Mask spooks investors

Thursday, February 28, 2002

BOCA RATON, Fla. - Stock prices of the nation's two CPAP heavyweights, Respironics and Resmed, declined sharply last month, following reports that Innomed Technologies had logged $20 million in sales commitments for its new nasal interface.

Two-and-a-half weeks after Innomed announced that it would start shipping its Nasal Aire interface by the end of January, Respironics' stock price had plunged by 33%; Resmed was down 24%.

Given the lack of clinical evidence to support consumer preference for the Nasal Aire and the ambiguous nature of the sales commitments, the CPAP industry and analysts who follow it are scratching their heads over the coincidental declines.

Bruce Jacobs, an analyst at Deutsche Banc Alex Brown in Boston, says the market was spooked by the Innomed news but doesn't believe the declines are warranted.

"I don't think you can necessarily draw the conclusion from the stock decline that this means [Innomed] is going to be a very viable competitor," said Jacobs. "I think the conclusion you can draw is that Innomed wrote a press release that was sufficiently effective in scaring people."

In addition to information about sales commitments, the Innomed release states that independent clinical trials have shown that patients pick the Nasal Aire 98% of the time when given a choice between using it or its competitors' masks.

"Everyone we have shown this too around the country has said this could revolutionize CPAP," said Patrick Karem, Innomed's CEO. "Is it going to? Don't know. Is it for everybody? No. But is it for the vast majority of the patients, yeah, it is."

Karem said the patients who selected the mask based their preference on a visual evaluation only. No studies have been released to support patient preference after using the Nasal Aire. Karem said a clinical study is being conducted now. The interface was patented in 1996 and received marketing clearance by the FDA in 1999.

"If this is such a great product, why haven't they got this thing out sooner," said Ron Richards, Resmed's vice president of marketing for the America's.

Karem said Innomed's founder ran out of money. The roll-out only became possible after Mergenet Solutions, which describes itself as a full service technology incubator, stepped in.

Since 1996 both Resmed and Respironics have stepped in, looked at the Nasal Aire and declined to pursue acquisition.

"You got to look at Resmed and Respironics," said John Miclot, president of Respironics home care division. "We understand patient inter-faces. We live in that world. And we both discount that product as a non-player."

The people at Southern Sleep Technologies, in Macon, Ga., also know nasal interfaces and are getting to know the Nasal Aire. The sleep lab has tested the mask on 28 patients, who were each able to choose from rival masks, and all 28 opted to go home on the Nasal Aire.

In the U.S., Medical Industries America began distributing the interface in late January. Initially, national sales and marketing director Frank Nelson said MIA is targeting the 40-50% of CPAP patients who he says become non-compliant after using the mask. Other industry estimates place the rate of non-compliance at 60%.

"Every [home medical equipment provider] has a large proportion of patients that they can go back to with our product and get them compliant," said Nelson. "By the orders we're getting, it's going to be a lot bigger than we think."

Some are questioning the $20 million figure released by Innomed. Richards estimates that there are 1.2 to 1.3 million people are using nasal CPAP and that as many as two million nasal interfaces are sold each year. At $90 per Nasal Aire, $20 million in sales commitments translates into about 220,000 interface sales.

Nelson doesn't doubt that the Innomed interface will capture 10% of the market in its inaugural year. Richards is doubtful.

"They're going to capture [a significant portion of market share] with a new product that has limited appeal and application?" he asked. "With an unknown product? With that sales force? With no clinical studies to back up its performance? I think it's rather comical."

Jacobs also questions the plausibility of a stunning success out of the gate.

"To be very successful in this industry, you have to have not only a very good product, but very good distribution and customer service and many other elements that make for a successful company in the OSA market," he said. "It remains to be seen whether Innomed can put all that together."