瑞思邁 (RMD) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to ResMed second quarter results conference call.

My name is Erica and I will be your coordinator for today.

(Operator Instructions)

The company has asked me at to address certain matters.

First, ResMed does not authorize the recording of any portion of this conference call for any purpose.

Second, during the conference call ResMed may make forward-looking statements such as projections of future revenue or earnings, new product development, or new markets for the company's products.

These statements are made under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995.

Risks and uncertainties exists that could cause actual results to materially differently from the forward-looking statements.

These factors are discussed in ResMed's SEC filings such as Form 10-Q and Form 10-K which you may access through the company's website at www.

ResMed .com.

With that said I would like to turn the call over to Kieran Gallahue, ResMed's president and CEO.

Thanks, Erica.

Good afternoon and thank you for joining us today.

As with our previous calls I will begin with summary remarks and then turn the call over to Brett Sandercock, our Chief Financial Officer, to go through the numbers in more detail.

We will then take your questions.

Well, we had another solid quarter.

Global revenue in the second quarter of 2011 grew 11% or up 14% on a constant currency basis.

Revenue in the Americas grew by 10% year-over-year.

ROW Revenue increased by 12%, and in constant currency terms, grew 17%.

We had a robust quarter in Asia PAC and the growth in Europe was remarkable as well.

We [afforded] very strong bottom line results.

GAAP EPS increased 23% to $0.37, and excluding amortization of acquired intangibles, EPS was $0.38.

Cash flow from operations was strong at $68.3 million, demonstrating our continuing commitment to strong operating performance and working capital control.

We also experienced growth across all product categories.

Global flow generator sales were up 8%, or 11% in constant currency, and the mass segment grew 16% during the quarter, a 17% increase on a constant currency basis.

Globally, the growth in sleep therapy devices was mainly driven by strong sales of our new S9 AutoSet.

Preference for the AutoSet is rising in the US, and continues to be a consistent source of growth in Europe and Asia.

The global market is recognizing the importance of automated algorithms to help patients achieve compliance and comfort.

Sale flow generators were particularly strong in Europe and Asia, growing 19% in constant currency terms for ROW, led by growth in France, Germany and Japan.

Growth in Switzerland in China were also excellent from a relatively smaller base.

Sales of flow generators in the Americas were up 2% year-over-year in Q2, modest by ResMed standards.

The good news, is that when you look underneath that figure, it is actually quite encouraging.

AutoSet and CPAP America sales grew in the double digits, even against very difficult base-year comparables for Q2 of fiscal year '10.

What pulled down the overall Americas flow generator year-over-year growth rate was primarily our bilevel sales, because bilevels are also included in that over all flow generator category.

As you all know our bilevels are still in the older S8 body style, and that impacted results.

Now the good news is that we're about to release or launch a controlled product release of the S9 bilevel series, specifically addressing this high-margin bilevel of market opportunity.

Looking back to the S8 series introduction, it took about four years following the introduction of the S8 CPAPs for the full S8 bilevel series to be released.

In the case of the S9 series, we have shortened that timely between release of the S9 CPAP to the S9 bilevel series to under a year and a half.

We will also be rolling out S9 CPAP and APAP in the additional geographies.

In Japan we'll commence controlled product launch of the S9 of the AutoSet and S9 Elite.

It typically takes about a year after the US and major European market launches to launch in Japan, given the Japanese process for product approvals and introductions, so this schedule is consistent with our expectations.

Another positive indication of forward progress and product development is the recent controlled product launch in Europe of our new Stellar 100, an adult and pediatric ventilator designed for both non-invasive and invasive use.

This is the first new ResMed-developed product resulting from our acquisition and integration of Saime.

The Stellar combines Saime's ventilation know-how, or knowledge and experience, with ResMed's proven quality and excellence in non-invasive ventilation into this new cost effective ventilator platform.

Just like the bilevel category, we will be releasing the S9 series.

This non-invasive ventilator is expected to positively contribute to our company-wide gross margins.

Now turning to Masks.

We have typically strong quarters in the patient interfaced throughout the globe.

Mask sales grew 19% in the Americas, and in constant currency terms, 14% in ROW.

We believe we continue to take market share due to the fact that masks are easy to fit, more value for the money, with less call-backs, and leads to higher compliance.

For Swift FX and Swift FX For Her nasal pillows are doing very well.

The feedback from the market has been outstanding.

It is particularly popular in combination with the S9, as a combination with the slim tubing and comfortable interface is focused on improving compliance.

And, we had numerous other product launches recently.

The Quattro FX Full Face Mask, launched last quarter in Europe to great reception, has now launched in the US this month, and is being very, very well received here.

A new and smaller model, Quattro FX, provides an effective alternative to conventional full face masks.

We launched the Mirage FX Nasal Mask in Europe during the quarter and will roll it out to countries over time.

The mask is a real breakthrough in terms of simplicity.

It is incredibly lightweight, has a slim and compact design, and is a leap forward in terms of ease of fit, use and comfort.

Plus, it's very wide fit range results in over 90% of patients fitting in a single size.

On the home sleep testing front, HME interest in HST has interest has increased significantly due to the competitive dynamics of more labs dispensing, and the obvious growth opportunity.

We believe HST now accounts for about 8% to 10% of sleep test volumes, and will continue to expand due to patient convenience and commercial payers' push toward HST, although that push has not been broadly enforced.

We also expect growth result from continued and improved awareness and validation of the critical role that sleep disorder breathing plays in the very serious, most rapidly growing, and most costly diseases in the world, cardiovascular disease and diabetes, as well as stroke and obesity.

Increasingly, there is evidence coming to light, that early interventions in the treatment of sleep disorder breathing may slow or prevent the progressions of these comorbidities.

There are more in issues in play in the transportation industry, especially in trucking.

In December, the Journal of the American Heart Association published a study done by the American Stroke Association.

This was a ten-year observational study of 1,651 men that found that severe OSA increased the risk of fatal and nonfatal cardiovascular events two- to five-fold.

It also demonstrated that sleep disorder breathing can increase stroke risk by leading to, or worsening, hypertension and heart disease, and possibly by causing reductions in cerebral blood flow.

Because of its association with other vascular risk factors and cardiovascular morbidity, the study reported that evaluation of sleep disorder breathing is recommended, particularly in those with obesity, hypertension, heart disease, or drug-resistant hypertension.

We continue our initiatives for the education of primary care physicians.

This is the second year of investment for Phillips and ResMed, and now with the addition of Cephalon's participation our combined investment is expected to reach 10,000 physicians this year.

Participants learn about symptoms of sleep apnea, screening implementation, diagnostic pathways, therapy, and the latest research on mortality and morbidity with untreated sleep apnea.

We are also involved in public awareness campaigns in Japan, with Phillips and [Taishan], one of our largest Japanese customers that has also helped to drive sales significantly in that region.

In addition, just a week ago, the Department of Health and Human Services launched its Healthy People 2020 goals in a chest position article.

Among the objectives set forth in its quote, ambitious yet achievable, ten-year agenda for improving the nation's health, are substantial improvements in sleep health, respiratory disease outcomes, and levels of tobacco use.

Sleep health is now a topic in the healthy people initiative.

This main focus is on increasing public knowledge of how adequate sleep and treatment of sleep disorders improves health, productivity, wellness, quality of life, and safety on the roads and in the workplace.

The public health burden is substantial, and awareness of that problem is lacking.

Thus, healthy people 2020 seeks to provide a well coordinated strategy to improve sleep-related health.

The objectives are to increase the proportion of persons with symptoms of obstructive sleep apnea who seek medical care, reduce the rate of vehicular crashes due to drowsy driving, and increased proportion of students in grades nine through 12, and adults who get sufficient sleep.

This is encouraging as we continue to see progress in waking people up to sleep.

Finally, during the quarter we acquired certain business assets and intellectual property of CHI-SAN, relating to the Sleep Comfort Care Pad, or SCCP.

The SCCP is a proprietary gel nasal pad designed to alleviate discomfort and soreness associated with mass contact at the nasal bridge.

This acquisition provides an adaption solution to all CPAP therapy patients while driving brand awareness and greater revenue profitability for patients not currently using ResMed products.

ResMed will commence distribution of the product next month.

So in summary, Q2 once again demonstrated the strength of our global reach, and balanced business while providing very positive signals for sustained industry growth as we look forward.

Our new product flow is robust and customer-meaningful, and demonstrates that our commitment to innovation is paying dividends.

Now I will turn the call over to Brett to provide details on financials, and then we'll take your questions.

Right, thanks Kieran.

Let's briefly run through our December quarter results.

Revenue for the December quarter was $306 million, which is an increase of 11% of the prior-year quarter.

Unfavorable currency movements reduced our second-quarter revenue by approximately $6.5 million.

So in constant currency terms, revenue increased by 14%.

Income from operations for the quarter was $69.9 million, an increase of 21%, and net income for the quarter was $58.5 million, an increase of 27% over the prior-year quarter.

Diluted earnings per share for the quarter was $0.37, an increase of 23% over the prior-year quarter.

Gross margin for the December quarter was 60.8% down sequentially from Q1 FY '11, but higher than the prior-year December quarter.

On a sequential basis, our gross margin was impacted by ISP declines, unfavorable currency movements, and temporary additional logistics costs associated with implementation of the new warehouse management system in the US.

Looking forward in the second half of FY '11, we will face some headwinds on the impact from the appreciation of the Australian dollar.

However, we will continue to focus on activities targeted at reducing product costs, including development initiatives, improving manufacturing processes, and building (inaudible) efficiencies on suppler and logistics cost structures.

SG&A expenses for the quarter were $91.6 million, an increase of 9% over the prior-year quarter.

In constant currency terms, SG&A expenses increased by 10%.

The increase in SG&A reflects expenses to support sales growth, as well as activities targeted at increasing the awareness and diagnosis of sleep disorder breathing.

SG&A as a percentage of revenue improved to 29.9% compared to year-ago SGA of 30.6%.

Looking forward in subject currency movements we expect SG&A as a percentage of revenue to be in the range of 30% for fiscal year 2011.

R&D expenses for the quarter were $22 million, an increase of 15% over the prior-year quarter.

In constant currency terms, R&D expenses increased by 10%.

R&D expenses as a percentage of revenue, was 7.2%, compared to the year-ago figure of 6.9%.

Looking forward in the current exchange rates, we expect R&D expenses as a percentage of revenue to be in the 7% to 8% range for fiscal year 2011.

Amortization of acquired intangibles was $2.6 million for the quarter, and stock-based compensation expense for the quarter was $8.2 million.

Our effective tax rate for the quarter was 25.9%, and we estimate our fiscal year 2011 tax rate will also be in the vicinity of 26%.

Turning now to revenue in more detail.

Overall sales in the Americas were $163.2 million an increase of 10% over the prior-year quarter.

Sales outside of the Americas totaled 142.8 million, an increase of 12% over the prior-year quarter.

As expected, sales outside the Americas were negatively impacted by currency movements.

In constant currency terms, sales outside the Americas increased by 17% over the prior-year quarter.

Breaking out revenue between product segments.

In the Americas, flow generated and sales of $77.4 million, an increase of 2% over the prior-year quarter.

Our growth this quarter was adversely impacted by declining our bilevel device sales, as we face the challenge of tough prior-year comparables, and an aging bilevel platform.

Masks and other sales were $85.8 million, an increase of 19%.

Underpinned by contributions from new products, and growth and accessories.

For revenue outside the Americas, flow generator sales were $98 million, an increase of 14% over the prior-year quarter, or in constant currency terms an increase of 19%.

This growth was driven by strong sales of various non- flow generator platforms, particularly in our European markets.

Masks and other sales were $44.8 million, an increase of 10%, or in constant currency terms an increase of 14%.

And globally, in constant currency terms, flow generator sales increased by 11% percent, while masks and other increased by 17%.

Cash flow from operations was $68.3 million for the quarter, reflecting strong underlying earnings and working capital management.

Capital expenditure for the quarter was $17.8 million, while depreciation and amortization for the December quarter totaled $17.3 million.

We continue to buy back shares as part of our capital management program.

During the quarter, we repurchased 595,000 shares for consideration of $18.7 million.

As of today, we have approximately $13.3 million shares remaining under our authorized buyback program.

Our balance sheet remains strong.

We increased our cash balances during the quarter to $616 million, at December 31.

This was the result of strong operating cash flow, and favorable impact of $26 million from exchange rate changes on our foreign (inaudible) cash balanced.

At December 31, total assets stood at $1.9 billion, and net equity was $1.6 billion.

I will now hand the call back to Kieran.

Thanks, Brett.

Erica, we are ready to open up the lines for questions.

(Operator Instructions) Our first question comes from the line of Ben Andrew with William Blair.

Please proceed.

Hi, good afternoon, guys.

Hey, Ben.

So Kieran, talk a little bit more about the US flow generator dynamic.

Plus 2%, if bilevel was down, what else did you see, (inaudible) was good, but what else did you see in mix, and was there any change in trajectory on pricing over the course of the quarter?

If you look underneath that number, it is actually, as I said, quite encouraging.

So, if you look at both APAP and CPAP when you combine them, that was up in the double digits.

It was very much consistent with growth that we saw in the US and the Americas overall.

It's when you peel it back, we definitely struggled a bit on the bilevel site.

The S8 bilevels are still fantastic products, have huge benefits from a competitive perspective.

But you get a little bit of the tired iron feel to it.

It really speaks for the value of the S9.

If people see the S9, they want the S9, and that's why it remains so strong and robust.

The real positive thing here is that, unlike with the S8 series were took us literally four years to get out the bilevel series after the initial introduction, the changes the team have made in the product development process in the way that we design these products, allow us to come out with the bilevels in a fraction of that time frame.

So we are literally going into a controlled market release within the next several weeks, and those things usually take them two or three months or so.

We are very well-positioned to be able to recover from that.

As far as pricing I would say nothing new.

There have been price pressures throughout the globe and certainly in the US over the last 9 months, 12 months.

I would say that has been steady state.

Did you see other mix though, within the non- auto non- bilevel product line towards lower-end product?

No, Mick can answer that.

Mick?

Yeah, Ben, it was the reverse, we saw a shift towards the S9 AutoSet and the S9 Elite products versus year-on-year life on the lower-end products.

This is not just within our revenues.

We had some market share data to show that the whole segment of low-end is declining and the segment of high-end CPAP and APAP particularly, are growing significantly proportional to the other end of the spectrum.

Okay, so no pricing pressure, positive mix, weak bilevel, you're going to correct that, and see how things shake the next couple of quarters.

Yes, just to rephrase that .Certainly there's no -- I would never say no pricing, there's always some level of pricing pressure in this marketplace, so I'd say it's steady state on that.

But the other parts of that, the mix shift remains very positive.

Thank you.

Our next question comes from the line of David Low with Deutsche Bank.

Thanks very much.

Can I get you to touch on the S9 Escape, given that was launched in the period, and how that went relative to your expectations?

Yes, it's a good launch.

The product is very well received in the market.

It is impacted by the idea there is this mix shift to the auto, so we looked at that, and we weren't sure if we would see some significant cannibalization down from the auto that had come out with th S9 going down to the Escape, we actually haven't found that.

We are very pleased with the with the way the launch has gone.

Okay, and the comment a minute ago that you've got some market data that gives you comfort that there is a move up the value chain, so to speak.

I was wondering if you could go over market share and what your competitors are doing, and is there any dynamics of any great note in the quarter?

You know, I think the information we give on these calls, if we give all the details of exactly how our share is going within each sub segment, Phillips, (inaudible) is now part of a large health care company.

And on their call, we might hear how the whole home care sector is doing at 4% or whatever.

But no details like this.

I'd really prefer not to get into too much into the details.

What we talked about a trend in the CPAP and APAP categories to move toward the higher end.

It is driven by compliance, comfort, and outcomes that the payers and physicians are expecting, and that is what's behind the shift.

But I will say, in general, we believe we continue to gain market share.

Yes, I guess the related question is, what do you think market growth has been in the period?

Yes, I think we had said last time -- the last call, we thought that the Americas' growth was probably somewhere in that 8% to 10% range, I think we said similar outside the Americas.

I think we would stay with that.

It is a hard number to get at, because as Mick was mentioning, it's not where -- we don't have scanned data out there.

But I think we'd say we are comfortable somewhere with 8%, 9%, 10%.

As you said, comfortable with a bit of share gain.

If I could change topics quickly.

The Saime product, I was wondering if you could talk about what you think the market potential is there, and what sort of timeframe does it take to be realized?

It's a really interesting product called the Stellar 100.

As noted, it is for use both in non-invasive and invasive applications.

It really is the first product that we are taking that ventilation know-how from Saime, and we're taking the quality orientation and the cost-effectiveness that we designed products with, and putting them together.

The market segment itself will be launching at first in Europe and then we are in the process of evaluating the launch strategy in the US market.

Although we do expect to be selling it in the US market, we are just not giving specifics about it.

We've got opportunities both in Europe, as well as Asia PAC, and we will, for the first time, see some opportunities in the Americas.

So, it's good opportunity ahead of us.

And I think it should be noted, this category, like the bilevels, this ventilation range tends to run above company averages on gross margins.

So we're looking for some accretion on those.

Our next question comes from the line of Joshua Zable with WJB Capital.

Please proceed.

Hey, guys.

Congratulations on a nice quarter.

Thanks for taking my questions here.

You bet, thanks.

Just a couple of follow-ups, here.

I know Brett mentioned ASP, and Kieran, obviously, having seen a number of cycles, obviously, I know there is always pricing pressure here.

I guess what I'm trying to understand is, it looks like the market has been slowing down for the past 12 months when I checked.

You guys obviously growing robustly in those headwinds.

Still, like you said, if you kind of peel the onion back on the CPAP base, it is still clearly growing faster than the market and taking share.

I'm just wondering, is there less share to be taken, or is there a makeshift in terms of price?

Because of the mix is going up and your growing slower, it would suggest pricing might be getting a little bit worse.

Again, just, are we in standard pricing?

Or is it a little bit worse because maybe your competition is getting a little more desperate because of all the share you've taken?

Thanks.

Look, we've got some very capable competitors out there.

Some very worthy competitors.

But I think our product lineup and our execution has really driven some substantial share gain.

We've said, probably the last line months or so, that we thought there was a little bit more pricing pressure then maybe the nine months before that.

This quarter didn't feel necessarily any different than the quarter before it.

But certainly, as you know, we have said you tend to run about 5% per year, sometimes a little hotter, sometimes a little less.

These last nine months you're probably a little bit hotter.

With that being said, we've been able to push our way through it, and I think our focus on makeshift has been very .very positive from that perspective.

And now, as we move into the release of the bilevel and ventilator lines, in addition to the mask size, and I think it's real important to highlight, the release of this Quattro FX Full Face Mask is just going extremely well.

It's a mask that doesn't have that T-bar resting, so it allows it to feel much more free on the face, great feeling capability, and really builds on the legacy we have in full face mask of providing the market premium product.

So, yeah.

I'd say last 9 months a little bit hotter, but I don't think last quarter was so different than the quarter before, and we continue to perform well.

That's very helpful.

Then just two quick ones.

Just on gross margin, obviously moving around, I know Brett make comments about sort of gross margin headwinds, it's currency-related, I understand.

Just in terms of trying to get our model right because I know you guys have been cutting costs as well.

Just sort of can you kind of help us frame, in any way shape or form, and then the follow-up, and I'll get back in queue here, is just on same here.

First product, obviously, very exciting.

Just wondering, are we going to see a number of products come out?

Or should we expect sort of the same type of long horizon between this and the next one?

Thanks, guys.

Congrats again.

You bet.

Brett, you want to take the GM question?

Yes, quite a long question there.

But on the gross margin, I think this quarter really is a combination of the ISP FX and the FX impact there, and some on that warehouse management system which is temporary, but something we've encouraged, we've bettered it down.

We really implemented that in October.

So, combination of those a little bit.

I think on the ISPs, as Kieran was saying, it looks like a fairly normal competitive market.

There was a little -- we are clearing through, obviously, some inside inventory as well.

So there's a little bit of impact there, which was negative.

Not a huge amount, but again, enough to tip it down on a sequential basis.

So that was there as well.

If you look at FX, a small, relatively small impact this quarter.

We will face the appreciation of the Aussie dollar as we work through that, that was up sequentially around 9%, so it was quite significant.

That'll run through, and depending on what the Euro does, the Pound does, and so on, so as you know, currency is pretty volatile.

You're talking the range of 100 or 150 basis points, I suspect, on currency, as we move through the fiscal year.

And, this is nothing new for us.

This is something we have been dealing with for many years, and we always power our way through it.

As you mentioned, we do continue to have some improvements on the operating side, and then with the introduction of these products that we've got in the pipeline, typically the mask products, the ventilation products, the bilevel products, all of which are meant to be accretive and supportive to the gross margin area.

As far as the question on products, out of [Paris], We're not going to get into too much detail on the product pipeline there, we would like to focus, at the moment, on this launch of the Stellar, but we've had that company for what, about five years or so and we've got a really rich product portfolio that we've been building, and I would not expect it to be the same timeline to the next significant product introduction, by any means.

And our next question comes from the line of David Stanton with Nomura.

Please proceed.

Good morning, guys.

Can you hear me?

Yes, we can David.

Look, just wanted to dive into a little bit more market growth in the US, and why that's declined.

Has there been an impact from lower physician visits?

Or perhaps [covera] rolling often?

What did you confidence it's going to increase over the medium- to longer term?

You bet.

So, really no change from last quarter's conference call.

And I will highlight when we say decline, I mean the market is still growing, and where we are at and market growth, let's call it the 8% or 9%, somewhere in that range, is most medical markets, I think, and most markets overall would be quite excited with those growth numbers.

Obviously, we continue to have higher expectations and continue to drive towards getting back to the normal range of the 10% to 15% growth, and we have every confidence we can get there.

So, not a lot new from the last quarter.

There's certainly -- you know we're not immune to things that are going in the general economy, and we know that physician office visits are down at least temporarily, and it's been affecting most parts of the medical business.

So I would call it just the general market trends.

It's because of the hugely underpenetrated nature of this marketplace, and the clinical data which just is stunning and continues to come out in support of our ability to help patients and reduce the costs associated with the most costly morbidities on the planet.

That - which is why we continue to power our way through it.

So, we remain very bullish and optimistic about the future in this industry.

Sorry, just one follow up -- just -- so the drivers over the medium term, are very strong clinical, just to summarize what you said, very strong clinical data, under penetration of the market, impact of, I guess time-sleep testing, and maybe increase requirements for compliance going forward, would that be a fair enough statement?

Yes, I think that's a great summary.

Thank you.

Cheers, guys.

Thank you.

Our next question comes from the line of David Clair with Piper Jaffrey.

Please proceed.

Yes, hi good afternoon everybody.

Good afternoon.

I guess the first question Kieran, just on the S8 bilevel.

It sounds like that was a major factor in the slow-down on domestic flow generator sales.

Is this -- I don't remember that being called out last quarter.

Is this something that all of a sudden happened?

Like, maybe a competitive product came on the market, or any kind of details you can give there?

Yes -- no, I think it is relatively a newer phenomenon, which makes sense.

You kind of get through the cycle of the early introduction of the S9 series and then the market catches up in some ways, with the older boxes, because they start feeling a little bit aged.

The -- no I mean, I think there might be some customers that are beginning to smell that there will be the impending introduction of the S9.

They may be managing their inventory a bit.

We know that some customers are managing their inventory a bit, in the near-term.

The good news there is that that's a short-term phenomenon that you overcome when you have a new product flow coming in.

So, yes, I'd say it was a little bit quicker impact in Q2, and again, we're just very pleased.

When you look at these things, we were very pleased to see that we still had the fundamental S9 products growing in those double-digit ranges, and were quite fortunate, although it has been planning that made his true, but we are quite fortunate we've got the bilevel introduction of the S9s right on its heal coming out here soon.

Okay, great, and I guess, along the same lines would you expect a pretty nice snap back when the S9 bilevel version comes out?

We expect that product to be -- that product series to be very well excepted in the market.

Okay, and then just a quick one on competitive bidding.

With the initial launch here, has there been any kind of impact?

Or what are you hearing in the market?

No, it's not new news, right,.

So it's been out there so long, and it's been part of the conversation for so long, and because it's limited to those nine MSAs, is it a part of the conversation, yes, but is it a new topic, no, not really.

Our next question comes from the line of Joanne Wuensch with BMO Capital Markets.

Hi, good afternoon, and thanks for taking my question.

You bet.

The acquisition that you made CHI-SAN?

Is that how it's pronounce it?

CHI-SAN.

Or CHI-SAN, I can't even pronounce it.

It looks like CHI-SAN.

And you have the name in front of you.

Yes.

What did you guys pay for that?

You know, it was a transaction where we are not releasing all the details -- it wasn't a huge transaction.

But, it wasn't a huge transaction, right, you know.

Single-digit millions.

Very small transaction.

It was an interesting product.

It was one actually we saw gaining some traction in the marketplace.

They were a small company with limited distribution, and we think we can bring to the party a global distribution force better positioning, and quite frankly, it's just an interesting little bolton.

That's the way I'd think about it, an interesting little bolton.

What do you plan on doing with your cash?

I'm sitting here and I'm looking at almost $6 million in the quarter that came in from net interest income.

If that's billing nicely, what are you doing with your cash?

Yes, well we continue to make these small bolton acquisitions when appropriate.

We have continued to buy back our stock in the marketplace, and have quite a few shares left in the authorized limit for continued buy backs.

We continued to scan the environment for appropriate M&A.

As we've said in the past, we are very careful about the selection criteria for M&A.

We've demonstrated that we are more than willing to pull the rigger on acquisitions that we think are a good strategic fit, and one we think will accelerate our penetration to the market, or leverage the penetration that we have made it to the market.

So we continue to not let money burn a hole in our pocket, but we feel very comfortable that we have the power to take action when and if we see it as appropriate.

Are you willing to project what total other income would look like for fiscal year 2011 if we're at a $9 million run rate for the second quarter?

Brett?

No, too much would depend on what we are doing in terms of capital management, buy back, and what we do on the acquisition front as well.

I will take that as a no.

No.

Yes.

And my last question, in all seriousness.

The Stella product sounds very interesting.

Do you have the sales force for that?

In Europe, it is a plug-and-play product.

In the Americas, we are evaluating the commercial strategy.

We're going to get the European and Asia PAC launch truly bedded down and rolled out, and we are, at the same time, in discussions and planning about the Americas rollout.

I'm not ready to speak to that, simply because of the discussions that are ongoing.

But we are evaluating appropriate ways to get the market that we think will accelerate our reach and do so in a cost-effective manner.

Okay.

Thank you very much.

Our next question comes from the line of Josh Jennings with Jefferies and company.

Please proceed.

Hi, thanks a lot for taking the questions.

Just talk about Europe quickly, and just what the reimbursement environment is like over there, whether there's any upcoming decisions, and how you're feeling about reimbursement levels currently and going forward?

Yes, well as you know, Europe is not Europe.

Europe is a collection of a number of different countries that have different healthcare systems and different dynamics, and we've got three different business models throughout Europe.

In Germany, we -- a substantial portion of our business is home medical equipment company, where we are the HME.

Countries like France are very similar to the way we operate in the US, and we have other markets where we work through a distributors.

There's a huge diversity, which is a good thing from our perspective, but a huge diversity in the way that products are reimbursed and how they go to market in each of those countries.

There is always changes going on somewhere.

Germany is always in a state of change.

Over the course of the last three or four years, they've substantially reduced the number of insurance companies, which we have found to be a positive because it simplified the way we need to administer our relationships at being an HME.

We continue to grow our daycare business unit there, which is our wholesale business there as well.

France, like most countries, has changed some elements of their reimbursement system over time.

A good example was the move to reimburse MRDs.

A couple of years which led to us deciding to acquire an MRD company, and that acquisition, by the way, is going quite well.

So, I will say there is always some level of change going on in different parts of Europe.

We don't do a heck of a lot of business in the (inaudible) nation.

So when you think about the countries that are struggling a bit, they tend to not represent a lot of what we do, and changes that occur there would probably be substantially less material to us.

Overall relative stability for '11 is sort of how to think about it?

Yes, as much as we can forecast government activity.

You know, but, yes, there'll be some changes and there's always some changes, and we will deal with them, and we'll work our way through them.

Great and I just noticed you mentioned 8% to 10% of the diagnostic work ups for sleep apnea have now shifted over to home sleep testing.

Where were you guys at the beginning of 2010, and where can that go by the end of calendar '11?

You know we didn't have -- these are always numbers we are trying to piece together bits of data from people who self-report to you.

But it was -- I would estimate, 1% maybe, of the market, 2% maybe of the market at the beginning of 2010.

It's grown substantially over the course of the last 14 months or so.

And I'll tell you, we look at that number, and we did this calculation recently based on some queries we've done in the marketplace, and we were quite pleased.

I mean , seeing that transition in that time period, and this is without -- this is without the insurance companies moving from the -- you can do HST, to you must.

Allright, so a lot of this is about market pull, and parts of entry, for instance, of some of these players into the PCP marketplace, as an example.

So, we are very optimistic and very comfortable with progression that we are seeing in the marketplace.

And we don't think it's even reached the tipping point, yet.

I mean, I think there's a lot more to be brought to bear here.

Nor do we think that at this point, even within that growth in HST, that it has been a substantial growth driver.

We think that those days are ahead of us.

We think that most of the volume that's coming in here was volume that was moved from PSGs over to HSTs, although we eventually believe it's going to be driving substantially more volume.

You are seeing many more questions out of both sleep positions who are getting more comfortable with the idea of HST and believing that they should get engaged, and we are pleased with that, because we would very much like to engage with the sleep positions and support our sleep position partners as HST ramps up.

But you are also seeing large HMEs, and regional HMEs, who recognize that there is an opportunity for them to substantially grow.

It's difficult to make up new option patients.

That's pretty much a zero sum game, to get more business, you got to take it from your neighbor.

It's difficult to generate more auction in our med neb business, but you start going over to sleep, and the discussions that we are having with sleep positions now, is their looking at and also with HMEs now, is they are looking at, how can they address more of the market?

How can they engage more patients?

How can they increase the referral rates?

And then once they are diagnosed and treated, the emphasis and focus on consumable streams, as you can see from the growth on the math side of the business, continues to be a very hot topic.

I think those things are good for patients, they're going to be good for payers over time, and they're certainly very good for the

Our next question comes from the line of Saul Hadassin with Credit Suisse.

Please PRoceed.

Good morning, guys.

Kieran, just to follow up with one question on the bilevel machines.

Can you talk about any dynamic that you might be seeing?

For example, are patients switching to the AutoSet because it is such a successful product, and hence are not needing to buy PAP components, or I guess the question is, what's happening with underlying growth in the bilevel component versus CPAP or APAP, and is there any difference?

Thanks.

Yes, we still see the bilevel growth or its category as growing for a number of different reasons.

To answer your specific question, are there some patients or physicians that are seeing the S9 AutoSet works so well that maybe there are times when they might have been moved over to the non-compliant OSA and using a bilevel, but now they're successful on the new AutoSet algorithm?

Yes, you definitely have some of that.

But if you look at the real volume in that marketplace, the drivers are things like obesity hyperventilation.

The drivers are where you need to have greater assistance in your respiratory process.

So, we still see very substantial growth opportunities in that marketplace, and we are still seeing growth.

So, the challenge we had was not market.

The market is there.

The challenge that we had was just some tired iron, and again, I'll just highlight, that's good news as far as I'm concerned, because we're entering in a controlled market release here within a couple weeks with an absolutely fantastic product or series of products.

And so, just to follow up on that, was there any changes within Medicare about entitlements to accessing bilevels during the quarter?

There had been, earlier last year, and I'll go through this and Mick can help me here.

But earlier last year there had been some tightening up of the language around reimbursement for bilevels.

But that language -- a lot of that language was reversed or pulled back.

So actually, if you look over the last four months, actually Dave, you probably know this well, been relaxed, and so we're back to a situation where it is a very favorable environment for bilevels.

I would agree with that, Kieran, and I think if you look at it on the swing basis, the qualification for going to bilevel in non-compliant got tougher in Q1.

It got easier then that new revised version, but still a little more difficult than it previously had been at the beginning of Q2.

So, where we stand today, it's still relatively good qualification standards.

But with a lot of things, sometimes the bad news travels faster than the good news travels, so I think those reimbursement issues probably affected us a little bit in Q2, but we feel good about where the final regulations stand on a go-forward basis.

Great.

Thank you very much.

You bet.

Our next question comes from the line of Derek Gilenek with Royal Bank of Scotland.

Please proceed.

Great, thanks for taking my question, guys.

Just quickly once again following up on bilevels, could you lay out for us the percent of product mix historically that bilevels have done, and what you're looking to go forward as far as product mix?

And secondly, on the opportunity.

If you would lay out for us, if you wouldn't mind, what you are looking at the opportunity in both Europe and the US and how they differ?

And your controlled launch, you said you're going in Europe first.

Any reason for that, and not going to the US first?

And timing on that, thanks so much.

Yes, so Mick and I will share this answer.

In general, we don't break out that bilevel as a total percentage.

I think at this point we will stay with that.

It's an attractive element, and I think more than anything else, it's a -- you see more of an impact both on revenue and margin, even as opposed to unit numbers.

Right, because, if you sell one CPAP, I should say one bilevel, and that's equivalent to selling, in some cases, three, four, or more CPAPS.

So there's a leverage equation in that.

CPLs, we choose to do those in the markets where we think it makes most sense.

And we've always staged it on a global basis in different markets.

Mick, do you want to talk about this specific case?

Yes, so I think you mentioned the question was why is our S9 bilevel CPL study in Europe?

It is actually a global CPL, so we are doing it in select countries and select regions in different parts of the world, including both Europe and the Americas, to test the product and watch as it ramps up.

In Europe, our S9 bilevel devices will be used from non-compliant, I should say, to a smaller extent, but often in non- invasive ventilation, or non-invasive positive pressure ventilation, NPPV section or category of the market.

So there's great opportunities for growth here.

Of course, in the US is used for non-compliant OSA, so they're different market segments, so we're testing them both in parallel with a controlled product launch.

And we -- as with the most products, the Japan will follow in a series of months later, usually about a year later.

What you're probably thinking though, was the Stellar -- the Stellar control product controlled release has begun and that is in Europe.

And the reason for that is that is where our current ventilation business is, and that is where our expertise is, so it makes most sense to do it in a market where we have the most experience.

So, as noted here, CPLs we do it differently, we do it in different ways depending on the situation.

Not unusual for us to do it regionally, and periodically, we'll do it on a global basis.

That's great.

Maybe if I can ask one more.

Maybe you can comment on Phillips acquisition of medSage, and what you think that means for the market in general and any kind of interest you would have in doing a similar type of acquisition?

Thank you.

We are very familiar with the team over at medSage, and I think it's a great platform because the concept is to help make it easier for customers to grow annuity streams.

Of all annuities.

Because the way that this normally works, is you don't normally switch out patients.

Once they are on a mask you keep them going on it.

From our viewpoint, all positive.

If that puts more capital to work and allows more HMEs to get engaged in resupply, we are all for it.

We think it's a great industry growth initiative.

Whether we put money into, or acquire, are two separate questions.

When we look at those kinds of situations, we have supported not only medSage in certain ways, but we've supported other replenishment supply businesses either monetarily, or with expertise, or management support.

Because in our mind, the idea is to build an ecosystem where HMEs understand how valuable it is to address the compliant user base, and they have the tools which allow them to do so effectively.

Because, quite frankly, it's going to help the entire industry and move it forward.

So, we are very positive about it.

Our next question comes from the line of Matthew prior with Merrill Lynch.

Please Proceed.

Good morning, guys.

Just a few questions from me.

Just the first one, Brett, if I could talk to you first on margin guidance if you would.

Previously you said in the range of 60% to 62% for gross margins?

Given FX and all the other issues, Is that still sound, or can we expect more around 60%?

In the past, we had got around the 60% or 62%, and I think that's still, on a long-term basis, that is what we would be targeting.

But we definitely will have some challenges in the short-term on currency headwinds.

And around that 60%, that low one is going to be more realistic, I think.

Just in the short-term, we can work through those currency headwinds.

In the meantime, we are working on cost-out programs across the board in terms of product development, in terms of manufacturing, and even on logistics and supplier relations, and what we do in terms of working with our suppliers in a much smarter way.

So all those programs are continuing, and we have a pretty good track record on delivering on those.

We faced some pretty solid currency headwinds in the past, and we just have to deal with that in our stride.

But in the short-term, I think it's going to be challenging with those currency headwinds.

But longer-term, I think we've got those margin expansion opportunities, and so we are pretty confident that we can do something in that area.

And some of the product flow that comes through down the pipeline, I think, will also help.

But, again, it's more of -- outside the next quarter type scenario, but definitely in the pipeline.

Great, thanks.

And Kieran, just a question for you in regards to the GP awareness, or the physician awareness program that you're pushing.

It seems to be a good way to drive your top line, especially through home sleep testing.

You're looking to reach, I think you mentioned, 10,000 primary physicians this year.

You've got a lever that you can pull going forward if you need to drive greater top line to push GP awareness harder to drive HSE and drive growth?

Well, I think it's all part of fundamental foundation building.

The complex problems you never try to address with a single solution, you try to build around them and try to attack it from multiple angles.

So, we support the clinical data which provides great support and demonstrating the benefit of identifying and treating patients.

And then, what you want to do is take the data and make sure the relevant audiences understand and can act on it.

We've spent a lot of time, effort, and resources in trying to better understand the way that primary care physicians think.

What gets them excited, and what are their barriers?

And when you look at the barriers, part of what we're trying to address is to help them understand that, A.

It is very important to address this disorder, if nothing else to address hypertension, or if nothing else, to address the diabetes that the patient may be suffering with.

And then focusing particularly on some of the ones they struggle with, like drug-resistant hypertension.

And then, on the other side, it's helping them gain comfort on therapy.

We are in a test pilot with another program, which is a consumer outreach program, looking at developing champions around therapy, and demonstrating to the world how successful and how life-changing CPAP therapy can be.

So this is the next evolution hat we are driving towards, and it has been used very successfully with other companies in similar industries.

So, we think this is an important lever.

We think it's very important in driving fundamentals.

All you have to do, if we did nothing other than take a number of the physicians that are recommending or referring one to five patients a month, right, which is the vast majority of them, and be able to move them up to five to 10.

Which is not too many when you think about the number of patients they see each month.

That is a huge increase in the referral volume.

So, yes, do we think it's going to be effective?

Absolutely.

We wouldn't be investing if it wasn't.

Is it something you turn over overnight?

No.

Is it something that you do in conjunction with other initiatives?

Absolutely.

So, that's why we test marketed it the first year.

We were so comfortable we jumped on board, and we were real pleased to see that Cephalon jumped on board as well.

And our last question comes from the line of Nathalie Kelley with Commonwealth Bank of Australia.

Please proceed.

Thanks for that.

Just following up on Matt's question, maybe firstly.

Have you been able to follow up on these education campaigns that you have been doing with the GPs, and soft of see if those referral rates are increasing?

Yes.

So, there's very positive feedback from them, and we do different kinds of programs.

Some of them we do in the general PCPs and some of them that we've done, for instance, where our ResMed foundation did some work with the Joslin, the preeminent diabetes education outfit out of Boston.

But they are nationwide.

Where we had a number of seminars across the country with 250 to 300 endocrinologists, nurse practitioners, etcetera in the audience.

And in many cases what you do is you have mechanisms to test people pre- and post- about what kind of activity, and then in some of these programs, we have mechanisms to follow up after a period of time to see whether or not the learning has stuck.

So, it is all self-reported information, so I always caution that.

But, by all indications, it is making a positive impact, and it's making a tangible impact, and it's making a lasting impact, right, which are the things you want to look for.

So, I will just say that we remain very confident, and expect to continue investing in these areas.

Great, and just secondly on home sleep testing.

I just wanted to know what you are hearing in terms of how close we are with the health funds actually saying that you must go and have a home sleep test rather than the PSG?

Boy, I tell you what, we are hearing more and more out of the payers.

A number of them have run pilots, and a number of them continue to run pilots and start to refine them.

What they are finding is that when they have left loopholes, loopholes are built.

And they need to start looking at some of the language in their process, which is very natural for them to do.

They sort of start off, see their reaction, and sort of tighten up the language over time.

So, we are seeing them begin to iterate.

They are very comfortable and excited about where the progress is.

Very comfortable with the clinical data.

So, our expectation is that we'll continue to move forward, and that as we -- it's very hard to guess what month.

I never try to get down to that level.

But, we think as we look forward over the next year we are going to see some substantial forward progress.

We are now at the one hour mark, so we'll turn the call back over to Kieran Gallahue for his final remarks.

Well great.

Thanks Erica, and thank you everybody for joining the call.

As you can see, this was another record quarter for ResMed and one that we are very proud of.

And as always, I'd like to thank the ResMed team members throughout the globe.

It is clearly a global effort, it is a multifunctional effort, and we are very proud, and I'm very proud of the team we have throughout the globe.

We continue to make substantial progress in raising the awareness of sleep disorder breathing.

We continue to be able to put market leading technologies and products on the market, and our pipeline remains full.

We're very excited, and we look forward to updating you in the quarters ahead.

Thanks very much.

Thank you for your participation in today's conference.

This concludes the presentation.

Everyone may now disconnect, so have a great day.