BOARD ROOM RADIO INTERVIEW WITH DAVID BURTON, CEO OF COMPUMEDICS LTD JANUARY 21, 2008 “JANUARY 2008 UPDATE” – TRANSCRIPT
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 January 2008, ” January 2008 Update”.
Board Room Radio interview with David Burton, CEO of Compumedics Ltd
21 January 2008 – Transcript
Melbourne Australia, Friday, 25 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 January 2008, which provided a link to the audio interview.
You have recently announced the re-financing of the Company. How will this impact the group, moving forward?
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.
You have mentioned the constraints placed on the business by your now past banking relationship. Have these been removed with the re-financing?
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.
What does this new banking relationship mean for the business’s expected performance in 2008?
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.
So, is there an impact on the Company’s strategy as a result of the re-financing of the business?
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 sleep-treatment 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.
Describe your company’s principal products and the healthcare markets they relate to.
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.
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?
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 sleep-diagnostics 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.
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?
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 sleep-disordered breathing conditions, including sleep apnoea.
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?
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.
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?
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.
Going back to core business, the Company has traded profitably now for some 18 months. Has the corner been turned?
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.
What are the key actions going forward for the business to ensure the improvements continue?
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.
Research and development spending continues to fall. Will this have any adverse impacts for the business in future years?
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.
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?
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
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.