Summary:

With a total addressable market of around 500 million mild OSA patients globally (170 million in the US) there is ample room for Somnomed to grow into a sizeable business even without stealing market share.

The vast majority of OSA-affected individuals do not, however, seek treatment. As of 2022, Wilsons estimated only 2.7 million OSA diagnoses lead to treatment each year in the USA.

This puts the size of treated US market at ~US$1360 million and the global treated market size at around ~US$4.4 billion. Even on these numbers, compared to Somnomed’s current market cap of $80m, there is ample opportunity ahead should the business continue to execute on the opportunity.

CPAP therapy (~92% market share, e.g. Resmed) involves the use of a CPAP machine, which delivers a continuous flow of pressurized air through a mask worn over the nose, mouth, or both. 

COAT (~8% market share, e.g. Somnomed) is a newer treatment option for OSA that aims to keep the airway open by using a different approach. Instead of using positive air pressure, COAT devices utilize a small, lightweight, and flexible oral appliance that is custom-fit to the individual's mouth. 

Top-Down Method: Globally:

a) The global sleep apnea devices market size was estimated at USD 4.2 billion in 2022 and is expected to reach USD 4.5 billion in 2023 per ‘Grand View Research’.

b) The industry is expected to expand at a compound annual growth rate (CAGR) of 6.2% from 2023 to 2030 (Source: Grand View Research)

c) As per the Chest Physician estimates in 2019, approximately 170 million individuals in the U.S. were diagnosed with OSA

d) According to the European Respiratory Journal in 2018, the estimated prevalence of OSA in 50 European countries was approximately 175 million

Market Share:

Hamish Corlett, Co-Founder of TDM Growth Partners, has recently acquired another ~$115K AUD worth of SOM shares on market. TDM is by far the largest shareholder having first invested back in circa 2010, prior to the ASX listing.

Disclosure: Held on Strawman and in real life.

I'm back in at this price (having traded it historically from around $1.40 up to $2.20).

• $1.28/share is a market cap of circa $106m AUD, given 82.8m SOI. That's an FY21 revenue multiple of circa 1.7x, which seems reasonable to me. SOM is not currently profitable (due to investments in R&D), so we can't put a PE multiple on this just yet.
• One way to think about what revenue multiple is fair is to consider what level of EBITDA multiple this should trade on, and what EBITDA margin this business might trade on 3-5 years from now. Assuming a fair 10x EV/EBITDA multiple and a 30% EBITDA margin at scale, that's a fair revenue multiple of 3x at scale (10 x 0.3). Purely a back-of-the-envelope calc, but useful at a high level.
• I think the Rest Assure product is key to the future of this company. It may fundamentally change the overall level of market share of COAT products v CPAP products, due to greater data and evidence on the efficacy of the approach.
• If this does eventuate and the level of COAT market share increases by 1% overall (say from 10% to 11% worldwide) and if we assume that SOM captures all of that revenue (a little bit of an aggressive assumption, albeit SOM is the market leader in COAT), then the SOM business doubles; that's the size of the opportunity here.
• A major risk to monitor is the progress of Incannex Healthcare Ltd which is developing IHL-42X which is a novel cannabinoid combination product for the treatment of Obstructive Sleep Apnoea (OSA); this could be a significant threat to both COAT (e.g. SOM) and CPAP (e.g. RMD) solutions and the progress of this product has been impressive so far.

I'll be looking to accumulate a little more around $1/share ($83m market cap). Given the share price downtrend and overall market conditions, I could easily see SOM falling to that level and potentially below (although there is some chart support around $1/share from the COVID 2020 March low). One needs to be very careful of catching a falling knife here (unless you have a very long-term view), although I do believe we are seeing value at these share price levels again.