ResMed Inc. (RMD) Q3 2008 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Third Quarter 2008 ResMed Earnings Conference Call. My name is Angela, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. [Operator Instructions] Before we begin, 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 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 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. With that said, I would now like to turn the call over to Kieran Gallahue, ResMed's President and CEO. Mr. Gallahue, please go ahead sir.

Thank you Angela and welcome all of you to ResMed's Q3 2008 conference call. I am going to start the call today with some remarks and I am going to pass the ball over to Brett Sandercock, our Chief Financial Officer and he will review the results in more detail then will come and open up for Q&A. Well Q3 was our 52nd quarter of consecutive growth and was a strong quarter for us as we grew our revenues by 16% on a global basis and we grew our earnings per share by 12% on a global basis. As well as generating over $33 million in cash flow from operations. In particular, this was a great quarter to reinforce the strategy of ResMed globalization. Right from beginning of this company, we focused on two things. Innovation and internationalization and this was a great quarter to reap some of the rewards of that as we saw the international business contributing significantly to our growth in the quarter. Let me, I think step back for minute and review some of the results. From a product perspective, Mask grew up 21% on a global basis and that Mask growth was supported by not only existing products, but also the introduction of new product of the product category. We introduced the Mirage Micro nasal mask. It's the first major release of technologies that work horse nasal mask section of the business in last four years. It came in promptly through the quarter. It has been received very well through, from the market place and it's just a great product. It helps in set up. It took the lot of the advantages that we saw in Mirage Quattro, full face mask integrated in nasal platform and we are getting similar reviews as we did Quattro indicating that the ease of use in setup, the efficacy of the products are absolutely fabulous. We are very pleased with the early introductory days of the Mirage Micro. Full face mask continue to be strong performance for us, particularly the Mirage Quattro, product in the and high-end of the full face mask line, so very strong productive category for us. Nasal pillows was a bit more of a mixed category for us. We continue to have the Swift II product line which has performed very well and continues to have a large share in fact the vast majority of the share of the nasal pillows market place. We have seen some competitive pressures in that in the last couple of quarters. They continued in this quarter. The good news on that by the way is that within the next week at Medtrade, we will be launching a new product into the nasal pillows category to product called the Swift LT. And we are going to introduce it as in adjunct. So not a replacement for the Swift II, but it has enough new feature sets and it is differentiated enough that it deserves its own place in the product category. So moving forward, we will have both those products the Swift II and the Swift LT and nasal pillows category and we're looking forward to some strong success out of that product line. Alright, let me move over to the Flow Generators, flow generators and global basis were up 11% and this was an area where in particular we had certain light on, that really performed well. As an example, in the Bilevel range, we have our VPAP series. And we introduced something called the VPAP Auto, midway through the last quarter. And again, this product came out of the gates very strongly. We're very encouraged by the early days of the launch and look forward to strong days ahead with the VPAP Auto. A key element of the VPAP Auto is that it merges a couple of technologies. On one side, it brings in the auto setting out rhythms that we've used in the APAP line for years. The market leading preemptive, very efficacious product category or algorithm used in the AutoSet APAP line. But it's also integrated something you're going to be hearing a lot more about, which is the Easy-Breath technology. And the Easy-Breath technology is really... it's a product category of platform under which we have both waveforms, as they're intended to improve patient's compliance and improve the efficacy of treatment. As well as a new motor, which is bring substantial value to the product line, in fact it was the basis of the very successful S8 II product line that we've launched in the international markets. The Easy-Breathe technology is a double-ended motor, that allows us to improve performance and it vastly, vastly decreases the noise. We've got a saying here that silence is compliance, it's because it's so important in order to reduce noise levels for both the patient and for the bed partner. And this is an example of where we're bringing that technology to bear [ph] and Bilevel, so good early days on that. On the higher end flow generators such as the AutoSet line, we continue to do well and we believe is a share gain position and that high-end of the market place. And very importantly and very, from a very exciting point from our view is as we speak we're launching new products in the Americas, into that category. So we're launching the S8 II Vantage [ph] and the S8 II (sic) [S8 Elite II]. The market overall will see it next week at Medtrade. It uses again that basic Easy-Breathe technology platform, both the waveforms as well as the very silent and high-performance Easy-Breathe motor. So we we're very excited about that. It's been a successful launch that we launched several months ago in international markets and its part of the contribution to our significant growth in those international markets. Lower end flow generated a bit more of a mixed bag there. What we have been finding is that a, certain feature set and particularly that feature set is expiratory, pressure release, where you have that up and down of the pressure in order to improve comfort and therefore, compliance among patients. We've seen that, there's been significant growth of that feature set in the low-end. It is not a feature set that we've had and as a result we've had some competitive pressures in that end of our product line. Good news here is that we will be releasing a product. We are going to call the S8 II escape with Easy-Breathe technology, alright with EPR, with Expiratory Pressure Relief. And that will be launched later in this quarter, will not be released to Medtrade, but will be released later in this quarter, and we'll begin shipping we believe before the end of the quarter. So non-material impact in this quarter, but great news as we move forward in plugging a whole, that we have in the product line that will allows us to be more competitive. Alright, let me take step back for just moment and talk about the market overall, I'd like to address two areas. One is co-morbidities and the other is home testing. Just to set the tones for the market as we move forward. This last quarter was actually very interesting and very encouraging quarter from the co-morbidity perspective, in particular, in the area of diabetes and the overlap between type II diabetes and sleep disorder breathing. There were several papers that were published in peer-reviewed journals that I think were important to this. One in particular was Vancorder et. al. [ph] in Chest that was released, I believe in February, and it was a review article looking at literature, that associated and that determined the overlap between sleep disorder breathing and Type II diabetes. What was really interesting about this is, is that it was a cross over that was, it was published in this clinical literature, but you saw very soon thereafter that there was pick-up in the more general press and that's always an important aspect for us as we look to move from the clinical silos in to the more general awareness and speaks well for future market expansion. In particular, many of you may have seen the 60 minute segments, several weeks ago, where they actually had two segments that featured two of the authors on that paper, Edward Tuscali and Eva Vancorder [ph] and they were only talking about sleep fragmentation and deprivation, not the full boat of sleep disorder breathing, but the end results become the same. They were showing that with healthy young males in their early 20s that, if you are sleep deprive them even for a couple of days then you start to see the symptoms of pre-diabetes. And it is very interesting way of beginning to educate the public on this overlap between type II diabetes and sleep disorder breathing, why its important to treat the sleep disorder breathing and to appropriately allow people to sleep without that fragmentation and be able to take away some of the other negative effects of sleep disorder breathing and why it should help in what is considered there other primary disorder to the extent that you want to call it. So very encouraging news, there is other news in that category, I won't go to depth on it, but it's important for us to note when we have these significant movements on the co-morbidity side. The other significant development during the quarter was in home testing in the Americas, in the United States. Many of you are aware that during the quarter, that the CMS, it's a Medicare came out with its final ruling on the national coverage decision for the use of home testing for the diagnosis of sleep disorder breathing. And in fact their final ruling confirmed their preliminary ruling from December and the net result is that they have approved home testing. They have approved in conjunction with polysomnography, so either course is acceptable in the determination of sleep disorder breathing and the movement of those patients into the care cycle to allow them to get treatment. Now as this rolls out, we believe this is going to be absolutely fantastic news for the patients and we believe for the sleep community. It's going to take a good 12 to 18 months. We still believe that in order for water to flow under the bridge and for us to see any material impact of these types of the developments. There is multiple steps that need to occur with movement from a national coverage decision to local coverage decisions having private insurers pick up the coverage of home testing and one, Aetna, a very large one has already picked it up which I think was a very positive signal and I suspect over the coming quarters we'll see others that will also pick up the coverage of home testing. Key for us during this time period as we intend to support our partners in sleep community, we feel that in this changing environment that they can play a very important role in expanding the access of care to patients integrating a home testing along with their PSG in the treatment of their patients. And it will also give other parts of the healthcare community incentives to be engaged in the diagnoses process. So the key here is a couple of developments along the co-morbidity side, one on the home testing side, both which we think are very, very health indicators for the growth of the market as we move forward. Both which have some time line associated with, but both which we think are going to have significant long-term impact. So instead of continuing on that one, I turn the phone over Brett, Brett will go through the results in more detail and it will come back and take your questions. Brett.

Great thanks Kieran. So I'll briefly run through our March quarter results. Revenue for the March quarter was $211.8 million, an increase of 16% over the prior quarter. Favorable currency movements added approximately $12 million to our Q3 revenues. Our income from operations are $37.4 million for the quarter and net income for the quarter was $29.7 million. Diluted earnings per share for the current quarter was $0.38 which represents an increase of 12%, compared to the prior year quarter that's excluding voluntary product recall expenses that we recognized in the March, quarter last year. SG&A for the quarter was $70.1 million, an increase of 14% over the prior year quarter. In constant currency terms, SG&A increased by modest 6% over the prior year quarter. SG&A as a percentage of revenue was 33%, compared to the year ago figure of 34%. R&D expense for the quarter was $15 million, an increase of 15% over the prior year quarter. In constant currency terms, R&D expense was consistent with prior year. As the percentage of revenue, our R&D was 7% and again this was consistent with the year ago figure. With our ongoing commitment to innovation, solid product pipeline and some clinical trial commitments, we expect R&D expense as a percentage of revenue to continue in the 7% range through the balance of FY '08. Amortization of the acquired intangibles is $2 million for the quarter and stock-based compensation expense for the quarter was $5.6 million. During the March quarter, there were three non-routine transactions that impacted our net income and I will run through these. First, we made a gain of $5.9 million on the completion of the previously announced sell and leaseback transaction on our Poway property in San Diego. Second, we recognized an expense of $3.2 million associated with the write-down of certain at cost investments. And third, we made a $2 million donation for the ResMed Foundation during the quarter. The aggregated net after-tax, impact of these transactions was a decrease in net income of approximately $0.2 million. So the bottom-line impact of all those transactions was negligible. Turning to revenues in more detail, overall, Americas sales was $99.6 million, an increase of 5% over the prior quarter. Sales outside of the Americas totaled $112.2 million, an increase of 27% over the prior year quarter. Breaking out revenues between products segments, in the Americas flow generators were 5% lower, than the prior year quarter. While masks and other increased by 13%, reflecting the continuation of strong sales in our new product introductions. For revenues outside the Americas, flow generators increased by 23% over the prior year quarter, reflecting increasing in momentum in S8 II sales, while masks and others increased by 33% again driven by strong new product sales. As Kieran indicated on a group basis, flow generator sales increased by 11% while mask and other on a group basis increased by 21%. Cash flow from operations was $33.9 million for the quarter. Capital expenditures for the quarter was $17.3 million and this included a $7.5 million in building construction costs associated with new headquarters in San Diego. Depreciation and amortization for the quarter totaled $14.7 million. We received $24.7 million in cash from the sale of our Poway property and these funds will be utilized for the ongoing construction of our San Diego headquarters. During the quarter, we also repurchased 575,000 shares for consideration of $23.3 million, despite our ongoing share buyback program and today on this program. We've repurchased 3.5 million shares out of a total approved buyback of $8 million shares. Looking at the balance sheet, our balance sheet remained strong total assets at the end of the March were $1.4 billion and net equity is $1.1 billion. Cash in cash equivalents, net of our external debt was $175 million at the end of March. I would now like to hand the call back to Kieran.

Great, thanks Brett. Well, why don't we jump right into the Q&A section? So Angela if you could lead us there, please. Question And Answer

Thank you sir. [Operator Instructions] Additionally, we would ask that you limit your self to one question and one follow-up question originally. Thank you and sir your first question will come from the line of Ben Andrew with William Blair. Please proceed. Benjamin Andrew - William Blair & Company, L.L.C.: Hi, good afternoon,

Hey Ben. Benjamin Andrew - William Blair & Company, L.L.C.: I guess the first thing is maybe let's talk about where the market are at in the U.S and in Europe. The U.S basically, obviously you're continuing to struggle with generators. Tell us what you think underlying patient unit growth is, as well as and the second part of really is, what do you think is going to happen with these new products coming out and can you get back to a point where you're taking back share, even yet in the next couple of quarters?

Yes. Great question, so we think on a global basis that the market is growing at about a 15% or so rate and obviously we are out performing that on the international basis and we've had some challenges as you know on the U.S side, particularly in the flow generator side of the business. As far as visibility in the patient flow, that's always difficult one to say. I think this quarter was an unusual one, from the perspective that you had a lot going on in the market place. On one side you had home testing, NCD coming out, you had some fluctuations in the economy on the other side, and of course you had competitive bidding. So I think to a certain extent, we saw some impact on the HME side, as they just sort of took a little breather, and said let me just make sure, I understand what's going on here before I build too much inventor, on your question on products and actually very, very excited about the product flow that we have coming through. The... part of this success that we have seen in the international markets, is has been contributed not only by the mask product line which is really doing quite well in market places that historically has been more difficult to grow. But, also on the flow generator side where we have introduced the SA II products already with the Easy-Breathe technology, and so we're getting some really strong market feedback on that. That's very comforting. On the U.S side, as we look into this quarter, we've got two products that we will be introducing in that high-end, so we've got the APAP product and the Elite. We'll have the full quarter of the VPAP Auto which we didn't have during the last quarter. And we will be entering although, it'd be later in the quarter, so much less of an impact, but I think it's very important that we're entering the other lower segment with EPR. On escape platform, so I think that plugs a whole that we were clearly struggling with it a little bit, and I think and quite frankly, I think its going to be better for patients in the long run, because what it's doing is bringing down a compliance oriented type of feature set into that category. We had some real good competitive wins here recently that we haven't seen the impact fully of, we've had a strategy of trying to make sure that we participate in all segments of the market. We have seen a win here within the last couple of months, where we became the primary supplier to Praxair on a global basis, and for the first time in our history with Apria, we are going to be on a level playing field in their essential care model, and that's really the ink is just drying on that agreement at this point. But, so as we look forward, I think it's going to give us access both on a product and on a customer basis to some win that we didn't have here in the last few quarters. So, I am actually very optimistic about it.

Just a quick follow up, I mean pricing dynamics in the U.S stable, getting worse and that kind of roll off the impact later this year and then maybe Brett can follow up with what the currency impact could be for the balance of this year, rates stay the same? Thanks.

Yes, alright great thanks for the question. So on the pricing, I would say the same thing, I did last quarter, which is that, we have not seen the floor that was established several quarters ago go any lower, which is good news and that's what we look for. So, if you go back three quarters, four quarters ago or so, when we started to see some of the significant price pressures and that's when we are talking about some deals that were quite challenging, we are not seeing prices go below that still. What does happen in this market place is that you see those early deals out of few customers and that rolls across the customer base. So basically this market is inefficient in the short-term and I mean it's efficient in the longer-term. So what that means is that we see the effect on average sale prices, sort of integrate over the series of quarter and I know we've still got several quarters and where that's sort of coming through on that curve. But what we look at is to see, was the floor established and we have been encouraged by what we have seen in the market place. Benjamin Andrew - William Blair & Company, L.L.C.: Great and Brett.

Yes Ben, on the currency side, this quarter impact was a little bit viable for us because the euro was particularly strong and we did have some hedging gains this quarter. The... looking forward if you look at sort of currency rates, as they are... I mean it is hard to predict it, depends on the dynamics of the euro, versus the Aussie and so on, but with getting through sort of $0.01 positive, $0.01 negative, up to maybe $0.02 max. And I see that going forward, there could be a stage that have $0.01 detriment throughout Q4, but I don't say it's been particular significant and again it really does depend on how the currencies move. With the hedging in place and they are exposed, I don't think its going to impact significantly, but it can be $0.01 or $0.02 either side of EPS. Benjamin Andrew - William Blair & Company, L.L.C.: But on the top line it would be another $10 million or $12 million a quarter, is that going to start to come back down, because the year-over-year rates getting a bit tighter?

Yes, if you see U.S sort of... U.S, its 156-157 pretty high, so I would suspect that it will sort of come through roughly that sort of number again on the top-line? Benjamin Andrew - William Blair & Company, L.L.C.: Okay, great thank you.

Thanks Ben.

And your next question will come from the line of Paul Choi with Merrill Lynch. Please proceed.

Thanks, can you guys hear me?

Hi, we can Paul. Thanks for your call.

Yes, Okay great thanks. If you could may be start with home testing, now that you guys have had some time to review the... review the ruling, could you give us perhaps your sense of how the paradigm will evolve here, given some of the ambiguities in the documents and since that if a person does test, for instance, positive on a home test, how you see them ultimately getting on to a device, is it going back to overlap to be titrated with the confirmatory PSG and so forth, if you can walk through how you envision that process developing, and secondly how you see the DMEs and physicians, ultimately allocating the reimbursement for that. And if you can sort of give, how you envision that, perhaps a year or 18 months down the road? That would be great?

Yes, okay, great. Lot of water has to flow under the bridge here. So what we're doing is we're listening to our customers. We're listening to the sleep community, we are listening to the HME community and we are seeing what... since they are the ones at the cold phase, we're seeing... what are you trying to do, how are you going to handle this, how are you in some cases lobbying, what do you think those success... success for that will be? So my guess is what's going to happen is it's going to be a number of business models. They are going to come out over the coming months that are going to try to influence speed and net outcome of this. Right, so we've got I think some of the leading sleep physicians who are trying to look at this on the on the hub and spoke model and they are saying you know what, this is a change that I can grow my business with and why I am going to use this is to augment the PSGs, and particularly the ones that are hybrids. They are both dispensing as well as doing diagnosis, you'll hear mixed reviews. Some of them want to bring people back in and do titration, other ones wants to keep the beds open so that they can use those for diagnosis of the more complex patients and use the home testing for the sample. So I think this is probably going to be both regionally and locally that in the next X number of months you are going to see people trying each of those and I think CMS is going to have to do what they are most comfortable with and what they feel provides the best care at the most economic level.

I'd hate to try to guess what the government's going to doing. But I think that whichever way it leads to the right economics. I think we will be adopting quite frankly, from our perspective, anyway you look at that, we win and I think the patients win and I think that will be positive as we move forward. There are other players that are trying to play a role here... we hear window of HMEs trying to play roles of IDTF, so of other players and the healthcare community and they will all try to figure out if there is a role for themselves in that market place where they can in many cases take the technical component and provide the read fee or the professional fee to either the sleep physician or other sleep trained physicians in the process. So again, I think what you are probably going to see there is that the HMEs and some of these other players are going to try to partner with the sleep community or other parts of the healthcare community to try to figure out, how they can on one side minimize near-term channel conflict, while building relationships with their key referral sources. So, it's Paul its real mixed bag now, but I think that's going to be good. I think it's good because there is a lot of activity, there is a lot of interest. We are certainly getting a lot of queries about our ApneaLink with Oximetry, because it is a very simple device. It is highly accurate. Sleep physicians have been using it as part of their hub-and-spoke model now for several years and it is very well positioned to help them as they think through the model, that's going to best both for their own business, as well as for patient care. So water needs to flow under bridge, but I think it's all positive momentum.

Okay. Then a follow-up for Brett; if you don't mind, just on the investment write-down, can you comment on what it is specifically and what about change it from a temporary to a permanent impairment. And secondly, on the inventory side, it did step up I think you said a little over $3 million. How much of that is perhaps ApneaLink related or how much of it is intense anticipation of buildup for Medtrade here? And I will hop off, thanks.

Okay. So on the write-down couple of that cost investments were the few trigger events that happened in the quarter on each of those. One of the entities did announce during the quarter, they had a significant goodwill write-down and it was significant, compared to the overall market cap of that company. So we took the view that after some significant write-downs and significant reduction in their share cost and this is in the slag in 10-Q over the last while is potential unrealized loss there. So in this quarter, we basically bit the bullet and write that down based on that trigger event, same with another, there was another small one in there as well in that, they have really decided to abandon the business model and looks like weren't going to get from that, so we also wrote that one-one off as well. So its couple of trigger events that moved it from temporary to what we thought was a permanent impairment. On the entry levels, aren't too bad, this combination is a little bit of some stocking to get ready for things like, it's like S8 II launch in the U.S for example, which is adding a little bit there. You do tend to get some currency impacting on that as well. If the U.S weakens against the Euro, obviously the euro, the European stockholdings would go up as well just on just on translation impact. So, it's a combination of level of items there.

Okay. Thanks lot guys.

Great. Thanks Paul.

And gentlemen again next question comes from the line of Michael Matson with Wachovia Capital Markets. Please proceed.

Hi, thanks for taking my question. I guess I was wondering given what happened with the home testing reimbursement. Do you think that there is possibility or is there anything in the works to get reimbursement coverage for the auto setting units?

Yes, thanks for the question Mike. It's a good question. It's a hard one to predict. I can tell you that as soon as we saw the preliminary NCD, we did go back to the well; we did work with our Washington consultants and put together a modified version of what we had tried before on the auto setting because we think it's the right thing for the patients. We think it's the right thing for our homecare providers, and we think it's going to be the right thing overall for the sleep community to have appropriate reimbursement for these auto setting devices. So we are definitely taking a bite of that cherry. We think that the case makes sense, both economically and for patient care, but once again it's always so hard to predict, the way the government's going to move in, and I would be very hesitant to give you a specific prediction on that, but what I can tell you we're doing whatever we can support channel on that.

Okay, and your U.S business, this is... it slowed once again here. What's going on and, I mean do... when do you expect that to reaccelerate, and do you expect it to reaccelerate, I guess?

Yes, the answer is yes, we do. So let me reveal little bit about what we have been faced with. This quarter was a good example of where there is just a mixed bag we had some very positive results, some good indicators on the high-end product line. So VPAP Auto was very encouraging and only partial quarter impact was very encouraging. The movement towards additional use of auto setting devices which again is why we want to go back to that, that realm. We think it's appropriate for our HMEs to be appropriately compensated for that. But we're seeing even in advance to that we're seeing a higher movement towards, many of these auto setting devices. Where we struggled was in that lower-end, and really it has to do with not having expiratory pressure release in the lower-end devices. The market has clearly told us that they feel that that is a valuable feature set. It's when it sells well in the higher-end of our product range and they have told us that it is important they believe in the patient compliance and therefore, we need to have that in that range of products. That is exactly why we accelerated our product development cycle on that product and am actually very pleased with the efforts of the team, and most importantly the results of the team in being able to position that for a launch, later in this quarter. So I think that's going to be important. I also think on a mask side, the Mirage Micro is coming out exactly as we would hope it would. It's a great product and it compliments our product lines the Swift II and the Quattro. In the nasal pillows that Swift II we were holding a lions share of that market and we are going to shift away a little bit with some new interest. This Swift LT that will be coming out later in the quarter and will be there for everybody to see it Medtrade, it's just a fantastic product. It's both efficacious, it is very significantly differentiated from the Swift II, it takes the best parts of it and then it also gives it a different products forum and that's gives a people choice with an Nasal Pillow segment, they don't have to look outside of ResMed to get a choice of product forums. So that's positive. And I also think that looking at some of these customers wins that I was talking about, participating in some those segments, particularly some of the larger counts. I mentioned the win at Praxair, I mentioned the win for the level playing field that we now have at Apria that we hadn't enjoyed before. I think those are important aspects as we gain back our step here and I think also then on the back drop of that whole thing, because I think your question at the end it sounded even broader, will it come back? I think that the signals in this market place both on co-morbidities and the home testing are very, very good indicators for the long-term health of this industry. I remain very confident of that.

Okay. Thanks.

All right, thanks Mike.

[Operator Instructions] Your next quarter comes from the line of David Clair with Piper Jaffray. Please proceed.

Hey guys, congratulations on a good quarter.

Thanks David and welcome to the coverage.

Thank you. Hey, just, can you give us some update on competitive biding. What are your conversations with the DMEs going like and any additional color you can provide and how that's progressing?

Yes. Sure. So with competitive bidding, they released the first 10 MSAs, the results of those first 10 MSAs, and as you know there is many, many MSAs throughout the United States. And with the feedback from HMEs, a couple of things, one is that in this market place only about 20% of the patients that are served our Medicare age. So it sort of dampens the effect to some extent, that being said it's certainly causing lot of conversations within the HMEs. We heard one large customer in the last couple of days in fact in your public comments was very vocal and what they are doing to try to communicate with CMS, their dissatisfaction with the process even though it's a customer, an HME that's well served by these types of decisions, because the business model supports it. The basic feeling of the HME community is that this not the best thing for patient care, and that they will very aggressively communicate that with examples back to CMS. So as we look forward, we certainly are the next 70 that are up for review here, and I think it's going to be interesting to see the impact that the HME community has on the rollout of this or changes to the rollout or lack of rollout. So I think there is still some smoke in that sector. Good news for us in this industry is it's about 20% of market; about 80% is still in private pay and the managed care side.

Do you expect any kind of impact once you it kind of gets up and running here, how are you kind of looking at possible price pressure from it, or anything along those lines?

Sure, in these markets there is always price pressure. If we go back two or three years ago, the big talk was on Oxygen and MedNet cuts. Last year, we had some industry led challenges, this year we've got competitive bidding. In these kind of markets there is always pressure on making sure that you are providing technology at appropriate prices and the government is going to look very closely at those thing. The good new in those circumstances from my viewpoint is that the extent there pricing pressure and again it always is, you want to be the number or number two player, because the scale is important in reducing cost and being able to effectively serve the market place. So I have full expectations that whether it's competitive bidding or some other term in another year, we will still be talking about pricing and we will probably be talking about that adding some item, because its just the nature of any medical device business.

And then just one follow up kind of the North American market. Do you, I mean do you think that this was kind of a little bit share loss or it's I mean how do you think overall North American market is growing. I know you said worldwide you still think 15% range, it's kind of what we should look forward, but do you think it's any kind of slowdown in bed growth or are they any kind macro factors that are kind of coming into play here.

Yes, so I think would you think any global basis. It was somewhere 15% growth and so we feel that really line we grew there. Certainly in the international markets, we feel that we're gaining share. And I'd have to say in the U.S. we on a global basis... on a macros basis, we lost share and I think that was predominantly the pressure that we saw in that low-end flow generator category, where we have yet to release the product with expiratory press release. And in the nasal pillow segment, we've seen some people trying to chip away at our very strong lead there in advance of us releasing new product series. So, I think it was a balance bag for us this quarter and it's one of the things that we are very pleased why we have international business on it. I think as for as bed growth, very hard to say, but I would be surprised if you are going to see substantial bed growth in the near term as people look at that home testing and look at there is a way that they can add capacity, now do I still hear about it? You bet, I mean I heard a group just two days ago, who announced, here in two that they were going to open up several beds. In San Diego they were going to open up several beds. And I know I heard news in different parts of the country. So, I think on the local, I will still see some bed growth. But I think many people are going to look at home testing and see how they can use that, shortly many of the sleep partners we are talking say how are they going to increase the capacity by leveraging home testing in some cost effective manner.

Okay, thanks a lot guys.

All right, great. Thanks.

Gentlemen, your next question will come from the line of Alexander Smith with JPMorgan. Please proceed.

Hi guys, just question on home testing; if CMS... or autosetting devices don't get separate code. Does that home testing really worked then, because how patients going to get titrated in the absence of taking home those devices.

Well, I think, I think it still works either way to question is... is it as cost effective as it could be and this is probably also going to be a question, if it doesn't get adopted in the first six month, does it get adopted and second month or in the second year, because I think there is going... I find it hard to believe there is not going to be a lot of eyes that are around area and eyes that are looking for where they get benefit in the system... I think it's going to be...

If you don't get lot of setting code at home testing and it's really just another screening tool.

I think, if you look at some players on the global community and even players in the U.S. community, we have seen where autosets use... are used in a pooled capacity, so sometimes even today, you may see sleep level do titration. They will titrate at a certain level and the DNA will still use an autotritrating device on a patient for two weeks, three weeks, a month, and they will basically use it as titration checker if you will, all right? And then once thing they get that, let's say 95 percentile on our machine, then they still issue a CPAP, but they will do it at a... that they'll do it at a... the pressure that they validated, the pressure that was titrated in a lab. So, there is multiple models that are already in existence and can be viewed. I think what's going to... certainly... by getting the code, what it does is, it narrows the gap for the HME and it just... it is further inducement... further encouragement not to remove the autoset from patient and do a switch over because that cost them money, its time and its risk, anytime you change some of this therapy, if there has been compliance, you are introducing a risk that inevitably is going to cost them more money. So I think what's going to happen is different people are going to experiment just as they already have and have for a number of years, I think it's going to experiment with different process flow. And I think the big determinant of whether they get paid for not maybe the percentage that keep on autoset as opposed to whether they do it at all or not. Does that make sense?

Yes.

All right.

Thanks for that guys.

And gentlemen, your next question will come from the line of Joanne Wuensch with BMO Capital Markets. Please proceed.

Thank you.

Hi, Joanne.

Gross margin, seem to be hovering around the 60% range. How much of that is being negatively impacted by foreign exchange and how should we think about that guidance forward?

So why don't I push that question over to Brett?

Yes; thanks, Kieran. So... yes, Joanne on the margin there is kind of two factors working at that, the stronger euro is benefiting the margin and obviously the stronger of the... against the euro is detrimental to it. If you look at in combination, it's pretty much a wash at the moment on the margin line. So, really because the euro, it's tending to offset the dollar impact there.

And looking forward, I mean are we thinking 60% of the floor on this?

Well, I mean if you look forward, there is... I don't know what's out there. We think around 60% is probably the number obviously there is a lot of impact on that, you'll continue to see pricing pressures and that has been the negative on the margin for a reasonable period of time. But we have had offset in that for example in geographic mix, where international sales have been pretty strong. So, that helps the margin. Product mix also helps. If mask growth is much stronger than flow generator growth, for example that we are experiencing at the moment that would help the margin, clearly when flow generator growth will accelerate that will then tend to put pressure on the margin. So, it's a matter of lying all those up and we are looking in the crystal ball, but there is the factors that have an impact on us and then you really need to make a call on where you think they're heading going forward.

Yes, the other aspect is that we've had a very aggressive global supply chain team, particularly on the vendor alliance side, which has been, I think just doing a bang-up job, working with our vendors to reduce supply chain cost, which have been a benefiting near term. I think we are going to see that as we move forward. So we are very actively working throughout the organization in order to maintain margins.

Have you seen any changes in the broader market now that Respironics is part of Philips?

Good question, we don't see a lot yet. We remain very positive about fill ups entry in this marketplace. One of the things that are... couple of things we're encouraged about our Philips is knows more to compete through innovations or known more to compete through market expansion. And historically of course that's exactly, where we like to focus and I think that that's good for the long-term health of the industry. Because we all need to be focused on expansion of the market, reaching more patients and we've long known that when we've been the guy doing the heavy lifting that the fast follower strategy of our competitor was a good strategy for them. And I think we are very much looking forward to the awareness that could be built through Philips and their activities in the global basis as well as a focus on innovation. So, no significant near term impact and we still remain positive that it's going to be a good positive long-term impact.

Okay. My final question has to do with the domestic sleep therapy number, hate to harp on this one. But it seems as if it is the low product or low feature product that really ships you up this quarter. And I am curious why the Tango didn't fit that need.

Yes, So, it was two areas, right? So, you are absolutely right. On the flow generator side, it was that lower category. And the issue has to do with that feature set of expiratory press release. The Tango is actually doing its job in sort of that blocking strategy in the low end used where all that is required is a very, very basic machine. So, it's doing it's in that category. What we have seen is that as the expiratory pressure relief type of feature set has moved into the lower end of the instrument side that a lot of volume has moved in that direction and just we've been very frank that we've been hurt on that side by not having a product that has a feature set, and that's exactly why we accelerated the development of the product that we will be able to release later in this quarter.

Okay. Thank you very much.

Thanks for the questions.

And gentlemen, your next question comes from the line of Jason Mills with Canaccord Adams. Please proceed.

Hi, this is Jamar [ph] for Jason?

Hi Jamar.

The question I have is on the higher reimbursement for APAP, is there anything anecdotally you could give us from your feedback about the process is going on now and is the timeline still at the first cut towards the end of this month.

I am sorry, Jamar; I missed the beginning part of your question. Can you repeat that?

Could you just give us any color or any anecdotal evidence you have from the process going on or what the status is?

On the APAP coding?

Right.

Yes, I am sorry; I missed the beginning part of your question. So on the APAP coding, there is really not a lot of color to provide. We submitted a recommendation, I think Dave Pendarvis is on the line now and may want to jump and can give color detail. We've submitted a proposal that we believe should... we thought it was a well written proposal that supported the channel and was sufficient information to say that is both better for patient care and better for the economics of the channel in order to support the use of AutoSet. My understand is that by the end of May or June, we should get some preliminary indications back from CMS and that following that there will be a common period and then the final ruling will fall from that. So, my expectation is within the next several months, we'll get an indication about which way it's going to go although there will be no final decision. Dave, you have anything else there or that?

No, Kieran; this is Dave. I think you got it right. The timeline is that it should be towards the end of May of that there is public hearing on the matter you typically get a preliminary decision from CMS in advance of that, but then as you indicated there is a period after that and the final decision may not come out until later this year, perhaps late as November of 2009... I am sorry, 2008. If there is a code granted, it wouldn't go into effect until January of 2009. And you really don't get much in the way of anecdotal indications from CMS in advance; obviously, we'll get something in advance, we expect. And then you'd have whatever readings of the tea leaves you can get from the public hearing sort of the end of May, but then you don't get the final decision until later in the year. So, we remain optimistic as Kieran said earlier in the call. It's always hazardous to try to predict what the government is going to do, but we do believe that the use of AutoSet devices, particularly in late of home testing and use for auto titration makes sense for... payers make sense for patients and makes sense for our customers, and we are hopeful that the CMS will see it that way.

Okay, thanks. Moving to home sleep testing, have we seen any local coverage decisions yet, and are they so they're following the NCE.

Yes, so the water is still flowing under the bridge on that one. We're still waiting to hear the various LCDs and that's going to translate into daily coverage and how it's going to impact the market and all. So, still bit of water to going to the bridge on that. Again, Dave you have any comments?

No, I think our expectation is that, it will flow through along the lines of the original CMS decision and that the private carriers will fall in line, again it makes fundamentals sense to allow home testing as an adjunct to polysomnography. That way to positions going to make the choice, whatever they think is right and the patients will be allowed to take whatever they think is appropriate. This is to make fundamental sense we expect go forward along that line, but it takes some time to play out.

Thanks so much. [ph]

And gentlemen the next question comes from the line of Joshua Zable with Natixis. Please proceed.

Hey guys, congrats on a great quarter and thanks again for taking my question here. Most of my questions have been answered, just some clarification; I know Kieran you mentioned the S8 II Escape with Easy-Breathe at the... sort of low end to get EPR there. I assume that would be part of the full launch with other assay, or should we... the way to think about it is that would be the first one to come out and then sort of the higher end models coming out in quarters to follow.

Actually, it's actually the opposite; so we are actually right now in the midst of launching the S8 II Vantage and S8 II Elite, and these are the products that we had launched or derivatives of those products that we had launched in other parts of the globe already, so that's what we going to see, when you go to Medtrade, and that's what our sales force has in its bag to sell. The Escape with EPR is not out towards until the end of the quarter and that's the rollout that we expect on the CPAP range of our products.

Okay. So the ones that are out are the APAPs right now? The S8 II Vantage and S8 II Elite are both auto devices, no?

Yes,so the...you're... absolutely, the Vantage is an auto device absolutely. The Elite is actually a CPAP device that has expiratory pressure relief. That also has the data and efficacy gathering capabilities. So think of it as a data reach CPAP and our APAP. That's our high-end product line. They are both launching with S8 II and the Easy-Breathe technology as we speak. And the EPR, which is a little less feature rich on the data side of the equation will have and it's also less costly is the device that will now have expiratory pressure relief, and that comes out at the end of the quarter.

Okay. And then just along the lines of... I am glad you brought up the data rich device. It's clear that along with the changes here in Medicare that monitoring a patients needs to be stepped up a bit and obviously with your devices having certain advantages over especially low end ones, have you seen a pick up or a higher level of interest in sort of devices that can offer more data?

That's a great question, and we actually have seen... in our product line, we have seen growth in the high end category. If you aggregate our high-end devices, and that's even taking VPAP auto for the sites, so we are just saying the CPAP, APAP side, we have seen that higher end category grow. Now, whether or not it's growing also in the low end, again we are more in a competitive challenge position, and that's we will find out once we launch the Escape with EPR. So, that's a balanced question, but we are definitely seeing a pick up in those higher-end machines.

Okay. And then just along the line of launch, I am sure obviously people are going to look at the U.S. generator number, I expect good things from the new launch. I am sure you do too or you said. But is there are any sense that why were sales person I knew I had a launch coming up of new products especially the newest ones, latest and greatest et cetera; is there any sense that part of the weakness might have been sort of some waiting for the next one?

Yes, it's a great question. There is a lot of psychologies that happened at the field level. I have a lot of confidence in our sales reps. I think they are very mature organization and they know that they need to sell what they've got. That being said, is it possible there might have been a little bit of hold of there is a possibility. Was it material, I have nothing that would indicate approve that it was material or not material. I can tell you on the opposite side now that we are providing their bag, these guys are extremely excited. The ability particularly with that Easy-breathe technology, they were able to warm up to it with the VPAP auto. They had a couple of months of selling it. We didn't see the full quarter impact, we had a couple of months, and so they are able to get out to customers; and in essence trial, how are they going to respond to this low noise positioning. How they're going to respond and they've responded extremely well. And of course the customers' first question was always, so tell me, when is this going to come out in CPAP range? You're going to put this in the CPAP range. And so their ability to have a second act only a few months later and be able to put it in the Vantage and put it in the Elite has really got the Sales force energized. In addition to knowing that they have got this Swift LP coming down the line and a recently introduced Mirage Micro. It's been a great psychological booster for us.

Great. And then just as I always ask, any update on the Sam there?

On Sam? Oh yes, so the ventilation product range continues to grow. I have been very pleased with the operational efficiency improvement that we've seen in that what we call our Paris range of products. Several of products remain manufactured in Paris itself; we've moved several other of those products over to Sydney. So, it is being received well. We are anticipating though is a series of update for those products, which will be coming out later next year. So, we are not announcing any dates on that et cetera. But we moved the team from simply getting the efficiencies in place and solving some of the... sort of the normal deficit engineering you see in companies when you buy in their early stage. And now they are able to focus to full time attention at the new generations. So, we've got really well energized and quite frankly a well lead team over there.

Great, thanks for taking my questions guys.

You bet; thanks, Joshua.

And gentlemen at this time, this will conclude the allotted time slot for the Q&A session. I would now like to turn the conference back to management for any closing comments.

Well, thank you very much. I appreciate everybody's time and attention. I think this was a great quarter for ResMed. It was a quarter that demonstrated and I think reinforced our strategy of internationalization, and we've got a lot of exciting things coming up. So, I look forward to updating you on future quarters. Thanks again for your questions and your interest.

Ladies and gentlemen, we thank you for participation in today's conference. This does now conclude your presentation and you may disconnect. Have a wonderful day.