Dr Boreham’s Crucible: HowSomnoMed is placed in the $10.4 billion sleep apnoea market

Health & Biotech

3 hours ago | Tim Boreham

Dr Boreham’s diagnosis:

Given thatroughly four-fifths of obstructive sleep apnoea cases are undiagnosed and thusuntreated, SomnoMed has plenty of room to grow.

The companyestimates the global sleep apnoea market at $US7 billion ($10.4 billion) to$US8 billion, growing at six to eight per cent a year.

In the keymarkets where SomnoMed operates, the share of COAT treatments as a proportionof the total OSA market ranges from four per cent (Italy) to 52 per cent(Sweden).

In Australia,15 per cent of mild snorers treated use mouthguard devices.

Sleep HealthFoundation Australia claims that more than 1.5 million Australians have a sleepdisorders, more than half for obstructive sleep apnoea.

Verdal-Austinestimates 2.5 million new CPAP machines are sold in the US each year, whichimplies plenty of disaffected users that can be wooed over to the SomnoDents.

As always,SomnoMed’s success will come down to the cost and efficacy of the devices andthe availability of reimbursement.

The use ofartificial intelligence also means the company will be able to share accruedpatient data with physicians and dentists, thus allowing them to predictsuitable COAT candidates.

SomnoMedlooks to be on the right track, despite the somewhat blah full-year numbers.

Management’swork has only just begun. “We have a long way to go to persuade sleep expertsto try COAT,” Verdal-Austin says.

As the headof a company selling mouthguard-like oral devices to combat obstructive sleepapnoea (OSA), Neil Verdal-Austin surprises us by praising the effectiveness ofthe standard-of-care rival pumps and masks sold by industry leaders ResMed andRespironics.

He says thecontinuous positive airways pressure (CPAP) units are 100 per cent effective —when worn that is.

The troubleis, the devices are renown for being uncomfortable and the compliance rate isextremely low at 30 to 50 per cent.

At the sametime, most OSA sufferers are recommended CPAP devices, even though oral devicescould be suitable for two-thirds of users (patients with mild to moderatesnoring).

“It’s likeprescribing someone a wheelchair before crutches and that doesn’t make sense tome,” SomnoMed’s (ASX:SOM) Verdal-Austin says.

SomnoMedmarkets continuous open airway therapy, or COAT.

SomnoMed’sSomnoDent mouthguard is a mandibular advancement splint that moves the lowerjaw slightly forward, keeping the airway open at all times.

The companysells in 28 countries and has treated 500,000 patients, including a failed CPAPcohort and previously untreated users.

Based on“patient feedback”, SomnoMed claims that 91 per cent of users have a betternight’s sleep, with 88 per cent using the device regularly.

What’s more,all of the patients continued using the device to treat their condition overthe longer term.

SomnoMedlisted in August 2004, raising $12m at 30c apiece.

The companyinitially was based on a device called the SomnoMed MAS (mandibular advancementsplint), invented by Sydney retired consultant orthodontist and champion rowerDr Richard Palmisano, who died in 2009.

US strategy put to sleep

Despite itssteady growth, Somnomed has undergone several strategy pivots, notably a hastyand costly retreat from its headline strategy of setting up a chain ofdirect-to-patient US sleep diagnostic centres, Renew Sleep Centres (RSS).

“We have beenthrough different strategic and board changes as we work out what we are, andwho we are best at treating,” Verdal-Austin says.

SomnoMedopened its first RSS centre in December 2016 but abandoned the strategy inDecember 2018, having opened four of the intended 16 outlets.

The coreproblem, in short, was a change to health insurance policies that increasedpatients out of pocket expenses (sound familiar?) and reduced reimbursementrates for SomnoMed.

While thechain received 60,000 inquiries, patient conversions were not strong enough.

“Whilst webelieve there may be a future for a direct-to-patient approach in the US … itwould require more time, more money and a lot of good management to turn RSSinto the business we were originally expected to have,” chairman Peter Neustadtsaid at the time.

The RSSfiasco saw the departure of US-based CEO Derek Smith, who was replaced byVerdal-Austin, the company’s long time CFO and chief operating officer.

In thoseroles, Verdal-Austin was integral to all of the company’s major decisions,including establishing a manufacturing facility in the Philippines and —presumably — the RSS strategy.

“We went alittle bit too quickly,” he says of the US misstep.

“The RSSconcept was borne out of the fact that the process of sleep specialists referringsleep-study patients to dentists was really slow.”

SomnoDent Avant

WhileSomnoDent continues to sell okay, no device company can stand still andSomnoMed is working on its next iteration: the digitally manufactured SomnoDentAvant.

Avant availsof computerised design and manufacturing techniques to produce the mouthguardscheaper and more quickly.

It’s alsopromised to be more comfortable for the user — a key driver of compliance — andhighly durable.

Avant willenable dentists to form mouth impressions with intra-oral scanners, rather thangunk.

“We canmanufacture our device in our Philippines facility within minutes,”Verdal-Austin says.

“It’s a newmanufacturing process for us. While others have done this, I believe we havedone this right.”

SomnoMed alsotackles the nocturnal blight of bruxism — teeth grinding that can wear down thepearly whites. Bruxism can also be an indicator of OSA.

A cheaperCOAT is sometimes better.

As alwayswith medical devices, cost is a key factor in the CPAP versus COAT equation.

The Avantssell for around $500, or the equivalent 500 units in other major currencies(unfortunately for snorers in Indonesia, they don’t sell for 500 rupiahs, orabout 5c).

Because thedevices have to be fitted by a dentist — that fiddles around with the mandible— the total cost comes in at $1,500 to $2,000.

CPAPtreatments cost in the thousands, but in some countries the devices can berented.

Putting the bite ondentists

In theory,SomnoMed’s target market should be the dentists, given they’re the ones fittingthe devices.

But typicallysnorers won’t go to a dentist with an OSA problem: they’ll go to a generalpractitioner and be referred to a sleep specialist, with the dentists thengetting the mandate to fit the devices (by law, only dentists are allowed to).

Having said that,Verdal-Austin describes dentists as “partners” of the company, which seeksalignment with the large dental groups.

Over the lastfour years SomnoMed has built a network of 20,000 to 25,000 dentists.

“Whether youhave one dentist or a roll-up, our job is the same: train and educate them totreat obstructive sleep apnoea effectively with an oral appliance,”Verdal-Austin says.

Of the 28countries in which SomnoMed currently sells, the company distributes directlyin 27 (the exception being a Singapore-based third party deal).

Surveying the competitivelandscape

Verdal-Austinestimates that oral devices account for about 10 per cent of the sleep apnoeamarket, but it’s not as if the company has the market to itself.

“Over thelast 10 years we have attracted more and more competitors as we have gonealong,” he says.

Rivals tendto operate in only certain regions: in the US, it competes with Prosomnus SleepTechnologies and TAP (as in Thornton Adjustable Positioner).

“We’recompetitors on one side, but also industry leaders trying to grow the size ofthe prize,” Verdal-Austin says.

ResMed alsohas an oral device called Narva, a business acquired seven years ago: “but theyhaven’t done much with it”.

Then there’sOventus, which listed on the ASX in 2015.

Founded byentrepreneurial dentist Dr Chris Hart with some heavy-hitting backing, Oventussells mouthguard devices called O2Vents, with a pipe forcing air to the back ofthe throat.

Finances and performance

SomnoMed thisweek reported a net loss of $15.76m for the year to June 30 2019, compared witha $6.93m deficit previously.

Earningsbefore interest, tax, depreciation and amortization fell 13 per cent to $3.39m.

Revenueclimbed 12 per cent to $58.89m.

Managementalso reports core earnings before interest, taxation, depreciation andamortisation (EBITDA) of $4.94m, up 27 per cent (this number excludes someinconvenient one-off expenses, such as the former CEO’s severance payment).

The reportedloss mainly was the result of $16.39m of expenses and write downs pertaining tothe RSS closure.

“As far as Ican legally say, we have provided all the future costs [of the closure] wecould possibly experience,” Verdal-Austin says.

SomnoMedended the year with cash of $7.69m. On the debt side, the company has an overdraftfacility of $5m — $3m of which has been drawn down.

Verdal-Austinsays the company has recovered 95 per cent of the US clients that were lostduring the RSS closure, with a turnaround evident in the fourth (June) quarter.

He isespecially chuffed that direct dentist revenue in North America improved by 31per cent.

Managementhas guided to revenue of $67m to $69m for the current year, up 14 to 17 percent.

EBITDA — thereported version rather than the core one — is expected to climb by 26 per centto 34 per cent, to $6.3m to $6.7m.

“We are veryexcited about the turnaround we are going to have in the business,”Verdal-Austin says.

Investorsweren’t so convinced, knocking 15c, or 7.5 per cent off the share price on theday. Two days later, they changed their mind and added 25c, or 13 per cent tothe valuation.

The gyrationscontinue the topsy-turvy ride of SomonMed shares, which slumped to a record lowof $1.45 in late June and then climbed to a 12-month peak of $2.34 in lateJuly.

The shareshit an all-time zenith of $4 in October 2016.

Dr Boreham’s diagnosis:

Given thatroughly four-fifths of obstructive sleep apnoea cases are undiagnosed and thusuntreated, SomnoMed has plenty of room to grow.

The companyestimates the global sleep apnoea market at $US7 billion ($10.4 billion) to$US8 billion, growing at six to eight per cent a year.

In the keymarkets where SomnoMed operates, the share of COAT treatments as a proportionof the total OSA market ranges from four per cent (Italy) to 52 per cent(Sweden).

In Australia,15 per cent of mild snorers treated use mouthguard devices.

Sleep HealthFoundation Australia claims that more than 1.5 million Australians have a sleepdisorders, more than half for obstructive sleep apnoea.

Verdal-Austinestimates 2.5 million new CPAP machines are sold in the US each year, whichimplies plenty of disaffected users that can be wooed over to the SomnoDents.

As always,SomnoMed’s success will come down to the cost and efficacy of the devices andthe availability of reimbursement.

The use ofartificial intelligence also means the company will be able to share accruedpatient data with physicians and dentists, thus allowing them to predictsuitable COAT candidates.

SomnoMedlooks to be on the right track, despite the somewhat blah full-year numbers.

Management’swork has only just begun. “We have a long way to go to persuade sleep expertsto try COAT,” Verdal-Austin says.

Disclosure: Dr Boreham is not a qualified medical practitioner,does not possess a doctorate of any sort and does not snore – in his wakinghours at least.

This columnfirst appeared in Biotech Daily.