Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: Flash Update: 3Q18 Earnings Results
Prev. Ed.: Apr3, 2018; 2Q18 Earning Update
Flash Update [Note: earnings update in progress; final report to follow]
ResMed announced 3Q18 adjusted earnings per share (EPS) of 92 cents, up 29.6% from the prior-year quarter.
Including one-time items, ResMed reported EPS of 76 cents in 3Q18, up 22.6% year over year (y/y).
A Closer View of the Top Line
Revenues in 3Q18 increased 15.1% y/y (up 10% at constant exchange rate or CER) to $591.6 million.
On a geographic basis, excluding Brightree, revenues in theUnited States, Canada and LatinAmericatotaled$317.5 million, reflecting a 7% increase over the prior-year quarter. Moreover, revenues from Brightree in 3Q18 totaled $39.9 million, up 14% y/y. Revenues in the combined EMEA and APAC region were$234.2 million, highlighting an 16% rise at CER from a year ago.
Adjusted gross margin contracted 10 basis points (bps) y/y to 58.2% in 3Q18. Fall in average selling prices led to the gross margin contraction, which was however, partially offset by procurement and production efficiencies.
Selling, general and administrative expenses were up 7.3% y/y to $147.9 million, while there was a 6.6% increase in Research and Development expenses to $37.4 million. This led to an 7.1% rise in adjusted operating expenses, which amounted to $185.3 million. However, adjusted operating margin in 3Q18 rose 230 bps to 26.9%.
Financial Updates
ResMed exited 3Q18 with cash and cash equivalents of $704.3 million, compared with $858.9 million at the end of 2Q18.
Year to date, the company generated $375.6 million of cash flow from operations, up from the 3Q17 figure of $273.7 million.
Along with the 3Q18 earnings release, ResMed announced a quarterly dividend of 35 cents per share, same as the prior payout. The dividend will be paid on Jun 14, to shareholders of record as on May 10.
As part of the company’s capital management plan, ResMed repurchased 200,000 shares for$19.4 million in 3Q18.
Guidance
Management expects SG&A expenses of around 25%, as a percentage of revenues, for the 4Q18. R&D expenses, as a percentage of revenues, are projected in the band of 6-7% for 4Q18. This reflects marketing expenses associated with product launches along with the ongoing legal expenses.
MORE DETAILS WILL COME IN LATER, IMMINENT EDITIONS OF ZACKS RD REPORTS ON RMD.
Portfolio Manager Executive Summary
ResMed, Inc. (RMD) designs, manufactures and distributes medical equipment for the treatment and diagnosis of sleep disordered breathing (SDB). Its primary focus has been to commercialize a device to treat obstructive sleep apnea (OSA). The company produces nasal continuous positive airway pressure(CPAP), variable positive airway pressure (VPAP) and AutoSet systems for the diagnosis, titration and treatment of sleep disordered breathing.
Of the nine firms covering the stock, three (33.3%) conferred positive ratings, four (44.4%) provided neutral ratings, while two (22.2%) assigned a negative rating to the stock.
Positive outlook (3/9 firms): According to the bullish firms, revenues and EPS exceeded estimateson the back of strength in all three product segments — generators, masks, and Brightree. Operating margin also exceeded the firms’ estimates. The firms also believe management will continue to record improvement in operating margin. In America, Mask revenue growth exceeded the firms’ expectations.They are impressed withResMed’ssuccess in acquiring new patients and expect the bullish trend to continue for the next few quarters as well. The firms also expect strong growth through the rest of the year on the back of mask launches and focus on improving customer resupply processes. The firms also stated that device revenue growth in America is significantly high in the quarter. The firms are also impressed with the better-than-expected performance of AirMini. They expect increased adoption of AirMini throughout fiscal 2018. The bullish firms also believe that a range of software updates and platforms like the recently-launched ConnectPRO should roll out in the coming days. The firms also believe that ResMed will bank on Brightree’s home hospice and nursing capabilities to drive growth outside the hospital setting.
Neutral outlook(4/9):According to the neutral firms, revenues and earnings surpassed estimates. Per the firms, ResMed has countered organic weakness by spending substantially on acquisitions. The firms also believe that revenueswere mainly driven by domestic mask performance. They believe organic growth, excluding contribution from Brightree and acquisitions,was probably in the mid-single digits in 2Q18. Gross margin also outpaced expectations.
Negative or equivalent outlook (2/9 firms): According to the bearish firms, ResMed’s 2Q18 revenues and earnings surpassed estimates on the back of tax benefit. The firms believe that the tax rate is a tailwind for the short term, but it eventually turned out to be a headwind. Mask sales were higher than the firms’ estimates. Despite the recent launch of AirMini, the air flow generator sales were nominally below the firms’ expectations.
Apr 3, 2018
Overview
ResMed, Inc. holds a major position in the worldwide market for generators, masks, and related accessories for the treatment of OSA and related respiratory disorders. ResMed is a leading designer, manufacturer, as well as a distributor of medical equipments for the treatment and diagnosis of SDB and related respiratory disorders. In 2014, the company introduced products like the AirFit P10 nasal pillows system, AirFit N10 nasal mask, AirFit F10 full-face mask and the Astral platform. Again in 2015, ResMed launched new products across its flow generator categories, which included the AirSense 10, AirCurve 10, Lumis and the AirView, its cloud-based remote monitoring and therapy management system, along with Air Solutions platform that provides a suite of end-to-end healthcare informatics solutions.
ResMed sells its products worldwide through a network of distributors, independent manufacturers' representatives and direct sales force. The company has manufacturing facilities in Australia, California, Singapore, Malaysia, France and Germany. Additional information is available online at
The firms identified the following factors to evaluate investment in RMD:
Key Positive Arguments / Key Negative ArgumentsResMed holds a leading position in the wide OSA market. / The firms expect ResMed to face more competition in the respiratory markets, as barriers to enter in the OSA market are extremely low. ResMed faces competitive pressure in the sleep therapy market.
The company recently made some significant acquisitions to expand its global business. We believe the buyout of Brightree and Inova Labs will enable ResMed to expand its customer base across the world map. / ResMed generates a significant portion of its revenues from international sales. If the U.S. dollar strengthens, it will hamper the rest of the world revenues.
Firms believe that recent and pending product launches, as well as more aggressive pricing efforts, will help ResMed stem its share losses. / An unfavorable geographic mix and a decline in average selling price are impeding margins.
Note: The company’s fiscal year ends on June 30. Fiscal references differ from the calendar year.
Apr 3, 2018
Long-Term Growth
OSA is still under-diagnosed due to first line diagnosis requirements for a full polysomnography (sleep test) in an attended sleep laboratory setting. However, the medical community at large is increasingly aware of the qualitative and quantitative aspects of the sleep disorder business in day-to-day life. Going forward, ResMed is consistently looking for potential acquisitions where the following three criteria can be met: the business is aligned with the long-term ResMed 2020 drug strategy; management can leverage the asset to increase ResMed shareholder value; and a cultural fit can be achieved between the business team and ResMed. Per management, the acquisitions of Inova and Maribo duly met these criteria.
Currently, the company believes that the SDB market will continue to grow on a number of factors such as increasing awareness of OSA, improved understanding of the role of SDB treatment related to cardiac, neurologic, metabolic and related disorders, and increasing use of digital and product technology to improve patient outcome and create efficiencies for customers.
ResMed 2020 Strategy and its three horizons: ResMed, in its ‘ResMed 2020’ plan, discussed about three horizons of growth supported by three main foundations, which are sustainable global leadership in healthcare informatics, expansion in high growth geographic markets and focus on best-in-class operational excellence.
The first horizon includes the company’s existing market in OSA treatment, where the company enjoys a competitive edge. The use of technologies that allow remote collection and information transfer through cloud-based computing is transforming the present clinical pathways to check on patients who use these devices. ResMed has made good progress in global leadership for connected care. In terms of progress in the first horizon, which focuses on ResMed’s core sleep apnea franchise, the company has been making advanced technology combined with digital health and connected care solutions.
The second horizon is growth in adjacent product and geographic markets, including homecare ventilation for Chronic Obstructive Pulmonary Disease (COPD), Amyotrophic Lateral Sclerosis (ALS) and other respiratory disorders, and emerging markets in China, India and Brazil. For progress in this horizon, management believes that the spectrum of cloud connected respiratory care products across ResMed’s portfolio will play a big role in reducing costs for providers and improving outcomes for COPD patients. Connected Care in ventilation can reduce costs and improve patient outcomes in COPD and beyond. ResMed continues to see portable oxygen concentrators (POCs) as animportant addition to its menu of respiratory care products. The integration of the Inova acquisition has focused on quality improvements to the current Activox POC platform. Management is making efforts to broaden this technology globally. The company plans to eventually add cloud connectivity to the POC platform which will help drive adherence for patients, fleet management for providers and activity tracking for physicians. With COPD being the number three cause of death in the Western world and the number two cause of re-hospitalization in the West, we expect this strategy of ResMed to play crucial role in its growth process. The company sponsored a favorable clinical study showing that non-invasive ventilation significantly reduces the risk of re-hospitalization for COPD patients
The company plans to add cloud connectivity to the POC platform which will help drive adherence for patients, fleet management for providers and activity tracking for physicians. As per a report by Journal of Global Health, there are over 380 million patients worldwide suffering from COPD.
The third growth horizon incorporates a portfolio of opportunities in new markets, including clinical adjacencies such as atrial fibrillation, heart failure with preserved ejection fraction, asthma, chronic disease management as well as sleep health and wellness. Another key area of this horizon is ResMed’s work on chronic disease management algorithms, including population health models, health care analytics, care co-ordination and Software-as-a-Service models for home health, home nursing and hospice.
Valuation
ResMed primarily focuses on manufacturing and distributing sleep therapy products. Thus, risks to the target price include ResMed’s greater degree of exposure to any downturn in the market compared to its primary competitor. Additionally, the reimbursement environment could become less favorable in the future
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Rating DistributionPositive / 33.3%↑
Neutral / 44.4%↓
Negative / 22.2%↓
Avg. Target Price / $90.25 ↑
Maximum Target / $93.00 ↑
Minimum Target / $70.00 ↑
No. of Analysts with Target Price/Total / 6/9
Downside from Current / 3.6%
Maximum Upside from Current / -0.7%
Minimum Downside from Current / -25.2%
Recent Events
On Jan 22, 2018,ResMed reported 2Q18 results. Highlights are as follows:
ResMed announced 2Q18 adjusted earnings per share (EPS) of $1.00, up 36.9% from 2Q17.
Revenues in 2Q18 increased 13.4% y/y (up 11% at constant exchange rate or CER) to $601.3 million.
Other Events
OnJan 8 2018, ResMed introduced ResMed-branded portable oxygen concentrator (POC) —Mobi.It offers an excellent balance of oxygen delivery, weight and battery life so that millions with chronic obstructive pulmonary disease (COPD) or other respiratory condition can enjoy ResMed-quality oxygen therapy at home or on the go.
Revenues
Revenues in 2Q18 increased 13.4% y/y (up 11% at constant exchange rate or CER) to $601.3 million.
ResMed currently markets products in over 100 countries through a network of distributors, independent manufacturers' representatives and direct sales force. Geographically, the markets are divided into three major categories: The Americas (including North and Latin America), EMEA and Asia Pacific. Sales in the Americas, accounted for 62.9% of revenues in 4Q17, whereas sales from the combined EMEA and Asia-Pacific region accounted for the remaining 37.1%.
On a geographic basis, excluding Brightree, revenues in the Americas totaled $329.2 million, reflecting a 12% increase over 2Q17. Moreover, revenues from Brightree in 2Q18 totaled $38.7 million, up 14% y/y. Revenues in the combined EMEA and APAC region were $233.4 million, highlighting an 8% rise at CER from 2Q17.
Some of the positive outlook firms expect FY18 revenues of around $2,280 million. The firms also project revenues at around $555.2 million for 3Q18.
Starting 3Q16, ResMed’s operating divisions are Devices and Mask Systems and Accessories.
Devices
Devices category includes flow generators along with humidifiers. Flow generators are integral to the treatment and diagnosis of obstructive sleep apnea (OSA). This condition relates to some sort of obstruction in the airways, including enlarged tonsils or adenoids, a deformed uvula or fatty tissue in the throat area. OSA patients’ breathing problems are not alleviated completely by the continuous positive airway pressure (CPAP) mechanism. Moreover, the CPAP mechanism cannot be used for the treatment of central sleep apnea (CSA), caused by a dysfunction in the thalamus area of the brain, or the mechanism that controls breathing and complex sleep apnea, which is a combination of OSA and CSA.
Apart from CPAP, ResMed develops variable positive airway pressure (VPAP) and AutoSet systems for the titration and treatment of SDB. The flow generator systems deliver positive airway pressure through patient interface, a small nasal mask, nasal pillows system or full-face mask. The VPAP units deliver ultra-quiet, comfortable bi-level therapy. AutoSet systems are based on a proprietary technology to monitor breathing and can also be used in the diagnosis, treatment and management of OSA.
The company reported domestic device sales of $173.7 million in 2Q18, up 13% y/y. In the combined EMEA and Asia-Pacific region, device sales were $163.3 million, up 11% y/y (up 5% at CER). Globally, device sales increased 9% at CER basis. Notably, ResMed included sales from the recently acquired Brightree within this business division. Moreover, revenues from Brightree in 2Q18 totaled $38.7 million, up 14% y/y.
ResMed has continued to drive solid device growth on increased reimbursement for telemonitoring of sleep devices compared to non-cloud connected devices, effective Jan 1, 2018.
Globally, the number of patients managed on the AirSolutions platform and the number of daily uses of its Brightree platform continue to grow rapidly. Earlier, in 2Q17, ResMed announced new data from Price Waterhouse Coopers which demonstrates that patients with sleep apnea who use ResMed's myAir have greater adherence to CPAP (continuous positive airway pressure) therapy. The company also launched AirMini, the world's smallest continuous positive airway pressure (CPAP) device.
ResMed has continued to witness exciting opportunities ahead for Adaptive Servo-Ventilation (ASV) therapy, especially for patients with central sleep apnea, complex sleep apnea, pain management medication and posttraumatic stress disorder (PTSD). For this innovative and beneficial therapy the company feels excited to get back to growth.
The company now hasmore than 6 million patients monitored bythe cloud-based AirView system and over 4 million patients monitored by 100% cloud connected medical devices at home.
Mask and Other Accessories
Mask systems are important elements of the SDB treatment systems. The company markets sleep recorders for the diagnosis and titration of SDB in sleep clinics and hospitals. Masks are a primary determinant of patient comfort and, as such, can be utilized to drive patient compliance with therapy.
ResMed currently has a range of mask products, the most recent being the AirFit Series including AirFit P10 nasal pillow system, AirFit F10 full-face mask and AirFit F10 nasal mask. Further, to enhance patient comfort, convenience and compliance, ResMed has been expanding its use of cloud-based patient management and engagement platforms such as AirView and myAir enabling remote monitoring, over-the-air trouble shooting and changing of device settings. It also introduced its S+ application, which is a personalized sleep solution that uses bio-motion sensors, to measure an individual’s sleep stages and environment and deliver personalized feedback that helps improve sleep.
Globally, masks and other sales increased 13% y/y at constant currencydriven by strong adoption of the F20 and N20 mask products.In the Americas, sales reached $155.5 million, up 12% y/y. In the combined EMEA and APAC regions, sales totaled $70.1 million, reflecting an increase of 23% on a reported basis (up 16% at CER basis).