Quarterly update and cashflow statement was out earlier in the week. Overall the results fine, but there were a few things mentioned that is not ideal:

• Revenue guidance for the full year downgraded from 20%+ to 15-20%. EBITDA guidance of $2m+ is maintained.
• Rest Assure, the new digital product, is probably 3-6 months behind schedule due to CE mark testing taking longer than expected.
• A weak Q2 performance in the US blamed on supply chain, logistics and macroeconomic pressures and increased competition.

The last point and especially the word “competition” sounds ominous.

I’ve had some clarification from management on this, and feel they could have communicated the US situation a bit better.

Essentially the company had a few logistical issues converge in Nov-Dec 2022. Fedex/UPS from the Philippines (manufacturing plant) to the US blew out from 2-3 to 6-10 days, staffing issues and covid at the US distribution hub, staffing issues and covid at the Philippines plant. All these issues blew out the time for patients to receive a SomnoMed oral appliance. Dentists were desperate to fulfil orders before the end-of-year reimbursement deadline so some went with cheaper products that were in supply. Most of the logistical issues have or are in the process of being resolved. The CEO is confident that this is a temporary shift in behaviour, and that the dentists will be back now the delivery times have normalised.

Of more concern is the poor global economic environment and its impacts on consumer discretionary spending. Oral appliances are not fully reimbursed in the US, and patients need to contribute to a co-payment. Recently there have been more instances of patients pushing back on these co-payment. Much of the business in Europe is fully reimbursed and does not experience this same dynamic.

Not the best update. Hopefully it’s just a small bump in the road. This time next year it could very well be self-funded, with Rest Assure generating accelerating growth rates and the market could be looking at it very differently.

The final annual report for FY22 was released yesterday. I had a read through, and refreshed my understanding of the unvested options situation. Others may find this interesting.

In June 2021, a vote was passed to grant board members, the CEO and key staff members a whole heap of options.

• Vested over 5 years, with 1/3 vested over the 3rd, 4th and 5th anniversaries.
• Exercise price is $2.00
• Vesting condition is the share price will need to exceed $3.50 for a period of time
• At the time was worth around $0.15/option - so translates to $90k/year over 5 years for the CEO, and $18k/year for non-exec directors.

Bottom line: Everyone is very well incentivised to get the share price over $3.50 by mid-2026.

Details of the options grant: https://www.asx.com.au/asxpdf/20210422/pdf/44vs4btr6r2ln5.pdf

@Strawman provided a great summary of the result, so I won't go over the same ground.

One thing that stood out to me was the strength in the North America segment. Management have always said NA would be more difficult than Europe due to price gouging from dentists and not having relatively weaker insurance and government healthcare systems.

However NA was the standout this year, and in the conference call Neil mentioned it'll again be the faster grower in FY23. Reading between the lines it should be >25% top line since it's a smaller segment than Europe. They've really cracked something here and it was mentioned that they've been able to change the prescription behaviour of sleep physicians to direct more traffic to oral appliance over CPAP.

Europe won't be a slouch either especially with a recent favourable change to reimbursements in Germany. Bodes well that they have the two largest segments (>90% revenues) firing for next year.

SomnoMed did +10% top line growth for the 1H FY22. Mainly held back to a soft Europe result. In the European markets, a lot of the sleep apnea diagnosis happens in a hospital setting and, along with dental (for oral appliance fitting) cancellations, was heavily hit by Omicron. North America was very strong - partly to do with seasonal reimbursements and partly due to a maturing sales and business development team.

With omicron easing in Europe, the company is confident in hitting their +15% top line full year guidance which means they’ll need to do ~20% in 2H. Revenue is now back to pre-covid levels, and 2H should put them well and well ahead for a record half.

The hot new thing is the disclosure of the new Rest Assure device. It's a oral device with an enclosed set of sensors that will measure adherence (whether you're wearing it) and effectiveness (measured apnea events). This will provide a slew of sleep data for the patient and their sleep doctor to monitor how well the treatment is progressing. Essentially bringing it slightly above par to a cloud connected CPAP machine.

Management is betting that this will unlock adoption on a few fronts:

• Bring the oral appliance on par with CPAP in its ability to monitor efficacy and adherence.
• In turn this will reduce the biggest barrier that sleep doctors have in prescribing oral appliances.
• Over time use the collected data to improve reimbursements with insurance companies and therefore reducing out of pocket expenses.

Although the commercialisation of the digital device is still a year off, the company appears well positioned to start hitting its straps in the coming years.

Thanks for sharing your experience @Rhin20! I’m personally interested to know how the SomnoMed product is better than the cheap alternatives if you don’t mind elaborating. :D

Agreed that the customer experience in NZ sounds poor. And agree that Align is a super impressive company, with huge reach with their vertically integrated proprietary scanner to manufacturing process. Though the market opportunity of oral device OSA treatment for a USD$50b company is trivial and may add complexity to their value proposition to dentists (The price of an acquisition of SOM would also be trivial). So unsure if it’s a move they’d ever consider. There’s a great episode about Align on the Business Breakdowns podcast.

In terms of manufacturing, the company’s flagship SomnoDent Avant product (https://somnomed.com/en/avant/) is a “fully digital” product. A 3D scan is taken of the patient’s mouth, similar to the Invisalign process. The scan is immediately sent over the interwebs to SOM’s manufacturing plants in the Philippines where an oral device is digitally milled. The milling process is similar to how the chassis of an Apple MacBook is made - a solid block has materials subtracted until the end product is shaped. The whole scan to delivery process is less than 2 weeks.

Milling is essentially reverse 3D printing. You have all the advantages of a fully digital, automated process. With the added benefit of being stronger since the process is subtractive not additive.

In Australia, SomnoMed have dentist partners that travel across the major cities doing 3D scans for potential patients. The costs are generally cheaper than normal as they’re doing greater volumes. Not sure what the situation is in NZ, but it might be worth reaching out to the local SomnoMed sales rep if you’re interested.

I’ve been a bit loathed to talk about SomnoMed, because it has one of the poorest liquidity levels that I’ve come across. But since both @Strawman and @SleepEasy have put content up with a fair bit of insight, I may as well throw in my two cents on the bull case.

1. Robust underlying growth over the past 5 years with evidence that it’s out-growing the CPAP market darlings. Obscured by a strategy misstep and negative impacts from the pandemic.
2. Has recovered from earlier missteps, and with the pandemic easing, is looking to accelerate top-line growth.
3. A refreshed board and management team with some big hitters.
4. Undemanding valuation metrics.
5. Consumer awareness for sleep apnea is nearing a tipping point.

Obscured robust underlying growth

In 2017, when there was an equal sales split between North America and Europe, the company embarked on a strategy in the US to establish its own sleep centres to target patients that rejected CPAP as a solution for sleep apnea. Part of this was to prevent US dentists from price gauging. Long story short, dentists saw this arrangement as a threat and started boycotting the product. SomnoMed admitted defeat less than 3 years later, a new CEO was appointed, and the failed strategy was rolled back in the US. A year later, the company had clawed back ground in the US, and Europe had grown to be a significantly larger percentage of sales. And then the pandemic hit - hospitals, dentists, medical practices were impacted heavily, and oral appliance sales were hit hard.

What is obscured from the turmoil is a European business that grew at a strong 17.8% CAGR for the 5 years preceding the start of the pandemic. In fact, growth was considerably faster than both RMD and FPH in Europe. Outside of the US, SomnoMed was actually gaining market share, not losing it.

Accelerate top-line growth

The most compelling argument for oral appliances are the prescription rates for the Nordic countries. While in the US only 8% of OSA cases are prescribed an oral appliance, it's 25% in Finland, 30% in Norway, 40% in the Netherlands and 52% in Sweden. This really demonstrates the potential upside in prescription rates.

The biggest bull case for this company is if you believe the Nordic countries are leaders in the treatment for mild-moderate OSA, and that Western Europe and North America are likely to follow in the coming decade, then there will be an enormous tailwind.

With the pandemic easing, management is seeking to increase investment and accelerate revenue growth to above 20% for the coming years.

Europe has historically grown at a rate only slightly lower than 20%, and as long as there's no further strategic mishaps in the US - I see no major reason to believe that a 20%+ growth rate over the next few years is out of reach.

A significant portion of the reinvestment will go into a new “technology project” to be revealed in early 2022. If I was a betting man, I’d say it’s likely to be a device that records compliance/effectiveness and allows for sharing of the data with physicians. Which brings it at least on par with the high end CPAP machines, and addresses a major gap. It will also provide objective data that can be used to convince physicians of the overall effectiveness of oral devices over CPAP for mild to moderate OSA sufferers.

Board refresh

A big board renewal happened in August 2020, with some accomplished people entering including Guy Russo as chairman. A few new board members purchased not insignificant amounts of stock following their appointments, ranging from AUD$80k to $200k.

Guy Russo had a long history with McDonald's that culminated in the position of the Australian President and later the Greater China President. He is known for a highly successful turnaround of Kmart in Australia during his time heading up the department store from 2008 to 2016. A straight talker that is very attuned to people, culture and customers, but ultimately measures success on sustained long-term "Sales, EBIT and ROC". He purchased A$500k worth of stock on market a few weeks ago.

Undemanding valuation metrics

3x sales, 60% gross margins, EBIT breakeven, Europe has demonstrated it can grow at 17% pa and is now 64% of group revenues. Looking to accelerate top line group revenue to 20%+ for the coming years.

Consumer awareness of sleep apnea near tipping point

Consumer wearables have come a long way in the past decade. I’m a bit of a health metrics nut, and currently have an Apple Watch to track sleep. It’s amazing that I'm able to pin point alcohol consumption just by looking at overnight heart rate stats.

The Apple Watch introduced sleep tracking in 2020 along with an oxygen monitor sensor in that year’s model. This year they introduced the recoding of “Sleeping Respiratory Rate” data simply by training machine learning models on the watch’s accelerometer data. In my opinion, they’re not far away from surfacing sleep apnea notifications to end users - as they’ve already done with atrial fibrillation.

WSJ (paywalled) also wrote about this according to information from insider sources: https://www.wsj.com/articles/apple-plans-blood-pressure-measure-wrist-thermometer-in-watch-11630501201

Should this happen, then a lot more people will be seeking medical treatment for sleep apnea. Oral device and CPAP makers will be flooded with increasing demand