CompuMed Inc. (CMPD)
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develops medical devices that utilize computer and communications technologies to provide
physicians affordable and rapid access to medical diagnostic information
CEOCFOinterviews: Mr. McLaughlin, how has CompuMed changed under your leadership?
Mr. McLaughlin: During the past two years we totally retooled our strategies, especially with our flagship, OsteoGram product where we expect to get most of our growth. Previously, we were trying to sell the product to primary care physicians in a film-based version using a standard x-ray of the hand to diagnose osteoporosis. The new strategy is to take the program and turn it into a DICOM program, which is nothing more than the acceptable standard used by digital x-ray machines. The strategy is to have the manufacturers of these digital, or filmless, x-ray machines become our key distribution channel sell the product.
CEOCFOinterviews: What does the OsteoGram software do?
Mr. McLaughlin: The OsteoGram software is a unique, elegant way to diagnose osteoporosis by taking an x-ray of a hand and analyzing bone density through software. We look at three of the bones of the hand, segment those bones and count the pixels, which we can convert into mass units. It is an inexpensive way to diagnose a very ubiquitous public health problem, using equipment that everyone has.
CEOCFOinterviews: How is it being diagnosed now and why is OsteoGram better?
Mr. McLaughlin: The main method of diagnosing osteoporosis is to use a technology called DXA. That requires a very expensive piece of equipment that costs anywhere from $80,000 to $150,000 and requires a dedicated room and technicians. It is not something that every clinic or hospital can afford to have. That is the crux of the public health issue today. Not enough people are being tested because it is inconvenient and not enough testing equipment is globally available. With our product, anyone that has an x-ray machine can get started.
CEOCFOinterviews: How is the new strategy working?
Mr. McLaughlin: The strategy is working fine. We initiated discussions with digital x-ray manufacturers about eighteen months ago, and we cut several deals to date with some of the smaller players in the industry while we continue to talk to the big, household names that manufacture these platforms. It will take a bit longer to get more deals done because they are like big ships, and it takes a lot of time and effort to steer them in the right direction- but that is happening. We are very pleased with the state of negotiations. In the mean time our smaller deals, especially the one with an Israeli company called OREX, are coming along nicely and we are beginning to train their sales reps. We expect to see some business from them before the end of this year.
CEOCFOinterviews: What is involved with a manufacturer in the decision to install your software?
Mr. McLaughlin: What is involved is for our software team to talk to their software team so that we can understand the inner workings of their operating system. We require a certain image and we must understand how their equipment functions so that our software can obtain that image. It is not rocket science, it is just a matter of communications. Manufacturers should integrate our software into their platforms because the jewel of this strategy is that we already have a CPT code (Current Procedural Terminology) dedicated to our technology. The CPT code is the way hospitals and clinics are reimbursed by Medicare, and reimbursement can offset the cost of that platform. In other words, if a clinic wants to buy a digital x-ray machine, and they test forty to fifty at risk patients a month using our software, they could pay not only for our software but the digital x-ray machine itself. This is a win for everyone, since the crux of the public health problem is that not enough people are tested and treated. Osteoporosis can be stopped by early intervention.
CEOCFOinterviews: Are there features in the equipment they are buying now that would hinder their ability to use it?
Mr. McLaughlin: The interesting point about all of this is that the manufacturers of the digital x-ray platforms are good at developing software to make those images appear, to be able to manipulate them, and to change the contrast. Up until now, they have not given much thought to developing actual diagnostic applications that can sit on their platforms. That is what we are going to do. We are the only ones in this space right now. Osteoporosis is first, we follow that up with an application for arthritis, another one for scoliosis, another to look at vertebral fracture and so on.
CEOCFOinterviews: What is it that CompuMed has figured out that enables you to do this?
Mr. McLaughlin: We just had an interesting technology and we were looking for a better way to market it. In stepping back objectively, when I came to the company and looked at the market place, it seemed to me that it did not fit into the primary care doctors office. It fit into the orthopedic office and the radiology department. The trend there was to go digital or get away from film based x-ray. It just made sense to me that our application was just like putting Microsoft Word on Windows. It just fits hand in glove with what they are doing.
CEOCFOinterviews: Why is it so important for doctors to check for osteoporosis?
Mr. McLaughlin: Physicians, especially radiologists and orthopedic surgeons, should be testing for osteoporosis. There is a general trend in Medicare to push physicians to test when we they see a fracture. The reason is osteoporosis costs us in the United States, sixteen billion dollars a year compared to breast cancer at six billion. It is a huge problem and Medicare knows it is curable and treatable and can be stopped. Not enough people are testing for it so Medicare is now pushing the hospitals to help the orthopedic surgeons and radiologists to start testing under an initiative called HEDIS 2004. Now all a sudden there is a tremendous impetus to start testing, and they are looking for an inexpensive and easy way to do it.
CEOCFOinterviews: Will you tell us about the revenue model?
Mr. McLaughlin: We actually have two revenue models. The current model is that we license the software to the manufacturer on a per copy basis. We have also filed a patent application for what we call OsteoClick and that will allow us to have a central server in our office to accept the images over the Internet. We would then do the analysis centrally and bill the clinic or hospital on a per-click basis.
CEOCFOinterviews: Is that a growing way of doing things in the industry?
Mr. McLaughlin: Interestingly enough, our core business is to interpret ECG or electrocardiograms. We interpret ECG traces for correctional institutions, occupational health centers and ambulatory surgery centers through software. That is an ongoing business for us and it just makes sense to expand that model into the bone field.
CEOCFOinterviews: Will you tell us about the financial condition of the company?
Mr. McLaughlin: The Company is in good shape. We have been in business for thirty years and we have absolutely no debt. We have adequate cash on hand, and we have a five million dollar equity line of credit that we can draw down on as we need. The company is losing a bit of money every month and we hope to be profitable this fiscal year, which started October 1st.
CEOCFOinterviews: You mentioned you had tests for other areas; are these being developed for the future?
Mr. McLaughlin: There is the arthritis application, which is very interesting. There are a number of biological drugs that have come onto the market with more following. They are very expensive, and all of them are injectable biotech drugs that cost about a thousand dollars per month. We believe that there is no objective way to find out if those drugs are working other than ask the patient if they are feeling better. Our follow up application to the OsteoGram would be able to objectively look at a patient with arthritis, and measure joint space narrowing and the progression of erosions in the bone down to the pixel level. We think that Medicare and other players are going to be very interested to have a tool to select the right patient and make sure the drug is working. That application is quite far down the pipeline, and we would like to think that we would have that out soon.
CEOCFOinterviews: Are there other competing new technologies that might interfere with your plans?
Mr. McLaughlin: Strangely enough, we are unaware of anyone else or a technology in this field that does what we do. When you are dealing with bones, there is nothing like x-ray; x-ray is the acceptable standard. We have a patent on our particular technology that protects us, and I think that is going to be key going forward.
CEOCFOinterviews: In closing, why should potential investors be interested and what should they know that they might not realize when they first look at the company?
Mr. McLaughlin: I believe the market for digital imaging tools is going to grow dramatically in the next few years. Investors already know that filmless x-ray machines are a hot market, in that hospitals are rapidly getting away from film. Any tools that are added to these platforms are going to be natural winners. There is one aspect of our offering that people miss- its not the product, the market or the intellectual property that is the hidden jewel in the whole thing- it is the CPT code. Getting a CPT code is a three to five year chore; it is very difficult. We have one dedicated to our technology, and it is a way for the manufacturer to have a better sales tool, and that is going to drive them our way. I feel that is going to become obvious to our investors very soon.
I believe the market for digital imaging tools is going to grow dramatically in the next few years. Investors already know that filmless x-ray machines are a hot market, in that hospitals are rapidly getting away from film. Any tools that are added to these platforms are going to be natural winners. There is one aspect of our offering that people miss- its not the product, the market or the intellectual property that is the hidden jewel in the whole thing- it is the CPT code. Getting a CPT code is a three to five year chore; it is very difficult. We have one dedicated to our technology, and it is a way for the manufacturer to have a better sales tool, and that is going to drive them our way. I feel that is going to become obvious to our investors very soon. - Jerry McLaughlin
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