Investors lose sleep over Compumedics share price

Investors in sleep and neurological disorders house Compumedics don’t need a hairnet with multiple sensors to work out why they toss and turn at night: the answer lies with the company’s erratic share performance.

On June 20, shares in Compumedics (ASX:CMP) soared almost 50 per cent after the company won a big US contract for its magneto-encephalography (MEG) scanning technology (see below).

But the biotech gods are fickle indeed and on July 7 the stock tumbled as much as 19 per cent to 56c after a hefty sales and earnings downgrade for 2016-17.

The revision — prompted by a $5 million sales shortfall in the US — highlights a paradox of Compumedics: it’s a global leader in its specialist sectors, but is still a miniscule entity as far as global device and diagnostics plays go.

Since then, its shares have fallen further, closing on Friday at 43c.

Perchance to dream

Most of us spend about a third of our life in slumber and the brain’s activity during this time remains a mystery. In his quest to crack the enigma, David Burton founded Compumedics in 1987 and in that year installed Australia’s first fully computerised sleep clinic at Melbourne’s Epworth Hospital.

Dr Burton (who had a background in electronics for sound recording studios) gained his inspiration after visiting a doctor for a sore throat. Apart from prescribing antibiotics, the physician asked him if it was possible to invent a sleep monitoring device and the idea was thus spawned.

The moral of the story: don’t put off that visit to the quack.

Awake to global opportunities

Compumedics now has 20,000 systems installed globally and, unusually for a Western Devil, has a strong position in China as the biggest supplier of sleep and neurological equipment — with orders in 2015-16 for $US8.2 million.

The company owns US-based Neuroscan and Germany’s DWL Elektronishe.

Geographically, Compumedics can lay claim to being truly diversified, with 29 per cent of sales from the US, 41 per cent from Asia and 15 per cent from both Europe and Australia.

Compumedics claims a 6 per cent share of the sleep diagnostics market, globally worth $US250 million a year. In Australia and China it has number one market position and is third biggest in the competitive US market.

Compumedics also has a sub 1 per cent share of the $US1.3 billion neuro diagnostics clinic market, with similar market positioning in these geographies.

The neuro diagnostics (research) and brain blood flow diagnostics markets are worth $US20 million and $US15 million, respectively, and the company has a 30 to 35 per cent share of these.

Like most device plays, Compumedics is moving from a capital equipment model (that is, selling the gizmos) to cloud-based service models that produce ongoing service revenues.

For example, four sites in the US to date have signed up for Nexus360, a cloud-based sleep diagnostics platform.

Currying favour with MEG

In brain imaging, the company’s Curry brain analysis software is the leader in the magneto-encephalography market (MEG), which is a small sector but growing at about 10 per cent a year.

MEG is considered to be superior to magnetic resonance imaging (MRI) for Alzheimer’s disease and similar ailments. MEG maps brain activity using magnetic fields and we are assured it is not skewed for patients with magnetic personalities.

At the heart of the company’s Orion Lifespan Curry MEG is a “patented double relaxation oscillator super conducting quantum interference device”, or Dros Squid for short, sensor system. Once again, we’re assured this surfeit of adjectives has nothing to do with sub-standard calamari.

The potential for using MEG brain imaging is huge, given the prevalence of not just Parkinson’s disease but Alzheimer’s and other dementia conditions, autism and epilepsy.

On June 20, Compumedics announced a MEG contract with Arizona’s Barrow Neurological Institute, the world’s biggest neurological disease institution and home to the Muhammad Ali Parkinson Centre.

The circa $5 million deal, which relates to the Orion Lifespan device, is the biggest system contract in the company’s history.

The company cites cloud-based sleep diagnosis and, in the neuro-diagnostics sector, long-term epilepsy. Traumatic brain injury applications are also an area of interest.

Another initiative is a cloud-based services platform called Ehealthmedics, which captures or transfers “medical grade sleep parameters from any web-enabled device”.

The company reports forward orders of more than $10 million over the next three years for its electronic-health tool, Nexus 360.

Behind the numbers

Compumedics reported $200,000 of net profit and $1.2 million of ebitda for the first (December) half, on revenue of $16.2 million.

Management also guided to a 2016-17 net profit of $4 million to $6 million and ebitda of $4.5 million to $7.5 million, on sales of $41 million to $43 million.

On July 7, the company said revenues would be about $33 million (compared with $37.5 million in 2015-16) and ebitda would be $2.1 million to $3.6 million (and that’s before $1.6 million of one-off restructuring costs).

Management blamed the timing of US sales and associated restructuring of its core business for the revenue tweak. In the first half, Compumedics also referred to a $2 million shortfall of US sales with this soothing reassurance: “the business has not been lost, just not received in the time frame anticipated”.

Burton dubs the revised result as “not entirely as we expected”, but insists management is not asleep at the wheel and its growth strategies remain intact.

Dr Boreham’s diagnosis:

Compumedics listed in 2000 at 50c apiece, but up until late 2014 they did their best Rip Van Winkle impression. A stirring rally saw the stock peak at 93c in November last year, before slipping as low as 33c in June, then more than doubling to 73c, only to sink below the issue price again.

A former Exporter of the Year, Compumedics has much to be proud of in terms of its global presence and reputation. And hats (or hairnets) off to management for not packing it in and pursuing medical pot or graphite exploration instead.

We suspect the stock presents a buying opportunity at these levels, but as usual investors should sleep on it.

Disclosure: Dr Boreham is not a qualified medical practitioner and does not possess a doctorate of any sort. Because he doesn’t own any Compumedics shares he sleeps soundly at night.

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