Q4 is the 70th consecutive quarter of revenue growth since ResMed went public.
All mask categories had strong growth. ResMed took market share in Q4, especially with the Mirage nasal mask.
Accessories also had strong growth. The Home Medical Equipment (HME) providers and Durable Medical Equipment (DME) providers are being more systematic in replenishing and delivering supplies to patients who need them.
ResMed had strong sales in Flow Generators in Q4, particular in high-end devices. ResMed benefited from having all of its PAP devices configured on the smaller and quieter S9 platform and from the shift from CPAP to APAP, which provides more flexible therapy, improves patient comfort and appears to enhance compliance. In the Americas, the S9 AutoSet and the VPAP Adapt, an adaptive servo-ventilator, sold well.
Europe's macroeconomic environment was still challenging, although the company had relatively strong sales in Germany and the U.K. Bilevel, AutoSets CS, ResMed's the adaptive servo-ventilator in the rest of the world, and the Stellar products, did well despite the challenges in Europe.
The Asia Pacific region had a solid quarter, with the Japanese market doing particularly well. Some cardiologists in Japan are using adaptive servo-ventilation (ASV) in patients without sleep-related breathing problems, as they have found an improvement in chronic heart failure parameters. Although Asia Pacific had been weak for a few quarters, it came back strong in Q4.
Ventilation sales of Stellar 100 and 150 continue to grow, especially in the rest of the world. The Stellar 150 includes iVAPS, a new automatic bilevel mode. iVAPS is also included in the new S9-based VPAP ST and the ST-A products, which are launching this quarter. VPAP ST was approved by the FDA for respiratory insufficiency and will be launched on the much smaller S9 platform.
With regard to home sleep testing, 2/3 of the commercial payers now require pre-authorization for the PSG sleep test. It expects that by the end of 2012, 25 percent of all sleep tests will be home sleep tests. About 30 percent of the sleep labs are involved in home sleep tests. ResMed expects to see a 100 percent increase in home sleep tests.
Going forward, ResMed expects modest to very poor growth in the low-end CPAPs and good growth in the high-end CPAPs. It also expects growth in bilevels and AutoSets. The movement to home sleep testing should increase the demand for AutoSet.
Competitive bidding impacts only 10 percent of ResMed's revenue (20 to 25 percent of US business). The only impact is with Medicare/Medicaid, not private payers. ResMed is supporting its customers to make sure they comply with the latest Medicare requirements. So far, competitive bidding has not had any impact. Linde's acquisition of Lincare at a decent premium is evidence that Linde also does not see competitive bidding as an issue.
ResMed also is not concerned about the new Medicare rules requiring Home Medical Equipment providers to verify that a device is no longer working before replacing it. It believes it is a common sense solution and it only sees 2 masks per device used per year, while Medicare allows 4. Further, ResMed's customers have already added into their call center scripts and documentation, steps to show the equipment is nonfunctional.
It is still unclear how the med tech tax will affect ResMed. It may apply to its dental appliances, but that is an immaterial part of its business. It may also apply to the hospital products, such as the Stellar 100 and 150. It expects the final regulations in September to determine what products will be subject to the tax.
A few weeks earlier, ResMed acquired Umbian, a data services technology provider in Nova Scotia that offers U-Sleep. U-Sleep is a patient compliance management solution that monitors CPAP devices and provides interactive follow-up services for health care providers. U-Sleep monitors devices from a number of different companies. U-Sleep should help the Home Equipment Providers reduce costs for compliance outreach. The impact on revenues and earnings will be minimal. A year from now, it should be accretive by $.01/share.
The newest clinical data have linked sleep disorders to: (1) a higher risk of dying from cancer, (2) diabetic peripheral neuropathy, (3) frequent co-morbidity with polycystic ovary syndrome, (4) poor prognosis in chronic heart failure, (5) readmission of patients with chronic heart failure to the hospital, and (6) retinal vein occlusion. Nighttime ventilation significantly improves the outcomes. ResMed is seeing better compliance due to improvements in the devices and the Medicare programs that will not reimburse HME until the patient is using the device. The compliance rate is now in the mid-70s after one year.
ResMed believes 25 percent of adults have sleep-related disorders. It has been marketing to primary care physicians through social media. It is also educating them about the relationship between sleep disorders and diabetes. With more providers requiring pre-authorization, ResMed believes more physicians will move to home sleep tests and the APAP, because these can be understood by primary care physicians, not just sleep physicians.
A recent study of public awareness of sleep-disordered breathing for members enrolled in the not-for-profit U.S.-based Union Pacific Railroad Employes Health Systems health plan resulted in 145 percent increase in PAP therapy and a reduction of $5 million in medical costs for those using the PAP therapy.
Financials.
Global revenues in Q4 increased by 9 percent, and by 13 percent on a constant currency basis. Revenues in the Americas increased by 13 percent. Revenues from the rest of the world increased by 3 percent or 13 percent in constant currency.
Revenues for fiscal year 2012 increased 10 percent.
Gross margins for Q4 were 60.9 percent, an increase from Q3. ResMed expects future gross margins to be between 59 percent and 61 percent, assuming current exchange rates.
SG&A expenses for Q4 increased by 3 percent, or 9 percent in constant currency terms. SG&A expenses as a percentage of revenue was 28.5 percent versus 29.9 percent a year ago. ResMed expects SG&A to be approximately 29 percent of revenue in fiscal year 2013.
Net income for Q4 increased 31 percent. GAAP EPS increased by 43 percent to $0.53 in Q4, which was a record for the company.
Earnings for fiscal year 2012 increased by 19 percent.
Net cash balances at the end of the quarter were $559 million.
About 50 percent of ResMed's manufacturing occurs in Singapore and that percentage will be increasing. There is still a 6 month lag in the effect of the U.S. dollar versus the Australian dollar. The majority of R&D is taking place in Australia.
In Q4, ResMed repurchased 2.8 million shares for $89 million. In fiscal year 2012, it repurchased approximately 9.3 percent of its diluted shares outstanding, 38.6 million shares. At the end of June, 8.8 million shares remain available for repurchase under ResMed's buyback program. ResMed expects to buy back at least 2 million more shares, which would equalize the dilution resulting from employee equity grants. It probably won't be as aggressive as shares purchases in fiscal year 2012, especially in light of paying a dividend as well.
ResMed declared a quarterly dividend of $.17, which was flat with the prior quarter.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
http://seekingalpha.com/article/777171-resmed-management-discusses-q4-2012-results-earnings-call-transcript?part=single
Copyright 2012 Jaygo's Earnings Conference Call Summaries
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