Somnomed ("SOM") - the new Resmed??

[steve fleming]

SOM market cap = $36 million

RMD market cap = $6 billion

SOM has been profitable the last 3 years, and a CAGR revenue over the last 5 years of 24%

Now going head to head with Resmed in Europe and North America

Updated broker reports on SOM:

http://www.somnomed.com.au/Corporate/Other_Reports.aspx

[NZSilver]

looks interesting, could be worth a dabble, anyone else have thoughts?

[lissica]

looks interesting, could be worth a dabble, anyone else have thoughts?

Looks like a pretty simple device to open the airway using dental plates to provide a jaw thrust of sorts.

Not really comparable Resmed or FPH, which provide positive pressure ventilation. I guess it might be useful for people with mild OSA.

[steve fleming]

SOM are forecasting FY13 revenues of $20m, representing a 30% increase over FY12, and ahead of their 5 yr revenue CAGR.

The thing about SOM is its very impressive gross margins (66%) so as they scale up, and complete their growth investment requirements, this should translate to some impressive profit results.

[OneUp]

Steve, SOM's gross margins appeal but suspect they will need to reinvest heavily in SG&A, so the breakout in NPAT may be some way off yet.

[steve fleming]

Steve, SOM's gross margins appeal but suspect they will need to reinvest heavily in SG&A, so the breakout in NPAT may be some way off yet.

Agree there is a bit of work to do before SOM starts generating meaningful NPAT.

But if sales get to $20m and they are still growing at 20-25% then a fair bit of that should drop down to the bottom line.

Its just very hard to get any decent visibility on whats going to happen to future sales growth.

[steve fleming]

SomnoMed aims to take a bite out of ResMed’s market

Australian sleep device company SomnoMed is hoping to steal market share from sleep therapy giant ResMed after a study showed its sleep apnoea device may be as effective as its rival’s. SomnoMed executive chairman Peter Neustadt has called on sleep physicians to reconsider oral devices for sleep apnoea, including SomnoMed’s SomnoDent, and recommend them in favour of ResMed’s dominant mask-based products.

SomnoMed has a market value of just $50 million, compared with Resmed’s $6.3 billion.

A recent Sydney study compared ResMed’s S8 CPAP to SomnoDent on patients with moderate to severe sleep apnoea, which is a sleep disorder that causes sufferers to stop breathing for periods of at least 10 seconds during sleep. The study found oral appliance therapies produced similar health outcomes, while patients were more likely to use them.

“Studies like this can’t be ignored,” Dr Neustadt said. “Physicians have to accept there is an alternative. Even if they love CPAP, their patients don’t necessarily love CPAP.” CPAP is short for “continuous positive airway pressure” and Resmed’s device has to be worn as a mask, with air pushed from a generator through tubing and mask.

In contrast, SomnoMed’s device is like a simple mouthguard, which clears the airways by bringing a patient’s jaw forward.

ResMed founder and chairman Peter Farrell defended his company’s highly successful CPAP. Dr Farrell said the study, where patients were monitored using CPAP for one month and then SomnoDent for one month, was too short and showed CPAP was better able to reduce patients’ pause in breathing. “The bottom line is that one works and the other almost works and that is not good enough, in my book,” he said.

ResMed sells 2.5 million CPAP devices a year. SomnoMed hopes to sell 38,000 oral devices globally this financial year and plans to more than double that number in the next two years as it expands in the United States.

Key to its success will be whether it can convince US health insurance companies, sleep physicians and patients that oral devices are a more effective and cheaper way to treat sleep apnoea. Dr Neustadt said oral devices made up less than 5 per cent of the sleep apnoea device market in the US, which was dominated by ResMed’s mask-based devices. He wants the US to follow the lead of European countries such as Sweden, where oral devices are suggested as the first line of treatment.

Wilson HTM analyst Shane Storey said SomnoMed’s SomnoDent was the market leader in oral devices and better than ResMed’s own Narval CC. ResMed offers its patients the oral appliance for mild apnoea or for use when travelling. “Anecdotal feedback I have had from people who have experience with both products is they prefer the teeth-contacting surfaces to be hard acrylic like SomnoDent’s,” Mr Storey said. “Narval CC is made of a polymer material and is more flexible. There is some concern about whether it can hold the bottom jaw in the correct position for sustained periods of time.”

Dr Neustadt said SomnoMed could follow ResMed’s lead and pursue a US sharemarket listing if it doubled its market capitalisation to more than $100 million in coming years. Andy Gracey, portfolio manager at Australian Ethical Smaller Companies Trust which owns 6.5 per cent of SomnoMed, backed its new strategy to distribute products through sleep physicians rather than through a network of dentists.

The Australian Financial Review

[percy]

Thanks Steve,great article.

[OneUp]

Interesting article, thanks.

Not sure why they used Resmed's S8 rather than the S9 which has been in the market for years now.

[lissica]

Interesting article, thanks.

Not sure why they used Resmed's S8 rather than the S9 which has been in the market for years now.

Yes, interesting. I don't see it as a replacement for CPAP though- I see the greatest potential as a cheap fix for people with mild OSA. If they can take a bite out of the market (pun intedned), then it could be a very big market indeed.

The only thing is that with so much less complexity- I'm not sure how great their competitive advantage will be. You could open the airway just as easily (but pretty uncomfortable) with an oropharyngeal airway, which is little more than a cheap piece of curved plastic. There must be all sorts other ways of achieving the same thing.