a dozen concerns i have

Hi All

As a current shareholder, I have some concerns about Somnomed. Just wondering if anybody has any thoughts about it. Not trying to ramp down the stock … only looking for constructive criticism/feedback …

1. The company sells only one product ... a plastic mouth guard ... if this fails the whole company fails ... it has nothing to fall back on!

2. There was some talk nearly 18 months ago when they took a 50:50 interest in the SMH Biomaterial production facility that there was scope for ‘many other uses’ outside of dental applications for the material. You shall note that nothing has developed from this since then nor has there been any comment about it from the CEO. Perhaps it is not as useful as they had thought at the time?

3. Despite many patents ... it is only a plastic mouth guard in the end, anybody can copy it with a 5% variation to the design to dodge the patent rights, make it for about 50c each in China and sell it for 50 bucks retail ... you don’t even need a dentist to make future adjustments ... anybody can adjust those little screws in the appliance ... which is a lot cheaper than the current approx. $1,000 they charge for it

4. They say that the Somnomed MAS has a 50-70% efficacy rate … from a marketing point of view … would you spend $1,000 on something that you know has a 50% chance of not working as opposed to about $1,500 (CPAP) which nearly has a 100% chance of working? Agreed … the cpap feels like crap with air gusting through your nose all night … but if (and ‘if’ being the key word!) you can get used to it, which it seems a lot of people have, it works great!

5. The large recent Buys by Belgrove that recently transpired were simply transferred from Golden Words P/L ... another top 5 shareholder ... this is rather meaningless as an indicator of positive shareholder activity as it is just a deal amongst themselves ... not an External party … see the subsequent Appendix releases to the ASX for confirmation.

6. The whole Resmed takeover potential has been bandied about ever since Somnomed listed several years ago ... they have never intimated that they were interested in Somnomed nor do they have any shares in it … usually companies that are prepared to take over a company will have accumulated a few shares in order to facilitate a take over at a later strategic stage … so it is very unlikely they would pay so much for such a high risk company whilst their own company has a well tested and proven product line including many other product lines.

7. These shares seem to be tightly held ... if anything this is what keeps the SP artificially high ... not low! The minute one or more of these larger shareholders get cold feet and wish to sell off their holding the SP shall plummet! This is very possible in the near future due to some people tired of poor performances in the share portfolio looking to free up capital to better use it in other areas.

8. I suspect many of the minor shareholdings are held by many dentists (ok .. ok .. this is my personal dig at dentists …) who supply the Somnomed products, plus other opportunistic traders looking for a quick profit on the share market, and ... like many traders, if the SP doubles from around 2c then they look to immediately sell it ... which is why the SP rarely has rarely gone above 4c in the last few years … it seems to always pull back to about 1.5 to 2c after a short spike.

9. Poor Sep '08 and Dec'09 quarterly sales. Despite CEO saying that sales run "unabated" in the Sep'08 quarter they actually sold only 2,559 appliances in Sep '08 quarter ... given that their current SP is based on the firm selling a forecasted 14,000 appliances in the 2008/09 year, they will need to average at least 3,500 sales per quarter ... anything less than this shall savagely affect the current SP and they are already well under this after the first two quarters with only about 6,000 sold in the first half year!

10. They are still ‘cash burning’ at a rate of half a million dollars a quarter and at this rate they shall be setting themselves up for another $2m net loss this year! … and his was supposed to be their first profitable year. Also, at this rate they will run out of funds in about 18-24 months time and will have to issue more shares to still fund their world-wide expansion … will this world-wide expansion ever finish? Why don’t they just become profitable in one area and ONCE that is successful then start to expand (using the profits from that area) … like most companies do!

11. Does anyone know what you need to do just to buy the device in Australia in order to get it covered by your private health insurance?? These are the steps (yes another 12):

i. Visit GP, get referral to respiratory physician specialist (est. $25 gap)
ii. Visit respiratory physician (est. $80 gap), get referral to recognized sleep centre at a hospital
iii. Spend a night in hospital for monitoring (est. $50 or $400 depending on level of private health cover)
iv. Go back to respiratory physician for sleep test results (est. $80 gap). If diagnosed with mild to moderate sleep apnoea get referred back to sleep centre to determine suitability for cpap
v. Spend another night at sleep centre (est. $50 or $100 depending on level of private health cover)
vi. Go back to respiratory physician for results (est. $80 gap). He/she tells you that you are not suitable for cpap so offers Somnomed as alternative. He/she refers you to dentist that specializes in fitting them
vii. Visit dentist (est. $40 gap). He determines suitability of your teeth and recommend x—rays and cleaning before fitting. If he has no time that day you book another day.
viii. Visit dentist for cleaning and x rays (est. $150 gap). Get moulding done and device order ($est. $650 to $1400 depending on your level of cover)
ix. 3 weeks later visit dentist to fit device (est. $60)
x. If device causes too much soreness after 1 or 2 weeks (which it usually does) revisit dentist for resizing (est. $40 gap) as dentist demands that you do not adjust screws yourself
xi. buy special cleaning solutions to clean device (est. $20-$30)
xii. revisit respiratory physician as final follow up appointment to discuss effectiveness of device. (est $80 gap)

… so you can see … process takes about 3 months and well .. I’ll let you add up how much it costs!


12. If you google MAS, you will see many other similar devices which Somnomed needs to compete with ... and although the Somnomed appliance may be the best of them all ... but it is also the most expensive ... and in difficult world-wide economic times people will look for the cheaper alternative even if it is not the best solution for them.


Sorry if this casts a shadow over this stock but I have tried to avoid "Sales Hype" in my review. This is a very speculative stock with an uncertain future. One could argue, if you are looking to double your money quickly why not just drop into the local casino and take a chance on the black or red squares on the Roulette wheel ... they will give nearly a 50:50 chance of either doubling or losing your money ... but with the added advantage that you don’t have to wait days, weeks or even years to find out if you are lucky ;)

Cheers all :)

Sam