and tight cost discipline as well as increased efficiencies so that we can accelerate profitability, delivering value for all of our stakeholders and especially the 2 billion patients plus worldwide who need our help.
As we move through fiscal year 2024, I'm confident and laser focused that we will continue to see improvements in our gross margin with GM leverage programs focused on five key areas. Number one, to drive the launch of AirSense 11 into new global markets and to increase the availability of AirSense 11 ultimately in all the country markets that we serve.
Number two, to drive ongoing strong mask growth with a combination of resupply programs, subscription programs and new product launches. And you can see that's working this quarter. Number three, to increase software solutions growth moving from high single-digit organic growth to double-digit organic growth with increased net operating profit leverage in that segment. Number four, to move the higher cost components and freight costs that we've seen through our legacy through our P&L.
Turning what was a supply chain crisis headwind into a steady tailwind as we move through fiscal year 2024, and number five, to implement cost reduction actions in non-core areas of our business to free up cash and to accelerate investments in market-leading med tech and digital health solutions. So in terms of Digital Health Investments and Solutions, we now have over 16 billion nights of de-identified medical data in the cloud and over 22.5 million 100% cloud connectable medical devices sold in more than 140 countries worldwide. We continue to lead the industry in digital health technology, and we don't plan to stop anytime soon. There is so much opportunity ahead of us. ResMed's mission and key goal remain crystal clear to improve 250 million lives through better residential healthcare in 2025.
This patient-centric mission drives and motivates ResMedians every day. During the last 12 months, we have improved over 165 million lives with the delivery of a medical device directly to a patient, a complete mask system to a patient or a digital health software solution, helping each person to sleep better, to breathe better and to live high quality lives with best-in-class healthcare delivered right where they live. I'm very excited about the opportunities in front of us.
In closing, I want to express my sincere gratitude to the 10,000 ResMedians for their perseverance, their hard work, their dedication, both today and every day. Thank you.
With that, I'll hand the call over to Brett in Sydney. And after Brett's remarks, we will open up for Q&A from the entire group. Brett, over to you.
