Company Interview / "Weight loss drugs an opportunity, not a threat..."

Key Topics:

Impressive growth and strong quarterly performance for ResMed (ASX: RMD)GLP1 drugs considered an opportunity, not a threat, for business growthThe potential of under-penetrated markets and mega trends as growth accelerators for ResMed

Mick Farrell, CEO of ResMed (ASX: RMD), expresses satisfaction with the company's performance in the past quarter, highlighting achievements such as a revenue of US$1.2 billion and earnings of $1.98 per share. He presents a positive outlook on the company's growth, mentioning double-digit growth globally, and impressive statistics in various sectors of their business. Key insights reveal ResMed's (ASX: RMD) notable 30% growth in non-GAAP net operating income, and Mick's pride in the team for their achievements in the last quarter.

Contrary to concerns over the impact of weight loss drugs, specifically GLP1 drugs, on ResMed's (ASX: RMD) business, Mick reframes the situation as an opportunity rather than a threat. Insight from over 800,000 patient data shows a stronger propensity to start and continue with positive airway pressure therapy for patients on GLP1 medication, overturning initial investor apprehensions over these drugs. Mick sees this as an opportunity for ResMed to tap into, marking an increase in patient numbers and their motivation for therapy.

Discussing growth opportunities, Mick points out under-penetrated markets and the company’s strong foothold in 140 countries. Despite substantial opportunities ahead, he highlights the mega trends in big pharma and consumer technology wearables as major potential accelerators for ResMed's (ASX: RMD) growth. Mick's vision for the company focuses on leveraging these trends, bringing more patients into the patient care funnel, and becoming a 'digital sleep health concierge.' He concludes with the reassurance of solid debt levels, ample free cash flow, and financial strategies that include a balance of business reinvestment and returning capital to shareholders.

Full unedited transcript below:

0:00

Let's get back to company results. ResMed, the medical equipment maker reporting revenue of 1.2 billion USD for the June quarter. That's up 9% from the previous. The company posting earnings of $1.98 a share for the quarter, and with 2.5 billion people suffering from sleep, health and breathing disorders. McPhail, the chief executive, saying the company is well positioned to drive market penetration and accelerate growth for the business. Shares have fallen sharply this year on concern that those rapid weight loss drugs will hurt demand for its products. Well, let's in fact hear from Mike Farrell. I caught up with him earlier.

0:40

I think we had a magnificent quarter, uh, 10,000 reservations in 140 country executed really well. Uh, we had double digit growth globally, uh, really solid growth in all of our businesses in the device part of our business, we grew at 6% year on year, right in line or slightly ahead of markets, taking some share in Europe, Asia, the rest of the world. In our masks business, we grew globally at 15%, and in the United States we grew at 17% year on year on some pretty tough comps on both of those. And in our residential care software business, we grew at double digits as well, right on 10%. And the other part, Andrew, during the quarter, as we had incredible focus on operational excellence and in keeping costs in check and efficiency. And so we had 30% growth in non-GAAP net operating income and really impressed with the team and what they achieved this, this last quarter. How would you describe where

1:39

revenues tracking at the moment? Has it been a bit lumpy over those past quarters?

1:45

Well, actually, I mean, we had some incredible accelerations in growth. Andrew, as you remember at the start of Covid with our ventilator surge. And then we had a competitor with a recall and some supply chain issues that sort of slowed down our approach. But then we had incredible growth throughout fiscal 22 and 23 And our device revenue, where we're growing at at 5% this quarter in US, Canada and Latin America, was on a comparable from a year ago of 30% growth in US, Canada and Latin America and our device. So some incredible growth, but sort of gone back to what I'd call normal growth, where you see mid-single digit growth in devices, high single digit growth in masks and accessories, and high single digit growth in our software businesses. But as you saw this quarter, ResMed doesn't accept market growth like that. We want to meet and beat it, and that's what we did in spades, not just this last 90 days, but the last 365 days of fiscal year

2:44

2024. Now, of course, the elephant in the room as far as investors and the broader market are concerned, are those GLP one drugs and how it is affecting your business. Much has been made of that and whether it's been overstated, how would you describe where you're at at the moment and the threat that it does pose to your business?

3:04

You know, Andrew, I'd actually turn that around and say, uh, it's more of an opportunity than a threat. Uh, I look at our study now, we're following 811,000 patients who have a GLP one prescription and then get a prescription for positive airway pressure therapy. And what we're seeing across that cohort of 811,000 patients is we're seeing more patients starting. More patients being there at one year and more patients being there at two years. And I'll walk through the stats pretty quickly here. But we're seeing the propensity to start positive airway pressure being 10.7 absolute percentage points higher for patients who are on a GLP one medication.

3:51

And then we're seeing it one year of therapy. At 12 months we're seeing 310 basis points. So 3.1 absolute percentage points higher not just adherence as in I'm on the therapy, but resupply rate as in I'm buying a new mask or accessory. 3.1% absolute percentage points higher at one year. And then we're seeing it go up even further. At two years we've got 510 basis points, 5.1% absolute percentage points, higher resupply rate at 24 months for patients who have a GLP one prescription. So yes, some in the market were betting against us 18 months ago and saying there's GLP one drugs are a threat. They're actually an opportunity. They're not a headwind, they're a tailwind. And the question is for ResMed, how well can we capture all these new patients that are coming into the phone to their primary care physician, their GP, and saying, I think I have a sleep and breathing problem? How do how do we make sure they get a

4:50

path to screening, diagnosis, treatment and management with positive airway pressure therapy for life and the combination therapy of a GLP one plus positive airway pressure therapy we think will be the norm for a vast number of these, this cohort of patients. So do you think it's fair to say that the opportunity that you've identified there has not been recognized by the market and certainly analysts, and therefore it's not reflected perhaps in in your share price?

5:18

Yeah. Well, I'd actually say that was true. 12 months ago. We took a big dip in the stock price 12 months ago when people thought that we've caught we've caught back up and we've got back 60, 70, 80, maybe 90% of that of that loss. On the rumor that these would be a threat or a reduction in the number of patients coming into the funnel. What we've done since then is produced four great quarters of growth. And so quarter in, quarter out, ResMed is going to deliver more patients, more technologies, the innovation leader and new products that we bring to market to show we make the smallest, quietest, most comfortable, most connected and most intelligent therapies to treat sleep apnea on the planet. And we achieved that this quarter, and we're going to continue to achieve that. So I think there's many, uh, who were smart investors who jumped in on that dip and have had a really good ride up. And the ride's not over. Uh, ResMed is now 35 years old. We were born in Sydney through a management buyout of technology from the University of Sydney and from Baxter Healthcare. My

6:17

dad founded this company in 1999, in Sydney, and we're in our 35th anniversary year this year, and we've got decades of growth ahead. I'm really excited about the future of ResMed, because more patients are going to come into the funnel with the innovation leader, but most importantly, we're caring about all the billion people who suffocate with sleep apnea on the planet. And only single digit percentages of them are treatment in a global scale. ResMed Duty Obligation. Our brand promise is to help with sleep, health and breathing health and care at home, and we're uniquely positioned to do so

6:52

and make you talk about a focus on under penetrated markets. What are or where are those markets and how you're likely to accelerate growth from this point on?

7:03

Yeah, it's a good question, Andrew. And, uh, look, we we operate in 140 countries worldwide. We're there and virtually every country in the world. Uh, we're probably 15% penetrated into the US market. So there's still 85% of the opportunity here in the US, which is the most penetrated market where I live right now, uh, in Western Europe and across all of Europe. Really, we're around 10% penetrated into the number of patients who suffocate every night. So 90% of the opportunity in front. But then you go to Asia, uh, Middle East, Africa, Latin America, rest of world. We're less than 5% penetrated into the opportunity. So 95% of the opportunities in front of us when you look at that, uh, that those countries and so huge opportunity in front of ResMed, I think actually going back to your last question, one of our biggest opportunities is to to leverage these mega trends. So a mega trend in big pharma with GLP one medicines bringing more and more patients into the into the

8:03

funnel. And as I said in our data, not just more patients into the funnel, more motivated patients as they bring them in. Secondly, another big megatrend we haven't talked about, but I think it's important. Big tech, big consumer tech, wearables. Samsung's Galaxy Watch, the latest one, has an FDA de novo clearance to detect moderate to to severe sleep apnea from a watch just from oximetry, and a program their smarts on the watch and smarts in the in the Samsung phone.

8:32

I think Apple is going to follow with their Apple Watch. I think Google's Fitbit is going to follow. They already track sleep, and I think they're going to detect sleep apnea and indicate for patients as will whoop or a ring Garmin and all the wearables. So between those two megatrends we need to capture those patients and help be the digital sleep health concierge to help them find a path from wow, I've got a wearable that says I might have a problem. That's the screening to formal care, diagnosis, treatment, prescription management and ongoing care as they need this therapy for life and it's going to be there to support them. And just briefly, Mieke, how are you intending to fund that those growth opportunities you talk of there? How is your debt level at the moment?

9:17

Look, debt levels are pretty solid. We've actually got access to, uh, you know, many hundreds of millions, billions of dollars of capital if we need it for appropriate M&A and so on. But look, the money is not burning a hole in our pocket. Uh, we generate a lot of free cash flow this quarter. Uh, we generated over 415 million USD this quarter in free cash flow. And what we do with that capital is we reinvested in the business. We invest 6 to 7% of our revenues straight back into innovation, to research and development, to the hardware, the software and the AI that takes us and keeps us as the global leader in sleep, health and breathing help. Uh, we invest, uh, you know, a bunch back into marketing and to driving awareness of patients into the funnel to get those billion plus patients to recognize when they're asleep and suffocating, that they have a problem. And then this is a great treatment to take care of them. And then we also return some of that

10:16

capital back to our shareholders who are listening to this, to this broadcast right at the moment there we give the shares back. We give money back through dividends. And we just increased our dividend by 10%. Was announced today. Our board of directors approved a 10% increase in our dividend. And we also do share buybacks. And of course, there's some capital available for appropriate mergers and acquisitions acquisitions we can make to tuck into the business. But the best thing that ResMed can do is do what we've done for 35 years, innovate, have the world's best innovation to bring more patients in the funnel, get them the smallest, quietest, most comfortable tech, and then get them part of our digital ecosystem. We've got 28 million patients in our digital ecosystem called RFU. We've got 19 billion nights of respiratory medical data in the cloud. It's our duty, our obligation to unlock those data and provide value to the patients, physicians, providers to lower costs, improve outcomes, and, frankly, bend the curve of chronic disease progression,

11:16

not just sleep apnea, but many of the co-morbidities that we can impact high blood pressure, diabetes, stroke rates, and beyond.