ResMed Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 24, 2024

There are 11 speakers on the call.

Operator

Hello, and welcome to the ResMed Second Quarter Fiscal Year 20 24 Earnings Conference Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Chief Investor Relations Officer, Amy Wakeham. Please go ahead, Amy.

Speaker 1

Great. Thank you, Kevin. Hi, everyone, and welcome to ResMed's 2nd quarter earnings call for fiscal year 2024. We are live webcasting this call and the replay will be available on the Investor Relations section of our corporate website later today, Along with a copy of the earnings press release and presentation, both of these are now available. During today's call, we will discuss several non GAAP measures that we believe provide useful information for investors.

Speaker 1

This information is not intended to be considered in isolation or as a substitute for the GAAP financial information. We encourage you to review the supporting schedules in today's earnings press release for a reconciliation of these non GAAP measures to the GAAP reported numbers. In addition to our discussion today, it will include forward looking statements, including, but not limited to, expectations about our future financial and operating performance. We make these statements based on reasonable assumptions. However, our actual results could differ.

Speaker 1

Please review our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially from any forward looking statements made today. I'll now turn our call over to ResMed's CEO, Mick Farrell.

Speaker 2

Thanks, Amy, and thank you to all of our shareholders for joining us today. Our Q2 fiscal year 2024 results reflect strong execution across our entire business driving double digit top and bottom line growth. These results are a testament to the incredible efforts of the global ResMed team. Our results were driven by double digit global growth in both devices and our software as a service business together with high single digit global growth in our masks and accessories business, holding our leading market share amongst high comps from the same quarter a year ago. In terms of bottom line leverage, our reorganization efforts and efficiency efforts in the quarter have set us on a clear trajectory of profitable growth.

Speaker 2

Taking a step back, All 10,000 ResMedians are energized about the opportunities in front of us. There are over 2,000,000,000 people worldwide suffering from sleep apnea, chronic obstructive pulmonary disease, respiratory insufficiency due to neuromuscular disease or insomnia. These chronic conditions form a healthcare epidemic in which ResMed is uniquely positioned to help. 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.

Speaker 2

Our end markets remain underpenetrated with many opportunities to add value, reduce friction, lower costs and improve patient outcomes. We support 100 of millions of people as they take control of their healthcare journey and navigate the complex healthcare world outside the hospital system. ResMed is the global leader in digital health solutions With over 17,000,000,000 nights of medical data in the cloud and over 23,500,000,100 percent cloud connectable medical devices sold into over 140 countries worldwide. We are the clear market leader in sleep apnea, a huge and growing market with Over 1,000,000,000 people impacted globally. Our category leading flow generator platforms grew 11% year over year.

Speaker 2

We have achieved and are maintaining supply of our 2 100 percent connectable AirSense platforms with unconstrained supply of the AirSense 10 form globally. Every quarter we continue to gain regulatory approvals to launch and to increase delivery volumes of the best in class AirSense 11 platform on our pathway to support more and more patients worldwide. Our commercial teams demonstrating the clinical and economic benefits of the ResMed Mask portfolio. During the quarter, our masks and accessories business grew 9% year over year in a highly competitive market, maintaining good market share with all players in the field in this category globally. We are excited to have achieved regulatory and reimbursement approval for our latest and greatest mask innovation and we look forward to bringing this technology to market soon.

Speaker 2

I've personally worn this new mask and our test data show not just n equals 1 from the CEO that it is highly favored by physicians, respiratory therapists and especially the most important customer, our patients. In terms of maintaining our momentum of mask and accessory growth, our clinical and commercial teams continue to partner with physicians and providers to drive resupply programs directly with their patients. Peer reviewed and published clinical evidence shows that using resupply programs leads to better patient adherence and to better patient outcomes. This is proving out in the real world customer by customer. We continue to see strong growth in the U.

Speaker 2

S. Mask and accessories business Where resupply programs are powered by our digital health ecosystem including AirView for physicians, Brightree for home care medical equipment providers and MyAir for patients. Outside the U. S. We are focused on developing, launching and scaling our direct outreach and subscription programs To help consumers take control of their own health and engage directly in refreshing their own mask, their own tubing, their own humidifier and other accessories.

Speaker 2

The importance of respiratory health and respiratory hygiene in the eyes of consumers has seen a permanent uptick Since 4 years ago when the COVID-nineteen epidemic started, we're supporting our customers with digital solutions and services to meet their needs and to ensure they have clean and fresh equipment to best treat their sleep suffocation and improve their health. Before I review updates on our key strategic priorities, I'd like to discuss recent actions we have taken to accelerate profitable growth across ResMed and to power our long term success. Last quarter, I discussed the steps we've taken to ensure that we can refocus and drive even more profitable growth. We stopped some projects that were not working out and we increased investment in areas that will be pivotal to our long term success including our digital health technology investments as well as focused device platform and mask technology development. We have introduced a new operating model centered on making ResMed even more product led, even more customer centric and even more brand enhanced.

Speaker 2

We will measure the success of this new 2,030 operating model by an increase in the velocity of new product innovation as well as enhanced value in the ResMed brand, while accelerating profitable growth. As the founder of ResMed States, innovation is not just invention of a great new technology is when a customer loves it, adopts it and chooses to pay for it. We have an incredible legacy and an exciting product pipeline to bring to market. Let's now turn to a discussion of our 3 key strategic priorities. Number 1 is to grow and differentiate our core sleep health and breathing health business.

Speaker 2

Number 2 is to design and develop and deliver market leading medtech and digital health solutions that can be scaled in 140 countries plus worldwide. Number 3 is to create and leverage the world's best Software solutions for care delivered outside the hospital and preferably in the home. In terms of addressing strategic priority number 1, As the world's clear leader in the field of sleep apnea and breathing health, we're laser focused in 2024 on ramping up our demand generation initiatives. We're raising awareness and creating pathways for patients to find access to care for sleep suffocation across specific global markets. We are leveraging traditional health care channels and investing in cost effective social media driven demand generation campaigns to help consumers who are concerned about their own sleep and breathing to find their way into screening, diagnostic, treatment and management pathways.

Speaker 2

Our goal is to provide a digital Healthcare Concierge Service to help guide people on that journey. We are tracking new patient starts in our physician and provider based ecosystem, which now contains more than 26,000,000 patient records as well as the new user starts in MyAir, which is a patient app where patients choose to participate in their own personalized health care journey to better sleep and better breathing. Our goal is to cost effectively drive more and more of the over 1,000,000,000 people worldwide who need our help into the channel. There are 2 megatrends that can have an influence on increasing that patient flow. 1 from big consumer tech and one from Big Pharma.

Speaker 2

Let me talk briefly about each of these megatrends. Many of the big consumer tech companies are increasing their focus on the area of sleep wellness. Apple has sleep wellness tracking built into its latest generation Apple Watch and has plans to enhance that capability with further sleep quality assessment. Google's Fitbit division has sleep wellness tracking built into its Whoop is doing the same. Samsung have not only built sleep wellness tracking into its latest operating but is helping to define sleep personas to help consumers better understand the 30% of their lives they spend In the state of sleep.

Speaker 2

We love this attention on the field of sleep wellness and many of these technologies will help each person find out if they have issues with sleep architecture, issues with breathing during sleep or issues maintaining high quality sleep. This could be one of the biggest waves of people taking control of their own pathway discovering they have sleep apnea or they have insomnia or maybe they have both, a state that is called COMESA for comorbid insomnia and sleep apnea. Ultimately, this will lead to increasing patient growth for ResMed overall. Now our goal is to best educate the person as they move from sleep wellness tracking to sleep health tracking and from consumer awareness Into a true healthcare pathway for screening, diagnosis, treatment and ongoing management of their chronic condition. ResMed plans to be there with the person through that entire journey.

Speaker 2

In terms of the impact of megatrends from big pharma, The current focus is squarely on GLP-one medications. Let me take some time to address what we are seeing in the market with patients on latest generation GLP-one therapies and positive airway pressure therapy. We're tracking a cohort of over half a 1000000 patients with prescriptions for both GLP-one medications and positive airway pressure therapy. These data are included in our investor deck, so You can review them there on our website, but I'll briefly summarize what we have observed. Around 6 months ago, there was a thought amongst some in the market That patients on GLP-one medications would be less likely to start positive airway pressure therapy.

Speaker 2

We stated at the time and still do that this was not likely the case as important risk factors such as craniofacial geometry, gender, Age and the basic physics and anatomy of the upper railway would remain unchanged despite this new pharmaceutical therapy option. Still, the theory remained. So now we have real world data and real world evidence at scale. Our analysis of over 529,000 patients with GLP-one prescriptions shows that not only is there not a reduction in the propensity to start positive airway pressure therapy, it is the exact opposite. For patients who have been prescribed a GLP-one, there is an increase of 10% of the Absolute percentage of patients that commence positive airway pressure therapy.

Speaker 2

So as an example, if you take a baseline of 75% of patients that commence PAP therapy after their prescription on average in a certain group. That would become 85% of those same patients who were on a GLP-one that would commence positive airway pressure therapy. And by the way, the vast, vast majority of these GLP-1s are the latest generation medications. Another hypothesis About 6 months ago was that patients on GLP-one therapy and PAP therapy would quit their PAP therapy, their CPAP or their APAP at a higher rate than the general population over time. The real world data again with a cohort of over 500,000 patients shows the exact opposite.

Speaker 2

At T equals 12 months after therapy commencement on PAP, the delta From general PAP population to a PAP plus GLP-one prescribed population shows an increase in the resupply rate of 300 basis points. So again, as an example, if the general population resupply rate at 12 months was say 70%, It would then become 73% for the population that was prescribed both PAP and GLP-one therapy. This delta actually increases over time going further with the delta from the general population receiving re supply at 12 months being 500 basis points higher for population prescribed both PAP and GLP-1s. Here at ResMed, we believe in treating the whole person, including the combination of what Professor Bill DeMent, one of the exercise 2, balanced diet and nutrition and 3, good sleep and breathing. We believe that addressing all three aspects results in the best patient outcomes.

Speaker 2

In terms of best in class treatment for sleep apnea, Achieving that goal of good sleep and good breathing, we have peer reviewed and published research demonstrating that we can achieve over 87% of patients adherent to our PAP technology by combining our market leading device platforms with digital health solutions including AirView for physicians and MyAir for patients. Even with this best in class global technology, we still have more than 10% Patients that need alternatives. We just can't get them adherent those 10%. We're investing in these alternative therapies And we are working to help patients who do not adhere to positive airway pressure to find their path to second tier therapies such as dental devices where ResMed has invested and scaled the market leading 3 d printed dental device for sleep apnea in Europe called NAVAL. In addition, we have investments in other 3rd tier therapies including pharmaceutical agents with our APNI Med investment as well as hypoglossal nerve stimulation technology with our Nexoah investment.

Speaker 2

ResMed stands for respiratory medicine Not CPAP company and we want to take care of the patient. We obviously start with the lowest cost highest efficacy therapies including CPAP, APAP and bilevel therapies and we then work through the alternatives to help the person sleep better and breathe better. The bottom line is this, a huge number of people need our sleep apnea treatment solutions today and for the next decade, 2 decades, 3 decades and beyond. We want every patient to find a path to good breathing and good sleep. Let's pivot for a moment to talk about our digital health technology investments, leveraging the 17,000,000,000 nights of de identified medical data and the 23,500,000, 100 percent cloud connectable devices in our ecosystem.

Speaker 2

We are investing in several artificial intelligence driven data products and capabilities in that ecosystem that we call our solutions. We're continuing to roll out one publicly we're talking about which is called Compliance Coach to customers in the U. S. Market In a controlled market launch, Compliance Coach is a solution that helps home medical equipment providers to prioritize both digital and personal outreach to improve patient compliance and drive better patient outcomes at a lower cost. Compliance Coach models and predicts the likelihood that a A particular patient will or will not adhere to therapy based on algorithms built on billions of data points.

Speaker 2

The AI product then identifies for the HME provider the key patients who may struggle to meet compliance requirements and takes a step further to drive digital and or human actions to maximize the probability of adherence across the group. Customers using the product in its initial launch are excited and are starting to see very positive results across their business and for their patients. One final update on AI technology for this quarter. We recently launched an in market trial of a ResMed developed generative AI product that serves as a digital concierge to help a group of people that we call sleep concerned consumers To best navigate as they search for their sleep related information and they ask questions about their sleep wellness and potential treatment options. This generative AI tool helps the person identify, engage and enroll on their personal journey to better sleep and better breathing.

Speaker 2

We're currently beta test marking this product Asia Pacific and we will look to scale globally over time. Our goal is to develop and scale this digital sleep concierge, so that all those seeking better sleep and better breathing can find their personal pathway for the best outcome, the best treatment and the best long term care. Our respiratory health business continues to be supported by sustained activity across our non invasive ventilator platforms as well as our life support ventilator platforms. We continue to invest in clinical and economic trials for high flow therapy that we call HFT to even more cost effectively treat COPD in the home. As we develop these next generation therapies, we will generate strong clinical evidence and economic outcomes that will support broader adoption of these innovations for treating respiratory conditions at home.

Speaker 2

The prevalence of respiratory insufficiency due to COPD as well as neuromuscular continues to increase and we offer low cost high quality treatments to help address this health care epidemic. Turning to our Residential Care Software as a Service business. We had another great quarter with year over year growth of 24%. Organic growth of our SaaS business was solid across our Brightree and our MatrixCare brands with another full quarter contribution from our Medifox DAN brand in Germany. Ongoing customer facing synergies between our Brightree offering in the U.

Speaker 2

S. And our home medical equipment resupply revenue remains very strong driving good growth across both our SaaS business and our core sleep health business. We expect to have sustainable organic growth across our portfolio of SaaS solutions in Home Medical Equipment, Home Health, Home Nursing and beyond to be in the high single digits as we continue through this fiscal year and to achieve stable double digit organic growth through fiscal year 2025 and beyond. We continue to drive operating expense leverage through management of our capabilities for cloud compute, capabilities for cybersecurity, interoperability and technology development. And we plan to accelerate net operating profit across our SaaS portfolio and across the entire ResMed business.

Speaker 2

Our Residential Care SaaS business remains an integral part of ResMed's growth strategy. This business complements the market leading software and the market leading device solutions that we have in our sleep health and breathing health business And we are well positioned as the leading global strategic provider of SaaS Solutions for Residential Care. We are transforming respiratory medicine and residential care at scale. We are leading the industry in developing, applying and adopting digital health technology Across our markets, we continue to scale and drive efficiencies in our operations. We're focused on driving top line revenue growth, focused cost discipline and increased efficiencies to accelerate profitability.

Speaker 2

We've created differentiated products and solutions for customers worldwide driving long value for our shareholders. We lead the industry in digital health technology with the smallest, quietest, Most comfortable, most connected and most intelligent solutions and we don't plan to stop innovating anytime soon. We invest around 7% of our revenues Straight back into market leading research and development. ResMed's mission remains crystal clear to improve 250,000,000 lives through better residential healthcare in 2025. This patient centric mission motivates me and ResMedians every day.

Speaker 2

During the last 12 months, we have improved over 170,000,000 lives by delivering a medical device directly to a patient or a complete mask system to a patient or a digital health software solution that provides personal care for a patient. We've helped each person to sleep better, to breathe better or to live higher quality lives with best in class healthcare delivered right where they live. I'm very excited about the opportunities in front of us and the pipeline we have ahead. In closing, I want to express my sincere gratitude to the more than 10,000 West Medians for their Perseverance, their hard work and dedication today and every day. Thank you.

Speaker 2

With that, I'll hand the call over to Brett in Sydney for his remarks And then we'll open up to Q and A for Brett and me and the team. Over to you, Brett.

Speaker 3

Great. Thanks, Mick. In my remarks today, I will provide an overview of our results for the Q2 of fiscal year 2024. Unless noted, all comparisons are to the prior quarter and in constant currency terms where applicable. We had strong financial performance in Q2.

Speaker 3

Group revenue for the December quarter was 1,160,000,000 a 12% headline increase and 11% in constant currency terms. Revenue growth reflects the ongoing combined availability of AirSense 10 and AirSense 11 devices to support solid underlying global demand and continued growth across our mask product portfolio. Year over year movements in foreign currencies positively impacted revenue by approximately $11,000,000 in the December quarter. Looking at our geographic revenue distribution and excluding revenue from our Software as a Service business, sales in U. S, Canada and Latin America countries increased by 9%.

Speaker 3

Sales in Europe, Asia and other markets increased by 12%. Globally, device sales increased by 11%, while masks and other sales by 9%. Breaking it down by regional areas, device sales in the U. S, Canada and Latin America increased by 7%. Masks and other sales increased by 10%, reflecting growth in resupply and new patient setups.

Speaker 3

In Europe, Asia and other markets, Device sales increased by 16%, again reflecting strong demand and significantly improved availability of cloud connected devices. Masks and other sales increased by 4%, reflecting the impact of a strong prior year comparable growth rate. Software as a Service revenue increased by 24% in the December quarter, reflecting the contribution from Amity Fox Down acquisition and continued strong performance from our HME vertical. Excluding our Medifox Dan acquisition, SaaS revenue grew by 10% in the December quarter. Medifox Dan contributed revenue of $28,000,000 in the December quarter, consistent with our expectations at the time of the acquisition.

Speaker 3

Note, as we have now passed the 1st year anniversary of our Medifox Dan acquisition, our future SaaS revenue year over year will reflect organic growth. During the rest of my commentary today, I will be referring to non GAAP numbers. We have provided a full reconciliation of the non GAAP to GAAP numbers in our Q2 earnings press release. Gross margin increased by 10 basis points to 56.9% in the December quarter. The increase primarily reflects a decrease in freight costs, an increase in average selling prices and favorable foreign currency movements.

Speaker 3

The benefits are partially offset by unfavorable product mix. Sequential gross margin increased by 90 basis points, primarily driven by a reduction in freight costs an increase in average selling prices for our devices, partially offset by unfavorable product mix. We remain confident of a positive gross margin trajectory. Like many companies, we are monitoring potential headwinds that could arise from the Middle East conflict. Disruptions in the Red Sea will likely increase sea freight costs and shipping lead times.

Speaker 3

We're closely tracking the situation and taking action to mitigate potential impacts where we can. Moving on to operating expenses. SG and A expenses for the 2nd quarter increased by 4%. The increase was predominantly attributable to increases in employee related costs. SG and A expenses as a percentage of revenue to 19.1% compared to 20.5% in the prior year period and reflects savings and cost discipline following specific taken early in the December quarter.

Speaker 3

Looking forward and subsequent to the currency movements, we expect SG and A as a percentage of revenue to be in the range of 18% to 20% for the second half of fiscal year twenty twenty four. This guidance reflects the impact of our restructuring activities that resulted in a reduction in our workforce of approximately 5% during the quarter. R and D expenses for the quarter increased by 6%. R and D expenses as a percentage of revenue was 6.4% compared to the 0.8% in the prior year period. Looking forward and subject to currency movements, we expect R and D expenses as a percentage of revenue to be in the range of 6% to 7% for the second half of fiscal year twenty twenty four.

Speaker 3

Operating profit for the quarter increased by 20%, underpinned by strong revenue growth modest growth in our operating expenses. Following the acquisition of Medifox Dan, our net interest expense for the quarter was $14,000,000 and as we continue to pay down debt, we expect interest expense to be in the range of $10,000,000 to $12,000,000 per quarter in the second half of fiscal year twenty twenty four. Our effective tax rate for the December quarter was 20.7% compared to 18.3% in the prior year quarter. The increase in our effective tax rate was primarily due to a significant reduction in the tax benefits associated with employee equity compensation this quarter compared to the prior year quarter. We continue to estimate our effective tax rate for fiscal year 'twenty four will be in the range of 19% to 21%.

Speaker 3

Our net income for the December quarter increased by 13% and non GAAP diluted earnings per share also increased by 13%. During the quarter, we recorded $64,200,000 of restructuring related charges following an evaluation of our existing operations and actions undertaken to improve operational efficiency and increase profitability. Restructuring charges included $28,600,000 of employee severance and other one time termination benefits, dollars 33,200,000 of intangible asset impairments associated with the wind down of certain business activities and $2,400,000 of other asset impairments. The restructure charge has been treated as a non GAAP item in our Q2 financial results. During the quarter, we also recorded a provision of $6,400,000 for expected costs associated with the recently announced masks with magnets field safety notification.

Speaker 3

This expense has been treated as a non GAAP item in our Q2 financial results. Cash flow from operations for the quarter was 273,000,000 reflecting solid underlying earnings and relatively stable working capital balances. Capital expenditure for the quarter was 23,000,000 Depreciation and amortization for the quarter totaled $45,000,000 We ended the 2nd quarter with a cash balance of 210,000,000 On December 31, we had $1,200,000,000 in gross debt and $1,000,000,000 in net debt. During the quarter, we reduced our debt by 130,000,000 On December 31, we had approximately $955,000,000 available for drawdown under our revolver facility, and we continue to maintain a solid liquidity position. Today, our Board of Directors declared a quarterly dividend of $0.48 per share.

Speaker 3

As we advised last quarter, as part of our capital management activities, we resumed our previously authorized share buyback program in the December quarter. We purchased 335,000 shares for consideration of $50,000,000 We intend to continue to purchase approximately $50,000,000 per quarter in the second half of year 2024. This will more than offset any dilution from the vesting of equity to employees during the year. Going forward, we plan to continue to reinvest in growth through R and D, pay down outstanding debt and deploy further capital for tuck in acquisitions. And with that, I'll hand the call back to Amy.

Speaker 1

Great. Thank you, Brett, and thank you, Mick. Let's go ahead and turn to the Q and A portion of our call. Kevin, I'd like to turn it over to you to provide the instructions and then run this part of the call.

Operator

Certainly. We will now be conducting a question and answer Our first question today is coming from Margaret Andrew from William Blair. Your line is now live. We do ask you to limit yourself to one question, please.

Speaker 4

Great. Thank you very much and good afternoon, good morning to everyone on the call. I wanted to maybe follow-up on your comments on JL Q1 even more so in the quarter. And I look at that 10% greater likelihood of folks starting CPAP when you're on a GLP, it seems like it could have a pretty meaningful impact growth. And again, I'm looking at it to say, if you're going from 75 patient new starts in a given period to 85, That's a 13% bigger market every year.

Speaker 4

So I guess conceptually, is that something that you agree with? Would it have a greater or less benefit impact if Trend continues and I guess any comments on a real impact that's over the next 3 years as GLP adoption grows? Thanks.

Speaker 2

Yes, Margaret, look, it's a great question. And as a biomedical engineer, I look at this and I don't know causality, I just know the correlation. And so we've now got data, the 529,000 data points that show that there's a 10% higher propensity to start PAP therapy, if you prescribe the GLP-one before and then you get the PAP therapy, 10 absolute percentage points of the cohort will start PAP therapy. My thought is that this is a more motivated patient, a more Engage patient in the healthcare system and they've been brought in by this new therapeutic tool. And so I do think that it will lead to greater growth.

Speaker 2

This megatrend of GLP-1s will lead to greater growth of patients coming into Our treatment pool over time and certainly the data are showing that with that cohort of patients. Yes, your quick math there of an increase I think is that if there's full penetration across the whole patient cohort and full adoption, there'll be ones across every patient coming through. Of course, that's I think realistically as we see these pretty fast rollout of this new pharmaceutical class, we will start see more patients coming to the healthcare system. Everyone is seeing that across medtech and across healthcare. They are more engaged and they do seem to be Getting prescriptions for many different chronic diseases, sleep apnea is not an exception and we've got probably one of the highest number of patients in that cohort of over 500,000 patients we're tracking.

Speaker 2

And of course we've got 26,000,000 patients in our database. So this is a minority of patients that we're seeing on these. But it is interesting within that cohort to see a higher Participation rate. Look, our goal will be to leverage that megatrend and to make sure that ResMed is there with the best Tools for screening, diagnosis, treatment and management. And we've done that over decades and we plan to do it ahead.

Speaker 2

I think maybe the consumer Big tech trend of sleep wellness tracking might be slightly higher in its impact over time, maybe not as quick adoption, But these sleep wellness tools coming across all consumer tech applications is incredibly exciting. ResMed's goal is here to leverage this demand gen that's coming to us From big pharma and big consumer tech, but then more importantly to get that personalized health journey, so that ResMed can be truly The concierge for that person as they find their path to better sleep and better health. So we do expect these trends to be positive. They won't be immediate. And our job is to drive it over time.

Operator

Thank you. Next question is coming from Anthony Petrone from Mizuho Group. Your line is now live.

Speaker 5

Thank you for taking my questions. Congrats on a good quarter here. Maybe Mikkel, stay on GLP-1s. We're getting a lot of attention turning toward the Eli Lilly surmount OSA study and maybe the KPIs that you're looking for in that study, how relevant do you think the primary endpoint is? Are there other secondary endpoints that are more important?

Speaker 5

And do you think over time you can collaborate with Lilly to drive the effort of using CPAP with a GLP-one? Thanks.

Speaker 2

Yes. Thanks for the question, Anthony. And it's a really pertinent Certainly, we're watching this amount OSA trial. It's a pretty small trial. It's less than 500 patients, 500 patients, 600 patients, I believe.

Speaker 2

So it's not Sort of the order of the real world evidence, real world data that we have like 500,000 patients we're talking about there. But I think it will be very interesting to see The presumption is given, it's the same biochemical compound as in other trials used for diabetes treatment and weight loss that it will have somewhere in the order of 10%, 20%, maybe even 30% weight loss reduction in this cohort. So that's a metric that's sort of well known from prior studies. The best evidence from the primary investigator on this, Professor Atul Malhotra From University of California San Diego, his assessment is that that should lead to pretty significant AHI reductions in the treatment cohort placebo maybe in the order of 50% to 60%, maybe even 65% AHI reductions in the cohort of these quite high BMI and quite high AHI patients. If you listen to a great podcast between Professor Malhotra And Doctor.

Speaker 2

Carlos Nunez, our Chief Medical Officer, which are available on our websites, when you get a spare 45 minutes, but there are some cliff notes that I think worth sharing here in this investor call is that Professor Malhotra was asked, What's the best therapy to treat sleep apnea? Is it A, weight loss or is it B, CPAP? And he said, well, that's a false dichotomy, this question. It's a false competition. It's A plus B.

Speaker 2

It has been for decades and will be for decades in the future. And as a PI on that study, he says, look, we have a new pharmaceutical agent that's going to help with treatment A. And of course that will be used in combination with treatment B. So the PI in the study is saying that he thinks the combination treatment of A weight loss medication similar to prior work in bariatric surgery that had much higher weight loss numbers or diet and exercise that Had all the variance that we've seen over decades of different methodologies there. But this one does seem to be a good agent for treatment A.

Speaker 2

And then we'll be need to be combined with treatment B to fully treat the sleep suffocation that the patients will have. So don't trust me The company that makes the therapeutic trust the primary investigator that's saying combination treatment has worked for decades and will work for decades. I would expect that to be the outcome of the trial. And yes, in terms of working with big pharma on this, I think they're very focused on other areas like obesity and diabetes. But as much as we can get their attention to talk about sleep and sleep health and to do their D2P advertising to talk about the importance of I think combined with the Apples and the Samsungs and the Googles of the world talking about it, it will be a huge positive for us in the sleep apnea treatment industry.

Operator

Next question is coming from Mike Matson from Needham and Company. Your line is now live.

Speaker 3

Yes. Thanks for taking my question. I guess I'll just ask one on Philips. So I think they've talked about relaunching their flow generators in some of the OUS markets. Just curious what you're seeing there?

Speaker 3

Have you seen that happening? And have they been able to recapture share anywhere? Thanks.

Speaker 2

Yes. Thanks for the question, Mike. And yes, certainly in tens of countries in Europe and Asia, We are in full competition with all the global players including the company you mentioned and the large regionals from Europe and from Asia and have been for many quarters. So they've come back in masks and devices across tens of countries in Europe and Asia. And their goal there when they come back, if they've been out for a year or 2, depending on the time they're out of each market is fight their way from the bottom.

Speaker 2

They've got 0% new patient start share when they first come back in and they're trying to fight their way up. And in general, they've had to fight against the number 2, the number 3, the number 4 player who don't have like ResMed has the leading technology, the best AirSense platform, right? The AirSense 11 globally is the best platform in all 140 countries. The 2nd best platform in I'd say all 140 countries is the Essence 10 platform. So their goal is to then fight against regional player from Europe with the number 3 or regional player from Asia the number 4 in the countries that they're coming back.

Speaker 2

And so we're seeing that country by country, we're seeing them fight for that share at the low end. It's Our focus as the market leader is on growing the market. And I think they're a fair competitor. We've competed against them for Decades since they bought Respironics and in general, we've won and taken share. We were winning and taking share from them in 2019.

Speaker 2

We're winning and taking share from them in 2023 2024 as they come back country by country. And if and when they come back to the U. S. Market in devices, By the way, they're already here on masks, never left and we've been competing and beating them there. I look forward to them coming back to the U.

Speaker 2

S. Market, so we can get any stock overhang away about what's it going to look like, What it's going to look like is what it looked like in all the other tens of countries where they fight for share from the bottom and work their way up. And I look forward to competition, healthy competition and we seem to do very well in it because we've got the smallest, quietest, most comfortable, most connected Most intelligent solutions and it's really about that. It's about the value provide getting that patient to the right care, lowering the cost, improving adherence and we've done a great job and I like all global competition in the space.

Operator

Thank you. Our next question is coming from Suraj Kalia from Oppenheimer. Your line is now live.

Speaker 6

Hey, Mick, can you hear me all right?

Speaker 2

Got you loud and clear, Suraj.

Speaker 6

Congrats on the nice quarter. So, Mike, in the 2030 operating model, right, if I got your commentary right, ResMed brand and profitability, velocity of product intro, Some of these things that you highlighted, I guess, where does compliance coach fit within the 2,030 strategic model? More specifically, I'm just trying to understand how do you measure the ROI in the compliance coach? And I presume this is going to be a primarily reactive AI model, any additional clarity would be great. Thanks.

Speaker 2

Well, thanks Suraj. I could spend the rest of the time That call around the 2,030 operating model, I'll just briefly talk about it and then talk specifically about Compliance Coach. Our 2,030 operating model, yes, it's the 3 tenants, right. The 3 tenets are product led, customer centric, brand enhanced. ResMed has always been product led, but now we have A Global Chief Product Officer whose sole role is to curate that product portfolio with an amazing team of hundreds of engineers and marketeers to bring that great innovation to market.

Speaker 2

So we'll measure the success on that on product velocity. How quickly do we bring innovation to market, time to market, time to success. Customer centric, we've always been customer centric, but we haven't always done the best job of analyzing the net promoter scores of patients, Net Promoter Scores of Physicians, Home Care Providers, physician payer providers and so on. So really understanding the marketing metrics around that and having our 1st Chief Marketing sit at the top table and really be laser focused on those NPS scores and driving them up and really valuing the multi $1,000,000,000 ResMed brand and enhancing that over time. And the 3rd part around focusing on profitable growth and driving that leverage with our 1st Chief Revenue Officer, it's really around that Profitable growth.

Speaker 2

And if the title was used broadly, I would call it the Chief Profitable Growth Officer rather than Chief Revenue Officer. But really, around keeping that discipline on the great growth we've had on the top line, but ensuring we get that leverage through OpEx, R and D and Particularly on SG and A in the new world to do things differently with tech. And that segues into the second part of your question, compliance coach. Yes, look, this is a great AI tool. By the way, it's not generative AI compliance coach.

Speaker 2

The other one that we launched in Asia Pacific, the Digital Concierge is generative AI and has that extra capability. Compliance coaches is garden variety what would have been called machine learning is artificial intelligence, it's a great algorithm and it's out there. The measure of that one success on that one, Suraj, is does it lower the cost to serve at that HME or with the same labor force of respiratory therapists and pulmonary doctors can they serve more patients. So lower cost, higher efficiency And really the key metric is what's the adherence rate at day 90, day 365, year 2, year 3 in that patient cohort that's gone through compliance coach? Is it statistically and significantly higher than what that customer was getting before?

Speaker 2

If they're a best in class ResMed customer getting 87% adherence at day 90, Does it go up to 90? Does it go up to 92? And by the way, those customers are very sophisticated in understanding what that means for their business. What it means for them showing the payers that they reduce costs in hospital care and that they improve outcomes for the patient in how they feel And of course, how they improve their own revenue and our replenishment supplies. Anyway, that's my the briefest answer I could do to that great question.

Speaker 2

Thanks, Suraj.

Operator

Thank you. Next question is coming from Steve Wien from Jordan. Your line is now live.

Speaker 7

Yes, good morning. Just a question for Brett. Brett, I was just wondering if we could look into the gross margin a little bit further And trying to understand, are we seeing in across that quarter the full benefit of the price that you've taken? Or is that some annualization effect as some customers perhaps roll off contracts? And whether or not from a freight perspective, could you just kind of reiterate what your expectations are there, what you're seeing with regard to the pricing following the conflict.

Speaker 3

Yes. Sure, Steve. So yes, I mean, on the gross margin and recent price increase we through during the quarter. Some of those, there will obviously be contractual arrangements there as well. So we put some it's gone through as a general increase and then there will be specific contractual arrangements that means those pricing will be a little bit progressive, I guess, if you look over the back half of fiscal 'twenty four on that.

Speaker 3

So that's let's call that be kind of progressively rolled through, but we're definitely seeing some of that impact already on that. I think the second part of your question was around is that around the sort of freight Red Sea disruptions and so on?

Speaker 7

Yes. Just what you are sort of intimating, if you could just repeat that commentary, what you're seeing in the market And how you actually are trying to anticipate or protect yourselves against that?

Speaker 3

Yes. So we're Definitely seeing the impact there and a lot of that shipping is not is obviously not going through the Red Sea, but then going around Good hope. So that's happening. Certainly increased lead times, I think. Probably you could be looking at 2 to 3 weeks On that, particularly this is particularly freighting to Europe in particular, but also to some extent to the U.

Speaker 3

S. Where you got to find alternate freight parts, if you like. So that's having an impact, and we're also seeing some increase in actual Freight rates as well. I think it's industry wide, not just ourselves. So we're looking at that closely.

Speaker 3

We're looking at Alternative routes, we're looking at multimodal distribution there. So there's a number of things we're looking at to mitigate that where we can, but it realistically probably see some uptick in freight costs. It would not manifesting our P and L in Q3, but there could be some headwinds in Q4 on that. But again, I think we just got to see how that evolves over the next little while.

Operator

Thank you. Next question is coming from Saul Hodesen from Berenjoey Capital. Your line is now live.

Speaker 8

Thanks. Good afternoon. Good morning. Just another question for Brett. Brett, just regarding the restructuring charges and also the charge for the mask recall, is that done now in terms of those P and L costs?

Speaker 8

Or do you expect any further costs to be incurred in Q3 or indeed Q4 of this fiscal year? Thanks.

Speaker 3

Yes. We're largely through that. I mean, I can't I don't think you can rule out restructures from time to time, but I think the material restructure that we did is behind us now. So anything going forward, I think, would be pretty minor on that. So I would say I'd characterize that as saying, yes, We've done the big restructure and that should clear us now for the next

Speaker 2

Just to jump in there, Brett, a little bit specifically To Saul's question about the mask with magnets upgrade of our labeling, which was cost as a recall in the U. S. And Some other jurisdictions that cost was fully taken account of in this quarter. We're not expecting to add anything more on the mask with magnets action Relabel and recall in certain jurisdictions.

Speaker 3

Yes, absolutely.

Operator

Next question is coming from Matthew Cheuvreux from Citi. Your line is now live.

Speaker 9

Good afternoon. Thanks for taking my question. Simple one, when do you expect to be fully transitioned to the AirSense 11 platform?

Speaker 2

Matthew, a very simple question, but rather complex answer in that we sell in 140 countries worldwide and each of them Most of them have their own regulatory pathway and often very different and complex. And obviously labeling language customization of the product for all the regulatory requirements needed in all those 140 countries. So we clearly launched in our top countries. We launched in the U. S, many countries in Europe.

Speaker 2

We just got Japan Last quarter, the quarter before and we're starting to ramp up there and you saw that in the good growth numbers in devices in Europe, Asia and other in the quarter of 16%. There was some good sort of starting that ramp there in a place like Japan, which is a fleet driven market versus a by quarter driven market. And so great to see Japan, the citizens of Japan to be able to get access to the best in the world Technology in the essence 11. But look, we've got hundreds of countries over 100 countries, we still have to go there. And so we've got to get regulatory country by country.

Speaker 2

And we care about people suffocating in all of those 140 countries in the same way. And so our regulatory and quality team, Dawn Hockey, our quality and regulatory officer working intensely with all the regulatory authorities in those countries as we have to ramp that up. And then in addition, we're ramping up supply. The good news is that we have the 2nd best platform in the world in the AirSense 10 and that is completely unconstrained. So if you do suffocate and get a prescription in the country that AirSense is not cleared yet.

Speaker 2

You can get access to incredibly small quiet and efficacious therapy platform and our best in the world, mass platform. And so there's no simple answer to when it will be completely done in 100% in all countries because I think as indifferent to maybe the S7 to S8, S8 to S9 and S9 to S10 generations is that we have a pretty unique citizen situation with our global citizenship here that we are the global leader and we've got a different responsibility to maintain our 2nd best platform which is the 2nd best in the world for a little longer. And so that will be out and I'm not going to give a defined end date But I will tell you this, we're going country by country, we're driving regulatory and we're scaling manufacturing as fast as we can on AirSense 11 because it is better technology, it's is low cost to make and we are able to have a premium for them in pricing. So it makes sense for us, the customers and for our shareholders.

Operator

Thank you. Next question today is coming from Matt Taylor from Jefferies. Your line is now live.

Speaker 9

Hi, thanks for taking the question. I wanted to ask a follow-up question on the surmount study. I think you outlined a lot of the high level stuff Very well. My question is a little more specific. I wanted to ask about what you thought you could see in terms of comparing the two arms of GLP-one versus CPAP plus GLP-one, do you think you'll see a difference there?

Speaker 9

What would you make of their results if there is a difference one way or the other?

Speaker 2

Yes. Thanks for the question, Matt. And so for those of you who haven't read through the nih.gov, feel free to go. My reading, I'm a visual learner. There's a split chart that the top half of it on the trial is a GLP-one side and the bottom half is a placebo side.

Speaker 2

And so they have this 600 odd or less than 600 patients split between those 2 in a certain proportion. And then within the GLP-one arm, they split to those on CPAP and those not on CPAP and the same within the placebo. So there ends up being 4 arms if you look at it. But if you go to the end of it, there's an arm that's placebo, no CPAP. So I just call that the placebo placebo arm.

Speaker 2

And then there's a placebo plus CPAP arm. And then there's GLP alone arm and GLP plus papalarm. So you start to get down to these sub analyses, it gets less powered. I actually I'm reading what you are on nih.gov. And so My presumption is at the highest level, they want to show that a GLP-one is better than placebo for lowering weight and improving AHI.

Speaker 2

Think they'll achieve that primary outcome. I mean all the data show that there's 10%, 20%, 30% weight loss reduction and that should correlate to significant AHI reduction. So I think they'll show that. As opposed to then the sub studies of CPAP versus no CPAP within each of those, look, we've got 35 years of history knowing that CPAP doesn't Half trait, right? I mean, the best that I've seen from weight loss reductions in bariatric surgeries and the best on the GLP-one prelim data is that it can half treat, maybe 50% reduction in AHI.

Speaker 2

I'd call that half treatment. I don't think any pulmonary physician in the world would be happy with half treating an AHI with positive airway pressure. Frankly, if you're not turning the AHI to less than 5, you're not truly treating the patient. And if it's higher than 5, it might be residual centrals And you have to move them to a bi level or it might be complex sleep apnea, you have to move them to adaptive servo ventilation. So there's so many options between APAP bilevel ASV that the physician should walk through, but they wouldn't be happy unless the AHI is less than 5.

Speaker 2

I think the probability Don't trust me in my quote on this, Matt. Again, the primary investigator on this study, Professor Malhotra said, the idea that weight loss alone treat sleep apnea is preposterous. That was the word he used. So you can use and he's the PI on this study. You can use his thoughts to what he thinks between the pap arm and the non pap arm.

Speaker 2

So he's sort of leaning towards what he said earlier that best treatment for sleep apnea is not A, weight loss or B, CPAP, it's A plus B. And so that's what I expect this study to show. And we'll see the data. They'll be out there in 3x whatever they want to release in headline and we'll continue to go. We'll continue to grow.

Speaker 2

We'll continue to drive patients into the funnel. And I think this therapeutic class will help us over the coming decade to bring more patients into the funnel.

Operator

Thank you. Our next question today is coming from Leanne Harrison from Bank of America. Your line is now live.

Speaker 1

Yes. Good morning, Mike. So Mick, Brett and Amy, I might ask a question about your device and mass sales So obviously strong device sales, your resupply programs obviously giving that some focus. But masks this quarter came out weaker than where we expected. Can you talk us through where the disconnect there might be?

Speaker 2

Thanks for the question, Leanne. And yes, really, really happy to take the question and talk about our devices business and our masks business. So look, devices Growth globally, incredibly strong in the quarter at 11%. Mask growth globally incredibly strong at 9%. We talk about the market being mid single digit growth for devices.

Speaker 2

So we're clearly well ahead of that with the launch since 11 in Japan and Europe, Asia, rest of the world and doing well in the U. S. A couple of 100 basis points above. And then in Master and Accessory, you talk about global growth being in high single digits and so beating that in U. S, Canada, Latin America.

Speaker 2

But what you're probably focusing on is the Europe, Asia and rest of world growth there in Q2 FY 'twenty four being 4%, right? And just to be clear, the Q2 FY 2023 growth That same category was 14%. And we weren't taking 500 basis points a share 12 months ago and then losing it this quarter. Really think if you look at the weighted average over that, which is what 18 divided by 2, 9% is sort of more in line with the market in that mid to high single digit growth of masks there. And look, there's some things around Some contracts with the particular countries that were moved from a December to January and others.

Speaker 2

I'm not going to go into all the details other than to say, we look really closely at share. We look really closely at what we're doing and this 90 day snapshot 4 quarters ago, which showed 14%, we weren't taking 500 basis points We were holding share and growing in a little category here or there. And now this quarter at 4%, we're not losing 500 We're actually holding share across that and it's due to some of those shipping areas, launch areas and a couple of tenders that were moved from 1 month to another. So really not much to see in that. But what I will say is that as we move forward, Maintaining that high single digit growth in devices globally and the high sorry, mid single digit growth in devices globally And high single digit growth in masks globally is not a given.

Speaker 2

We've got to drive that demand. We've got to leverage this big pharma trend. We've got to leverage the big tech trend. And we've got to get better doing demand generation in the areas where we know we can push it up. And so that's what we're going to be focused on going forward.

Speaker 2

I hope that answers your question, Leanne.

Operator

Thank you. Our final question today is coming from Michael Pollard from Wolfe Research. Your line is now live.

Speaker 10

Good afternoon. I will ask a mask question as well, following up there in a slightly different way. So the U. S. Number was up 2% sequentially.

Speaker 10

Normally you see high single digit increase Q over Q kind of year end seasonality in the U. S. Deductible flush that kind of thing. Kind of are the puts and takes in that number? And the specific question is, did the magnet field safety notice kind of limit your ability fully capture mass demand in the quarter or were there other influences?

Speaker 10

Thank you so much.

Speaker 2

Yes, great question, Michael. So yes, U. S, Canada, Latin America 10% growth in the mass in the quarter is actually very strong market growth rate single digits holding share there. We do see that December particularly for U. S.

Speaker 2

Markets where high deductibles and deductibles reset December 31, some good revenue there. And so we had a good comp from the year before and Both solid numbers there from the comp the year before and this 10% U. S, Canada, Latin America growth. So I think we did really well there as we closed out the quarter. In terms of any impact from the masks with magnets Update on our labeling class in the U.

Speaker 2

S. As by the U. S. FDA as a recall. I got to tell you, there was no product removed from the market.

Speaker 2

This was about having our plastic clips as an option which we scaled up manufacturing and have them as an option. So when a patient is set up, If there's a very, very small minority of people who have an implanted pacemaker or other metal device in their upper chest or craniofacial area, Then those patients are offered an upgrade to the plastic clips. For everyone else, the other 95%, 99% of patients, They keep the convenience of the magnet, so that if they go to the bathroom in the night, they can come back in the dark and just clip it on and not have to seek for plastic Clips to clip together, the magnet completely goes on there. And so as we've done that labeling upgrade, and by the way, we had a competitor do this similar one About 12 months ago, the market has been very trained in knowing to ask questions about implants, to ask questions about our partners implants. And if they have that to offer the plastics clips which are fully available on ResMed masks as an alternative to our mask with magnets.

Speaker 2

The mask with magnets are so convenient. They're doing so well and 99% of people they're great. For that 1%, the HMEs are very comfortable now to ask those questions. And the other 140 countries we Working through the appropriate ways to ask them questions and get people the best mask and have the best fit and drive the best adherence over time. But they had no impact on the quarterly sales whatsoever.

Speaker 2

And we don't expect an impact going forward because this was an upgrade to labeling that was actually in line with clinical practice over the last 12 months. And it just makes sense to do that. Thanks a lot for the question, Michael.

Operator

Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over to Mick for any further or closing comments.

Speaker 2

Thanks, Kevin, and thank you again to all of our stakeholders for joining us on this call. The opportunity in front of us is huge and for joining us on this call. The opportunity in front of us is huge and largely untapped. It's an incredible runway. We see more and more people coming into the healthcare system This will benefit us as we seek to help them sleep better, breathe better and live better lives in 140 countries.

Speaker 2

Thank you to all 10,000 ResMedians. Many of you are also shareholders for what you do today and every day. With that, I'll hand the call back to Amy to close us out.

Speaker 1

Great. Thank you, Mick. Thanks everyone for listening. We do appreciate your time and your interest. If you have any additional questions, please don't hesitate to reach out directly.

Speaker 1

This does conclude our Q2 2024 conference call. Kevin, you can go ahead and close us out.

Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

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ResMed Q2 2024
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