Oventus Medical (ASX: OVN) – Undisrupted sleep, disrupted billion dollar markets

Article written by Pitt Street Research. For the full report click here

Since the origin of CPAP in the early 1980s there have been treatment solutions for Obstructive Sleep Apnea, and these have created multi-billion-dollar companies such as ResMed. CPAP, however, while improving over time, is still relatively expensive and under-utilised thanks in part to patient discomfort, rendering it ineffective for many patients. Enter the simpler treatment modalities for mild and moderately affected patients, including mouthguard-like oral appliances, which have been growing in importance for the last 15 years.

The race is now on for the optimal design of such a device, and a contender for the laurels is Oventus Medical with its O2Vent range. We believe that the ability of the newest O2Vent designs to interface with CPAP and EPAP provides a way to provide personalised treatment to get the best outcome for the individual patient in more than 80% of cases.

We value Oventus at $0.52 base case and $1.46 optimistic case using a DCF-based approach. Our target price of $1.00 sits at the midpoint of our DCF range.

We see Oventus being re-rated by increased sales and by further clinical data showing the superiority of the O2Vent ‘Sleep Treatment Platform’.

Introducing Oventus Medical

Oventus Medical has evolved its ‘O2Vent’ range of oral appliances for the treatment of Obstructive Sleep Apnea (OSA) into a Sleep Treatment Platform that can treat most stages of the condition. While the standard of care for Obstructive Sleep Apnea (OSA) remains CPAP, the oral appliances are growing in popularity in what is arguably a multi-billion-dollar market.

Oventus Medical with O2Vent set out in 2014 to commercialise what it regards as the most effective oral appliance yet designed, useful in the treatment of both OSA and snoring. In 2017 Oventus discovered that O2Vent could interface seamlessly with CPAP and with another OSA treatment modality called EPAP, and thereby improve the effectiveness of both modalities.

As a consequence Oventus is now working on combination products that will allow O2Vent to treat the vast majority of all OSA cases. Primarily for this reason, Oventus believes that O2Vent is a key ‘disruptor’ in the rapidly growing field of sleep apnea treatment.Sales are still at start-up levels, although a world-wide distribution deal with Modern Dental, alongside Oventus’own efforts to drive sales through the sleep channel with their new team in the US, have the potential to move O2Vent past the launch phase.

What is Obstructive Sleep Apnea and why is CPAP the standard of care for this medical condition?

OSA is a potentially dangerous sleep disorder in which breathing repeatedly stops and starts without the sleeper beingaware of it. If people tell you that you snore loudly, or you feel tired even after a full night’s sleep, you may haveOSA, which, as well as the drowsiness, comes with numerous long-run physical and mental health complications and sometimes results in death. The condition, which is regrettably commonplace, impacts an estimated 20% of US adults.

Continuous Positive Airway Pressure (CPAP), involving a mask or nose piece and a hose which delivers continuous air pressure into the nose and/or mouth, can treat OSA because the air pressure helps to keep the airway open. CPAP is generally regarded as the standard of care for OSA because of its track record of effectiveness over multiple studies and its long history of use going back to the early 1980s.

Why are oral appliances increasingly used to treat OSA?

In OSA, an ‘oral appliance’ is any device which, fittedinto the mouth prior to sleep, is able to widen the airways so as to avoid apnea. Many of these appliances,particularly the ‘Mandibular Advancement Devices’, push forward the lower jaw and have a ‘mouthguard’ look andfeel. Oral appliances are increasingly used to treat OSA in part because of the relatively low adherence rate with CPAP, which in turn is due to the discomfort associated with the mask and the air pressure. The attraction for oral appliances, particularly for mildly and moderately affected patients, is the relative patient-friendliness of such devices and ease of use.

Why is Oventus Medical’s O2Vent potentially the best oral appliance for OSA yet designed?

The OventusAirway Technology centres on what we call an ‘Airway Structure’ within the oral appliance that, by delivering airto the back of the throat, bypasses various obstructions from the nose, soft palate and tongue. Other oral appliances are not able to deal with these obstructions. This particularly improves the breathing of patients with nasal obstructions, which represents a sizeable percentage of the patient population.

Oventus has also shown that O2Vent’s Airway Structure can interface with CPAP and EPAP and thereby lower the rate of air pressure needing to be delivered by these devices. For these reasons Oventus believes it has developed one of the best oral appliances yet.

What is Oventus Medical’s Sleep Treatment Platform and why is it potentially disruptive?

In 2017 OventusMedical’s investigators made the surprising discovery that connecting a CPAP hose to the O2Vent’s AirwayStructure would markedly improve the efficiency of a CPAP machine. Around the same time, they discovered that the O2Vent’s Airway Structure would work with a lesser-known treatment modality called EPAP. Subsequent clinical work has shown that these combination devices have the capability to treat around four-fifths of all OSA.

Oventus now calls its suite of O2Vent standalone and combination devices a Sleep Treatment Platform. The reason this Platform is disruptive is that it notionally allows many more patients to be drawn into care than conventional CPAP, a multi-billion-dollar market today, ever could.

If Oventus Medical is so good, why is it only capitalised at A$31.8m/US$23.5m?

We think there are two main reasons for the current low market capitalisation of Oventus. Firstly, there are multiple oral appliances availablein the market and therefore no clear ‘winner’ in this space at the present time. Secondly, sales of O2Vent appliances are still at the start-up phase. We believe that further data on the effectiveness of O2Vent alone and in combination with CPAP and EPAP can increase sales and therefore market recognition of the product’s advantages, leading toa re-rating of the stock. We also see any strategic tie-up with a player in the CPAP space as greatly assisting in the disruptive nature of the product.

Ten reasons to look at Oventus Medical

1)  The market opportunity is enormous, with perhaps 20% of the adult population suffering sleep apnea, and many patients in search of oral appliance solutions because of the drawbacks of CPAP. In addition, it has been estimated that less than 20% of patients are actually in care, since they are yet to be diagnosed or have fallen out of care.

2)  Oral appliances are now mainstreaming in the sleep apnea space, with pioneering devices now growing in market appeal, helped by the increasing numbers of dentists that are certified to practice‘dental sleep medicine’.

3)  The design of O2Vent has competitive advantage, with the inclusion of an Airway Structure within the device allowing air flow and pressure to be delivered past obstructions which competing devices cannot deal with. This design has allowed Oventus to secure patent protection over the O2Vent designs.

4)  The data on O2Vent is highly favourable, with around half of all patients that previously used a Mandibular Advancement Device, reporting improved outcomes, namely, a 30-50% reduction in their Apnea Hypopnea Index (AHI) measures over what had previously been achieved. The early data on ExVent and ONEPAP have also been favourable.

5)  Oventus Medical has been continuously innovating around the O2Vent design, with new designs being regularly added to the range over the last three years. We believe this innovation can contribute to increased physician and patient acceptance of O2Vent.

6)  O2Vent can interface with CPAP and EPAP, allowing most OSA to be treated. Clinical data has shown that the combination with CPAP can markedly reduce the level of air pressure required from a CPAP machine. This has potential to increase CPAP adherence for many patients and could prove attractive to key players in the CPAP space. The data on combination with EPAP has shown that this already well- tolerated treatment modality can be made even more effective. Oventus believes that O2Vent on its own, with O2Vent+EPAP, can treat around four-fifths of all OSA. With O2Vent+EPAP+CPAP the other 20% can be treated, without the need for a full face mask or straps..

7)  Oventus now has commercial channels in place. A 2017 distribution deal with Modern Dental has potential to markedly increase awareness of the O2Vent products globally.

8)  Oventus is funded for the next stage of its development, with a late 2017 raising of A$8m providing the working capital to take O2Vent past the launch phase.

9)  Oventus Medical has a solid leadership team. Founder Dr Chris Hart, who created the original O2Vent design, has overseen a continuous evolution of the O2Vent concept. CEO Neil Anderson has many years of experience working in the emerging medical device space and has been instrumental in reducing the O2Vent designs to practice. Backing Hart and Anderson is a board that the successful bio-entrepreneurs Dr Mel Bridges and Sue MacLeman.

10) Oventus is undervalued on our numbers. We value Oventus at $0.52 base case and $1.46 optimistic case using a DCF-based approach. Our target price of $1.00 sits at the midpoint of our DCF range. We see Oventus being re-rated by increased sales and by further clinical data showing the superiority of the original device and add-on products used in combination with it.

Valuing Oventus Medical

We value Oventus at $0.52 per share base case and $1.46 per share optimistic case, using a DCF-based approach. We assume that the company does not partner O2Vent T in order to grow usage quickly but retains 100% of the commercial upside.

Re-rating Oventus Medical

We see the following factors as helping to re-rate Oventus Medical over the next twelve months

  • Increasing sales of O2Vent products;
  • Further data on the clinical effectiveness of O2Vent from the OVEN-003, OVEN-004 and OVEN-005 studies;
  • The completion of further O2Vent designs, most notably the nylon design, ExVent and OnePAP;
  • Presentations on O2Vent at meetings attended by key opinion leaders in sleep medicine;
  • A tie-up with a key player in the CPAP space.

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