SomnoMed Limited (SOM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the SomnoMed 2022 Half Year Results Call. [Operator Instructions] I would like to now hand over the conference to Neil Verdal-Austin, CEO. Please go ahead, Neil.

Thank you, Lisa. Well, good morning, ladies and gentlemen. And as mentioned, my name is Neil Verdal-Austin, and I'm the CEO of SomnoMed Limited. Thank you for joining us for this audio webcast where we present our half year '22 results and elaborate further on the new technology recently announced. The disclaimer and agenda slides are self-explanatory, so let's start with Slide 5, the half year financial highlights. We are extremely pleased with the revenue growth seen in the North American region, while in Europe, this growth was softened by the various COVID restrictions, limiting our access to physicians and hospitals, while patients also postponed their dental appointments due to the COVID pandemic. In APAC, we experienced the same due to the recent Omicron wave, but however, we believe that this will improve in all 3 regions into the second half. EBITDA went as planned, a breakeven result after investing in R&D, on new technology, new IT and infrastructure teams as well as additional sales and marketing resources in all 3 global regions. Cash was again well managed with a balance of $17.6 million as at 31st of December. Slide 6 outlines some of the more strategic and operational highlights for the half. First and foremost, of course, is the announcement of our inbuilt technology-enabled oral appliance. This technology will be known as Rest Assure, and more on that later on in this presentation. Our sales and marketing efforts have been strengthened during the half in all 3 regions. New margin capabilities; additional sales and business development skills; an appointment of a Director of Business Development in North America; a Director of Global Strategy; and a new leader of our global clinical affairs portfolio, who will direct and lead our future clinical research programs. The SomnoDent Avant and the SomnoDent Herbst Advance Elite products continue to go from strength to strength in all markets. This is underpinned by our manufacturing quality commitment, aligned with our propriety b-flex comfort liner, which brings unparalleled comfort and retention, a distinct differentiator. Our vision and mission on Slide 8 remains our ultimate guide in all we do. We are patient-focused and multidisciplinary in our approach. This would, of course, now come to life and become real through the Rest Assure technology that will, for the first time in this industry, facilitate exactly that but also together with the patient. The addressable OSA market is simply enormous. We don't need to create that. This slide, 9, indicates just that. There are around 900 million people that currently suffer from OSA globally, of which more than half have mild OSA. Patients with mild OSA are less compliant to CPAP and left -- and if left untreated, OSA can lead to increased risk of stroke, heart attack, depression and diabetes. Slide 10 takes a closer look at the disease progression of OSA over time even when the patient is in treatment. In this published study with a comparative oral device, the efficacy of the device was measured at 3 to 6 months, 2 years and finally at 5 years. I want to bring your attention to the patients with mild OSA, as indicated by the dotted lines. This paper clearly shows that mild OSA tends to worsen over time, indicating again that active treatment follow-up is necessary. That's exactly why overnight objective treatment data for COAT is critical for effective treatment of OSA as it is for CPAP. This is why we have invested in this very technology. This is the very reason for Rest Assure. I will now hand over to our CFO, Mr. Hervé Fiévet, who will present the financial and finance slides. Thank you, Hervé.

Thank you, Neil. So to introduce the financial part, Slide 12 is just another view of the group's revenue growth by quarter and for the half year. After a very encouraging first quarter showing strong momentum in our underlying business with a growth of 14% versus PCP, the second quarter was subdued due to resurgence of COVID in Europe. Nevertheless, the group was supported by an excellent contribution of the North American region that resulted in a 7% improvement over PCP, and that led to a 10% growth for the first half of FY '22 over FY '21. Now Slide 13, which details this revenue growth by region, shows that in spite of APAC being impacted by the succession of lockdowns in ANZ, albeit still ending with an improvement in Q2 to deliver minus 5% for the first half over PCP. The North American region really did justice to its investment in the medical referral channel and delivered a 25% growth for the first half, of which a very good 36% growth in the second quarter. As for Europe, after a promising first quarter at just 17%, the region demonstrated its ability to mitigate the impact of the Omicron wave in Q2 to deliver a 5% growth for the first half. As countries are gradually lifting restrictions, to echo what Neil said, the pent-up demand and underlying momentum allow us to confirm guidance for FY '22. And moving to Slide 14, detailed margin and EBITDA. The highlight really is the ability of the group to maintain its gross margin percentage in spite of the impact of COVID, and therefore, we need to convert the sale increase into margin that support the investments in R&D, systems and teams, which, in turn, underpin the upcoming inbuilt device technology. This led to an EBITDA in line with year-end guidance, just about breakeven at $4.2 million. Slide 15 focuses on the $2.4 million increase in regional sales and marketing spend, which underlines the investment in sales and marketing teams and resources focused on the medical channel as well as a $2.4 million increase in head office shared resources around R&D and system licenses to pave the way for Rest Assure. Last but not least, on Slide 16, the balance sheet and cash flow show the ability of the group to generate a neutral operating cash flow from the breakeven EBITDA. Also, after a first tranche of $3 million of investment in Rest Assure, a suite of connected systems to support it as well as [ needed ] machines, the group ended the half year with cash at bank of $17.6 million with an undrawn facility of EUR 3 million, which confirms a strong balance sheet and the ability of the group to finance its ambition, which now Neil will expand upon. Neil, over to you.

Thank you, Hervé. On behalf of our entire organization, I'm actually very, very proud today to be able to introduce to you SomnoMed's first inbuilt technology-enabled oral client. This has been 2 years in the making with a focused development team, both in-house and externally. This dawn of a new era begins where SomnoMed brings meaning to technology-driven. It brings real data and proof and evidence of the effectiveness equation, and it delivers OSA treatment where comfort, convenience and compliance need not be compromised for connectivity. I will now hand over to our Senior Vice President of Global Marketing and R&D, Mr. Mark Harding, to present the section on Rest Assure. Thank you, Mark.

Thank you, Neil, for the opportunity to present SomnoMed's inbuilt technology-enabled oral appliance that we've named the Rest Assure technology. Over SomnoMed's 18-year history, we found that one of the reasons why sleep physicians prescribed CPAP is because CPAP provides them with data on how long the patient used the treatment for and how effective the treatment was. COAT does not currently do this. We believe that over time, this has led to lower acceptance of and lower reimbursement for COAT. Rest Assure addresses this disparity. The sensors embedded in the Rest Assure device will provide data on the usage and efficacy of COAT treatment. The Rest Assure patient app will motivate patients to understand their treatment and improve their sleep habits. The Rest Assure physician portal will allow sleep physicians and dentists to share data and work together to optimize patient treatment. So what is the value of the Rest Assure technology to SomnoMed? In 2019, SomnoMed commissioned a market research with 242 sleep physicians in the United States. This identified that no overnight monitoring of COAT was a significant barrier to the prescription of more COAT appliances. When SomnoMed offered to provide a chip in the appliance to capture this data, 1/3 of the surveyed sleep physicians noted that this might change their prescribing habits in favor of COAT. And as Neil has already mentioned, our effectivity equation tool compares CPAP and COAT treatment. It's accepted that CPAP is a highly efficacious treatment but only when the mask is worn. Adherence to therapy remains an issue for CPAP. But on the other hand, COAT is -- while COAT is less efficacious than CPAP, patients typically wear their device for the whole night, and therefore, both treatments may have similar clinical effectiveness over the whole night. Rest Assure will provide the data that will prove this hypothesis, not in a clinical trial, but in the real world, every night, all night and for every patient. Sleep physicians also identified in the research that they would discuss COAT with their patients if the patient asked them about it. Our plan is to build Rest Assure as the alternative treatment to CPAP. We want patients to ask their sleep physicians for a Rest Assure. We want physicians to prescribe Rest Assure, and we want dentists to dispense Rest Assure. How will the Rest Assure technology work to deliver the data? Well, the sensors on the Rest Assure appliance will record overnight data such as jaw opening and head position onto a memory chip on the oral appliance. In the morning, the patient places their Rest Assure device in the SomnoMed supply docking station, and their data is transferred via Bluetooth to the patient's phone app. This is done automatically. From the phone, the data is pushed to some dedicated cloud service where our algorithms will turn this into measures of treatment efficacy and calculate how long the patient wore their device. This data is then available for the patient to view in a patient app and the physician and dentist to view in a dedicated web portal. We expect that this data should be available less than 10 minutes after the patient docks their device. The Rest Assure device then stays in the docking station throughout the day, charging the battery so it's ready for the next night's sleep. What information does Rest Assure provide? And how does this compare to CPAP? Both CPAP and Rest Assure provide information on how long the patient uses their device. CPAP measures the time the patient is wearing their mask, and Rest Assure will measure the time based on the number of sensors that are activated when the patient places the device in their mouth. Both CPAP and Rest Assure will measure efficacy using a surrogate apnea-hypopnea index, or AHI. Sleeping on your back or supine can worsen sleep apnea as the tongue and soft tissue push down and constrict the airway. Rest Assure measures if the patient is sleeping on their back, and sleep physicians can use this information to help patients to change their sleep habits. And finally, both Rest Assure and CPAP will measure treatment interruptions and the respiratory or breathing rate of the patient. CPAP and Rest Assure will provide similar data, but with Rest Assure, the data comes from a device that has been customized to the patient's teeth and mouth, giving the physician peace of mind that the data received can only be from his or her patient. How did SomnoMed develop and validate the Rest Assure algorithms? In September 2021, SomnoMed completed a 31-patient study, collecting over 400 hours of sleep data. During the study, the patients wore both a Rest Assure appliance and a NOX gold standard home sleep test device. The NOX home sleep test collects 13 different signals during sleep, and these signals were correlated with the sensors in the Rest Assure. In the graph of the center of the page, you can see the measurements provided by NOX and Rest Assure were highly correlated for efficacy. SomnoMed is now working with Professor Peter Cistulli, the Chair of Sleep Medicine at the University of Sydney, to independently validate these algorithms. In a second study currently underway, 30 different patients who currently use a SomnoMed COAT device will be provided with a Rest Assure appliance. Patients will provide information on how easy the system is to use and their preference for Rest Assure versus their current COAT device. The algorithm performance will again be compared with the NOX gold standard home sleep test. The data will be presented at the World Sleep Meeting in Rome in 3 weeks' time and also used in our regulatory submissions for Rest Assure. So what is the time line for commercial readiness of the Rest Assure? Well, the Rest Assure system is currently in the advanced prototype stage and being used in clinical trials with functional but early versions of the software. We still have development and regulatory activities to complete. By the end of Q3 this financial year, we will finalize the patent strategy for Rest Assure, premier the technology at the World Sleep Meeting to around 2,000 sleep physicians and complete the validation study. By the end of quarter 4 financial year '22, we plan to have completed the docking station and sensor design and the final software. We'll also select and verify manufacturers of these important medical device components. In financial year '23, we'll execute our first Rest Assure production run. We'll validate that the hardware, software and cloud-based systems work together and produce the thousands of patients of test report -- sorry, thousands of pages of test reports and data required by the FDA and CTA. Ultimately, our commercialization can only proceed after the documentation is reviewed by the applicable regulatory authority. Thanks again for the opportunity to present the Rest Assure technology, and we look forward to providing you future updates on this project. I'll hand you back to Neil now.

Thank you, Mark. This now leads us to the future. Slide 26 you've seen before, but it's important to emphasize how well positioned for growth SomnoMed truly is. We have built foundation upon foundation over the last 14 to 15 years to get us to this very point where we are now ready for the next exciting chapter in our history. Turning to Slide 27. We've always said that our main strategic intention is to ensure that patients who suffer from OSA know that they have a choice, a choice that includes a comfortable, custom-made device with proprietary materials that allow them to remain in treatment, and now we'll be able to soon measure that so that the comorbidity associated may be avoided down the road. We should, therefore, see over time, a growing oral appliance share of total OSA treatment market where SomnoMed remains the oral appliance leader. We've also said that over time, as we achieve that category leadership, we will continue to invest to drive top line growth and deliver a positive EBITDA, as Slide 28 shows. This financial framework and specifically the accelerated growth section highlighted remains our focus. And finally, Slide 29 reaffirms our commitment to the guidance given for fiscal year '22 by driving revenue growth, utilizing cash for purpose-driven and market needed innovative solutions for our customers and staying true to our mantra, treatment-focused and technology-driven. Thank you. I will now hand back to Lisa, our operator, for any questions.

[Operator Instructions] Our first question is from Melissa Benson from Wilsons.

Neil, I have a bit of a technical question first on the Rest Assure device. Obviously, it's very exciting, and you noted like the different parameters, [ both for a MAS ] versus CPAP. I was just wondering, with the surrogate AHI measurement, is that like a sensor-specific measurement? Or how are those AHIs basically being calculated?

Thanks, Melissa. I think that's best answered by Mark.

Melissa, so yes, we are developing a surrogate AHI that is being tested or validated in that by Peter Cistulli, [ in fact ], at the University of Sydney. The algorithm that we're developing is based on mandibular movement. So as you -- as the patient moves into apnea, their bottom jaw starts to open up. And what we see is a very clear signal that the patient is going into apnea, and we correlate that signal with the gold standard measurement of AHI. So that's basically how it is. It's a mandibular movement signal that's driving the AHI.

Got it. And that's in addition to like the temperature sensor that you've had in some of the past models that are more for the compliance purposes like when it's in their mouth.

Yes. That's right. When the device goes in their mouth, the temperature sensor is activated, and so we know that the patient is using the device. So the temperature sensor provides more information around usage. That's correct.

Got it. And if I could ask a second question. This is probably more of Neil. We're just wondering, you're mentioning this has been the barrier to adoption and uptake, particularly in the U.S. market, I guess, in terms of reimbursement. I mean what's kind of the steps or the necessary hurdles to get over to kind of shift COAT reimbursement from that kind of second-line therapy into an equal first line? Is that something that involves a head-to-head clinical trial with CPAP? Or I guess just any commentary you have around what that actually might take to move on a reimbursement standpoint.

Yes. Thanks, Melissa. I mean this is obviously one of our ultimate goals, and I think that we've always thought in that process, which may take, obviously, some time, that data is critical, and so we need objective data. So the reason for Rest Assure was to bring to the industry and to the oral appliance market a real data, overnight monitoring of every single patient. We could have hundreds of thousands of patient nights in literally 3 months of commercialization. Using that data and providing that data would be the foundation, I think, to going to all of the medical communities, medical societies to look at clinical guidelines and to challenge those guidelines for the future in terms of first- and second-line mild and moderate, at least, treatment for those OSA patients as well as then to the insurers and to challenge some of the reimbursement codes, restrictions, limitations and values of the future for this company.

And just on that reimbursement code. Is there any that you know of that are kind of existing remote patient monitoring codes that, for example, might be useful for sleep physicians right now if they were to be monitoring the Rest Assure data?

Yes. That's part of our plan and program. We're well aware of that, and that will lead into our future reimbursement policy.

I don't have anybody else in the queue. So I'll just check it then if anybody would like to ask a question. [Operator Instructions] Okay, Neil, that's all the questions we have.

Fantastic. Thank you so much, Lisa. Thank you to everybody for joining us this morning. Thank you for the time. Today really marks the beginning of a new chapter for SomnoMed, and our whole team is excited about the future that this new technology, Rest Assure, could bring to our multidisciplinary customer base and their patients. Thank you for your time.