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Executives

Peter Farrell - Founder, Chairman, and CEO

Brett Sandercock - CFO

Rob Douglas - COO

Don Darkin - President, SDB Strategic Business Unit

Geoff Neilson - President, Respiratory Care Strategic Business Unit

Mick Farrell – President, Americas

Analysts

Ben Andrew - William Blair

Michael Matson - Mizuho Securities

Joanne Wuensch - BMO Capital Markets

Jason Mills - Canaccord

Matthew Prior - Bank of America Merrill Lynch

David Clair - Piper Jaffray

Dan Hurren - UBS

David Low - Deutsche Bank

ResMed Inc. (RMD) F2Q12 (Qtr End 12/31/2011) Earnings Call January 26, 2012 4:30 PM ET

Operator

Good day ladies and gentlemen and welcome to the second quarter 2012 ResMed Inc earnings conference call. My name is Stacy and I will be your conference moderator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

In addition the company asks 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 of 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.

At this time, I would like to turn the call over to Dr. Peter Farrell, ResMed’s Chairman and CEO. Dr. Farrell, please go ahead sir.

Peter Farrell

Thanks Stacy, and thanks everyone for joining us. I’ll begin as usual with a short summary and then pass the call over to Brett Sandercock, ResMed’s CFO and then we’ll go into a Q&A.

So first, the financials. We finished with a very solid quarter. Global revenues in the second quarter of 2012 grew 9% to $333 million, which was also up 9% on a constant currency basis. Revenues in the Americas grew by an encouraging 12% to $182.5 million and ROW revenue increased by 5% at the headline and also in constant currency terms to $150.2 million.

GAAP EPS increased 14% to $0.42 for the quarter and I believe consensus was $0.38 which we comfortably beat and if we exclude the amortization of acquired intangibles, EPS was a record $0.44which we would suggest represents effective management and operational excellence and efficiency.

With the respect to product performance, masks continued to perform well across the globe and we continue to take market share. The three masks, new masks in the FX trilogy that is the Quattro FX, the Mirage FX and the Swift FX as well as the four versions of these masks continue to do extremely well and with the success of the Mirage, we are gaining additional share in nasal masks category which recently had been a week spot for us.

And we just launched the Swift FX [Bella] mask giving female patients the choice of how they wear the masks since it offers hair management solutions in brief and we expect this to also improve patient compliance and in brief the mask has a loop which wraps around the ears without any straps on the forehead or head itself.

And as we recently been highlighting, there is a further reason we continue to see strong growth in the mask category other than the introduction of the new products is that there is excellent business in the resupply or replenishment of masks to the existing patient base. And in this context we are working with our DME and HME customers to help them leverage this business opportunity.

Global growth in flow generators this quarter was primarily driven by ventilation and bilevel devices including significant contribution from our Adaptive Servo-Ventilation line, the VPAP Adapt and the S9 AutoSet CS, but in addition also the Stellar products. And we can provide more granularity on that if people wish. In the Americas, bilevels are regaining share as they prove to be a strong value proposition for HMEs and physicians who we believe are scripting them.

Growth in the basic flow generator market is still somewhat problematic. It continues to be a challenging environment and actually proved to be a bit more so this quarter in Europe due to difficult macroeconomics or the macroeconomic environment there which people don’t need very much explanation on.

The European climate is a little bit cautious and perhaps nervous and the market has slowed somewhat, looking more like growth levels in the US, that is around the 6% to 8% mark. But because we don’t have any material business in those countries or in the countries under severe distress, we’re somewhat isolated from the potential basket cases if you like, the so called PIIGS.

Ventilation sales of the Stellar 100 and the 150 continue to grow progressively in Europe and parts of Asia. The 150 Stellar was launched in Europe at the end of the calendar year and both products have received regulatory approval in Japan and will launched there soon.

These vents will rollout progressively over the next few quarters. Of note, the Stellar 150 includes iVAPS which is an automated bilevel mode. The success of the Stellar is another positive indication of our continued progress in product development and there will be more offerings in this space over time. Sales of Stellar 100 in the US are ramping to expectations with the CareFusion sales team. They’re also now selling our masks along with the ventilators.

The new Greundler humidification product, HumiCare D900 started controlled product launch in Germany and we’re doing further CPLs a little later on in France and Sweden. We are also working on FDA approval and we have to launch the 900 in the US in early 2013 or if not before pending FDA approval.

On the HST or the Home sleep testing front in the Americas, commercial payers continue to see toward HST with the requirement of prior authorization for attended PSG sleep test while encouraging the use of HST. At this point Aetna, United and Humana have pre-authorization initiatives from PSG to see patients to HST. In 2011 we estimate approximately 15% of all the test or all the sleep test where HST and we expect to see continuing adoption of HST during 2012.

It’s difficult to look into the crystal ball and know exactly what that growth will be. I think it is going to double others within ResMed a more conservative, but we will see what it turns out to be. To some extent, this takes the pressure of low level CPAPs because as people would understand with HST, there is no setting of pressure in the sleep lab which means that physician DMEs, HMEs have to point towards APAP or our autosetting devices.

So that’s all good from our point of view. On the clinical front, the flow of data substantiating the connection between sleep disorder breathing and chronic diseases continues to materialize a study conducted recently in Spain with over a thousand women, just published in the annals of Internal Medicine demonstrated the severe obstructive sleep apnea was associated with a significantly higher risk of cardiovascular death in women and that adequate sleep as treatment has been shown to reduce that risk. Also in a recent study published in the British Journal of Psychiatry researchers have suggested that schizophrenic patients have an improved quality of life if their sleep disorders are treated.

And finally in the area of occupational health and safety, advisors to the FMCSA the Federal Motor Carrier Safety Administration at a meeting last December recommended that the agency toughen up its approach to evaluation and treatment for sleep disorder breathing. The Motor Carrier Safety Advisory Committee and the Medical Review Board have formed a joint subcommittee charged with producing recommendations for an eventual rule that will set standards for sleep apnea screening, evaluation and treatment. They plan to present this strategy next April.

Now let me turn the call over to Brett. Brett?

Brett Sandercock

Thanks Peter. I will just run through the Q2 results. Revenue for the December quarter was $332.7 million, an increase of 9% over the prior year quarter. In constant currency terms revenue also increased 9%. Income from operations for the quarter was $67.3 million, a decrease of 4% over the prior year quarter reflecting the impact of unfavorable currency movements.

Net income for the quarter was $62.9 million, an increase of 8% over the prior year quarter. Diluted earnings per share for the quarter were $0.42, an increase of 14% over the prior year quarter. Gross margin for the December quarter was 59.7% up sequentially from Q1 FY12. On a sequential basis our gross margin benefited from favorable product mix, improvement in manufacturing and logistics costs. Sequentially currency movements had a minimal impact on our gross margin this quarter.

Looking-forward for the balance of FY12, we expect to have gross margins to be in the range of 58% to 60%, assuming current exchange rates. We continue to execute on initiatives targeted at reducing product cost through supply chain efficiencies, product design, and manufacturing improvements.

SG&A expenses for the quarter were $100.6 million, an increase of 10% over the prior year quarter. In constant currency terms, SG&A expenses increased by 9%. SG&A expenses as a percentage of revenue was 30.2% compared to the year ago figure of 29.9%. Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 30% for fiscal year 2012.

R&D expenses for the quarter were $27.2 million, an increase of 24% over the prior year quarter. In constant currency terms, R&D expenses increased by 21%. R&D expenses as a percentage of revenue were 8.3% compared to the year ago figure of 7.3%. Looking forward, we expect R&D expenses as a percentage of revenue to be in the range of 8% for fiscal year 2012, reflecting the strong Australian dollar and continued investment in our product pipeline.

As a result of previously announced acquisitions, amortization of acquired intangibles increased to $3.7 million for the quarter, while stock-based compensation expense for the quarter was $7.4 million.

Our effective tax rate for the quarter was 24.2% compared to the prior year quarter effective tax rate of 25.9%. The lower tax rate reflects the benefit of lower effective tax rates in our Singapore and Australian operations. Looking forward, we estimate our effective tax rate for fiscal year 2012 will also be in the vicinity of 24%.

Turning now to revenue in more detail, overall sales in the Americas were $182.5 million, an increase of 12% over the prior year quarter. Sales outside the Americas totaled $150.2 million, an increase of 5% over the prior year quarter. In constant currency terms, sales outside the Americas also increased by 5% over the prior year quarter.

Breaking out revenue between product segments, in the Americas, flow generator sales were $80.5 million, an increase of 4% over the prior year quarter. Masks and other sales were $102 million, an increase of 19% over the prior year quarter, underpinned by strong contributions across our portfolio of masks and continued growth in accessories.

For revenue outside the Americas, flow generator sales were $100.1 million, an increase of 2% over the prior year quarter and in constant currency terms, also an increase of 2%. Masks and other sales were $50.1 million, an increase of 12% over the prior year quarter, or in constant currency terms, an increase of 11%. Globally, in constant currency terms, flow generator sales increased by 3% while masks and others increased by 16%.

Cash flow from operations was a record $110.6 million for the quarter, reflecting strong underlying earnings and working capital management. Capital expenditure for the quarter was $12.3 million. Depreciation and amortization for the December quarter totaled $22.9 million.

Our share buyback continues to play a major role in our capital management program. During the quarter we repurchased 4.1 million shares for the consideration of $110.5 million. For the first half of fiscal 2012, we have repurchased 8.5 million shares for consideration of $235.2 million. The 8.5 million shares purchased year-to-date represents approximately 5.7% of our diluted shares outstanding. At the end of December, we had approximately 14 million shares remaining under our authorized buyback program.

On January 25, we increased our syndicated bank credit facility from 300 million to 400 million, providing the group with additional funding flexibility. Our balance sheet remains strong. Net cash balances at the end of the quarter were 497 million. At December 31, total assets stood at 2 billion and net equity was 1.6 billion.

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

Question-and-Answer Session

(Operator Instructions) Your first question comes from the line of Ben Andrew with William Blair. Please proceed.

Ben Andrew - William Blair

So, Peter, can you talk a little bit more about two things please, for my question. First is international volumes with a kind of steady through the quarter or getting worse or you really looking at maybe a more difficult environment than you saw in fourth quarter for the balance of fiscal ’12 and then ended a balance of the year, and then second, on the product mix side, that was a pretty impressive performance on gross margin. Is that something that was unusual in terms of the mix this quarter because that gives us a pretty broad range for the year. So maybe talk to the mix and the dynamics there please?

Peter Farrell

Let me just address the gross margin first Benefit. Obviously getting close to 60% was pretty encouraging. But I think the main thing is and I will let Rob chime in here particularly regarding Europe and maybe for the first question back to Robert. You will note that we had really encouraging growth, as you know the Adaptive Servo-Ventilator products are now in the S9 box and we saw a very good growth there and of course there is also the Stellar and the new Bi-Levels in the S9 box. So higher margin products for sure and that is pretty encouraging. I think we are kind of delighted that we made 60% gross margin.

With respect to what is happening in Europe, I mentioned in my remarks that we were relatively insulated from the Greece, Spain and so forth. We did have some relevant business in Italy and however that was the quite good and obviously the big ones of Germany and France,. The 5% figure down a little bit from perhaps what we have observed in previous quarters and there was nothing that came to me in terms of changes during the quarter.

One thing we do know is that I think we mentioned this before we haven’t but there was a 6% reduction in France in reimbursement and that kicked in and also there was a reduction in reimbursement in Germany for PSG. But that only affected the private market which is roughly a third of the markets. The two thirds being the government-based hospitals where there was no drop in reimbursement. But maybe, Rob you can add some more flavor, if you wish?

Rob Douglas

Sure. I think there is no evidence of hitting a cliff in Europe at all. We would say the market growth in Europe is probably slow more around where the US has been over the past few years. The uncertainty is not helping, but the business is traveling along quite nicely and that’s pretty steady as you go.

Ben Andrew - William Blair

And I guess my follow-up would be, maybe Brett can you give us a sense on hedge gains; in the quarter it looks like the other line was a little bit bigger and where might that be over the balance of this year if rates stay where they are? Thanks.

Brett Sandercock

So, if you say that where hedge gains recorded; they are through other income in the P&L which was $8.5 million this quarter which is predominantly FX guidance there. That you will see from operating income really we were hurt by currency however we had pretty significant hedging gains this quarter really due to all the strengthening both against the US, but in particular against the Euro over there sort of quarter-to-quarter it was about a 9% increase; so its quite significant and marking those to market goals those hedging gains.

If you look at all up for the quarter, the FX was positive on the EPS by about a penny, so it’s pretty much a wash with those gains. Looking forward, if rates stay exactly where they are or where they were at the end of December then you would get more gains through other income, we’re on the hedging because we do mark-to-market. But at the moment, they are even up a little from where they were so there will probably be some minor gains coming through, but it would be largely benign unless we get significant movements in currencies again.

Operator

Your next question comes from the line of Michael Matson with Mizuho Securities. Please proceed.

Michael Matson - Mizuho Securities

So I guess just back to the commentary on gross margin. So Peter, do you think that the gross margin then is sustainable at closer to 60% or do you think if there is some reason that leaves you to believe that it could fallback down to more of the middle of that range this 58% to 60%?

Peter Farrell

Well Michael, we don’t have a crystal ball to be able to laser beam you know on what gross margins going to be; as you realized it’s a function of geographic mix and Europe was bad a bit relative to the US. That doesn’t help; but on the other hand you know the higher margin products showed the biggest growth. If that continues we’ll be you know the sales and the Bi-Levels in the adaptive servo-ventilator obviously master a pretty good and remain good and that’s been true to the past several quarters.

So assuming the mass hold up and assuming the growth holds up in the Bi-Levels, the vents and also the order setting products will be close up to 60; if that doesn’t hold up we might drop a little bit, but I think Brett said you know we’re comfortable with 59 to 60 and that’s a better and as precise as we want to be.

Michael Matson - Mizuho Securities

Can you give us any timing around new platform launches on the flow generator side; I guess S92 or S10?

Peter Farrell

We’re working on those; I don’t know; I’ll throw that to Don Darkin. Normally, we don’t, you know we’ll let you know when we’re launching. So making predictions there is not what we’re normally into, just like we don’t make too many predictions.

Don Darkin

I do but most of the others don’t.

Peter Farrell

Don, do you want to say anything?

Don Darkin

The platform is well underway, but at this point assume that’s where we’re at. You know particularly, the step-up in expenditure on R&D and that’s obviously reflective of a greater push in certain areas. But just like we don’t give guidance, we are not going to tell you when the product is going to launch.

Michael Matson - Mizuho Securities

Yeah I mean, that actually read into my next question, just because we’ve seen R&D even on a constant currency basis we’ve seen some pretty dramatic increases there and I am just wondering kind of where you are spending all the money. I understand, look you are launching new products at a regular intervals etcetera, but the number of new products I guess from an outsider simply doesn’t really seem like its gone up all that dramatically. But yet your R&D is going up a lot. Is there something related to that big study, the SERVE-HF study that you’re running or something else going on there behind the scenes?

Peter Farrell

The SERVE-HF study is sort of a fixed spent. So there has been no acceleration in that. We’re up to around 900 patients out of the total 1260 planned. So that hasn’t been reflected in the increase. It’s mostly ventilation products, that are cheap to produce and also we’ve been making a push on the health informatics and those two areas are really the main geeks; really ventilation and health informatics.

Brett Sandercock

Just as we’ll pay much that the recent acquisitions, BiancaMed, Gruendler etcetera where they’ve got some nice products and so on. We’re continuing our R&D efforts there as well. So that increases as well and that’s effectively R&D that we’ve acquired but that we certainly you know, very excited about and we’re absolutely funding those as well.

Peter Farrell

Yeah, good point.

Michael Matson - Mizuho Securities

And then just one more quick question, did I hear correctly that the currency impact on your EPS was positive a penny, positive $0.01 this quarter?

Brett Sandercock

Correct. The bottom-line that would’ve been 41, but it came in at 42. So, you know, not really immaterial.

Operator

(Operator Instructions) Your next question comes from the line of Joanne Wuensch with BMO Capital Markets. Please proceed.

Joanne Wuensch - BMO Capital Markets

Did you call up the Bella Mask, B-E-L-L-A as in Beautiful or the Twilight Movie?

Peter Farrell

Yeah, hi Bella.

Joanne Wuensch - BMO Capital Markets

Okay, just checking. Peter, not that I want to move you along, but can you talk about CEO succession planning right now?

Peter Farrell

Well, I think, we sort of talked about that last, maybe it was last call, I can’t recall. But we’re using an outside recruiter because we like their template. But there is not, it’s not something that we’re rushing along. You know, I made some comment there about my hope in sort of rather, it wasn’t bland; things are going well and we’re going through a very sort of circumspect evaluation and we have got 3,500 roughly give or take employees. We think a few of those people are qualified to run the organization and we are just going through 360s if you like and looking at peoples’ strengths and where they maybe need their improvement.

We are using the outside recruiter to help us with that evaluation; we’ve also have another consultant, McKinsey Partner and we’ve worked with Clem Doherty; I don’t want to give advertisement for Clem’s like minded individual’s consultancy, but he is a good guy and he knows us very, very well, we have been working with him since 2004 and he knows all the senior people. And so we’ve got if you like a person who knows us really, really well and recruiters that are beginning to digging down, getting some granularity and we will get reports back from those guys over the next couple of months then we will look at those reports and we will decide where we go from there. But there is no even an announcement Joanne.

Joanne Wuensch - BMO Capital Markets

I am sorry, may be it was in Australian newspapers or somebody picked up that Nick was in queue for this; my am I reading or am I remembering something wrong?

Peter Farrell

I think there was a women from I think it was Australian Financial Review which is one of, I don’t know if there is anybody from the AFR on the line but, they indulge in gross exaggeration where there is always takeout of bids where you know somebody is taking us over and there is a big flurry that goes up into the marketplace and we get calls from bankers wanting to help us out with our settle.

Again, that’s just a beat up; there is nothing to that as I told you, we’re going through a proper circumspect evaluation and we will make an announcement sometime in the future. I don't think it will be, it will not be the near future.

Joanne Wuensch - BMO Capital Markets

Alright on a more financial note, you have if I remember correctly, a $400 million cash on the balance sheet, you just expanded your credit agreement, what are we doing with all this cash.

Peter Farrell

Well, we as you saw Brett indicated that we've been doing a very aggressive buyback, 4.1 million shares for over a 110 million last quarter, the quarter before that I think if Brett can correct me, 125 million about the same number of shares, 4.5 million. We think that from what we can see we think the stock is incredibly undervalued. You can see with our current results we like this area. We continue to be excited about the future. We are in an area which is, it’s preventative medicine, it improves patients’ quality of life and also reduces healthcare costs.

So we are in a, if you like a sweet spot regardless of what happens in the crazy world of sick care, also known as healthcare. So we are in a very good space and we believe that the best value at the moment, we increase the borrowing so we have the flexibility. There's another 14 million shares approved for buyback. We believe that the stock is cheap and we are putting our money where our mouth is.

Regarding the balance sheet, our total debt including current and non current together is around $225 million and we have net cash of around $0.5 billion, but most of that's offshore. We are not going to bring it back here at the ridiculous tax rate sort of existing in this country and so we will however make investments leveraging the balance sheet in areas like we did or like we’ve done with say BiancaMed and so. But we’re making some private investments where we think we can, we’re not trying to make money on equity plays, I mean you know invest $3 million and you get 10X and you get $30 million back and you put it on our balance sheet with net cash of nearly half a billion, it’s kind of like so what.

So we are doing this in the marketplace to put people in a direction which we think makes sense or we are investing in technology that we think in the future will make sense. So that’s where we are putting out our resources, the buyback and minor investments in people that we think can choose straight and will help us expand the market.

Operator

Your next question comes from the line of Jason Mills with Canaccord. Please proceed.

Jason Mills - Canaccord

Hi, Brett first question is for you. I am certainly not a foreign currency expert. I just wanted to see if I can get a little bit more granularity there because you did a nice job of giving us some color around the constant currency growth in both SG&A and R&D and saying that revenue and gross margins were not affected by currency. So just looking at the SG&A and R&D based on constant currency growth using your percentage as, it looks like it added about a million and half bucks currency did to the cost. And then you said other income 8.5 million was predominately FX. So I am getting into a higher impact from currency just using what we’ve heard so far in the call. So could you just help me out in getting me to understand a little bit better?

Brett Sandercock

The big one there would have been the (inaudible) impact year-on-year judgment, so as you know a lot of ware that we have is basically a quarterly lag with the cogs until we ultimately sell that inventory. So if you step back and look at that lag impact, the Aussie dollar actually appreciated quite a lot over that period and that’s what hurt us through the margin. And year-on-year certainly was quite a big impact, it would have been probably a little over 200 basis points on the margin. That’s where we are getting hurt at the operating income line. And of course we had offsetting hedges coming through this quarter which more than offset that. So we ended up with having that one penny benefit coming through.

Jason Mills - Canaccord

Okay, so kind of leads to my next question on gross margin, sort of what the constant currency gross margin would have been, you said initially that you saw minimal impact from FX, but now you are seeing, it seems like you had actually a significant impact. Are you saying pro forma, we are looking at margins, it would have been on last year’s currency levels around 61.5%?

Brett Sandercock

That certainly would have been high. So two things on this, Jason, the first one is my comments were generally on sequential movements in the gross margin which people tend to focus on given how volatile currencies are and so on. So that’s one aspect. The other aspect is the year-on-year margin which if you looked at it kind of down I think was 60.8% last year, 59.7% this quarter. So that’s definitely come down and the big driver of that is basically currency on that. So if you basically, you strip that out on constant currency basis, it is suffice to say that margins would have been higher than they are, than they were last year even. Fortunately we are live in the world where it is kind of really volatile at the moment. So we get a lot of these movements happening. You can see the weaker euro even now is going to play a part as well and end up being a bit of a headwind for us. So, there is a whole bunch of factors playing it on that margin, making it pretty difficult to predict.

Jason Mills - Canaccord

Is it possible that you have the mirror reversed in the currency markets happen at some point in time?

Brett Sandercock

In terms of potentially weakening Aussie and so on.

Jason Mills - Canaccord

Yeah, and then you would have gross margins that show up in the 200 basis points lower and is a negative impact. Is that possible or do you feel like?

Peter Farrell

It could. If you look trending over the last two or three years, where the Aussie has been basically on the rise almost inevitably and remotely. If that turned around for some reason, then there is a lot of headwinds we’ve had over the last two or three years would end up reversing and we would see the benefit of that. And it overly stems from the large part of our cost base is here in Australia. So denominated Aussie dollars.

Jason Mills - Canaccord

Okay, and Peter, on the product mix of flow versus mask, you have consistently proven your mask growth is sustainably strong, what can you do to couple overtime your flow generator growth with that strong mask growth, I presume you don’t have any inclination of that coupling with mask growth coming down. So, I presume that you’re gearing up for flow generators to come up and exist at a higher level, sort of similar to your mask. I am just wondering what sort of initiatives or plan strategy you have in place for that?

Peter Farrell

Well, the one possibility that we’re looking at, given the replenishment area and given the growth in masks, as you pointed out, it’s been strong, traditionally strong. We’ve seen a weakening in the flow generator space and now with HST coming in, I have mentioned that the positive impact on APAP or our autosetting products and also the growth in application of the Adaptive Servo-ventilation.

In the last call, I mentioned some of the good things that were happening in Japan where Adaptive Servo-ventilation was being used on heart failure patients even though they didn’t have frank sleep disorder breathing. The cardiologists there and we are involved in a continuing study there. The cardiologists there believe that because of the impact on fluid in the lungs and fluid in the pleura that Adaptive Servo-ventilation should be used for all heart failure patients.

That’s pretty encouraging and we’d like to see that spread, but one thing we are looking at and Don can talk to this if he wants to add some flavor to it, but the replenishment area is showing very, very encouraging growth and we have been saying to ourselves, Gee you know what, what about flow generators in that space.

So it’s a huge number of very old flow generators. It is kind of like the old Volvo ads. We have been driving this thing for years and years and years. Well guess what, horsepower has changed, acceleration has changed in the newer ones, wouldn’t you like to buy a new one and hey why don’t you trade in your old one.

So we seen and quiet frequently patients that will come in with a flow generator and a CPAP device that is over ten years old. With hundreds and hundreds and hundreds of hours on it. Well Gee you know things like noise, impedance, the algorithms I mean everything has evolved and obviously we make pretty good products because they last a long time, but they have been significant improvements particularly in people that have, and we sort of suggest a lifetime of five years. So there's a lot of devices that are out there that are well over five years old and like I can’t give you the numbers but its in the millions of devices that are out there, how many are older than five years, we can provide some estimates, that looks like half of them. So there's no reason why we could alert people to the fact that they might benefit from a newer device with better compliance and certainly we would think better quality of life. So that's something we are looking at.

Operator

Your next question comes from the line of Matthew Prior with Bank of America Merrill Lynch. Please proceed.

Matthew Prior - Bank of America Merrill Lynch

I will just have a rather quick one in regards to the European mix of flow gen business. Can you talk about whether the European mix is similar to the US in terms of flow in CPAP orders that's been viable given that the current level in CPAP what you see in the future?

Peter Farrell

That's quite a different mix. Generally Europe is much more a higher mix on the CPAP. Typically the older sets are a lot stronger and the US has a model where patients who don't live well with the CPAP end up on a Bi-Level device and that's not immobile in most European countries. So the mix is very different.

Matthew Prior - Bank of America Merrill Lynch

And then just one follow-up question, Peter you talked about obviously home sleep testing and we've still got this issue of PSG labs not yet participating in HST. When do you see that coming, is it now that we've got pre authorization that you will get that potential transferences of PSG labs participating in HST and ultimately what’s the conservative argument, you mentioned that some in ResMed are more conservative than yourself, I am just curious if you can flush out and any other kind of things for us.

Peter Farrell

Okay. Matt let me take your last question there. You can say that I am optimistic but in looking at the terrain, I think we’re going to see a doubling in HST, which means the potential doubling in the America’s in AutoSetting setting devices. So that just my hunch. We’re seeing there is some anecdotal evidence coming back from the marketplace that the payers are getting a little more AMC there, they are saying material expenditure on PSG and they are not -- this authorization is building up a whole ahead of steam. Why? Because it’s going to save them money and you are looking at rough figures 1200 bucks plus for PSG versus 250 for HST. But they are other dynamics that are playing here as well and we’re trying to inform the sleep labs and they’ll pass it over and make in a second and need for him to make a comment.

But the sleep labs, we did a survey and found out that 30% of patients have a script written to attend the sleep lab for PSG, 30% of the patients time show out. So if your 30% are no shows that’s big number. And we’ve also found that if the sleep lab also offers HST and if you think about HST versus PSG. PSG you get on a six to eight week wait list and you got to bring a duffle bag with all your gear and then they wire you up. And this is for something that a five-year-old child can diagnose. I mean this is something that is very, very simply to do, particularly if you have a history and a physical by a physician who knows what he or she is doing.

So you could almost argue, you could go straight from a history and physical. In a lot of cases straight to autosetting treatment because only autosetting will tell you whether you need treatment or not. But that means obviously buying a device. But physicians would have been in this game for while, now 80% of the time which patient needs treatment and will benefit from it. Anyway stepping back from that so you have got labs. Now if they offer both, then it’s a 2% no show which is quite different. Now, if you think of HST, it is a medium. You take the HST, the apnea link in our case home with you. You bring it back the next morning. In two minutes you get a full diagnosis and you immediately satisfied with the CPAP rather than waiting six to eight weeks, perhaps ten weeks before you’re put on treatment.

It’s very inefficient to PSG. It’s very expensive by comparison with HST and much, much, much more inconvenient. So you are going to see consumer move there, you are seeing the payers pushing people in that direction. And I think that the labs that don’t offer HST are actually dinosaurs. The fact is that the whole market is moving in that direction. There is no stopping it and those that resisted. I can loose them. So, and I think given the fact that most of them don’t want to end up on the dole or accepting welfare payments. I think they will move and how quickly that will happen, I am saying it’s doubling. It could even get a higher. I don’t think it is going to be any worse than 30% of all sleep testing and HST. Others conservatively within ResMed, the same more like 25%. But that’s still pretty significant 80% growth versus 100%.

Brett Sandercock

But Matthew, to your question there about sleep labs are not participating in HST. They’re actually already are. And they’re participating at the double-digit percentage rate and it varies by geography around the Americas. But if you look in the Northeast and the Southeast particularly where there is very high density of sleep labs, you’re talking 20% to 40% of them all ready sleep centers participating in home sleep testing and some of them actively offering it because they’re saying that the no-show rate for just PSG is about 30% and the no-show rate when you offer both PSG and HST give people choice. Its down to 5%, could be in that 2% to 3% range in some early data. So that no-show rate goes way down. They’re seeing that and the forward-looking sleep centers are already doing this. Even the American Academy of Sleep Medicine, which is the sort of group that helps govern this group has put together an accreditation program for Home sleep testing. So, it’s now sort of sanction within the sleep center community and they’re all talking about how do we tie in to patient centered medical homes to accountable care organizations. And all this evolution of the payer environment within the US market and how do we make sure sleep changes upon utilization management at those payers to care management or disease management. So that we show that there is an ROI to the insurance company of diagnosing and treating and managing the patients on CPAP, APAP and VPAP products. So that message is there and both across sleep centers and across the sleep medical communities as well as the HMEs and manufacturers like ResMed, we’re partnering up to put that story together and drive home sleep testing as part of that.

Operator

Your next question comes from the line of David Clair with Piper Jaffray. Please proceed.

David Clair - Piper Jaffray

Any comments you can give us on the launch of Stellar 100 and then Peter you mentioned we have some more ventilation products in the pipeline. How should we think about ventilation going forward for you guys?

Peter Farrell

I think Jeff Nelson, if he is still awake, he is in Europe and Geoff you are the guy on the ground there. Stellar has been released in Europe as a 100 mm on 50 would you like to comment on that please Jeff?

Geoff Neilson

Can you hear me?

Peter Farrell

I can hear.

Geoff Neilson

Okay so Stellar 150 has been in the market now for a while. It’s launched throughout Europe and we have also got that with CareFusion distributing into hospitals in US and they have launched that towards the end of last quarter. And Stellar 150 we launched in Europe and that has our automatic therapy called IPAP switches being well received so far.

And Stellar 100 and 150 are approved in Japan and we look forward to launching that in the next quarter and the growth rate is to our expectation and CareFusion has been lot of sampling and their sales force is excited and we are getting some interest from the hospitals and they are showing that, but obviously the sales cycle in the hospital is a bit longer than at home care.

And that is story with the Stellar 100 and 150 and looking forward we are investing in new platforms to replace our existing platforms that are available in Europe and the timing of that we wouldn't say at the moment, but we are actively investing in that and you can see that by some of our R&D expenditure.

And then we are also looking at humidification with Gruendler and we are doing a CPL or controlled product launch in Europe at the moment and we would be looking forward to launching their new humidifier over in about a quarter’s time and before the end of the financial year.

So we are excited about what we are doing and the business is growing; it’s growing quickly in the US with some of the HST products and obviously we are looking forward to new products as they come online.

David Clair - Piper Jaffray

Then a quick one here for Brett, you know how should we think about the medical device tax impact in 2013?

Brett Sandercock

Yeah, I mean it’s probably going to be interesting one for all medical companies there on that tax that comes through. At the moment, I mean we have a, we got a team together at the moment that's looking at it on the assumption that its going to come through and who knows what might happen. But at the moment, with sort of planning that’s going to come through, what – that Peter and guys might have some color on whether it gets there or not, but at least that’s what we are planning for. And then it’s just a question of who is, how you do that, who you pace with, or who does that kind of thing, I think all that's got to be worked through.

Peter Farrell

I mean, we are expecting the worst on that, but hoping for the best, I mean there is a lot of water to flow under the bridge David, and hopefully it ends up being positive for the whole of the medical device industry.

Operator

Your next question comes from the line of Dan Hurren with UBS. Please proceed.

Dan Hurren - UBS

Well, good morning everyone. Just wanted to ask Peter your comments at the last quarterly result in relation to stopping discounts for the low end CPAPs in the US became such as huge issue after the quarter. Could you just give an update on that?

Peter Farrell

I never mentioned it Dan, if I had known it was going to create such havoc.

Dan Hurren - UBS

Well, Peter could you perhaps just, I mean at the time you’re talking about some of that volume might come back would have fallen in the next quarter; you didn’t know how many of the price sensitive or how many of the buys were price sensitive; can you just talk about how that’s played out over the second quarter?

Peter Farrell

Well, I think you know I was talking about that we were doing a bit of market segmentation etcetera, but look I am going to tell that to make my comment, but basically we had a period where there was a sort of hockey stick thing going on when I mean I am going back a few years now, we decided that we wanted to have a more you know saying in a way of satisfying customers more of you know; if you can get to further, further, further, I mean that’s kind of dreaming a little bit, but you don’t want to have 60% of your sales in the last month.

I am just trying to pulling that figure out of the air; I am not saying that that’s a real number. But too much of the business was being pushed towards the end of the quarter. And it creates logistical issues and if you start offering better prices you know appearing as you are desperate at the end of the quarter to make sales. Then that’s going to push everything in the direction of a hockey stick at the end of the quarter and we decided that we did want to, we did want to offer bag and base process and we didn’t want to have this logistical nightmare towards at the end of the quarter and we’ve taken steps to get around it, so Mick, why don’t you, do you have anything to add to that?

Michael Farrell

Well, I mean the only thing I would say that Dan is that, we haven’t changed really anything in how we operate from Q1 to Q2. We operate our business for the long term, looking at long term efficiency and supply chain management for us; our manufacturing facilities, our inventory facilities and for our customer’s inventory facilities and delivery to their patients.

What changed from Q1 where we were minus 2% in America’s flow generators to Q2 where we were plus 4% in America’s flow generators wasn’t any fundamental shift and how we did that. We are doing the same thing as we did in Q1 and Q2. What happened was that we have seen a positive impact overtime going out talking to sleep physician by sleep physician, sleep lab by sleep lab, HME by HME, about the benefits of the S9 Bi-Levels to benefits of the VPAP adapt which is now in the S9 platform, the benefit of the VPAP ST and driving the value of those products and leveraging the positive mix shift from S9 Skype up to S9 auto-setting that is linked with HST which is titled to the question.

So that is probably mix-shifts have resulted in that six point turnaround from minus two to plus four. It’s nothing to do with any sort of change in long-term. By the way we got the same of operational efficiency in tying with our large customers that we have before and we plan to stick with that going forward.

Dan Hurren - UBS

So I just, I guess in a word, you are saying that the segmentation is progressing as planned and is proven to be successful?

Michael Farrell

Correct. We are doing the Wayne Gretzky skate to where the tuck will be, not where it was and that’s what we have been doing and it seemed to work here in Q2 and we plan to continue to do that.

Peter Farrell

Have you understand the Wayne Gretzky?

Michael Farrell

All the rugby ball…

Peter Farrell

Yeah, where do you think the ball is going to end up basically; if you’re not an ice hockey fan, than we can send you a bit more detail, but we’ll take it offline.

Dan Hurren - UBS

I will check it out on YouTube. Thank you, gents.

Operator

Your next question comes from the line of David Low with Deutsche Bank. Please proceed.

David Low - Deutsche Bank

If we could just turn back to the same sort of topics, the Stella sales during the period, I mean, Mick you just commented that you had to turnaround the 6% turnaround. Just how much was ventilation sales contributed to that?

Brett Sandercock

Well, we don’t give granularity on that, David. You know, because once you start, it’s going to be every quarter getting down to granularity and we don’t think makes a heck a lot of sense. I think Geoff put it correctly we were very satisfied with where we are in the sales, both with CareFusion and with our Asia-Pac and European sales. So a good growth and we expect to see that continue.

David Low - Deutsche Bank

And just again on the Bi-Levels and I guess that was an issue going back a few quarters. If you could talk, I mean, Mick you mentioned the marketing of those products and then now in the S9 platform, just can you talk about where sales of Bi-Level devices are now. This is where they were in 12 months ago, given we went through that deep with the product launch?

Michael Farrell

No, David. We’re not going to go, like we’re not going to split out the category between details of VPAP ST versus Stella. We’re not going to go in to the detail split between CPAP, APAP and Bi-Level, other than to say that it was positive material impact of the S9 Bi-Levels, particularly of VPAP adapt and the ST, which is now there sort of high margin, high value for the customer, high value for the insurance provider products and we’re focusing our attention, and marketing and our sales people have their feet on the street with selling the value proposition of ResMed’s high end flow generators and ventilators as well as our algorithm and how essential as part of HST so a combination of many factors have contributed to that sort of positive mix shift that you saw in flow generators in that period.

David Low - Deutsche Bank

Sure. Look I am not expecting you to break it out, I just wanted to get a sense as to whether we were sort of back to the same run rate or whether the Bi-Levels is a category offering the same opportunity that they were 12 or 24 months ago?

Michael Farrell

Look I think we have a good opportunity to take share overtime in the Bi-Level category and in the ventilation category and Geoff can talk more about the global ventilation opportunity, but within the Americas in Bi-Levels we got a lot of run rate and we are going to move at it and keep the value proposition selling on a ongoing basis.

Geoff Neilson

And having said that I think last quarter and certainly the quarter before we talked about the non-complaint OSA so if you like the lower margin Bi-Levels VS products we are seeing that the S9 order set has such a good algorithm, you know one sleep physician who is switched exclusively using the S9 order set and he said he has gone from the low 20s in terms of non-complaint OSA going on to Bi-Level down to more like 5%. So that’s at the low end and we don’t see any big changes there; in other words it’s going to go from the 20% down to perhaps the 5% non-complaint OSA going on to Bi-Level S.

David Low - Deutsche Bank

And just one follow up, the pricing environment I guess it’s a pretty standard question on these quarterly calls, but could you talk about what you've seen with your ASP and perhaps touch on what the competitive environment been as well?

Geoff Neilson

You know we happily we've seen no unexpected, put it that way, unexpected changes in ASP which is a good thing. But it seems that the other guys are you know not doing anything silly and we certainly have no plans to do anything silly. I mean typically we are not price setup and we intend to keep that philosophy going forward, and I don’t normally comment on that it’s the environment wasn’t particularly surprising.

David Low - Deutsche Bank

The 3% to 5% price decline to the quarter that you've talked about in the past…

Geoff Neilson

Well, that's annualized. That's an annualized figure, the 3% to 5%.

Operator

We are now at the hour mark. So I’ll turn the call back over to Dr. Peter Farrell for his final remarks.

Peter Farrell

Alright. Well, thanks once again for joining us today and I’ll just reiterate that we continue to be excited about the future prospects for us in the sleep disorder breathing space. We’re in the right space. Its preventive, improves quality of life and also reduces healthcare costs and we look forward to continuing contributions in this space. So thanks guys.

Operator

We thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.

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