Hi guys, Rob Phillips was interviewed recently by well followed...

Hi guys,

Rob Phillips was interviewed recently by well followed Alan Kohler. I think it highlights a few very interesting points which I will go through in a follow up post - but for everyones benefit please see the transcript below. It goes into a lot of detail around strategy and new products. More detail around the shift into the digital health sector and more information regarding our new rockstar partner Mr Meng. I think it is very helpful to get our heads around where exactly the company is at present - exciting stuff ahead ! 2018 is going to be massive.

Alan Kohler: A Device for the Heart: Uscom

Audiocast Interview with CEO Rob Phillips

Uscom is a medical device business that was founded in 2000 and listed in 2003. CEO Rob Phillips inventers the company’s heart monitoring device so Alan Kohler gave Rob a call to find out how the company is progressing.

Transcript

Rob, it’s obviously been a rollercoaster for you over these last 15 years, in fact I think it goes back to 2000 when you invented the product.  Tell us about the invention of it.  You were at the University of Queensland – I suppose, the first question is, how come you were able to take it away and it didn’t belong to the university?
Well, it’s interesting, Alan, because all small caps particularly in Australia, particularly medical devices, all have their own stories, and ours is no exception.  I was working independently doing my own clinical work, and also researching through UQ, where I developed my own concepts and ideas about circulation.  My research was positive and the IP was granted in my name, as the ideas had developed outside UQ.  The University of Queensland have been very supportive and encouraged me to develop my research and commercialise the device while attached to the University.  UQ are very progressive and that’s why they have such a good reputation.
Once the patent is granted the real rollercoaster begins; its not an end point, it’s actually the beginning.  You have to build a product, you’ve got to establish your market, you’ve have to clinically validate the device and prove that it is clinically useful and can contribute goto healthcare on a global stage.  You then have two choices; you either seek an early exit and hand the marketing and sales over to a major and sell your IP.  Or, you say, I think this is great, and the real growth opportunity is to actually build a company around the technology.  I don’t have an exit strategy, and I’m building a company around our technology, and that’s really what Ive been doing for the last 10 or 15 years…
But you actually did hand it over to a Gorilla but it didn’t work.
[Laughs] Well, things don't always go to plan, and what we did was we signed an exclusive distribution agreement with a large US company believing that was best and quickest path to market and revenue. However the global financial crisis intervened and suddenly we found ourselves cash depleted, trying to maintain the company and unable to sell through anyone else and without access to our own IP and technology, so it was a really challenging time.  Once we resolved that, we brought in a private equity team who were equally ineffective and put the company at further risk .
I value shareholders capital and take my responsibilities seriously. Getting capital in Australia is not an easy and it depends on trust and communication.  So, in 2011 got together with some of the other shareholders and we restructured the company and I assumed the role of CEO and the Executive Chairman role.  Since then we’ve driven the company, we raised capital and a’re averaging 30-50% PA growth since then.  We’ve also acquired two international companies, are about to release seven new products, remain debt free, and we’re almost cash flow positive. We’re looking forward with great optimism to 2018.
It takes time to understand global market and where your products sit, and how best to market them, but a great bit of research in the UK says medical devices take 15 to 20 years to get established and profitable in the market place.  I thought was unlikely, but the truth is it does take time. However the rewards are really good, so while the barriers to entry are high, the opportunities are great and that is where we are as a company now.
As you say, you took back control of the business or management of the business in 2012 and raised money in 2013, but you raised that money at 20 cents a share and now you’ve just done another capital raising at 13.5 cents a share, much less than you got back four or five years ago.  Is that disappointing to you?
Absolutely, however the share price is not always linked directly to fundamentals.  I try to remain objective about the share price but as Chairman and CEO ultimately the responsibility is mine.  If I notice a seller I wonder why theyd sell the stock; our achievements are excellent and the future is bright.  But what you recognise is people don’t sell necessarily based on the quality of your stock.  They might be going through a separation, they might need to pay their tax or put their mother in law in a new house or any number of reasons.  People buy and sell stock, and the market’s an unpredictable place.
Ultimately too, not everybody’s interests are aligned. If the stock goes down then shareholders may be motivated to sell.  If the stock goes up, they sell crystalise gains.  For us after performed so well after the 20c raising the share price went to 35c and many shareholders cashed in taking us back to 20c again because we’re a tightly held small cap.
For this raising at 13.5 cents, within five days we were up 56% and then profit taking halted our rise at 20c.  However, for me fundamentals is what drives business, and ultimately I believe that if you create a real and profitable business that will overwhelm the vicissitude of the market.  And that’s what we are doing, creating a business based on real fundamentals.  There are many conceptual businesses in the market at the moment and it can be frustrating to see the amount of capital that’s poured into conceptual businesses without realistic foreseeable revenues..
But you mentioned, Rob, about this research in the UK that said it takes 15 years or so for medical device businesses to come to market, but you’ve had 15 years…
Exactly, and we are intermittently profitable, have acquired two international companies, established global operations and manufacturing, and are about to release 7 new products globally.
Well, sure, but you invented the thing in 2000, listed in 2003, so you’ve had a fair while already.  When I asked you about whether you’re disappointed in the stock being 13.5 or 20 cents now versus 20 back then, is the disappointment that you haven’t got anywhere with the product fundamentally?
No, quite the opposite.  Our products are receiving global recognition and the BP+ is installed on the International Space Station and is entering international release mode now. We’ve also acquired two companies, we’ve set up an international volume manufacturing system, we’ve set up international offices, we’ve got devices that have gone through international regulatory processes and been approved.  Considering the GFC took five years out of our evolution, we have done well, and Im confident investors will see value in real businesses ultimately and our value recognised.
Don’t get me wrong, I am disappointed as we have bought and combined three businesses and are still only valued at $25 million dollars.  Each of these three businesses now we have developed the products and achieved approval for them, has individual values in the order of $25-50M.
I think there’s no doubt that we’re a real business that’s undervalued and we’re on the cusp of realising that opportunity as our new products are now coming to market and we have developed a really strong China marketing strategy to ensure rapid uptake.  Uscom has spent the last five years acquiring, building, developing, product refining our distribution and now it’s time to convert this to revenue. While the timelines may not be as planned the outcome is imminent.
Uscom develop and manufacture  cardiovascular and pulmonary devices, and these are absolutely critical areas of medicine.  They account for approximately 75% of all global human mortality, so our devices will be important, valuable and long term revenue generators.  The USCOM 1A is saving lives and our new products will save lives as well.  We’ve got very high worldwide KOL support and it’s now really about sales, marketing and distribution.  If you simplify or characterise where the company is at the moment, we are at the infliction point transitioning from a technical science based company to a sales, marketing and distribution entity which is where the revenue is.
I suppose it’s a good time to talk about what exactly your devices are.  What was the thing, firstly, that you invented that forms the core of the business?  And then we can get onto the things that you’ve bought since then.
My background is clinical ultrasound and I’ve done that for many years, educating and training and doing my research through UQ.  My basic observation was that circulation is so vital that If it’s obstructed for two to three minutes you cells begin to die, yet we measure it so poorly.  People measure pulse, and look to see if you’re blue; these are very crude measures.  Uscom has created a solution which allows us to accurately, rapidly and noninvasively measure and understand circulation.
This means we can better manage circulation particularly in heart failure, hypertension, sepsis, fluid… All of these things are currently done incredibly poorly and our devices are improving management in these vital areas.
But what does your device do exactly?
The USCOM 1A measures the cardiac output, it measures the blood volume ejected by the heart.  When your heart contracts it squirts our 75-100 mls of blood per beat, and we measure this to within 2% accuracy.  When you’re in heart failure it beats only 25 or 30 mls, and then when we treat it with an inotrope this may go from 25 to 50 mls, and so we accurately measure the response to treatment.  So it measures the blood flow in your heart non-invasively and that’s previously been a measure that you could only do by putting a catheter into your groin and running it into your heart.
And it does that with ultrasound?
Yes, and that means totally non-invasively, which means that you can apply the technology from pre-term neonates all the way through to 110-year-olds.
Describe the patents that you’ve got.  Does the patent cover the use of ultrasound to measure the heart?  I mean, are you fully covered on patents or is it rather more specific than that?
Our original Uscom patent is quite broad in application and It was granted for the use of ultrasound to monitor blood flow.  Previously, ultrasound has been used to measure blood flow, but not to monitor, and we developed a series of patented developments which allowed the device to monitor blood flow.  It is the change in your heart function which is important and that is what we measure.  We got the patent to monitor using ultrasound.  
Patents are always potentially “breachable” and less innovative competitors can always write around them.
Ultimately, patents function as tacks on the road, if you like, to slow down competitors. Patents become important when your revenue is large enough to justify copying your product, when you are valuable and established in the marketplace.  Having said that, you need a patent portfolio in place and I think we’ve got 10 or 15 patents specifically around USCOM 1A, and then another perhaps 10 or 15 on newer technologies to support new products.  But we are continually examining potential patent breaches, and it’s inevitable that someone will breach our patent, in which case we will take the appropriate action.
I think in the first half of 2013 you bought a business called Pulsecor, a New Zealand company, which had a blood pressure device.  Firstly, why did you do that?  Did you think that your heart monitoring device wouldn’t be enough on its own, that you needed to add to that?
A single product company is vulnerable to newer technologies and patent breaches, so a diversified company has a hedged exposure. If you’re trying to develop your technology to sell as an exit strategy it’s very straightforward, you just develop the one product and you keep focused on it.  However I believe the real path forward is to hedge your technologic risk by taking on board other technologies.  This spreads the cost of building a business, the compliance of being listed, etcetera, which is really substantial. The principle criteria for the Pulsecor acquisition was, is it synergistic with our current product?  Adding vascular and BP monitoring to our cardiac products made great sense; its physiologically synergistic. We do cardiovascular and pulmonary medicine, and BP+ is a fantastic vascular monitoring technology so suited us perfectly.
The BP+ looks at the heart pressures rather than the arm pressures. Its increasingly recognised that blood pressure is a widespread but inaccurate measurement. While hypertension occurs in approximately 1/3 of all adults, less than 40% of these have properly controlled BP, and this is generally related to poor BP measurement.  So what the BP+ does is actually measure BP at the heart, as well as in the arm like other devices. The pressure at the heart is more indicative of stroke and heart failure than pressure in the arm.  The BP+ technology is really innovative and simple.  It’s a viable replacement for every BP monitor worldwide and it’s really exciting to bring it to market. It is on the international space station for this reason; it provides better measures.
The technology was developed in New York, a collaboration between New York and New Zealand.  Then when we bought the company we had a beta device and we’ve spent the last four or five years developing the software, refining the hardware and operating systems and the way the device represents and transfers this information.  We’ve just recently released the BP+ for sale in Europe and we’re now following that up with the CFDA and the FDA for sale in China and USA. It’s a really beautiful device and exciting technologic development to improve the science of BP monitoring.  It’s a high end BP device and will change the way we manage hypertension.
How does it measure the blood pressure?  Is it also with soundwaves?
No, no, it uses a method called oscillometry which is what previous devices have used.  We blow up a cuff around the arm and measure the pressures at various times through the cardiac cycle, as normal devices do, but then it inflates to an extra 30 points above the systolic pressure. This blocks the brachial artery so you’re effectively measuring directly down the subclavian artery from your arm into your heart, just through a thin vessel. That pressure equalises, really, instantaneously and provides an accurate measure of your heart pressures. It’s the same as an invasive and direct measurement into your heart.  
So supra-systolic oscillometry, which is what it’s called, is a simple but revolutionary concept and the data that’s being published demonstrates that it works on kids, on adults and the elderly. Previously, you had to put the arterial pressure line into your heart to get the cardiac pressure wave form, but now you can just put the cuff on your arm and measure the same thing.  The BP+ is now demonstrating information about blood pressure and BP treatment not previously demonstrated, things that they’ve never seen before, and it’s just because its more sensitive.  It’s a better measurement at a better place in the circulation, if you like.
So what was the second acquisition you made?
The second acquisition was a company called Thor in Budapest.  They were a small innovative spirometry company.  Spirometry is the study and measurement of your respiration or breath.  You blow through a tube and there are many different measurements that reflect the air volume flows.  The rate at which you blow through the tube and the rate at which the flow accelerates/decelerates and the absolute volumes all tell you whether you’ve got asthma, chronic obstructive pulmonary disease (COPD) and if the treatment is working. Occupational lung disease and sleep apnoea change the way your respiration works and can be measured using a spirometer.
Colin Sullivan, the founder of ResMed, is actually on the Uscom medical advisory board and one of the applications that we’re considering using these spirometers for is sleep apnoea.  So these are really exciting devices, that are also based on ultrasound, and the strength of ultrasound is it’s incredible accuracy. It’s also easy to clean and doesn’t need calibration, whereas, all the other asthma monitoring technologies are generally less accurate, difficult to use and disinfect and require recalibrating.
So the application of spirometry has been limited worldwide because of the weakness of current technologies.  The SpiroSonic technologies, the rebranded Thor technologies, are a big improvement and are entirely digital and can connect to an iphone and then to a central server through a proprietary software application for telemetric diagnosis.  They’ve also got auto voice guidance on board to make sure that you conduct your own measurements well.
An additional benefit of the Hungarian acquisition was not only that there were seven really good products, and that these technologies were more advanced than any others in the world, but they also had accredited volume medical device manufacturing facilities.
Hungary is technically very strong and they’ve got a very good history of precise small electronics manufacturing and they do a lot of the car electronics for Mercedes, Audi and BMW.  So, for us, the acquisition gave us product, it gave us revenue; the company was almost breakeven.  And as we also had volume manufacturing we can move the BP+ to Hungary for efficient manufacture. From Hungary we can then access China, US and Europe.  So, it’s logistically smart as well as technologically and operationally smart.
You mentioned you’ve got seven products, it’s not the three that we’ve just been talking about, you’ve actually got four products.  Are they based on the same, those three technologies?
Yes.
So it’s seven technologies or seven devices based on those three technologies?
Yes.  This is really interesting because the Hungarian group have put together a very good R&D team and we’ve got four Eurostar grants to develop special applications for pulmonary testing based on our SpiroSonic devices.  One of them is for home care management of COPD in Barcelona.  The idea is that central hospitals – hospitals provide expensive and inefficient delivery of pulmonary care.  What they are doing is to give old folk with COPD an Uscom spirometer at home.  The spirometer digitally connect to an application in their communication device (iphone), so it’s wireless.  The iphone or your communication device then connects with a central proprietary application in the hospital to store your lung function examination data.
So, there are approximately 100 elderly folk living at home with COPD and each morning they blow in their Uscom SpiroSonic devices.  The information is transferred to the doctor in the hospital. Half a dozen doctors provide diagnoses and they look at all the readings, they then say, ‘Mr Smith, all looks good, enjoy your day.’  Or, ‘Mr Smith, this looks terrible, you better take your puffer and do it again and see how it goes.’  Or, ‘Mr Smith, get in here straight away, we need to take care of you and we want to admit you to hospital.’  But what it’s doing is forcing people to take responsibility for their own health in their own home environment and moving their management cost out of the hospital thus reducing the infrastructure to manage those 100 people each day, and they get personalised management feedback.
So it’s a really exciting pilot project in Catalonia and the results so far are excellent.  We’re just about to start some additional telemedicine trials in China for heart failure and asthma.  One of the other EuroStar grants is for home management of lung transplantation post-surgically.  While the other two studies are developing special cancer detecting devices.  When you’re breathing in and out you pass out cells in the air that you exhale and what we’re developing is a special spirometer that grabs those cells, puts them together and then allows them to be fed into a mass spectrometer that can diagnose pulmonary cancer or other cancers throughout the body.
The opportunity exists to be able to characterise and leverage into the whole genetic technology field using these what they call exhaled exosomes which are basically the cells that we breathe out as part of the normal respiratory cycle. So there are a lot of really quite interesting front line research and development projects that we’re involved in and will result in new products that we will also bringing to market in an orderly pipeline.
You’ve reported $3.5 million cash revenue for FY17.  What were you selling?  What are you actually selling?
Uscom 1A.  Well, it’s interesting.  If you look back at our history our revenue has increased somewhere between 20 and 60% per annum for the last five years. We’ve been selling Uscom alone and we’ve probably lost on average a bit over 1M per annum, which that has gone to acquire the companies, to develop the products and to establish our new markets.  So I think we’ve been pretty frugal.  Clearly this revenue will grow once the seven new products are released to market.
No, but I’m asking you, which of your devices are you selling?
Uscom 1A and a little bit of the old Thor or SpiroSonic device.
How much do you sell them for?  What do they cost?
For the three series they actually cover different price points.  The Uscom 1A is a small ultrasound device.  We sell that for about $15k USD and it’s sold into the market at about $25-30k USD.  The BP plus, we sell for about $1,500 USD and it’s sold for about $2,500 USD.  The spirometers, we sell for about $1,200 and they’re sold into the market at about $1,800.  So they successively sort of move down the  price scale and the spirometers of course have attached consumables with them.  The BP+ will probably have a service model associated with diagnostics, and the Uscom device is a capital expenditure, so they’re all quite different price points.
Do you sell them all to doctors or hospitals or both?
Currently mostly to Drs and Hospitals. However as telemetry becomes more routine and people are expected to take more responsibility for their own health and cost constraint becomes more critical, our devices will be moving into home care.  In fact, we’ve got two of the major global technology software companies have bought products from us to explore in their digital healthcare platforms. That’s incredibly exciting for us because while currently they’re only pilot projects these software companies have big plans to move digital health into every home and they will need digital front end sensors which is our speciality.
I’m not sure I understand what you mean.  You’re saying that some of those products are going to be sold to patients rather than doctors?
Yes, into home care.
Home care.
Absolutely.  Or to service providers.  Regional providers will buy devices and give them to people to who have diseases and then monitor their condition via the internet.  No one is sure of the financial model yet, but it is an emerging health trend that we are leaders of.
What’s your sales infrastructure?
Our model has been that we cut margin for distribution. So we have sub-distributors worldwide; it’s too expensive to go direct.  It’s too risky and in our space particularly every territory has a unique component of marketing.  In every hospital, whether it’s in the US or in Europe or in China, which are our three main markets, each hospital has a distinct key decision maker.  So a sub-distributor who actually knows all the people within the hospital, can do a much more cost effective job than us, if we were trying to work out who the appropriate person to sell to might be.   We do sub-distribution.
You still have to sell it to the sub-distributors, have to organise and run them.
Exactly, absolutely.
So how are you doing that?
It’s never optimal and the quality of distributors is variable. At various times distributors can be fantastic and very capable, and then suddenly they lose their key sales staff and suddenly you’ve got an ineffective sales system.  So you have to continuously monitor and manage that.  We’ve expanded internally our sales organisation here recently.  We brought on Damien Linnett who has been with many of the major internationa medical device companies over the last 20 years and he’s come onboard to grow our sales marketing group as we release our new product.
The transition from basic science to sales, marketing and distribution is an exciting one for us because it’s converting our investment in science into revenue, and Damien and Denise Pater are very experienced people in this territory.  Their job is to look at what are the marketing materials, sales support, training materials and clinical support required by distributors.  How do we setup the technical and clinical support globally and how do we find and bring on board and induct high quality new sub-distributors.  Ultimately, it’s about sub-distributors self-interest and that’s triggered when they sell your product and they’re happy, then they’ll keep selling your product.  But we have to make sure that we drive our product in their systems and that is what ultimately generates our sales.
We mentioned before that you’ve just raised money at 13.5 cents and you’ve brought on a new and significant Chinese shareholder.  I think I read somewhere that the money was largely about setting up for the Chinese market, tell us about that.  Who is the guy that’s now your shareholder and what’s the plan with China?
China’s obviously the frontline for us; it's the driver of the global economy, but its not easy for westerners.  China has 1.4 billion people, 100 cities with over 10 million people.  The US, for example, is 0.32B, less than 25% of the population of China, and it’s only got 10 cities with more than 10 million people.  So you have got scale that is substantial. But you actually need people who actually have networks and have experience with that scale. We’ve been there, we understand it.  I lecture there frequently, and probably spend four months of the year there.  But the challenge is, you need a well experienced Chinese partner.  
Stephen Meng, who’s a deputy GM of Sihuan Pharma, a $24B HK, Hong Kong listed China based pharmaceutical company has recently invested personally in Uscom.  For the last 10 or 15 years, he was key in building the distribution for Sihuan within China.  He built a team of 3,000 distributors selling into 10,000 hospitals in China.  Worldwide Uscom has less than 50 distributors, so the potential scale up is incredible, and he brings the skills; he is not only Chinese, he’s got a prior history and understands the pathways both of approval and regulatory and distribution.
He’s very excited about our product.  He’s been involved previously in a pharma, and I think globally pharmas are under stress with governments focusing on containing profit margins and competition from generic manufacturers.  It’s a hard business now.  Medical devices have retained high margins. So I think Mr Meng sees this as a means of diversifying and using his skills to grow our company.  We were raising capital and I was in China and I got a call from his agent and he said, ‘Come up to Beijing and spend some time discussing this.”
So he took half of the raising and he now holds 10% of the company.  He’s since been out to Australia, visited the company, spent more time with us and is looking increasingly at being involved in the company.  China, we talk about the opportunities in China, but it’s not the sort of place that you can just arrive and plan to dominate the market.  It’s a very sensitive market, you’ve got to understand the system and you need Chinese language, and you need to understand Chinese law and have an extensive network or connection of distributors. So it’s really about the right Chinese partner and I’m really delighted to have someone with Mr Meng’s distribution experience working with us.  He also has incredible strategic skills.  They floated Sihuan Pharma in Singapore, and the Executives felt the $2 billion value was under priced, so they delisted the company and relisted it on Hong Kong at $24 billion plus.
So he’s a very strategic and experienced investor.  He has a number of different interests but remains with Sihuan and he’s looking to provide greater assistance to Uscom, which is fantastic for us.  China is massive and suits our products perfectly.
We’ll have to leave it there, Rob.  It’s been great talking to you again, thank you.
Likewise, Alan.  Thanks for your time.
That was Rob Phillips, the CEO of Uscom.