SomnoMed: Result 2016

It's been another year of impressive growth for this maker of sleep apnea mouthguards.

New sales records in the US, Europe and Australia over the past year have helped SomnoMed to a solid full-year result, with revenue increasing 28% to $44m.

Total direct sales of SomnoMed’s custom-made mouthguards to treat sleep apnea rose 23% to 55,975 units. Licensee sales, on the other hand, fell 45% and now represent only 5% of the total – down from 11% last year – as the company switches to selling direct to customers, rather than licensing its SomnoDent device to third parties. Including licensee sales, SomnoMed sold a total of 58,983 units, an increase of 15%.

Key Points

  • Strong direct sales growth; licensees decline

  • Two small and one big acquisition

  • Guidance for EBITDA to double

Most of the growth came from North America, where sales increased 27%. This was noteworthy because the effective cost of treatment rose in the first few months of 2016 when US private health insurance premiums and deductibles increased sharply.

Most insurers the world over still favour continuous positive airway pressure (CPAP) devices as a treatment for sleep apnea. With this in mind, it was encouraging to read that ‘insurance contracts currently being negotiated by SomnoMed in the US, Holland and Germany continue to indicate a positive change in the reimbursement landscape’. Getting insurers on board to fund SomnoDent devices will be an important milestone because it lowers the out-of-pocket expense for patients.

European sales performed admirably, rising 21%, with sales in new European markets growing 39%. Sales in Asia Pacific, including Australia, rose by a more modest 8%, though management noted that South Korea had been a top performer with growth of 20%.

New acquisitions

The company made three acquisitions during the year, including a supplier of a key lining material used in the company’s products, as well as the Canadian Strong Dental, a local SomnoDent manufacturer, and – most importantly – the rights to Simple Sleep Services’ intellectual property (see SomnoMed’s shifting business model). SomnoMed intends to open five US-based sleep centres in 2017 and 10 more in 2018, which will allow it to use in-house dentists to diagnose patients and fit its mouthguards.

Year to June 2016 2015 /(–)
Table 1: SOM result
Total units 58,983 51,355 15
Revenue ($m) 44.0 34.4 28
Gross Profit ($m) 25.3 19.5 30
EBITDA ($m) 1.48 0.87 70

Overall, earnings before interest, tax, depreciation and amortisation (EBITDA) rose 70% to $1.5m. Management expects 2017 to be another year of strong growth, with unit sales and revenue expected to rise by at least 20% and EBITDA to more than double to $4m.

As with medical device maker Nanosonics, we got into SomnoMed early, and we’re reluctant to get out while the company is still growing at such a fast rate.

We’re happy to hold SomnoMed for the long term, but that doesn’t mean you should let the stock become a large part of your portfolio; it’s still a young, one-product company, with a new business model and new chief executive, all of which add risk. With the stock having more than doubled since we originally upgraded it in SomnoMed: A future mini-ResMed?, we highly recommend that you lock in profits to keep your portfolio weighting below 2%. HOLD.

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