isn - a qualitative analysis

I'm an avid follower of Biotech and Healthcare micro-caps and Isonea, although a medical device company can still be valued by applying the same qualitative analysis methods as one would use for a speculative biotech company.

When sizing up a biotech company's strategic and financial health, analysis often relies heavily on qualitative analysis rather than quantitative, financial methods of valuation. Here are a few non-numerical items to consider when analyzing biotech companies.

I always apply this method for valuing micro-caps in this sector and I would encourage others to at least cross reference some of the points highlighted here with your own investment strategy - This of course is more applicable for a long term strategy.

Disclosure: I don't hold ISN, nor do I intend to at this time so please take the following with a grain of salt and accept that it may not be free from errors - Please feel free to correct, disagree and/or challenge any part of the following post - we're all here to help and learn from each other.
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Products & Pipeline

Naturally, a company's product portfolio and research pipeline are the lifeblood of its success. That means you need to take a close look at the company's key products and the features of its technology. Ideally, the company should be developing a technology platform with multiple – rather than single – treatment opportunities. Importantly, the company should be working on a large number of products that target diseases with large patient populations.

Watch out for biotech firms developing products for big treatment areas – such as cancer, and cardiovascular diseases and central nervous system disorders – where potential return in investment is greatest. Stay clear of companies developing "me-too" treatments for disease areas that already well served by existing technologies in the market.

At the same time, find out where the company's products are situated in the development pipeline. The later the product's stage of clinical development, the greater the chances of regulatory approval, market launch and commercial success.
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Core Technology
The Company’s core technology consists of proprietary sensors, signal conditioning hardware, and extensive array of signal processing algorithms for automatic detection and quantification of wheezes, cough and respiration. The technology also includes protection of the inner-body signal against interferences from background noisy acoustic environments which is found in pulmonary function testing laboratories. The quantification of wheezes is based on their duration, namely, the percentage time a patient wheezes (e.g. 12 seconds of wheeze in a minute is equivalent to a WheezeRate of 20%). The WheezeRate correlates with the extent of airway narrowing and conventional measures of asthma. The detection of cough facilitates coughcounting and determination of cough distribution over time.

The Current Product Range
Based on its core technology, the Company is bringing to market a suite of products to supply solutions for major aspects of the disease, from the mild to the severe, from hospital to home, from young to old, during rest and during exercise (i.e. exerciseinduced asthma) and from awake to asleep (nocturnal asthma). Below are brief descriptions of the products, their intended use and market, their current status, and the timeline for rollout. The products are listed in the order of their commercialisation onset.

The Personal Wheezometer - The Company’s flagship product is a hand-held device for home use. When placed on the neck with its sensor over the trachea, it picks up the breathing sounds and determines if wheezes are present. A thirty second determination indicates the momentary wheeze rate. Should it be high, the patient (or parent) is instructed to seek medical help. The Personal Wheezometer prototype was completed in June 2008 and had an initial launch at the annual conference of the American Thoracic Society (ATS) in San Diego in May 2009, and a follow-up launch of the production WheezoMeter at the annual Congress of the European Respiratory Society (ERS) in Vienna in September 2009. This product has received European CE Mark clearance and Australian TGA approval for sale in these jurisdictions. Today’s WheezoMeter product line includes the Clinical WheezoMeter, two Personal WheezoMeters (adult and child), and retrieval software.

The WHolter is a 24 hour ambulatory digital data-logger / recorder. It is intended to be used for tracking wheezing and coughing for evaluation of nocturnal asthma, occupational asthma and persistent cough and, in the patient’s own allergen environment. The WHolter™ will also be incorporated as a component in the first phase of the WIM-GER™. The development work has been completed and the product had a soft launch at the ERS Conference in Vienna in September 2009. Sales of the WHolter to PFT labs, sleep labs and WHolter™ monitoring dispensing clinics commenced in 2010.

The Wireless PT is an add-on option to the PulmoTrack to facilitate ease of use and to reduce the cost of manufacturing. This product was launched at ERS in Vienna in September 2009.

The WIM-GER is a combination of iSoneas WHolter and the ZePhir Impedance and pH monitor of Sandhill Scientific Inc. This joint venture collaboration resulted from a KarmelSonix-sponsored study that revealed the two types of relationships between asthma and cough, on the one hand, and Gastro-Esophageal Reflux (GER) on the other.

The ASAM or Acoustic Severe Asthma Monitor is a novel continuous monitor for minute by-minute assessment of the severe asthma patient, typically in an ambulance, the Emergency Room, the Intensive Care Unit (ICU), and during recovery in the paediatric or internal medicine ward. The device combines the wheeze detection core technology outlined above, and the advanced active acoustics technology developed by the Company.
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Is Isonea developing "Me Too" products? I would answer this question with a yes, however to be fair although there do exist many other Asthma Monitoring devices on the market today, Isonea's core technology processes algorithms measured by acoustic signals which to my knowledge makes it unique among currently marketed wheeze measuring devices.

FDA Decision:

The Personal Wheezometer is intended to be a home use version of the Pulmo Track and Pulmo Track model 2010 (WIM-PC) providing wheeze-rate information for both home and clinical settings.

Personal Wheezometer: is intended for quantifying the presence of wheezing. This device should be used under the guidance of a physician or qualified healthcare professional for monitoring acoustic pulmonary functions. - FDA 510 (k) summary - 21/09/2009
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Patents

A biotech company's technology and products might have great potential, but does the company possess patents to protect its technology? By giving the biotech company exclusive rights to its technology, patent protection increases the value of the technology and the company. The company can pursue R&D and commercial development with less fear of competitors "stealing" or infringing on their technology. Most importantly, patents can attract royalties-paying commercial partners with the financial clout to fund R&D, clinical trials, product development and marketing.
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The topic of patent protection has got me a little stumped on a couple of points:

4 of the 7 key patents were invented by the company founder, Noam Gavriely and assigned to Karmel Medical Acoustic Technologies Ltd which I note also ceased being a substantial holder in November 2011.

1. Are these key patents now licensed to iSonea from Karmel Medical Acoustic Technologies Ltd or Noam Gavriely or were they re-assigned to Isonea during the recent name change phase?

2. If the future ahead for Isonea's technology looks so promising why did the inventor of the technology, Prof Noam Gavriely resign from the company and dispose of all shares in Isonea?

3. To my knowledge KarmelSonix presented a total of 14 patents of which 6 were already granted, 4 patents were pending and another 4 were in preparation as of 2009

4. The WheezoMeter, PulmoTrack and WHolter are all protected by two patents as shown in this flyer which were filed in 1996 and 1997 respectively giving patent protection through to 2016 and 2017 - Only 3-4 more years remaining of patent protection is quite concerning as it not only decreases the value of the technology and/or license to a potential partner but would also deter lucrative partnerships from being established? This forms the predominant basis for my own decision not to invest in ISN and I would certainly be happy to hear from others on this very topic.
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R&D

Does the company have a track record of productive research and development? Mature biotech/Medical device companies spend about a fifth of total revenue on R&D, while early-stage biotech/Medical Device ventures typically spend well in excess of hundred percent of revenues on R&D. Not surprisingly, the outcome of R&D spending can vary wildly, especially for early stage biotech ventures.

A key factor in success is the ability to develop cost-effective technologies that represent breakthrough therapies. R&D that delivers similar results to those already on the market is less likely to translate into successful products. Look for companies with R&D programs focused on diseases that aren't currently well-treated.

Isonea have provided the one document titled, November 2010 on their website under the heading, "Clinical Study"

I'd like to see more peer reviewed material made available and if possiblemore information related to the study programs planned for 2012.
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Management

Talent and experience of management is critical for long term success. Ideally, the biotech company should be run by executives who have developed and commercialized treatments before. It's a good idea to look for management teams with a track record of meeting publicly-stated goals and development milestones. Meanwhile, be wary of companies that regularly miss their targets. Executives must have an excellent understanding of the clinical and commercial development process, appreciate the costs involved, and have a record of putting company's resources into projects that offer high returns on investment.
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One of the reasons I don't like a company changing its name is for a lack of transparency as a result. Maybe it's just skeptic in me however on first observation, and I haven't conducted a thorough search yet, but it appears to me that presentations announced to the market as far back as KSX - 2009 Announcements and 2010 Announcements are almost identical to the most recent ones provided in 2011 and 2012.

August 2011 - Karmel Sonix: Share holder Update
- "I became interested in joining the Isonea team when I discovered that the depth of the intellectual property..."

This comment does surprises me somewhat as it was the lack of IP protection over Isonea's technologies that formed part of my decision for not investing in the company.

- "My experience and leadership resulted in one IPO on Nasdaq, one M&A to GE Healthcare, and one independent firm becoming a global leader as a manufacturer and service provider..."

When claims such as these are made, I would like to see a little more transparency. Why wasn't the name of the IPO provided? What merger or acquisition by GE Healthcare can Mr Thomas be credited with? And what is the name of the independent firm his direction was attributed to for becoming a global leader? Why omit such detail?

- "One of these partnerships (Omron) has already been announced. We will announce several others (global Fortune 500 Healthcare company partnerships) prior to the end of this calendar year"

A big red flag in my book when management fail to deliver on publicly-stated goals. My interpretation for the use of the term "several" is four and I believe any dictionary will define the word, "several" as "A number more than 2 or 3", so 1 out of 3 or 4 is a failure by anyones standards.

While on this topic however I should point out that on 31 August 2011 when ISN announced, "iSonea Signs Memorandum of Understanding with Fortune® 500 Healthcare Company", it also stated, "It is expected that definitive binding agreements will be finalised in the near term:"

I suspect share holders might still be awaiting the "definitive binding" details of this agreement and to be fair this industry as a whole moves at a very slow pace, although I do hesitate to make one exception, and I apologise in advance if I'm out of line here, but am I the only one who sensed a slight touch of desperation with the Bergen funding agreement?

On announcement of this agreement ISN stated, "Bergen’s commitment is to invest in iSonea and dollar cost average its investment, allowing the shares to appreciate as the company hits various future milestones. Future share purchases will be at premiums to the current share price, "if" the Company’s share price appreciates."

"Also the initial investment is designed to convert at such conversion price formula that while the Company cannot restrict Bergen from selling, there is an incentive for the investor not to sell until future achievements result in positive growth and share price trends."

It also stated:

Our key goals were to find:

* An investor committed to a longer term relationship, at least 24 months;

* An arrangement that would extend maximum flexibility to iSonea, allowing the Company to receive funding at elevated share prices, as we hit milestones;

* An instrument that would minimize dilution to our shareholder base

23/08/2011 - Shareholder Update

Another point worthy of a mention was the motivation behind a name change from KarmelSonix to Isonea. I can accept the new name derives from a combination of "I" for Innovation and "son" carrying the latin meaning for "sound", and "ea" representing the Latin word, "Apnoea" which of course means "without breath", but from my observation, and I share this as only an opinion - I believe 7 times out of 10 a company only changes its name to hide from something in its past?
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Partnerships

These days, biotech companies can rarely succeed alone. Given the big costs of drug development, a biotech company will be held back from reaching its full potential unless it can find partners to help fund clinical trials and commercialization. So, it's important to find out if the company has secured promising collaborations and licensing partnerships. Look for partners that show lasting commitment – remember, the biotech product development process can be a very long and expensive one. Also, keep an eye on deal terms as they offer a reliable indication of value that the market gives to the technology. A good licensing partnership agreement will include not only a generous royalty rate on future sales but also healthy upfront payments plus milestone payments for achieving development targets
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Do Isonea plan to secure any lucrative licensing agreements and why have no big players come knocking on the door over the past 3 years?

Isonea claim to have 23 distributors in the U.S., Australia and Asia and recently signed a deal with a subsidiary of Omron to distribute ARM devices in Japan and multiple foreign markets, however further progression is yet to be reflected in the financial reports.
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On March 22, 2011 KarmelSonix proudly announced a new JV with Healthy Sleep Solutions, which the announcement claimed "boasted a 30% share of the Australian market and with operations in India", and additionally, "The launch of this JV was a cornerstone of KSX's move to combine medical device sales with lucrative trailing revenues". "The JV is projected to provide up to 24,000 tests anually, contributing significantly to KSX's revenue stream"

On quick observation of the Healthy Sleep Solutions website I couldn't find any mention of KarmelSonix, Isonea or any branded products. Is this "cornerstone" JV agreement still in place?

Financial Resources

Finally, it's important to know whether the company is well-financed. After all, funding is the fuel of the biotech industry. Without funding, a biotech company will be forced to cut back on R&D, and clinical and commercial activities – reducing its chances of maximizing return on investment. It's reassuring to see enough cash on the balance sheet to cover expenses for at least a year or two. A solidcash position means that the company can strike up favorable partnerships without having to accept the first deal on offer. Of course, the hope is that the biotech company won't have to rely on external financing and cash reserves to keep R&D and commercial development going and will eventually be able to run profitably from high margin revenues.
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The funding agreement with Bergin, whilst essential to continue ramp up sales strategy and progress clinical studies through 2012, this year may also prove the make or break for Isonea imo. Without attracting a funding partner to speed up future progress they may lose the last of their foothold in this highly competitive landscape, and as I said before, if the technology holds so much promise the big players should be knocking at the door.

Net Loss for financial year 2011 - ($6,677,311)
Net Loss for financial year 2010 - ($5,939,761)
Net Loss for financial year 2009 - ($6,701,092)
Net Loss for financial year 2008 - ($11,678,053)
Net Loss for financial year 2007 - ($5,123,912)

Revenue FY2010 - $348,493 - Cost of goods (269,886)
Revenue FY2011 - $332,087 - Cost of goods (239,770)

Q3/2011 - $4,000? Did I read that right?

* Medicare reimbursements for pulmonary rehabilitation to be reduced significantly as reported by ATS in December 2011. How will this effect Isonea's Sales & Marketing strategy?

Medicare Cuts Pulmonary Rehabilitation Reimbursement
The Medicare final rule for the Hospital Outpatient Prospective Payments System included steep cuts in reimbursement for pulmonary rehabilitation. CMS finalized its proposal to cut reimbursement for pulmonary rehabilitation (G0424 Pulmonary Rehabilitation for patients with COPD) from $62 to $38. Patients who have diseases other than COPD should be reported with the timed, 15 minute G0237, G0238 codes or the group code, G0239. The ATS believes CMS based its decision on faulty data. CMS based its decision on data collected from hospital cost reports.
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The bottom line

It's almost impossible for the average investor to grasp the science that underlies biotech/medical device companies and their development projects. Given that early stage medical device businesses typically have scant financial records, quantitative analysis represents a big challenge for investors, too. That said, looking at the key qualitative drivers of biotech value – namely a promising product pipeline, patents, talented management, durable partnerships and access to funds – offers a good first step in sizing up business potential.

This Qualitative Analysis On Biotech Companies article was authored by Ben McClure who is a contributor to Investopedia.com and the director of Bay of Thermi Limited, an independent research and consulting firm that specializes in preparing early stage ventures for new investment and the marketplace. He works with a wide range of clients in the North America, Europe and Latin America. Ben was a highly-rated European equities analyst at London-based Old Mutual Securities.

Ben's hard and fast investing philosophy is that the herd is always wrong, but heck, if it pays, there's nothing wrong with being a sheep.
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Source of information:

Overview of Medical device Regulations

FDA - Device Classification

FDA applications submitted by Karmel Sonix

Operator Manual - PulmoTrack 2020-3020

WheezoMeter video demonstration - The Doctors - 03/09/2010

Applications for Medical Device Product Code "BZM" (Calculator, Pulmonary Function Interpretator (Diagnostic)

Application for Reimbursement Code - 17/11/2009

ATS Coding & Billing Quarterly - December 2011

Product Broshure - WheezeRate - A new paradigm in Asthma Management - 07/07/2009