瑞思邁 (RMD) 2013 Q2 法說會逐字稿

Welcome to the second-quarter ResMed Inc.

earnings conference call.

My name is Adrienne, and I will be your operator for today's call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

Please note that this conference is being recorded.

I'd now like to turn the call over to Constance Bienfait, Director of Investor Relations at ResMed.

Constance, you may begin.

Thank you, Adrienne, and thank you all for joining us today.

The Company has asked me 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 developments 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 exist that could cause actual results to materially differ from the forward-looking statements.

These factors are discussed in ResMed's SEC filings such as Forms 10-Q and 10-K, which you may access through the Company's website at www.resmed.com.

Please limit your questions to two at any one time, and then you can place yourself back in the queue.

With that said, I would like to turn the call over to Peter Farrell, ResMed's Chairman and CEO.

Peter, go ahead.

Thank you, Connie, for that exciting introduction.

Thank you, again, for joining us, and I will begin with some summary remarks and then turn the call over to Brett Sandercock, our CFO, for more financial details, and then, of course, as usual, we will take questions.

So, first, a brief financial summary, which, as I said, Brett will fill in the details a little bit more later.

We finished with another extremely robust quarter.

You might be well and truly tired of hearing this, but this now represents our 72nd consecutive record quarter for 18 straight calendar years in which we have grown the topline.

Global revenue in the second quarter of 2013 grew 13% to $377 million, up 14% on a constant currency basis.

Revenue in the Americas grew 16% to $212 million, and ROW revenue increased 10% or 12% in constant currency terms to $165 million.

We believe that our continued market growth is being driven primarily by two factors.

First, the fact that more people are finally beginning to accept that untreated sleep disordered breathing is, in fact, a major public health problem, and secondly, our superior product quality, coupled with our full solution offerings, which I'll come back to in a moment.

Net income for the quarter increased 24% to $78 million, while GAAP EPS increased 26% to $0.53 for the quarter.

If we exclude amortization of acquired intangibles, EPS was a record $0.54.

Our global growth in flow generators this quarter was primarily driven again by our high-end devices with strong sales of AutoSet, Bi-Levels and our adaptive servo ventilation products, the VPAP Adapt, as well as Stellar 101 150 products product.

And as we had originally anticipated, having all our PAP products configured on the smaller, quieter and more appealing S9 platform has worked out quite successfully.

We also believe we continue to take share in the AutoSet space, as well as continue to gain back share in Bi-Levels, and there's still plenty of room for us to continue to grow.

The new EasyCare Online Compliance Management system continues to be adopted broadly, and we're seeing solid uptake from both existing, as well as new accounts.

Products and programs, which provide superior therapy and better compliance bring value to patients, customers and payers.

It's all about driving outcomes for these constituencies and having the data to drive compliance and adherence to improve lives and save healthcare costs is the right space to be.

With respect to masks, all categories continued to do well, while accessories also grew quite strongly.

Both large and small HMEs continue to see the benefits for themselves and patients in being able to be more systematic about supplying replenishment products to those patients who need them.

With the great success of our recent mask offerings, we are reaping the benefits of the resupply of these masks as patients remain happy to stay with what has been most comfortable and effective for them.

And I'm proud to announce that on behalf of the ResMed team, ResMed has emerged as the most preferred mask brand based upon a statistically significant global study done in the timeframe August through September last year by a UK-based market research firm, DVL Smith.

The sleep apnea patients surveyed were current PAP users and used their device for at least four nights per week, and they were all using masks, every mask type.

That is full face, nasal or pillows, and also they were using all brands.

Now admittedly we initiated and paid for the cost of the study, but we have no input whatsoever to the study's conclusions.

So we are very pleased about that.

With that said, we're keeping a watchful eye on the recently released competitive masks.

Also as an aside, we plan to launch our own suite of ResMed masks during the latter part of this year or during this calendar year.

Turning to the rest of the world, and despite the fact that there is still a lot of economic uncertainty in Europe, the UK and Germany and France in particular, these territories -- Germany, France and UK -- delivered solid quarterly results.

And regardless of the challenging economic climate and concomitant fiscal restraints, the market is still focused on treatment, which keeps patients out of the hospital and keeps them healthy.

Sleep disorder breathing treatment does this in spades.

France has just initiated a new telemonitoring requirement to track compliance, and we think this is an appropriate step and bodes well for our superior data monitoring solutions.

AutoSet CS, which is our adaptive servo ventilator product in Europe, and the Stellar products again did well in most parts of Europe.

The Asia-Pacific region also had a solid quarter with robust sales in Japan, particularly with Stellar and also AutoSet CS, our ASV product, as I said, as well as the Bi-Level product portfolio.

There's also a great deal more focus on compliance in Japan with data capture hopefully lessening the need for so many physician visits or at least shortening the time that the patient needs to spend in the physician's office.

With respect to ventilation, the VPAP ST-A is making inroads in most geographies, and as I've already mentioned, sales of Stellar are quite robust, especially in Germany and Japan.

In the US, we are in the process now of hiring respiratory care managers to call on referral points in hospitals, and we expect this to drive our home ventilation sales.

On the HST or home sleep testing front, about 60% of commercially covered US adult lives are now under a preauthorization requirement for attended PSG or polysomnography in an effort by payers to steer providers and patients towards HST.

This is anticipated to go to 75% of commercially covered lives by this spring.

We estimated that at the end of 2012 about 25% of all sleep tests were HST, and we expect this number to grow to 50% or over by the end of this calendar year.

We continue to see a steady increase in the number of sleep labs involved in HST, averaging about 35% in the last 12 months, which rose to 40% in November in response to preauthorization enforcement.

We are also involved in primary care physician awareness initiatives as HST continues to advance with PCPs becoming increasingly more important in the diagnosis and management of the sleep apnea patient.

As flagged in the press release, we've been pioneering a market dynamic for several years that is now starting to get traction.

The sleep market is not just about selling equipment in order to treat SDB, but it is about forming relationships with our customers, the HMEs and payers.

A culmination of our range of our high-quality flow generators, the best and most comfortable masks and accessories and easy to access robust data makes ResMed in our view the best value proposition for all providers.

In short, we provide for a full integration.

The sleep market is one of the first healthcare markets to actually provide useful treatment data and has done so for about a decade.

Good growth would account for using EasyCare Online as evidence of its value.

We feel we are also getting traction with payers and making the case for CPAP therapy.

With more understanding of the prevalence and severity of sleep disordered breathing and obviously its association with chronic comorbidities such as heart failure, diabetes, gerd, depression and so on, the case to reimburse is SDB therapy and authorization and continuous resupply makes more and more sense.

And as evidenced by the shift of preauthorization for PSG, patients understand that HST is making sleep testing easier and cheaper for everyone.

In addition, putting patients on AutoSet rather than straight CPAP, even after an in lab sleep test, is more efficient for the HME and, in fact, more effective for the patient.

As recognized time and again, treating SDB has proven to be preventative for a multitude of other more severe and costly comorbidities, certainly more costly than simply treating sleep disorder breathing.

In short, it is easy to make a compelling case for the payers.

As we have noted many times over, the diagnosis and treatment of SDB is the holy grail of medical treatment for three reasons.

It drastically improves patient's quality of life, it slows down and even improves concomitant comorbidities and additionally reduces inpatient and outpatient costs.

Now, let me turn the call over to Brett for some additional financial detail and then we'll take questions.

So over to you, Brett.

Great.

Thanks, Peter.

Revenue for the December quarter was $376.5 million, an increase of 13% over the prior year quarter.

Unfavorable currency movements reduced our second-quarter revenues by approximately $4.1 million.

In constant currency terms, revenue increased by 14%.

Income from operations for the quarter was $92.1 million, an increase of 37% over the prior year quarter.

Net income for the quarter was $77.9 million, an increase of 24% over the prior year quarter.

Diluted earnings per share for the quarter were $0.53, an increase of 26% over the prior year quarter.

Gross margin for the December quarter was 61.8%, up sequentially from Q1 FY 2013.

On a sequential basis, our gross margin continued to benefit from a favorable product mix.

Looking forward, we expect our gross margins for fiscal year 2013 to be in the range of 60% to 62%, assuming current exchange rates.

We continue to execute on initiatives targeted at improving our global manufacturing supply chain and logistics cost structures.

SG&A expenses for the quarter were $107.8 million, an increase of 7% over the prior year quarter.

In constant currency terms, SG&A expenses increased by 8%.

SG&A expenses as a percentage of revenue improved to 28.6% compared to the year ago figure of 30.2%.

Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 28% to 29% for fiscal year 2013.

R&D expenses for the quarter were $30.3 million, an increase of 11% over the prior year quarter.

In constant currency terms, R&D expenses also increased by 11%.

R&D expenses as a percentage of revenue were 8.1% compared to the year ago figure of 8.2%.

Looking forward, we expect R&D expenses as a percentage of revenue to be in the range of 8% for fiscal year 2013, reflecting a continuing strong Australian dollar and also continued investment in our product pipeline.

Amortization of acquired intangibles was $2.5 million for the quarter, while stock-based compensation expense for the quarter was $9.5 million.

Our effective tax rate for the quarter was 20.8% compared to the prior year quarter effective tax rate of 24.2%.

The lower tax rate reflects the benefit of lower effective tax rate in our Singapore and Australian operations.

We currently estimate our effective tax rate for fiscal year 2013 will be in the vicinity of 21% to 22%.

On December 7, 2012, the IRS released their final regulations for the medical devices excise tax.

Following our evaluation of the regulations, we believe a relatively small number of our products are subject to the medical device tax and as such estimate the annualized financial impact from the tax to be less than $1 million.

Turning now to revenue in more detail.

Overall sales in the Americas were $211.8 million, an increase of 16% over the prior year quarter.

Sales outside the Americas totaled $164.7 million, an increase of 10% over the prior year quarter.

In constant currency terms, outside the Americas increased by 12% over the prior year quarter.

Breaking out revenue between product segments.

In the Americas, flow generator sales were $93.7 million, an increase of 16% over the prior year quarter, reflecting strong growth in our APAP and Bi-Level devices.

Masks and other sales were $118.1 million, an increase of 16% over the prior-year quarter underpinned by strong contributions across our mask product range and continued growth in accessories.

For revenue outside the Americas, flow generator sales were $108.9 million, an increase of 9% over the prior year quarter and in constant currency terms an increase of 11%.

Masks and other sales were $55.9 million, an increase of 11% over the prior-year quarter or in constant currency terms an increase of 16%.

Globally in constant currency terms, flow generator sales increased by 13%, while masks and other increased by 16%.

Cash flow from operations was $93.6 million for the quarter, reflecting strong underlying earnings and working capital management.

Capital expenditure for the quarter was $13.8 million, while depreciation and amortization for the December quarter totaled $19.3 million.

Our share buyback continues to play a major role in our capital management program.

During the quarter, we repurchased 1 million shares for consideration of $40 million.

For the first half of fiscal year 2013, we have repurchased 1.2 million shares for consideration of $48.1 million.

At the end of December, we had approximately 7.6 million shares remaining under our unauthorized buyback program.

During fiscal year 2013, we intend to purchase at least 2 million shares under our share buyback program.

In addition to our buyback program, our Board of Directors today declared a quarterly dividend of $0.17 per share, consistent with our previously advised dividend policy.

Our balance sheet remains very strong.

Net cash balances at the end of the quarter were $657 million, and at December 31, total assets were at $2.3 billion and equity was $1.8 billion.

I will now hand the call back to the operator for your questions.

(Operator Instructions) Dan Herrin, UBS.

Well, good morning, everyone, and thanks for taking my question.

I would just like to explore that a little bit about product launches, and is there any more detail on what product launches were required do you think to maintain growth through as the comps get tougher through the second half?

Well, Dan, as you are aware, we have been on this kick for many years.

I mean we typically come out with masks, a new mask offering somewhere in the timeframe of nine to 12 months, and new devices tend to be more like 18 months to two years.

So this is just continuing what we normally do, but the focus is on improving comfort, reducing noise and also attempting to reduce COGS.

But maybe I'll throw that question for more detail to Don Darkin, and Don, would you like to say a few words about product releases?

Yes, so, Dan, we have currently had a fairly robust pipeline over the last three to 5 years.

We're really just following that plan out.

We've got a number of offerings in all segments coming through this calendar, and it's just basically we're laying them out as planned previously.

So, as Peter mentioned, they're addressing the main high points of mainly in comfort and costs, but essentially they will be -- we are fairly comfortable that they will be through this fiscal end calendar year launching.

Okay.

Thanks very much, and one just that is on a different track, can you just remind us again on the potential new flow from the SERVE-HF study?

(multiple speakers) The timing, etc.

Right.

At the end of January, we will be pretty much at the full complement of patients for the study.

And we've got some substudies ongoing, which probably won't complete their patient requirements until the end of May, but we're looking at still a couple of years.

We had a meeting on the cardiovascular space just this week, and people are feeling pretty comfortable with the compliance as being addressed the way it should be addressed that the units, mainly in Germany but also Germany and France, together with the bulk of all the clinical centers.

We seem to be on track, and people are quite satisfied with where we are.

But it's still early days in terms of any results.

Perhaps I could also add we're planning a study which will be run in the US, not an IFU or an indications for use study that is not an FDA-approved study, but a study done with a prestigious university -- well, let's say -- I will give it out, Duke.

And we're just dotting the Is and crossing Ts for Chris O'Connor, who is the Chair of Cardiology at Duke.

Not everything has been put to bed, but we are going to do a study, which doesn't have mortality and morbidity as the endpoints but rather a six-minute walk, quality of life injection fraction and so on.

And we're actually quite excited by that particularly based on some of the data that I referred to before coming out of Japan.

And we expect that study to be (multiple speakers)

And we shouldn't expect that study this year?

What's that, Dan?

I'm sorry to interrupt.

I just said that we shouldn't really expect any incremental news this year from those studies.

No, I wouldn't necessarily.

You'll get a lot of -- we expect a lot of good anecdotal reports, but nothing prospective, randomized controlled trial, peer review stuff if you like.

But we will still be keeping you up-to-date with you know -- met our analyses and smaller studies, if you like.

Great.

Thank you very much.

Once again, please limit your questions to two any time.

(Operator Instructions) David Clair, Piper Jaffray.

Hi.

Good afternoon, everybody.

Thanks for taking my questions.

First one, just, Peter, real quick, where do you think we are in the mix shift that's kind of been benefiting the flow generators?

I mean how much more room for shifts at the higher-end devices do you think we have here?

Well, I think there's a fair amount of runway there, David.

I mean it's sort of sticking your finger in the air to try to guess at it.

But all I can say is the momentum is clearly there, and you're not going to see very much usage of sleep labs for pressure setting, and the fact is that there are now enough peer-reviewed papers in the literature comparing our AutoSetting devices with fixed CPAP.

And, in fact, if you look carefully at the data, the data are more in favor of APAP than they are in favor of fixed CPAP in terms of compliance and compliance in terms of the number of hours a patient spends on the device.

And it really makes no sense at all given those data, and we've sold -- how many APAPs do you think we've sold now?

I know it's somewhere in the 2 million area.

I mean it's not like we haven't got plenty of data on these devices.

And it makes no sense to go to a sleep lab to have the pressure set.

I mean it's just you're better off on an AutoSetting device, which is what we've been saying for the last decade, and the data are now there to prove it.

And it's just an added inefficiency to go to a sleep lab to step up pressure.

It is an added expense, it makes no sense to spend the money, and you are not getting any benefit.

So, we see it continuing.

And particularly now with 75%, shortly 75% of commercially covered lives requiring preauthorization, this horse has got plenty of puff.

And then, for Brett, the tax rate guidance you provided and the gross margin guidance, I mean this quarter we were at the low on the tax side, and this is the second quarter in a row where gross margin has been north of that 61% midpoint.

Is this conservativism, or should we be expecting something in the back half of the year?

Dave, I think as you can see, we've been sort of tracking at the higher end of that range, and I suppose what I'd say is we're comfortable with that 60% to 62%.

If you look at some of the product mix trends and they probably got some time to play out, then you could make the case that would be sort of the higher end of that range I suppose.

But I would say, look, we're comfortable with the range we've given.

But as you can see, that trend-wise we have been at the higher end of that range.

And the tax rate, Brett?

Yeah, the tax it really sort of reflects sort of full-year tax calculations around, so the [21] to [22] is where we'll be for the fiscal, around that area.

Okay.

Thanks.

Congrats on a good quarter.

(multiple speakers)

Saul Hadassin, Credit Suisse.

Good morning.

Can you hear me?

Yes, Saul.

Thanks.

Peter, just picking you up on your comments about the data suggesting that CPAP, in fact, gives more compliance with the AutoSet training devices.

Does that give you more confidence or any confidence that you might actually see a HCPCS code from Medicare for the APAP device?

Well, Saul, that's been in the hopper for so long, I mean it's almost since the birth of my first child.

You know, there've been so -- CMS has just drawn a line in the sand on that.

It would be nice if it were to happen.

I just don't see it; I just don't see it.

I mean we went we -- in years past, we spent a lot of time providing data, going back and explaining that this is a completely different animal because it gives roughly a 40% lull of pressure through the night.

It tracks what the patient actually needs in the upper airway, and therefore, QED it's a different animal.

And they just haven't accepted the logic, so I don't expect that to change.

It would be nice, but I just don't expect it to change.

Okay.

Thanks and just one last question is also for you, Peter.

You had some good color on the adaptive fee or the AutoSet in Europe and Japan.

I'm just wondering how is that adaptive fee going in the US, and is that a device where you really need to wait for that data from the SERVE-HF study trial to see meaningful sales there?

Well, Saul, we've had data going back for almost a decade, and it's interesting when you look at the Japanese data.

Now it's not -- if you're looking at the US market, the Japanese data would be considered not tight enough, not near the protocols, not enough focus on randomized controlled trials and so forth.

But we did sort of introduce the data from 25 centers in Japan to various people here, and I've noted before that in Japan cardiologists are actually doing the sleep studies themselves.

I mean, it just so happens that the infrastructure there is conducive to that.

But cardiologists are now putting patients onto adaptive servo ventilation treatment, the AutoSet CS, without the patient having frank sleep disorder breathing.

And the reason is they maintain -- well, first of all, there's been nothing new under the sun in the treatment of congestive heart failure for decades or at least a couple of decades, and they've noted a drying out of the lungs, a drying out of the pleura, the area around the heart and the patients are just doing much better.

So we believe that by getting the word out to people that this will have an impact on the sales.

Also, the fact that the SERVE-HF study trials, what we've seen particularly in Germany and France, what we are seeing is the fact that you have seen your heart failure specialists who are involved in the study, and they are seeing positive results for the patients.

And so we're seeing an uptick in sales just by the fact that they are involved in clinical trials.

So you're right.

I don't think -- we're not sitting back hoping -- waiting for a couple of years for a study to be completed.

We are out there marketing the products, and we're doing whatever we can within the law and within the regulatory environment to draw people's attention to how valid we believe these data are.

Okay.

Thanks a lot, Peter.

Ben Andrew, William Blair.

Good afternoon, Peter.

Ben, how are you?

I'm well, thanks.

A question for you relative to mix as well as customer behavior.

What chunk of the time do you, number one, see people start out a patient on an auto and downgrade them eventually just to kind of switch out that cheaper device?

I understand the clinical argument favored, but what percent of the time do you actually see that?

And do you anticipate it getting a bit more difficult to make the economic arguments after we get implementation of Round 2?

Gosh, Ben, I just we have no visibility to those sort of data at all.

But look at asking -- I'm not aware of any large scale switching to -- I mean I know some of the hybrid DMEs will use AutoSetting and then switch the patients to a cheaper device, but I'll throw that to Mick.

Do you have any comment?

Yes, that model may have applied five to 10 years ago with the ratio of an AutoSet to CPAP device was a 3 to 1. Now you're talking more like a 1.25 to 1, and the delta -- the price difference between the two, given the whole price compression that's been happening that 3% to 5% we talked about over these last years, is a minimal delta, and it is $75 at least to get somebody to go to the patient's home and change a device.

And then you've got to ensure the settings are right, and you can have complications and return visits.

So the economic argument is driven to first-time setup on APAP with all homes we are testing, but as we said in the preamble, some PSG testing is now looking at APAP applicator as well.

And it is because it drives compliance, adherence and keeps the patient on therapy and adapts the changing needs, breathing position, changing drug regimen, change in weight, many, many factors.

So the mix shift from CPAP to APAP is industrywide, and we believe that plays to our strengths where the order set is superior to its competitors in that category, and they really are very few players, I would say, looking at a VPAP or APAP initial period and then moving the patient down to basic CPAP because of the long-term complications that they see.

In the change out and long-term upside, they see an APAP keeping the patient on therapy and keeping the patient out of hospitals for the payer and high quality of life for the patient and for the HME keeping them coming back to order replenishment masks and accessories.

So I guess you can summarize it then by saying you throw the inconvenience in with the current build between what does it cost you for an AutoSet and what it cost you for a regular CPAP, but I mean it's kind of like, why bother.

Okay.

Thank you for that.

That's helpful.

And then, Peter, have you guys had conversations with any of the larger homecare dealers or even the GPOs that address some of those groups relative to their approach after Round 2?

And again, we know the experience in round one.

We've heard you guys answer that question quite a few times.

But what sort of differential do you expect when you increase it by a factor of 10, and what sort of conversations are you having?

Thank you.

Well, I haven't had conversations, but I'll throw that to Dave.

Dave has been thinking about Round 2 quite a bit, and maybe Mick wants to make a comment.

But Dave, do you want to go first on that?

Sure.

So, Ben, with regard to this use of AutoSet in connection with home sleep testing, I think a lot of that is occurring more on the commercial side rather than on the Medicare side.

For example, all of the pre-authorization requirements that have been a large part of driving the shift toward more at-home diagnosis is on the commercial side not on the Medicare side.

So I'm not sure that any reimbursement changes on the therapy on the Medicare side are really going to have a significant impact on this mix shift to auto.

But certainly we have conversations with the trade associations about what should we be doing as an industry together with Congress or with CMS and others about affecting competitive bidding on the progress and how CMS is rolling it out and how the various bills that are in Congress are passing.

So we're certainly talking with them about those types of issues, but I guess I would throw it to Mick in terms of actual behavior.

But I think our customers have gotten pretty comfortable overall with the idea that competitive bidding is coming and other MSAs that they didn't have it in before.

So I don't expect any large change in terms of customer behavior either in terms of how they're addressing patient needs or equipment selection or how they're focusing on the business generally.

Yes, the only thing I would add to Dave's comments, which is right on track, is that we are partnering with customers; we have discussions with them every day about the pricing environment.

Round 2 could not have been more publicized.

Probably, frankly, moreso in our investor and analyst community than it is with our commercial discussions that we have on a daily basis because it's just par for the course.

We know it's happening.

We know it's going to hit July 1. Obviously they light on saying what the results were as they work through those results, but we have been having discussions with customers over the last two years on this.

I know you asked us not to use our experience in those nine cities for the [91], but as a business guy being involved in this, we've experienced that those discussions happen.

We partnered with the winners.

So what we plan to do when it goes 10x is partner with the winners again.

And we have a pretty good idea of who they will be.

They are the partners who think about long-term compliance and adherence and the people who will pick up those orphan patients from some of the small folks who may go out of business.

So we know the plan, we've got it ready to put in place, and we partner with our customers on it.

So to summarize, to Dave's point, we're looking at the AA homecare and the large industry groups, but we're also working with customers on the second front on a daily basis, and we're ready to grow through competitive bidding Round 2.

Great.

Thanks, guys.

Matthew Prior, Bank of America.

Hi.

Good morning, guys.

My two questions.

Are you guys focused on the contracts that you make?

Mick, I guess compared to bidding Round 2, there's been several delays.

Can you give us any kind of thoughts you have around timing for the announcement of that?

And just I'm really interested in the pricing dynamics between CPAP and APAP given some manufacturers are pushing out lower pricing on CPAPs, you're focusing on APAPs, HST forces the APAP to switch, and I guess I'm concerned somewhat that you could see more pricing aggression in CPAP that could drag down APAP as they fit under the same code.

Yes, although they are both on the E0601 code and we talked about that earlier, that's not going to change.

We tried that five times.

But the mix shift to APAP will continue.

There will continue to be price pressure on both CPAP and APAP in a competitive market.

That's what happens.

Unfortunately we don't have any specific intel as to why Washington is moving slowly, other than if the government and they've got 10 times the number of data coming through, and probably the payment wasn't much bigger than Round 1 looking at it.

So we don't have a date as to when that's going to come.

But we are reasonably confident in our range of expectations as to what the reductions will be based upon Round 1, and some good surveys have been done across the group.

But we'll see the data when we come to it.

In terms of, you know, low-cost players in the CPAP space and its impact on APAP, there is certainly an impact there.

But if you don't have an APAP, you can't compete, and the category of the market requires an APAP.

So it's really a two or three horse race, maybe four in that space.

But it's a category that we plan to grow, and we have the best algorithms, and we've done well so far.

Connie, I don't know if you've any further intel into what's happening with CMS on that front?

No.

As Mick said, we expect that any day now as it's later than fall, so we're hearing noises that maybe next week.

But we don't know anything more than the rest of you.

Thanks.

That's good to hear to the extent they're keeping it all under wraps.

But I guess my second question just focusing on that issue of compliance and moreso informatics.

Can you talk to what percentage now of the second and third tier DMEs are running a compliance system like EasyCare Online, and in your discussions with them in the late uptick competitive bidding, do you think that's going to be a marketshare winner for ResMed or the other players?

I'll hand the second part of this question onto Don Darkin because his team put together the healthcare informatics play EasyCare Online, which is penetrating across the group.

But in terms of, you know, looking at the tiers of HMEs in the US market, particularly, but you know across the Americas, I mean as EasyCare Online was introduced, we had Respironics customers who'd been on this platform for five to six years who switched over within months, some of them weeks, onto EasyCare Online.

The value proposition of EasyCare Online of having data available immediately in a very sort of, I'll say, Apple-like user-friendly iTunes like user-friendly cloud environment has been incredibly powerful for not only the providers, the HME providers, but really more importantly the physicians who write the prescriptions and have access to those data and in future to our customers' customers for the providers to provide those data to payers and even in the future to patients as well.

But specifically to your question, the second and third tier sort of large regionals in the mom and pops really have started to adopt EasyCare Online because it's simple, it's easy and it's available.

And more and more prescriptions for connected S9 devices with wireless capability are coming to markets.

Don's team has been across this sort of S-curve adoption in EasyCare Online.

I don't know, Don, if you have any further comments on HI or on EasyCare Online?

Thanks.

Matt, we're pretty impressed with the uptake.

In fact, it has gone much quicker than we expected, and it's pretty much subdivided across all the DME groups.

What we are seeing now is a slight connection between the uptick on the data for EasyCare Online and a push in the growth as well in that space.

So we are quite pleased with that position.

And I'm expecting with a small -- we've got a bunch of pending releases within that space both with EasyCare and some other software that we would continue to see a pretty big uptick in the adoption of that, which also actually helps us with moving towards the APAP space as well for the data.

So pretty positive there.

And Matt, just to add a bit more flavor, you know on the issue of price pressures and cheaper products being available, if these guys can't offer end to end solutions and the robustness of the data management and the algorithms, I mean we are just not seeing -- look, I'm not saying we're complacent -- that's the last thing we are -- but we just don't see this as being a big deal.

One other quick note on the timing, Matt.

CMS has planned a bunch of webinars for the bidders and other constituencies in February.

So if the numbers don't come out sooner, you are going to have to push back the schedule for the whole year quite a bit.

Okay.

Great.

Thanks, guys.

[Bruce Dew], [CDN].

Thanks, guys, for taking my question.

Just in terms of the mass replenishment, I know you've given some update before, but you don't have sort of great detail in terms of end-user replacements.

But can I ask in terms of the sort of US mass replenishment rates, what do you think the market is at currently and in particular whether or not you've come to see sort of more, some of the small to midsize DMEs really starting to push the replenishment story?

Well, there is no question that people are seeing it as an opportunity, and the more compliance improves and we have seen compliance improve -- and, in fact, I was talking to the guy who runs a small service company in Atlanta this morning, and he surprised me by saying that their compliance is 90%.

So if you're getting that sort of compliance, you are going to obviously see an impact on replenishment.

And if you go right back to when CMS changes the rules and said you have got to show 30 days consistent use within a 90-day period of a patient put on CPAP, then you're forced to get into health informatics or at least track what's happening.

And that's also caused people to improve their compliance.

So that also has a very positive impact on replenishment.

But the latest data I saw it's still the order.

In fact, a little less than two masks per -- two cushions per patient per year.

But I'll throw it to Mick for further comment.

This ties back into Matt's question about the different tiers of HMEs, right?

So the large nationals to the core because the large nationals have all adoptive replenishment and I would say are executing pretty well, and they can always do better.

And we're working on partnering with them on that.

The large regionals, more than 50% adopted, but there's still a lot of runway left on that large regional space.

The mom and pops, very much underpenetrated in this space, and we through EasyCare Online -- that's where it ties into Matt's question -- through EasyCare Online penetrating its way into that sort of mom and pop and small regional space and give them the facility and capability and some other software elements that have gone into that that is linked to our Umbian acquisition and the U-Sleep platform as that starts to become available throughout the HME space can give far more capability for this masked replenishment to take off.

So if reimbursement allows 12 cushions per patient per year and we are sub two cushions per patient per year, you can see there is a lot left on that runway.

And mask systems is more penetrated, but that cushions area, there's a lot of room to grow, no matter what happens on the reimbursement front.

So it is a balance across, and we are looking at how we empower the whole spectrum of our HME customer group across the small, medium and large segments.

And we have a team that is dedicated and focused to doing this, a consultant sales team that focuses on this space.

So we're not just talking about it.

We're taking action.

Great.

And just my second one was just in relation to your other comments in terms of potentially some masks launched, mask product launches towards the end of this calendar year.

Just with, I guess, the recent product launches you've seen from your competitors, I guess what are you seeing in terms of the feedback and how they're doing in terms of the nasal pillow category and also the full face mask category with what some of those guys have launched?

What are you seeing from the competitor products thus far?

Well, you probably saw one of the analyst reports was out in the last day or so comparing the quality of masks, and across the board whether it's full face or whether it's, you know, nasal pillows or the nasal masks, the Mirage effects, we are just significantly above the others in terms of patient and physician acceptance.

So our current offerings are actually pretty damn good, but you can always improve.

And Don and I were chatting just before Christmas or around Christmas when I was in Sydney and Don was showing me through the new masks that are in the hopper, and they're just hugely impressive.

But even without talking about, gee, if you think what we've got now is pretty good, you will in the future.

We're not doing that.

We just continue to make improvements.

Now when others release masks, typically what you get is people are going to try them out.

So the Respironics offerings and they got offerings across those three spaces, full face and pillows and nasal.

But we're still seeing better acceptance of our current products, and we expect that to continue.

So you get a blip, people try stuff, but now we're seeing it in reverse.

Great.

Thanks.

Michael Matson, Mizuho Securities.

Thanks.

I have trouble pronouncing it, too, sometimes.

I guess, first of all, I guess I'm just curious there has been a lot of focus on the mix shift that you are clearly benefiting from with all the higher end products.

But you know to the degree you're able or willing to answer it, I'm curious what you think the actual volume growth is in the market, both US and outside the US?

Because, you know, the checks that I've been doing indicates that volume growth is actually pretty low, and obviously with these mix shifts, maybe you don't need a lot of volume growth.

But I just want to see if I'm missing something, or does that seem reasonable?

Well, you know, in terms of growth rates, we haven't changed in the last couple of quarters based on the information that's coming from a variety of sources to us.

So European growth is somewhere in the vicinity of 4% to 6%, 6% to 8% in the US and maybe a little nudged up a little higher in Asia Pac, 8% to 10% in terms of overall market growth in terms of the volume of devices.

Now, in terms of our specific business, no question that the benefit of HST to AutoSet is a huge plus, and as you know and as we mentioned in the press release, all of our products are now in the S9 platform.

That is we've seen that this had an extraordinarily positive effect on the CPAP ST-A, but also on the adaptive servo ventilators.

I mean we can -- bear in mind there, we went from an S7, which was almost like a car battery by comparison, to this much more user-friendly lighter with there was some change in the algorithm as well.

I mean we have gone to Auto 8. So we made improvements in both the size and to a lesser extent the algorithms, and we're seeing, if you like, our Bi-Level business is coming back to where we believe it should be.

And, Michael, do you have anything to add to that?

Yes, hey, Mike, and we saw your report that came out.

I think one thing that when you look at the volumes and what the growth rate is and when you say, you know, the revenue growth rate in the Americas is 6% to 8%, it may be that the volumes are slightly higher than that.

I mean you've got mix shift as a positive, but then you've got ASP declines in the 5% range that is a negative factor on that as well.

We haven't talked publicly about volume numbers within devices, you know, because we're the only company, public company that goes into this space, and whatever information we use is heard by our competitors, but we don't get the flip side of that.

But I think one area that may be worthwhile adding to your research area is the leakage that happens throughout the pipeline when a patient goes into the pipeline.

Patients sometimes when they get the referral onto PSG or HST leak out the system.

Our research has shown when you've a choice between home sleep testing, particularly in PSG and even just offering the HST, you get less patients leaking out of the system.

So that would argue that even without the macroeconomic environment improving, which we think it probably is, you have that chance to lower leakage as HST goes from 12% a year ago to 25% this last calendar year to, you know, our projections are that is 35%, 45% -- even some optimists at 50% by the end of this calendar year.

So that leakage rate we expect to reduce as home sleep testing comes to market.

So that's just another part to put in the equation of patient flow volumes.

All right.

I guess I'm still a little confused just because it sounds like now you're seeing that the pricing -- obviously peer price has been down, but I assume mix was more than offsetting that.

Maybe the difference is you're talking about the market more broadly, instead of ResMed specifically.

But okay.

I guess my other question is just on Singapore.

What portion of your production is going through Singapore at this point, and how much higher do you think that can go?

Well, we're north of 50%, and we're heading to 75%, and I don't know, Rob, do you want to make a comment on that?

Yes, Mike.

It just stays as part of the long-term plan.

We're putting growth in our production into Singapore, we're holding our facility steady.

What will happen is we'll hit some capacity limit in Singapore and evaluate our next steps.

But, as Peter said, that could easily go to 75%, but it will have to move steadily and incrementally.

We are also running production in Malaysia of headgear that was the result of an earlier acquisition of some business.

So that's picking up that number a bit as well, and our supply team is continuing to work on that strategy.

But in our growing business, we can do this in a very organized way.

And a little bit of advertising here for Singapore, last month I was down there and had the pleasure of meeting with the Economic Development Board, at least their healthcare sector people.

And when the Singapore government talks about business and government and academe working together, they actually walk the talk, and in most of the other countries where we're doing business, you know, the United States or Australia, they just don't walk the talk.

It's more of an [80] business environment that way, and it can be with taxes or unionization and whatever it is.

But the Singaporean government, they are just a pleasure, an absolute pleasure to work with.

All right.

Thanks a lot.

David Low, Deutsche Bank.

Thanks very much.

Just a question.

We picked up the story that Respironics has experimented with a direct to consumer model.

I'm just wondering what ResMed's view is of that and whether you benefited from any backlash from the Respironics pushback?

Well, you know, if you go back a couple of years ago, maybe three or four years ago, Philips actually flagged if they were looking into direct to consumer.

So we weren't surprised by this statement, to be honest, and Kroger is probably not a bad month to go.

We have done 2000 outlets, but it's -- look, I've heard a couple of stories, but there was one of the big DMEs sitting there saying, listen, you guys, and they immediately withdrew.

But then we heard that they only withdrew from the stores which were advertised, and it was still ongoing.

But, Mick, you are closer to this than I am.

Hey, look, I think it's a great question about Philips.

Basically for those on the call that may not know, Philips worked on a pilot experiment with a supermarket/pharmacy chain called Kroger's, and they have actually sent a letter to the industry about this.

I am not breaching anything that they haven't made public.

Their approach and experimentation with the pilot trial with a mass retail channel was provocative in a market.

You know, the immediate question from customers to us was, well, are you guys going to follow?

And we said no, and here is why.

We think it's all about compliance and adherance and ensuring that patient gets the best setup and the best chance to stick to the CPAP therapy.

And that conversation with a physician, respiratory therapist, or some specialist in this space up front, talking about the comorbidities, heart failure, heart attack, hypertension, diabetes, morbid obesity upfront drives adherence.

And the other part of it is just simple business models and what is won.

When you look at brick-and-mortar bookstores, they're going out of business to Amazon.

So why would a patient whose compliant and happy with their mask want to pick up their cushion at Kroger's when they could if, let's say, the HME had set up a good replenishment program and you could just click 1 on your phone or press Yes on a text or click on an iPhone app that may be the HME had provided or through EasyCare Online, or I am getting it provided for the patient.

So we think the best business model will win is the one that drives best compliance and adherence, showing a return on care, and that it's a better business model for HMEs.

And it's a wake-up call for HMEs that if you don't service the patients with cash model options, right, where it is beyond reimbursement for high deductible health plans, that someone else will fill that need.

So there wasn't a huge backlash in the quarter.

Our growth numbers were based on solid performance.

But it was an interesting experiment, and it helped us create some great conversations with our HMEs about reimbursement, cash business and replenishment that we think was in line with our conversations before and was a catalyst for further discussions about maybe penetrating those large regionals and large mom and pops as to -- and even the small guys about how to drive replenishment.

Because if you don't do it, someone else will.

That was a sort of experiment and summary from outside.

And if you're looking at direct to consumer, I mean one thing you could think more about is that it would be more along the lines of a diagnostic system, in other words something alerting to you that you have poor sleep quality or whatever, and that's along the lines of sort of buying something in an Apple store or getting something from Omron measuring the wellness in this wellness category and then directing you to go to a sleep lab or go to a sleep physician or whatever.

And to Mick's point, if you don't get compliance, we all lose.

And we're, frankly, pretty delighted with what we're hearing about compliance now, and surprisingly the government actually did something sensible.

So we are even more surprised at that.

But the CMS, the 90-day, 30-day continuous user steam has been a positive for the marketplace.

Right.

That's very helpful actually just on that same game.

You mentioned in France a change in requirements on telemonitoring.

Can you give us a little bit more detail on what's exactly going on there, please?

Well, they're using their checkbook to force people to do data monitoring.

You are going to get paid less if your device doesn't provide the appropriate telemonitoring.

But, Rob, maybe you can say a few words about that.

But we consider it -- we are in a lovely, I mean a really strong position with EasyCare Online and U-Sleep from Umbian and so on, but Rob, do you want to add some more flavor?

Yes, I would say the French body sort of managing this really gets the economic case around sleep apnea, and they want to make it even more efficient for treating.

So there's been a discussion going on for about a year to implement this requirement for wireless monitoring effectively in all patients.

And it's been a tough discussion throughout the year, but it's now reached the position where we know what to do with.

We've actually got our EasyCare Online system running in France and working well, and we're going to provide the best online monitoring in the most efficient online monitoring service in France.

It's going to be a very good solution that we will be providing there.

And the French authorities want to see this start real soon, and around the middle of the year, they will be expecting all new patients to be wirelessly monitored for sleep development.

And there is an economic incentive for people to do it for the healthcare providers because they get paid more or they get paid less if they don't provide this.

And so well actually, they will go out of business.

The reimbursement effectively changes midyear.

You get paid less if you're not offering data monitoring.

Well, the French reimbursement model, you know, it's sort of a fixed regular weekly fee, and that's has got a plan for where that goes.

And the overtime, like all issues in business, gradually decreases.

But the rates, it won't decrease if you're on the telemonitoring.

So it's effective price differential coming in there for that.

We are now at the one-hour mark, so I'll turn the call back over to Dr. Peter Farrell for his final remarks.

Thank you, Adrienne.

Yes, thanks, everybody, for listening, and I think we will call it quits.

And except to say that another great quarter from our team and I want to congratulate all ResMed employees for doing just an absolutely splendid job, once again, for our 72nd record quarter.

That's now 18 years.

I sound like a broken record.

So it's a pretty good record, which we are extremely proud of.

So thanks to the guys and the team.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating, and you may now disconnect.