What have been the major achievements of Compumedics in the last six months?
The major achievements in sequence would be the ongoing growth in sales, improvement of our profit outlook and strengthening of our product range and intellectual property. The strategies for the company’s core fundamentals are built on (being) a growth company in a high growth market, taking a strong position in a relatively new field, which is sleep diagnostics. We have strengthened that core business, in two fronts, in sales and in technology.

On the sales front the largest device market in the world is the USA. We have now taken a direct distribution position there and succeeded, given that we have shifted from distributor dependency of past years. Over the last 12 months we have really been testing the mettle of Compumedics to take on the world’s biggest market. It has been positive. The sales announcements will reflect that. It is an important milestone that in the number one device market in the world we are able to hold our ground independently.

What made you move away from the USA distributor dependence?
At a macro level of the company’s history, the two or three major challenges relate to distribution changes in major markets, particularly where our revenue is dependent on these markets, and no more so than Europe or USA. We have now mitigated the risks of distribution changes in the USA. That’s good news for shareholders. We are moving forward, not only in sales, but also in the strength of the company’s fundamentals.

Dependence on distributors in the world’s number one market (USA) can be a risky strategy.

So just reiterating on the major achievements. We switched from our dependence on distributors to our direct sales and marketing base in USA; we have succeeded on that base with our direct sales force in the world’s largest market. It is one of the most fundamental milestones in the company’s history. Another major achievement would have to be the fact that we have appointed a new European distributor, Draeger. I think that it is an exciting opportunity and it is proving to be a strong lift in the European picture, which has been rather subdued in our revenues in past years. It is exciting because there are few high-profile European based companies of the ilk of Draeger that come to mind when you look at the companies making a major play in the sleep market. A number of major sleep product companies are American, and Australia takes a strong role but to have a European company take a strong position in Europe with the Compumedics technology appears to be a working strategy. Draeger have been rolling out our products quite aggressively across a number of the major European countries. We see that as good news in terms of the future and Europe’s role in the company’s revenues.

Can you contrast the situation where you have a distributor in Europe but have gone direct in the US?
In Europe you have to look at the geography of the market and the dynamics of the market. In America there are 50 states but generally the regulatory conditions, the culture, the language and the methodology is similar across most states in America. But of course you can go to two neighbouring countries in Europe and you have a totally diverse set of circumstances. Any attempt to directly manage 50 countries for distribution in Europe compared to 50 states in America is absolutely opposite in terms of the infrastructure requirements, the expense and the coverage. To find a good master distributor with Draeger does make sense for us. To have our direct sales operation working in America and improve the efficiencies, improve the profitability also makes sense in this phase of our growth and under the market circumstances outlined.

Could you take us back to the Neuroscan acquisition. You bought that from the Marmon Group? What was that acquisition about and what did you learn from it?
The first factor was that there was a synergy on reducing costs by closing their factory and with relatively minimal increased cost strapping that to our factory here in Melbourne, Australia. I think you are seeing the tide turning in bringing value back to our country but on a logical basis. Producing two companies’ products at virtually no increase is obviously a desirable cost formula.

The second one. Profits have been lifted. In the last two weeks of this financial year (just gone by) we released the new Neuroscan SynAmp2. That’s not a bad shift from purchasing a company and within a year releasing a new product at half the cost of goods and a significant lift in technology performance. We achieved that because we are a technology company. That’s our game. What we purchased we understood. So now the profitability equation for that company is in a different ball game. That was a significant achievement.

The third reason for the purchase would have to be the growth in the EEG market. Neuroscan has actually 80%-90% of the world market in neuro-physiology and we think we caught a sleeper here in terms of the technology stocks being low. For example, some of their prime installations and current installations include the Albert Einstein Centre, the Mayo Centre, the GE Research Centre, some of the finest centres in the world for neurological researchers. Why is that important? Now we have the top end, the Rolls-Royce of the neuro-physiological market. These are people that write the papers that lead the field. Compumedics has 50% of the Australian market. We have now paved the way for our international sales growth in the EEG and Stroke Diagnostic Clinical markets. Of course performance always speaks better than speculation. That’s quite a good move for an Australian company that would otherwise have difficulty without international branding. We now have a strong formula for success in the stroke diagnostic and EEG markets to supplement our core sleep diagnostics drive.

The fourth one. It relates to the reason we purchased this company in the first place. A neural and nerve sciences company is quite relevant to Compumedics, whose core strengths are in sleep diagnostics. In the world market it is recognised that 60%-70% of people that suffer first time stroke also have sleep disordered breathing. Neuroscan have technology for nerve conduction and EMG recording which is the equipment used to diagnose stroke sufferers, so there is a good synergy to strengthen our diagnostic focus. And similarly with EEG. EEG is the predominant technology at the core of sleep monitoring.

So the acquisition matched in several areas.
So the key points are: one, reduced costs; two, lifting the profit by halving the cost of goods. Then growing our diagnostic equipment sales and adding the EMG and the EEG product benefits to augment Compumedics current strategy.

That’s well summed up. One other thing about the Neuroscan acquisition - had you been looking at a company like this for some time? Was there anything that made you act in a particular way in terms of being dynamically active?
I think it would be fair to say that I looked at 100’s of companies, since our IPO in 2000, including nearly every EEG company whether they were for sale or not. So when the Neuroscan opportunity did come up I had a measuring stick from which to do my comparisons. Without that homework we couldn’t have moved as quickly as we did. The preparation, the learning, the homework is 99.9% of the deal.

But when you had to act you acted quickly…
Absolutely. We had been looking and had done our homework, but we were not prepared to buy just anything that came our way.

So there were lots of ‘acquisitions’ you ignored on the way to getting one that did fit.
Its much harder, and it takes much more discipline, to walk away from a deal, which by the way we have done a number of times, without even blinking. It is easy to get caught up in the ego of winning an auction. I can tell you I have been in a few of those auctions. And I am delighted to say we have walked away.

It sounds like good advice to other people in similar circumstances, learning to be able to walk away. Is there any other good advice that is important in that regard?
Do your homework. You can’t cheat homework. You can pay 50 consultants to borrow your watch and tell you the time but if you are not prepared to do the hard yards and understand the homework yourself, understand the technology and markets and know what you are buying, then you are reliant on a whole lot of interfaces and faith in third parties. I have no desire on understanding technology or business by relying only on interfaces. Our background is in engineering. We do research thoroughly. I think removing those dependencies is a helpful aspect. Don’t buy what you don’t know unless you are prepared to rely on someone else. If you rely on someone else and they fail you, look in the mirror and blame that person.

That’s really well put. Can you describe market conditions going forward. You’re involved in both North America and Europe?
Compumedics as a company has always thrived more in tougher times. We don’t rely on the gloss or the hype. We are a company based on fundamentals, which I believe derives from our strong engineering background. So the first thing is, I think the market is right for Compumedics. We are a tough, resilient and realistic company with good values, being people, ethics and contribution. We seem to able to knuckle down and work our way through these times of market downturn probably better than or as good as any company out there. We know how to run a company and keep the fundamentals in check. So firstly we are the right company for these times. Secondly, the market we are in is the sleep medicine market, one of the few new discovery fields of medicine in recent decades.

We are a leading player in a new market with high growth, which even in developed countries, still ranges between 10% and 20%. I think that is a great position. I think for us to be in Australia, amazingly for us there are some advantages. We have a fine education and medical system and we are away from the main players, which is a disadvantage in terms of sales but innovation-wise, we don’t follow the crowd. We do have an edge in innovation and technology, which has proven that from Australia we can mix it with the best, even from our relatively remote island.

Asia Pacific has a company, it’s called Compumedics. It does provide good equipment, and we have a loyalty there, it s mutual loyalty plus we are striving forward in Europe and the USA. A strong market is always important – to have a good niche, to have a strategy and technology that can stand firm. Compumedics has continued to demonstrate strong sales growth across its range of products, especially the core sleep diagnostic systems. As a step towards enhancing the Company’s profits and value to shareholders, a recent restructure with a strong focus on operations excellence and profitability is likely to have a significant positive impact on future profitability. Our outlook for the moment is one that continues to strengthen day by day.

We’ll wrap it there. Thank-you David.

David Burton added in writing after this interview a summary of the Neuroscan deal

Neuroscan Acquisition – Main Achievements:
· 80% of world neurology research market
· Factory in USA closed and manufacturing transferred to Australia
· Main product now redesigned, with lift in technology and performance, but have reduced cost of goods by more than 50%. Profits are rising.
· Acquisition included stroke diagnostic systems (major cardio-vascular disease brought on by sleep disordered breathing).
· International base now in place for expansion of worldwide Compumedics Clinical EEG market, penetration of EMG market and expansion of Neuroscan traditional research EEG market.