here is the interview

ASX / MEDIA RELEASE
Board Room Radio interview
with David Burton, CEO of Compumedics Ltd
21 January 2008 - Transcript
Melbourne Australia, Thursday, 24 January 2008.
Leading Australia-based medical diagnostics company, Compumedics Limited (ASX:
CMP), is pleased to provide the following edited transcript of the interview of David
Burton, CEO, by Board Room Radio on 21 January 2008. This transcript follows the
ASX announcement of the interview on 21 June 2007, which provided a link to the audio
interview.
Click here to listen to the audio interview.
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Question 1:
You have recently announced the re-financing of the Company. How will this
impact the group, moving forward?
Answer 1:
Our new bankers, HSBC, have offered the business a true international platform. This will enable
the business to not only manage its cash flow around the world more easily, but will also
substantially reduce the previously excessive finance costs. As we informed the market
previously, our financing costs have increased by over $500 thousand over the last couple of
years during a period when the Company was working very hard to reduce its borrowings. Debt
reduction has been achieved and, financially, the Company has the least amount of debt it has
had in a long time, and it is in a substantially stronger financial position as a consequence. The
new relationship with HSBC further solidifies this on-going improvement in the Company’s
financial position.
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Question 2:
You have mentioned the constraints placed on the business by your now past
banking relationship. Have these been removed with the re-financing?
Answer 2:
Yes. The Company has negotiated a better funding package for the business with HSBC that will
enable the Company to manage the cyclic nature of different parts of the business and also allow
it to re-focus on growing the most profitable parts of the business. As we noted at 30 June 2007,
the Company could not ship product to fill all outstanding orders because of the constraints
placed on the business at that time by its previous bankers. This situation repeated at 31
December 2007, with close to $2 million in unfilled orders remaining on hand at that time. Those
orders could have potentially shipped had the business had more appropriate funding
arrangements during the last months of calendar 2007.
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Question 3:
What does this new banking relationship mean for the business’s expected
performance in 2008?
Answer 3:
What it does mean is that the Company should be able to better manage its operational
performance during the 2008 calendar year to match the on-going improvement in other parts of
the core business. This will help the Company drive further financial improvements in the
business to build on the return to operating profits and positive operating cash flow that have
been achieved over the last eighteen months. Over the past three years the Company has
executed an almost “textbook” turn-around in the business from operating losses of over $4
million in FY2005 to operating profits at 31 December 2007 and 30 June 2007. The Company is
busily finalising its 31 December 2007 results and I can say that profitability has continued into
the first half of the current financial year.
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Question 4:
So, is there an impact on the Company’s strategy as a result of the re-financing of
the business?
Answer 4:
In short the answer is “no”. The Company has its core business of sleep, neurological, brain
function and brain blood-flow diagnostic products. This business, as mentioned, has delivered a
remarkable turnaround in performance over the last three years, restoring both profitability as well
as positive operating cash flow and maintained its size despite the surging Australian dollar.
This business is poised to continue to grow profitably into the future.
The business also has its separate Medical Innovations Division that consummated its first sleeptreatment
deal in June 2007 with the SomniLink® SPAP® device. This milestone potentially
opens up to the Company the vastly larger sleep-treatment market which runs into the billions of
dollars in size. Compumedics itself has equipped about 4,000 beds world-wide that currently
generate hundreds of millions of dollars in both sleep-diagnostic services and sleep-treatment
device revenues. Compumedics, through this deal, and more to come, will gain access to this
opportunity. The Company is actively considering capital-raising options in relation to these
activities. It will keep the market informed as substantive outcomes are achieved.
In addition, the Medical Innovations Division continues to work on several other medical
technology platforms for which developments will be announced as they become material.
Our new relationship with HSBC will enhance our ability to develop all of these opportunities into
commercially viable medical technology businesses.
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Question 5:
Describe your company’s principal products and the healthcare markets they
relate to.
Answer 5:
Compumedics Limited, founded in 1987, is a global leader in the design and manufacture of
diagnostic technologies for sleep disorders, neurophysiology and cardiology. Compumedics
holds an 80% share of the Australian sleep-diagnostic equipment market, and has a major and
rapidly growing presence in the US, European and Asian markets for its sleep, neurological, and
Doppler blood-flow diagnostic monitoring devices. All of these fields were pioneered or
discovered in the 1980s, validated in the 1990s and are only now undergoing rapid
commercialisation into the fast expanding $1 billion-plus global markets for these products. The
Company has increased sales more than 4-fold from $9 million (in 1999) to the region today of
$40 million. This reflects our continued commitment to R&D as well as sales and marketing. On
those numbers, you can see we are a relatively early “play” but our outlook in these unique fields
is high growth. Our move into the adjoining field of sleep-treatment with a new patented
breakthrough product, switches us from a core global diagnostics sleep-market, which is
estimated in the region of $250 million, to the $2 billion treatment market. We now have a new
“intelligent” CPAP treatment called “SPAP”, which is an innovation the Company has developed
and which is a natural step-out for the Company. Our focus has been primarily in high growth,
early phase, good outlook markets, in relatively new areas and we are now switching into the
treatment sector, which is a complementary market but much larger.
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Question 6:
We understand that Compumedics is a global leader in the $250 million sleep –
disorder diagnostics technologies market. This move takes the Company into the
$2.1 billion global sleep–treatment market. What impact is this likely to have on
Compumedics if it can take a significant share of this market?
Answer 6:
Being the only independent sleep-diagnostics company and having such a large installed base of
sleep beds in many of the most prestigious clinical and sleep-research organisations in the world,
the SomniLink® SPAP® system may become a logical choice for practitioners to recommend to
patients, subject to any regulatory constraints. We expect that Compumedics’ market presence
in the sleep-treatment market will grow organically from its well-known and dominant presence in
the sleep-diagnostic realm. Further, the design approach to the SomniLink® SPAP® system took
into account sleep efficiency and patient comfort, as well as being a simple treatment for
obstructive sleep apnoea. The SPAP® system has the ability to link to a patient’s diagnostic data
for controlling the system. This has resulted in a treatment system that is arguably superior to
those currently available in the market. The SPAP® also has the ability to link into the sleepdiagnostics
laboratories and clinics as a product that can be individually controlled according to
both sleep- and respiratory-related diagnostics for an individual patient, all at a competitive price.
It is unlikely that there will be head-to-head competition and undercutting on price by competitors,
because the SPAP® products are well differentiated from those of competitors.
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Question 7:
What is the rationale for the Company moving beyond diagnostics technologies
for sleep disorders where you have a strong market position into the more
competitive sleep-treatment market?
Answer 7:
The development of advanced products for treating sleep apnoea is a natural step-out from our
traditional diagnostics business and leverages the Company’s knowledge and experience in the
field to develop advanced, next-generation solutions for the management and treatment of an
increasingly prevalent problem. This is a major milestone for Compumedics, as the development
of new and innovative products in the sleep-treatment market has been a part of our long-term
vision for the Company. While some experts view sleep treatment primarily as addressing
deficient respiratory function, our development of the SomniLink® SPAP® system is based on the
premise that both quality-of-life and sleep-quality are integral to the optimal treatment for sleepdisordered
breathing conditions, including sleep apnoea.
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Question 8:
Given established players in the market and the early stage of your
commercialisation program, are you targeting any specific opportunity or market
segment to build a presence?
Answer 8:
Obstructive sleep apnoea may affect up to 10% of the population. Only a small proportion of OSA
sufferers have been diagnosed to date. The estimate of market size may be very conservative
and growing. Compumedics already has its diagnostic equipment installed in over 4,000 beds
around the world, in a significant proportion of the world’s sleep laboratories, representing
hundreds of millions of dollars of sleep-treatment device sales per year, to other companies. The
sleep practitioners who run the laboratories with Compumedics equipped beds that are used in
diagnosing OSA will likely enable a ready market for the new SomniLink® SPAP® gas-delivery
systems.
Even a small proportion of new gas-delivery systems sold each year will result in Compumedics
gaining a market presence very quickly. Initial trials have indicated that the technology in the
SomniLink® SPAP® system provides the potential for a superior treatment experience for the
ultimate decider – the patient.
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Question 9:
What expectations do you have for these products over the next few years? Do
you see the time when treatment technologies surpass diagnostics as the core of
the group’s operations?
Answer 9:
The treatment market is nearly 10 times the value of our diagnostic market and we have premium
value and innovative products so the outlook is promising and has the potential to surpass the
size of our diagnostic business.
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Question 10:
Going back to core business, the Company has traded profitably now for some 18
months. Has the corner been turned?
Answer 10:
Whilst it will always be difficult for any small-to-medium sized business competing and expanding
on the global stage to state categorically that the corner has been turned, it is very encouraging
that Compumedics has traded profitably for 18 months now. The last two years saw the
Company implement a very demanding and rigorous re-structure of the business across all areas,
which has lead to the emergence of positive earnings at the current revenue stream. The current
year’s result has been achieved despite a tight working-capital regime, onerous debt repayments
and increasing borrowing costs. Despite this, the business still achieved an overall operating
profit.
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Question 11:
What are the key actions going forward for the business to ensure the
improvements continue?
Answer 11:
There are a wide range of on-going programs and new initiatives that will continue to progress.
The existing programs range from continuing to strengthen our Asian and European distribution
arrangements, launch our new long-term monitoring EEG product range, intensify our sales and
marketing efforts, through to on-going cost reductions. Late in the 2007 financial year,
Compumedics sub-let a third of its office space in Melbourne as this was surplus to its needs. In
addition, the US business has been re-located from El Paso, Texas to Charlotte, North Carolina.
These two initiatives will contribute cost savings in the 2008 financial year. Furthermore,
Compumedics will continue to review all operational aspects of its business to ensure that all
activities are being achieved in the most efficient and economical manner possible.
Question 12:
Research and development spending continues to fall. Will this have any adverse
impacts for the business in future years?
Answer 12:
The Company has reduced research and development (R&D) expenditure back to about 15% of
revenues, excluding the booking of an intangible asset this year. This is a significant reduction
from the 20% of revenues spent on R&D two years ago. The Company plans to hold R&D
spending in dollar terms at current levels until on-going revenue growth in the business sees R&D
spending at about 12% of revenues. Compared to our peers overseas, this is an appropriate
target to aim for without jeopardising the product flow and delivery for the business. More
importantly, Compumedics released several new products in the 2007 financial year and has a
significant pipeline of products ready for release in the current financial year. The business is in a
very strong position as far as product development and releases are concerned.
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Question 13:
The Australian dollar to the US dollar exchange-rate has appreciated significantly
in the current year and looks like holding at current levels for some time. How will
this impact the business, going forward?
Answer 13:
The Board reviews the Company’s foreign exchange policy on a regular basis. In the 2007
financial year the Company booked a $1 million net foreign exchange loss as a direct
consequence of the falling US dollar exchange rate. However, it is important to note that in the
over six years since listing Compumedics the impact of foreign exchange movements on the
profitability of the business had been almost neutral. The Company estimates that a plus or
minus one cent movement in the Australian dollar to the US dollar exchange rate has an
approximate plus or minus $60,000 impact on profits after tax. The on-going strength of the
Australian dollar relative to the US dollar forces the business to continue to rigorously seek
efficiencies so that underlying profits can be maintained, which is not a bad thing.
David, thank you
About Compumedics
Compumedics Limited, founded in 1987, is a global leader in the design and manufacture of diagnostic technologies for sleep
disorders, neurophysiology and cardiology. In 1987 Compumedics established Asia Pacific’s first fully computerised sleep
laboratory. Compumedics holds 80% share of the Australian sleep-diagnostic market, and has a major and rapidly growing
presence in the US, European and Asian marketplaces for its sleep, neurological, and Doppler blood-flow diagnostic monitoring
devices.
In 1995 the company was selected to supply equipment to the US Sleep Heart Health Study, the world’s largest sleep study of
its kind, currently exceeding 14,000 studies with 20,000 patients scheduled by 2008. The company has corporate
headquarters in Melbourne, Australia and offices in the United States, Asia and Europe.
In 1998 Compumedics was awarded the overall Australian Exporter of the Year.
In 2000 Compumedics was listed on the Australian Stock Exchange.
In 2002, Compumedics acquired US-based Neuroscan - the world's leading supplier of instruments for brain-research. In the
US - the world's largest medical device market - Neuroscan hold around 90% of the market for brain-research products. This
acquisition has enabled Compumedics to take advantage of the synergies between research and clinical-based Neuro-
Diagnostic technologies, re-affirming our commitment as a world-class developer of both sleep and neuro-diagnostic systems.
In 2003 Compumedics was awarded the Frost & Sullivan Award for Market Expansion Strategy.
In 2004, Compumedics acquired German-based DWL Elektronishe GmbH, enabling Compumedics to expand its global
operations into the neurovascular and cardio-vascular diagnostic fields.
In 2006, Compumedics was awarded the Frost and Sullivan Technology Leadership award for the innovative Somté recorder
product.
In 2007, Compumedics and Chairman were inducted into the Victorian Manufacturing Hall of Fame for their pursuit of
excellence in manufacturing.
Compumedics has grown to become a global medical diagnostic company with world leadership in three of the most exciting
high-growth sectors and some 12,000 systems installed Compumedics businesses now include their core and pioneering
sleep-diagnostics (Sleep Division), Neuro-diagnostics (Neuroscan and Neuroscience Divisions), and non-invasive blood-flow
diagnostics (DWL Division). All of these fields were pioneered or discovered in the 1980s, validated in the 1990s and are only
now undergoing rapid commercialisation into the rapidly expanding $1 billion plus global market.
The company has increased its sales more than 4 fold from $9 million (1999) to $38 million (2006), reflecting its continued
commitment to an effective sales and R&D organisation.
www.compumedics.com