Medical devices darling SomnoMed was smashed last week on concerns it will be forced back to the market to raise even more funds.

After closing at a near 52-week high of $3.91 on Tuesday, the shares fell 15 per cent to close the short trading week at $3.35 on Thursday.

An analysts cut the stock’s outlook on the back of an earnings downgrade, as they pondered whether the company (ASX:SOM) would be forced to raise more funds.

Investors ignored the 45 per cent revenue surge to $18.5 million, focusing instead on the company conceding that the start-up of its first clinics was slower than expected.

SomnoMed has built a handy niche in the medical devices sector by making mouthguards for treating sleep apnoea.

Resmed, the $18 billion outfit that makes masks and associated equipment for treating apnoea, saw its shares surge last week on buoyant December quarter earnings.

But compliance is an ongoing problem since many sufferers of sleep apnoea give up on the intrusive masks. That has opened the door for the likes of SomnoMed to sell its far less intrusive mouthguards — a more palatable and less expensive alternative.

Newer listed competitors for SomnoMed include Oventus and Impression Healthcare, although both are still effectively in start-up mode.

Somnomed (ASX:SOM) shares over the past month.
Somnomed (ASX:SOM) shares over the past month.

The poor quarterly figures from SomnoMed saw Morgans analyst Scott Power slash his price target to $3.58 from $4.04 previously Mr Power downgraded his advice to clients from ‘add’ to ‘hold’ as he waits for further clarity on the outlook for its sleeping clinics.

SomnoMed has established a dozen sleep clinics in the US, and is intending to open another four or five by mid-year, taking the total to 16 or 17.

The retail rollout has encountered resistance from existing resellers of the mouthguards over concerns the clinics will cannibalise existing sales.

And while SomnoMed had told investors previously that this problem had eased, the same issue has flared up at its newer centres.

Lost sales

SomnoMed argues the sleep centres will help boost overall product demand, but existing resellers are not convinced, which has led to some lost sales.

“Management has downgraded FY18 guidance after observations from the first 12 [sleep] centres showing a slower initial sales take-off profile than originally forecast,” Mr Power told clients following the release of the December sales details.

“We have reduced our price target and downgraded our recommendation to a Hold.”

The real concern is that slower-than-anticipated revenue growth at the clinics will weigh on margins and cash, which may force the company back to investors to raise fresh funds.

“New clinics are taking longer than we had expected with early patient numbers ramping up,” the company’s chief financial officer, Neil Verdal-Austin told Stockhead.

The initial clinics were smaller than those now in planning, as SomnoMed took a cautious approach with its first steps into the new market, which has added to its woes.

The slower path to getting the new centres to break-even saw cash reserves fall to $7.5 million from $9.7 million at the start of the quarter.

If SomnoMed keeps its foot on the accelerator in rolling out sleep centres in the US, a return to the market for fresh funds could occur later in the year.

‘More cautious stance’

“We are happy to take a more cautious stance until the economics of the clinics becomes clearer,” Morgan’s Mr Power said. “Upside lies in improved [sleep] clinic metrics and openings above our forecasts.”

SomnoMed came to the market for funds in mid-2016, raising $10 million with an issue priced at $2.50.

Other medical devices outfits were mixed on their December quarter earnings, with Visioneering Technologies ending the week at 46c, well clear of recent highs at 54c, even though Canaccord, for example, raised its price target to 72c from 69c.

Visioneering pointed to seasonal headwinds for a slight softness in sales, which it said was common throughout the sector in the US, the company’s core market.

Canaccord reckons an increase in the number of sales accounts in the December quarter is a ‘lead indicator’ of future revenue growth.

Volpara, the breast imaging software house, enjoyed ongoing support as it highlighted the role of Artificial Intelligence in developing its products, with the focus here on progress in newer markets such as Japan and Taiwan.

It finished last week at 71.5c, not far off its recent all time high of 74c.

Morgans described Volpara’s analyst call on its December quarter numbers as “upbeat” with the focus on the theme of commercialising “big data” which it is accumulating through its sales contracts.