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ResMed beats Street with ventilators driving revenue up 9%, but tailwinds ebbing.

ResMed late Wednesday reported fiscal fourth-quarter revenue of $770.3 million, topping Wall Street estimates of around $755 million. The year-over-year increase of 9% was driven by strong ventilator sales due to COVID-19, partially offset by a drop in demand for the company's sleep devices. 

CEO Mick Farrell told investors Wednesday it saw $125 million in quarterly ventilator sales and produced about 100,000 of the devices in response to the pandemic, but tailwinds for the breathing devices and ventilation masks are starting to ebb. "While we are still working on current and future contracts with hospitals, as well as city and national health authorities for these ventilators, the volumes will be significantly lower in the September quarter," Farrell noted.    

At the same time, the headwinds for its sleep apnea, COPD, and asthma businesses are also letting up. "We expect a steady sequential quarter-by-quarter sort of U-shaped recovery" throughout fiscal year 2021 as patients return to primary care, sleep, and pulmonary physicians to treat these chronic conditions, Farrell said.

In response to the global pandemic, ResMed has manufactured over 150,000 ventilators since the beginning of calendar year 2020, more than tripling its production of these potentially life-saving devices compared to the same period in 2019. However, it's a run rate that cannot continue for the company, Farrell acknowledged.

In terms of ventilator sales, Farrell said "we're not going to predict exactly what that will be here in the September quarter," in response to an analyst question, though he did describe demand for these products as having "gone down a lot." 

While Latin America, Sub-Saharan Africa, and parts of the Middle East and Asia still have "peak impact" ahead of them in terms of ventilation needs, and some patients recovered from COVID-19 may have lung damage and require long-term ventilator support, Farrell said ResMed expects a "pretty significant drop-off" in demand for ventilators in the company's first quarter of fiscal 2021.

Jefferies analysts in a Wednesday note called the $125 million in incremental ventilator sales in the quarter a "high water mark" with more modest contribution going forward, while highlighting ResMed's core sleep business hit with a $105 million headwind. As a result, they concluded that near-term COVID-19 headwinds are outweighing tailwinds with "lingering weakness" in core sleep as the pandemic continues to evolve.

William Blair analysts in a Thursday note were more upbeat about the quarter's "better-than-expected performance in the sleep segment despite COVID-19," calling that business "more resilient" than originally believed.

ResMed's sleep apnea business has been particularly hard hit by lockdowns in response to the pandemic, experiencing double-digit declines in new patient flow across all markets. CFO Brett Sandercock told investors continued headwinds for sleep devices in the first quarter of fiscal 2021 are expected, citing a "temporary" reduction in the diagnosis of new patients.

"Today in Germany, we stand at more than 85% of pre-COVID sleep lab capacity already up and running, whereas in China, the other end of the spectrum, we stand at 50% of pre-COVID diagnostic capacity in that geography; most of the other 140 countries that we sell into around the world fall somewhere between those two extremes," Farrell added.

By comparison, he said the average in the U.S. is currently about 70% of diagnostic capability but some states are closer to 60% and with some in the 75% range. 

Going forward, Farrell sees the expansion of home sleep apnea testing continuing post-pandemic as well as a steady sequential increase in sleep lab activity and visits to pulmonary specialists both in person and via telehealth.

In particular, he said telehealth and remote patient monitoring represent benefits to ResMed's business as COVID-19 has accelerated digital health tech adoption and demonstrated the value of virtual diagnosis outside of hospital settings.

"This acceleration of digital health adoption represents a significant medium to long-term tailwind for our business," Farrell said, pointing to the launch of ResMed's AirView cloud-based remote monitoring software for the company's ventilators in Europe. Using AirView, he said healthcare providers can remotely monitor patients' respiratory rates and blood oxygen saturation levels, a tool he contends will outlast the pandemic.

Author: Greg Slabodkin


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