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04 July 2014

SomnoMed Limited Summary company financials (A$m)


*3 quarters so far
reported
Year end June FY2012H FY2013H FY2014H* FY2015F FY2016F
Price A$1.56 Revenue 15.2 18.5 26.4 35.1 45.6
Market cap (A$m) 66.8 Revenue growth 23.6% 21.3% 42.6% 33.0% 30.0%
Enterprise value 60.9 EBITDA 0.9 0.7 3.1 5.5 9.0
EBITDA margin 5.9% 3.8% 11.8% 15.8% 19.8%
Free float 92% EBIT 0.5 0.2 2.4 4.6 7.8
EBIT margin 3.0% 1.1% 9.1% 13.1% 17.1%
Net income 0.5 0.6 1.5 2.8 4.8
Net debt (cash) -3.5 -4.2 -5.9 -9.0 -14.8
Shares outstanding 41.3 42.4 42.8 42.8 42.8
EV/Sales 1.98 2.32 2.33 1.67 1.17
EV/EBITDA 33.5 60.5 19.7 10.6 5.9
PE 64.2 79.2 44.5 23.5 13.8
PE ex cash 20.3 10.8
SomnoMed is the market leader in sleep disorder treatments through Continuous Open Airway Therapy (COAT), a method of treatment
which is gaining share from Continuous Positive Airway Pressure ("CPAP") treatments for sleep disorders. SomnoMed is listed on the
Australian Stock Exchange, has revenues of A$26m, of which 52% are in the US, 33% in Europe, and the remainder Asia and Australia.
SomnoMed has been profitable since 2010, and, since 2007, has grown revenues at a compound annual rate of 41%, and gross profit at a
compound annual rate of 50%. The company has net cash, and a meaningful opportunity to grow revenues further. The company's COAT
device is sold in 22 countries and has treated more than 150,000 patients. SomnoMed owns all the intellectual property rights to its product
and has patents in Australia, USA, New Zealand, Canada, Europe, Hong Kong, Japan and South Korea.

Assuming current revenue growth rates can be maintained, SomnoMed trades at 1.65x next 12 month EV/Sales, 10.4x EBITDA and 23x PE.
The EV/Sales rating is a greater than 50% discount to CPAP market leader ResMed. Additionally, SomnoMed's margins remain low relative
to their potential . Looking out to the following year, and assuming some margin expansion, SomnoMed's rating drops to 5.8x EBITDA and
13.8x PE (10.8x PE ex cash). Revenues will still remain below A$50m, however, offering ample room for further growth relative to longer
term revenue potential closer to A$500m, assuming SomnoMed can continue market share gains from CPAP market leader ResMed, which
has more than A$1.5bn in revenues.

Both SomnoMed's COAT product and ResMed's CPAP product treat sleep apnea, a type of sleep disorder characterised by pauses
in breathing or instances of shallow or infrequent breathing during sleep. Sleep apnea affects approximately 24% of middle aged men and
9% of middle aged women and typically occurs in individuals with narrow upper airways or poor airway muscle tone. In all indi viduals the
upper airway has no rigid support and relies on active contraction of upper airway muscles to hold it open. However, in middle aged
individuals with poor airway muscle tone, the airway is prone to temporary collapses during sleep. Typically the individually subconsciously
arouses from sleep, then will fall back into sleep, often unaware, and this cycle can repeat every five minutes or so. Sufferers of sleep apnea
experience loud snoring, daytime sleepiness and fatigue associated with significant levels of sleep disturbance, as well as increased risk of
heart disease, stroke and diabetes.

ResMed's CPAP treatment for sleep apnea has historically been prescribed as first line treatment for all severities of sleep apnea. CPAP,
however, consists of a bulky device - a ventilator-type machine and facemask that blows air down the airway - which is not particularly
"patient friendly" for an individual trying to sleep. By contrast, SomnoMed's COAT product - a device which sits in the mouth, over the jaw
with an upper and lower component - has transformed patient treatment of sleep apnea. The design of the device ensures the lower jaw
sits forward which works to keep the airway open, and is an alternative and more patient friendly solution to mild apnea. A recent study -
disclosed by SomnoMed - compared Resmed's CPAP to SomnoMed's COAT product. When used properly, both products produced similar
results in patients. However, SomnoMed's more patient friendly COAT product was more likely to be used by patients voluntarily over time
whereas with the CPAP product, patient usage tended to be less regular.

A longer term outcome is likely to be continued market share gains by SomnoMed's COAT device, which currently has a market share of less
than 5% in the US, against ResMed's dominant CPAP devices. In Sweden, which is in the advanced stages of acceptance for SomnoMed's
device, COAT now has a market share of close to 50%, and the device in Sweden is considered first line therapy for mild sleep apnea. To the
extent SomnoMed's Swedish market shares represent an indicator as to the shares which can also be achieved by SomnoMed in other
regions, the revenue upside for SomnoMed is significant. ResMed's A$1.5bn of revenue is more than 50 times SomnoMed's A$26m.

As SomnoMed grows, it is reasonable to expect its margin will also expand. The 2013 EBIT margin of 1.1% included one off expenses relating
to the recruitment of executives and staff and the build-up of the US medical departments, restructuring of the US dental sales and
customer service departments and the expenses relating to the acquisition of European businesses. If we adjust for these items, SomnoMed
achieved a 9.1% EBIT margin in 2013. Another indicator of a likely higher longer term margin potential is SomnoMed's gross margin which,
at 67%, is above ResMed's gross margin at 62%. SomnoMed currently spends 59% of revenues on administrative expenses and sales and
marketing, compared to the more mature model of ResMed spending 36% of revenues on the same line items. Modelling a larger, more
mature SomnoMed with a cost base equivalent to peer ResMed, but with gross margins maintained higher, suggests an EBIT margin of
above 30% is possible, although a high teens forecast is sufficient to put the company on a low teens earnings multiple in two years time.

Recent performance from SomnoMed continues to be encouraging. Q3 2014 volumes increased by 28%, as a result of improvements i n
SomnoMed's US business as well as continuing strong growth from Europe and Asia. Revenues year to date are up 43% and were up 50% in
Q3 (+30% at constant exchange rates). We assume comparable revenue growth rates can be maintained for the next two years as the shift
to SomnoMed's COAT product continues.

In summary, SomnoMed is the market leader in sleep disorder treatments through Continuous Open Airway Therapy ("COAT") and has a

In summary, SomnoMed is the market leader in sleep disorder treatments through Continuous Open Airway Therapy ("COAT") and has a
track record of c. 40% revenue growth with likely continuing market share gains from ResMed, which offers a less "patient friendly"
Continous Positive Airway Pressure ("CPAP") treatment. SomnoMed trades at a 50% EV/Sales discount to ResMed, and at estimated 13.8x
PE for the year ending June 2016, assuming continuing revenue growth and some margin expansion. Longer term, EBIT margins have the
potential to reach 30%, assuming SomnoMed achieves the same cost base as a % of revenues as peer ResMed. Additionally, revenues have
the potential to grow significantly from current A$26m, assuming market share can continue to be taken from ResMed's A$1.5bn of
revenues.