When I first started reading about Osprey Medical (ASX : OSP), I desperately wanted to find something good, to discover a small ASX-listed medtech company doing something great in the world. At a most basic level, there is a lot to like about OSP. It has some really good people. It seems to have actually developed a working product with appropriate marketing clearances. OSP even seems to have a sensible strategy for expanding the indications for its product (at least according to their most recent investor presentation and what I have been able to glean from clinicaltrials.gov). The company is trying to build a sales force for its product in the US, a fun but challenging task (I have been there…) and it has some intelligent clinical advocacy.
But is contrast-induced nephropathy (CIN) – that is when contrast media used for X-ray/CT imaging causes renal toxicity – a real issue?
The answer is sort of yes, and sort of no.
Frankly, when I first read about OSP, I was a bit surprised at the articulated scope of the clinical “problem”. Having had 15 years of experience in medical imaging and several collaborations with the angiography/fluoroscopy group when I was at Siemens, I was aware of CIN and the desire to optimise dose/image quality – but almost nobody in the imaging space really loses sleep about using Omnipaque or Isovue. It is my perception that it is generally accepted in the radiology community that the risk of CIN has been overstated, mainly because the 1,000 or so studies that have been conducted in the last three decades have not usually had any control groups, were mostly retrospective, and may have even used meaningless end-points.
I mean, taking a step back and looking at the bigger picture, Isovue alone has had 300 million people dosed. Across the entire population the risk of some degree of CIN is roughly 1/ 100,000. If you put those two sets of numbers together, and frame it in the context of a “drug” this is a pretty damned safe drug. Generally speaking, I think it is fair to say that contrast media is considered to be very safe, though prescribing guidelines clearly reflect the fact that certain classes of higher risk patients with impaired renal function, diabetes, etc. may require a different approach to risk management and post-administrative care, though there is a mythology that high-risk patients require immediate dialysis after contrast administration. Again I think this has been largely dismissed by the radiology community and the baseline procedural risks across all patient populations are well understood.
But whatever you believe or don’t believe about CIN, whether it is a really serious problem or not, I frankly struggle with OSP’s business proposition. I want to believe it, but I don’t get it.
Let’s do the math together.
I was prepared to be optimistic and give a bigger slice of the market action to OSP in my hypothetical model. Let’s assume that between US and EU, about 10 million patients get contrast in the angiography suite / cath lab (and growing fast because we are getting fat and old). OSP is, to their credit, a little more cautious. They think that focusing on patients at risk for acute kidney injury, that maybe it’s around 30% of this number. Let’s say 3 million patients. Now obviously, it’s unrealistic to believe that OSP is going to penetrate the entire market coming out of the box, but let’s imagine that they achieve such a remarkable feat. How to price it?
Well, one of the claims of the OSP “Avert” system is that it can reduce contrast usage by 40-50%. That’s potentially great from a renal toxicity vantage point but it really doesn’t have an economic impact. Last time I checked, a (single use) dose of Isovue or Omnipaque was only a few bucks. Put into the context of the overall procedure cost for angiography, this is basically in the noise alongside the electricity bills and the departmental coffee budget. So that’s probably not the ideal basis for a business model.
I should also note, as an aside, that the contrast agent material business is a lousy business. It’s a very price-sensitive and competitive business. New innovations struggle to achieve commercial viability just because the risk-benefit and price point doesn’t really allow it. This is a high volume, low margin game. Even the isomolar contrast agent Visipaque (with a possibly better safety profile) hasn’t really been a slam-dunk because why spend the extra money if it isn’t worth the benefit? I mean this is a case-in-point that service providers are not willing to spend more on a safer solution, mainly because the cost-benefit isn’t justified.
… but I digress.
There are a bunch of different ways to come up with a commercial model to possibly justify the use of the OSP’s technology. I prefer to keep it simple. Let’s imagine, even considering the price sensitivity of contrast media, that OSP can bring in $5 of revenue per administration. This is incredibly generous. With 3 million US/EU studies a year, that’s $15m in “attributed” procedure-based revenue. Now, does that number make sense? Well, let’s say that the OSP Avert system is comparably priced to a top-end auto injector system at an international average price of $20,000 (US is about 70% of this). Taking the $15m and dividing by $20,000 means that about 750 hospitals are going to be able to justify a system on the basis that the most serious patients generally get referred to larger/more sophisticated clinical sites. That number is very reasonable (based on, for example, AHA surveys).
In other words, whether you calculate the potential of this technology from either a price sensitivity or a market potential vantage (sites) on a completely saturated basis where everyone buys into the technology, you might have a total $20m market opportunity. Let’s be generous and add service contracts on top of that and double the number (I am ignoring large recurring revenues from consumables because that is going to be a tough sell). But then when you overlay realistic market penetration rates, competitive technology strategies (better contrast agents, more sophisticated injectors, etc.) you start to realise that this is a company that will probably be lucky if it makes $5-7m a year. Based on their last set of financial statements, they have a long way to go (i.e. the stock is ridiculously overpriced).
But that’s ok – it’s early days. Er… buy big shoes so you can grow into them…?
I guess the bigger question is whether the planned creation of a 30-35 person sales force is really the best way for a tiny revenue stream like this to be realised. That level of sales force is going to cost about $5m / year plus upside to run. It doesn’t seem to really leave much room for the company to actually make money. I get that there are product expansion opportunities and I also believe that if OSP can get into the most clinically critical part the market, then there may be scope for wider adoption as a risk prevention measure. But still, not matter how you cut the math, this is going to be an uphill battle.
In conclusion, we have plenty of companies in the “Long Tail” out there spruiking a product concept that this probably never going to see the light of day. Here we have a company that has delivered on a product and is pushing it into a clinical install base. The value proposition is not irrelevant, but it’s truly hard to buy into the story that after half a billion doses of contrast agent, we all of a sudden need this. Whether angio labs will want to cough up the extra CapEx (against the backdrop of constant pressure on procedure reimbursement), maintain an additional piece of equipment, and possibly even add time to the procedure process is highly questionable in my opinion.
When I was researching this article, I realised I didn’t really know what an osprey was other than being some kind of a raptor (and a funky sort of helicopter). Ornithology was frankly never my strong point. It turns out that the interesting thing about the osprey is that it is a single species of bird that has almost world-wide distribution.
Let’s hope that OSP’s product strategy can deliver beyond its “single species” namesake…