A change of contrast: Osprey Medical

Mike McCormick is the CEO of Osprey Medical. Osprey makes a device that lowers the amount of contrast media needed for angiograms or other heart procedures that physicians put into the blood in order to be able to check out what’s going on with the heart, but the problem is that that stuff also damages the kidney and anyone with a pre-existing kidney condition is risking kidney failure entire because of the contrast. 

What Osprey’s come up with – actually it was invented by someone at the Alfred Hospital in Melbourne but Osprey’s an American business – anyway, it’s an American company listed on the ASX, using Australian technology. But what it does is lower the amount of contrast media required and therefore makes it safer. They’re trying to sell that. Interestingly, the company suffered a setback in October 2015 because of a trial. We go into that with Mike McCormick in the interview but the point is that the share price collapsed after that and really hasn’t recovered since, but since that time they’ve continued to grow their sales. 

They’re a way off cash breakeven, Mike McCormick says they are heading for cash breakeven in the end of 2021, more than three years away. They’re burning a fair bit of cash now but they’ve had 15 consecutive quarters of sales growth, revenue growth. Even though there was that setback in October 2015 which caused the share price to collapse, they have continued to growth the revenue in that time and relatively convincing on the subject that they will continue to head towards breakeven and then profitability. There’s a fair bit of operating leverage in the business, once they hit breakeven they’ll probably keep going.

The advantage of the business from an investment point of view is that we’re not going through trials anymore, they’ve done the trials, they know what the product does, so it’s not as if you’re waiting for phase 1, 2, 3 trials for 10 years of that, they’re out there selling the thing and it clearly works but it doesn’t work exactly as they intended it to or hoped it would, so what you’re doing is just waiting for the sales to grow to the point where it pays for the cost of the business. There’s a reasonable credible evidence that that’s going to happen. 

At some point the stock will re-rate. It’s currently at 2.8 cents and at some point it’ll go back at least to presumably what it was – it’s 18.5 cents and so it was up to 70 cents before October 2015’s fall down to below 20. The question is whether it’s now going to at some point re-rate when the market regains confidence in their ability to make a profit. But I’ve gone into some detail with Mike McCormick on all this stuff, I think it’s worth listening to and maybe an opportunity. 

Here’s Mike McCormick, the CEO of Osprey Medical.

 Mike, I wonder if we can just, to begin with, go back in history a little bit to October 2015, because obviously the Osprey share price collapsed in that month after a trial that you reported came out and your share price never really recovered from that and I think it’s worth just beginning by understanding what happened then and it just seemed to me that the thing that occurred is that you reported there was no significant reduction in contrast induced nephropathy, which is kidney damage or disease, and is it fair to say that at that point your product went from being a must-have for hospitals to being something that would reduce their costs and is a nice-to-have?

Excellent question.  Thanks for going back to 2015 and the randomised controlled trial that we did.  As you’re familiar, you do these randomised FDA controlled trials to get claims, to get regulatory approval and claims, and that’s the reason that we did that trials.  There were four claims that we were seeking when we did that original clinical trial and those four claims are dye reduction,  reflux reduction which is the mode of action and how the product works, that we can reduce the costs for the hospital, we can do all of that without affecting the image quality and that we’re reducing acute kidney injury.  Those are the claims that we were going for.  We were successful in getting three of those claims.

We got dye reduction and we do reduce it a lot, we reduce the contrast by 40%.  We also got a claim that we can reduce that contrast without affecting image quality, so that was the second claim we had.  Then our mode of action, reflux reduction was the third claim.  What the clinical trial did not show with statistical significance was a reduction in acute kidney injury.  That was not a claim that we were able to show.  We had a trend in that but we didn’t have a statistical significant finding there and so the market reacted to the fact that we did not show that improvement.  

All that said, the FDA obviously gave us approval with the claims that we had and we’ve commercialised since then with the claims that we’ve received and our products are used – since that timeframe we’ve had growth every single quarter in our sales revenues as we’ve commercialised our products.  

I mean, obviously the share market had one reaction but I’m I suppose more interested, fundamentally, in the reaction of the marketplace to your product.  Was there a change in the that the hospitals regarded you after that?

No, there wasn’t.  A couple of different things there is first and foremost, prior to that result, it wasn’t like there was a big impression that then changed where we had enormous sales in the United States prior to those results and that was a different perception from the market.  In the US marketplace, and we commented on this back in 2015 – first off, if you take the doctor and the doctor is who uses medical technology, so it always starts with the physician.  Physicians commonly know why you would want to reduce the amount of contrast media used in a procedure. 

We never actually have to engage them on why that’s important, they know why that’s important.  Reducing contrast is one of the only modifiable factors that they can control that helps to lower the problem of acute kidney injury.  So it wasn’t like doctors didn’t understand why dye minimisation was a good thing or that the claims that we’ve received around dye minimisation was a claim but they didn’t know what the value of that was, doctors clearly knew the value.  What we’ve been doing since then is capitalising on that value. 

Was there a change in the public market perception?  Yes, there was.  There clearly was.  People felt like, gosh, without the acute kidney injury claim you’re not going to be able to successfully commercialise your portfolio.  Clearly what we’ve been doing is commercialising a portfolio and pleased to say that we’ve had consistent growth every quarter since that timeframe, sales growth. 

That’s right, you’ve had 15 consecutive quarters of growth and the quarter on quarter growth rate currently is what, 15-20%?

This last quarter, so in the second quarter of 2018, we just announced that quarter.  We had 25% growth in the primary franchise, which is the DyeVert PLUS franchise versus quarter one, so it was 25% unit growth quarter over quarter.

It’s quite interesting to me that the share market, your investors, really don’t seem to believe it.  I mean, you had in your bio shares presentation just the other day, the market opportunity slide showed 3.2 million DyeVert procedures per year, pricing $395 per procedure, market $1.8 billion.  The market’s not really kind of believing that. 

It’s a great question.  You’re asking a CEO, do I think we’re valued appropriately?

I suppose I am asking that, but do you feel like you’re not believed or something?

Here’s a couple of things, I guess there’s a couple of things that the market’s reacted to in terms of the price for our shares.  First and foremost, we continue to produce evidence every quarter that our business is growing and we measure that in three different ways.  Number one is, how fast is the business growing quarter over quarter?  Second is, how many new accounts have signed on to buy the products from us?  And third is, how many are in the sample to purchase pipeline?  Those we think are the three key indicators, we report those every quarter. 

This last quarter they were all very solid, 25% growth quarter over quarter, double digit in new hospitals, 10 new hospitals coming on board.  Over 20 hospitals in the pipeline, that means they’re evaluating.  We also added to that mix by talking about national contracts that these large buying groups – we secured three national contracts last quarter.  All of those are indicators that are certainly pointing up.  I think the market continues to want to see us produce quarter on quarter growth rates like that.  We certainly have a large market opportunity and I believe that over time, certainly as the company moves from the case where it is today to cash flow positive. 

I believe that the market certainly starts valuing you differently as you move towards cash flow positive and that’s where we have our sites set on as a business, to move from where we are today to cash flow positive.  We anticipate getting to cash flow positive when we reach about $25 million dollars in revenue and we anticipate that to happen some time in 2021 probably toward the latter part of CY21, somewhere in that timeframe.

Okay, well that’s a fair way off isn’t it?  Have you got enough cash – I’m just trying to look at your quarterly now as to what your cash in the bank is.  What have you got, $27 million in cash, will that get you there?

We have $27 million in cash and given our growth rates that we expect quarter on quarter, we do have enough case.  We also have no debt, so we have the ability to also use working lines of capital.  Normal, traditional operating leverage against your working capital, so we’ve got that possibility too, so that certainly looks like we’ve got the ability to get there.  It’ll be tight, but with working capital and traditional debt type of financing, we believe that we’ll be able to get there.

Can we just talk a little about your sales effort and how you’re going about it?  On the quarterly we just talked about, staff costs were USD$2.7m for the quarter.  How much of your staff is sales and how are they going about the selling?  Is it on commission or base pay or what?

Excellent question.  Our sales organisation today is built of 18 sales territories, those are distinct geographies that we consider a territory, that has a direct salesperson in it.  Then five of those territories also have a clinical application specialist, that’s like a clinical education person that helps to reinforce the way that the product is used as well as how to protect patients’ kidneys.  How do we commission those people or what are the costs?  The sales rep is paid $200,000 annualised compensation package and that’s a 50/50 mix.  50% of that is built on a base salary and 50% of that is built on variable compensation or commission.  Those commissions are structured around productivity which you would normally see in types of sales organisations.  It’s a 50/50 mix, for the clinical it’s a little bit more base, it’s about 60/40, but they’re not paid $200,000, they’re paid about half the price of a sales rep. 

We’ve got, between the sales reps and clinical specialists, 23 people.  It’s a direct sales organisation, they only sell our equipment.  We do anticipate in the second half of this calendar year or between now and the end of the year, that we will add about five more people, three of those being sales territories and two of them being clinical specialists.

On the presentation I read out before, the per unit price, DyeVert was $395, but are you actually getting that?  Because I read another thing where its $350.

Our list price on our DyeVert PLUS system is $395, that’s what we have as our list price.  Our average selling price, if you look at our history over the last year and a half, our average selling price has been every quarter between $350 and $360, that’s been the average selling price, very stable in that range.  At the end of Q2, the quarter that we just had 25% growth, the average selling price in that quarter was $350.  We’ve had a very stable price of $350 per quarter.

And we should note that this is a per procedure price, it’s not a once off sale?

Yeah, exactly right.  Our business model is, we have a disposable device that is used on each patient, so when you look at the overall market and how we approach the market, there’s 7 million patients that have these angiograms done per year.   Angiograms are where they’re injecting contrast media or dye to see if you have a blockage in one of the arteries in your heart or in one of the arteries in your leg, they use contrast dye to do that.  Every time they use contrast dye it’s got to be filtered by your kidney.  If they inject stuff into the bloodstream that’s the function of the kidney, is it filters your bloodstream and the dye is injected in the blood. 

People with bad kidneys are really highly susceptible to having a problem called contrast induced acute kidney injury and that’s what we’re trying to avoid.  About 25% of the patients that walk in and have an angiogram done, this injection of dye, have pre-existing bad kidneys.  Those are the ones that we focus on, but because it’s a 7 million procedure market, the bad kidney group is 1.5 million patients per year, so it’s huge.  And it is single use, so each patient is an independent patient and they need to buy a device for every patient that has a bad kidney that they want to protect from the harmful effects of dye.

Just briefly back to October 2015, is what happened then that your market shrank from the full 7 million back to the 1.5 million who have pre-existing kidney problems?  Before that, was it possible for you to sell the device to the doctors and hospitals for all the procedures?

Excellent question.  No, it really didn’t.  Back in that timeframe, always as we’ve come out we’ve always said that our product is going to be primarily used in patients with poor kidney function because they’re at the highest risk of having acute kidney injury.  To your point, it doesn’t mean that patients with healthy kidneys wouldn’t benefit from less dye.  Contrast media or dye is a heavy duty drug, so other people could benefit.  It’s just world-wide in the healthcare system, just you benefitting doesn’t mean that they necessarily offer it to you. There’s got to be a substantial medical need as necessitated by the risks of the procedure and in our situation, people with bad kidneys are an incredible high risk and that’s why it’s used there.  Again, back to what happened in 2015 – why did the market react so strongly if you...?  And I always describe the market size and the market size didn’t change.  The results you got, three or four claims, why was there so much value put on the fourth claim.  I’ll defend the market here and then I’ll tell you what’s happened since ’15.  At the end of the day, when hospitals are buying goods and services what they really want to know when they buy a good and service is, we understand what your product does, like ours, it lowers the amount of dye. 

But what really matters to us as a hospital at the end of the day is that that lowering of the dye means that we protect patients and have fewer of them that have an acute kidney injury.  That was one of the claims that we were going for in the trial and while we showed a trend toward improvement, it wasn’t statistically significant so we didn’t get the claim.  Getting the claim would have clearly been nice to have the claim, however I think the market perceived that, gosh, without the claim, your ability to successfully commercialise will be very difficult. 

What we’ve shown since then in all of our quarters is that our commercial success has not been stymied or stopped, that we continue to grow quarter on quarter – and we’ve got to continue to demonstrate that – and that there is a huge market uptake of the products even without that AKI reduction claim, because the doctors clearly know that lowering the amount of dye is a critical component of reducing acute kidney injury. 

To what extent is your salesforce selling the devices to hospital administrators as a cost reduction or alternatively to cardiologists as a safety procedure?

Yeah, great question.  We’ve got a little bit of both and I’ll describe both.  First and foremost, the selling effort always begins with a physician.  Our devices are by prescription or by use of this physician only first and foremost, so we always start with the physician because they’re the ones hat are injecting the contrast, they’re also the ones that are going to be, blamed is a strong word, but associated with contrast induced acute kidney injury if it happens as a result of their procedure.  They’re always the starting point because doctors are the ones who adopt new technologies and they understand the value proposition.  That’s the starting point.

However, the administrators of the hospital clearly are a very influential and important part of the decision making process, because once the doctor sees the technology, wants to use it, describes why it’s better, then the financial administrator wants economic proof that using this kind of a device is going to lower their costs.  We do that, in fact, in a very strong way.  This is where the administrative parts of our sales process come in is, gosh, the economics around kidney damage is incredible to the hospital.  A patient develops a kidney reaction to contrast media, stays in the hospital for four days, is the average.  Those four days are not reimbursed by the insurance company, private insurance or if you’re a public patient, paid for by the government, the government doesn’t pay for it either.

The hospital is the one who wears the economic risk and the financial burden of that bad outcome, whether it’s acute kidney injury or another common bad outcome would be bleeding, that a person has a bleeding complication.  Any of those types of outcomes of this procedure are considered to be an adverse event that was caused by the procedure and insurance or the government doesn’t pay for that, so the hospital wears those additional days in the hospital’s expense. 

The hospital has very strong reasons to want to reduce that burden and that’s where we produce our economic presentation, that using our product lowers the risk of acute kidney injury, which can lower their costs because they’re the ones who are wearing the burden of that cost and we’ve got a really strong value proposition that shows them if they use our products and they use a be kind to kidney approach to all their poor kidney function patients, that they will lower their cost of days in hospital following an acute kidney injury syndrome.

I suppose the next question is, how big of a deal is it for the hospital and the physician to adopt your devices?  How many people have to be retrained and how much work needs to be put into it by the hospital?

Good question.  One of the big things with these quality measures, things that improve patient outcome and reduce hospital cost, you’re exactly right.  The question often is, how hard is it, how hard is it to adopt your technology?  Is it disruptive to the flow of patients?  Because if it’s really hard for me as a doctor to develop the skill or it’s disruptive to the flow of patients through the hospital, then it might not even be worth doing it.  What’s our situation?  The device that we have is incredibly safe for the patient, it doesn’t represent any new risks to the patient and it’s also very easy for the physician to use.

I’ve been in medical devices for the last 30 years and I’ve never had a medical device that I could immediately hand to a doctor and give them a sample to try in the theatre, operative suite, and it gives them the automatic response that they expect.  In our situation, 40% dye savings without image quality reduction.  Our product immediately does that.  Most of the time with devices, you have to get a commandment that the doctor will do 10 or 12 because they have to develop some skill in order to know how to use the device so they can get the consistent result.  Ours is really easy to use.  They get it the very first time.  They use it, they get 40% dye savings.

We don’t present a risk to the patient, it doesn’t change the operative way the physician does the procedure and it doesn’t disrupt the flow of the patient through the suite or through the hospital.  Those are all things that are in our favour as we work towards commercialisation of our products. 

But it does seem to me that there is a bit of work they have to do, I mean they don’t just plug it in and use it the next day, do they? 

It does feel like, wow, the economics work, it’s no risk to the patient, why doesn’t everybody use and right away, immediately…?

Yeah…

Even though we’ve grown every single quarter, why…

That’s kind of what I’m wondering.  We’re talking about, you’re going to breakeven end of 2021, that’s more than three years off.  How come the hospitals just aren’t picking the things up?

Let me give you a couple of indicators on, not just our products, but in the medical device industry in general.  What we primarily work on a daily basis is, first and foremost, with your new device, you have to build awareness, awareness amongst all physicians that there is a solution to this problem.  That’s number one and the way that you do that, traditional ways you’d do it is you’d do peer review scientific journal articles, you will go to the big meetings, have doctors speak from the podium…  Clearly, we are doing a lot of that.  Gosh, we’ve had seven podium presentations just in the first half of this year, but you have to do that to build awareness, marketing campaigns, all those things to build awareness.

The second piece that you work on with medical devices is you’re changing the embedded pattern of practice to a new best practice that improves outcomes and reduces cost.  Whenever you’re talking about changing an embedded practice that takes some time.  We are a new therapy, a new way to treat patients with bad kidneys that lowers that patient’s kidney risk.  It takes a bit longer to do those activities than it does for example just to change the stent that they already buy to a new lower cost stent.  That happens faster if you’re just changing a product that they already buy to a lower cost product, that obviously happens faster than when you’re changing a procedure to a new way to do the procedure, although ours is very simple but that drives better outcomes.  That’s more of an education process.  I’ll give you a quick analogy to that and the time that it takes and I’ll use a company that I think is exceptionally strong, one that’s done very, very well as a company – Nanosonics.

When I look at Nanosonics, from the very first revenue that they had to when they went cash flow positive, it took them slightly over seven years to get to cash flow positive, from first revenue to cash flow positive.  If you look at ourselves, we’re on a very similar trajectory to that, possibly a bit faster, to get to that same milestone.  The only reason I bring up Nanosonics is because I think they’re an exceptional company, very well run, exceptional technology, but it’s also a new technology.  They were changing the conventional way things were done for better outcomes, better outcomes for patients and better outcomes and lower costs for the hospital.  But it takes time to educate that market and move that market.

Just finally, how come you’re based in Minnetonka, Minnesota?

A couple of things on why is that, an Australian publicly traded company from the United States, how did that happen?  Our technology originated by Dr David K. who’s a cardiologist/heart failure specialist at the Alfred Hospital in Melbourne.  He was the one who had the original idea.  Just a very short backstory, my father in law had bad kidneys back in 2008 and he had to have one of these cardiology procedures and following that procedure, his kidneys failed and he had to go on dialysis.  I’m a medical device person, have done a couple of different companies. 

I started looking for a device that could lower the risk of these patients that have bad kidneys of having such a bad outcome from a simple cardiology procedure and that’s where I got linked up with Dr K. who had an incredibly inventive way to reduce the amount of contrast media.  That’s why a US company has strong roots in Australia and is publicly traded in Australia, because Dr K. is the original inventor and still very active with our company in terms of our science and technology and all the invested capital has come from Australia, but we are based in the United States because that’s the world’s largest market.

Did you set the company up to commercialise Dr K’s technology?

Yeah, we had to develop all of it first and then get regulatory approvals on it, and now commercialising Dr K’s ideas.  I will tell you that Dr K’s ideas have been fantastic.  We’ve treated over 8,000 patients to date and we’re protecting many, many patients from the harmful effects of contrast thanks to what Dr K. invented.

But you’re from Texas, how com the company’s not in Houston?

I live in Minneapolis.  Actually, the reason why Minneapolis, Minneapolis has a very strong medical device infrastructure there, a bunch of companies, the ecosystem is strong which means you can hire really bright engineers, really bright manufacturing people, so that’s why we’re based in Minneapolis, the ecosystem for medical devices is really strong there. 

Well that’s good to know, thanks very much.  Great to talk to you, Mike, thank you.

You bet, thanks for the time.

That was Mike McCormick, the CEO of Osprey Medical.