A big bet on a fix for snoring
Restore Medical hopes its treatment for sleep apnea will give it a slice of a fast-growing $15 billion market.
By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- A small medical device maker that's just gone public is hoping a unique treatment for sleep apnea and chronic snoring will help give a big lift to its stock - but the results so far have been mixed.

For the 12 million Americans with apnea, Restore Medical Inc. (up $0.00 to $7.50, Charts) sells the Pillar system, a device that gets implanted into the soft palate at the back of the mouth to clear the airways of patients with the sleeping disorder that obstructs their breathing.

The Pillar procedure is considered less painful than reconstructive surgery of the soft palate, another option for apnea patients, and more convenient than the sleeping masks used by most patients.

Implanting the Pillar costs about $1,500 on average, according to the company. Prices for sleep masks with air machines range from about $400 to $1,000. And the tab for the reconstructive surgery known as uvulopalatoplasty can run to several thousand dollars, though costs vary widely.

Restore Medical would cater to those patients with less severe forms of apnea who either don't need more serious treatment, or don't want to deal with the inconvenience of the mask or the pain and invasiveness of the surgery, analysts said.

"Patients have to weigh whether they want a minor procedure versus something you just put on your face every night," said Christopher Warren, analyst for Janney Montgomery Scott.

Considering that the market for sleeping treatments is growing 20 percent a year, and that only 20 percent of apnea patients are being treated, Warren said there are plenty of prospective clients.

Robert Paulson, CEO of St. Paul, Minn.-based Restore, said the Pillar system is a "minimally invasive" option for patients with mild to moderate apnea, who would otherwise choose from "a life-long commitment to wearing a mask" or a "very invasive surgical procedure."

Paulson owns options on 408,000 shares of his company, about 3 percent of the more than 15 million shares outstanding.

The Pillar device, less than half the size of a toothpick, is made from the same synthetic used in surgical sutures, and can be implanted in a short procedure in a doctor's office, Paulson said.

On the market since 2003, Pillar was shown to be effective 81 percent of the time in the latest clinical trial, he said.

Tao Levy, analyst for Deutsche Bank, a lead underwriter of Restore's IPO, said the convenience of the Pillar system could help Restore Medical claim a profitable, though relatively small, slice of what he estimates is a $15 billion market for treatments for apnea and snoring.

"You could go get [the Pillar procedure] done, and you'd be eating pizza this afternoon," said Levy, referring to the device's convenience as a selling point.

Restore Medical's stock price has slid more than 8 percent since its May 17 IPO and trading has been volatile.

But Levy, who rates Restore Medical a "buy," projects Pillar sales to climb to $13 million in 2007. While small, Levy says the sales growth should boost the stock price by more than a third over the next 12 months.

The market for masks

Apnea robs sleep by causing brief pauses in breathing as often as every two or three minutes, and reduces oxygen levels in the blood, according to the National Institutes for Health.

The sector for apnea is dominated by two makers of oxygen masks, which, despite their inconvenience, are still considered effective and the leading treatment for apnea patients: Respironics Inc., (down $0.19 to $34.48, Charts) a Pennsylvania company with $267 million in total sales for its latest quarter, and San Diego-based ResMed Inc., (up $0.07 to $47.72, Charts) with $162 million in sales for the latest quarter.

"The gold standard over the years has been a sleep apnea mask, as cumbersome and unattractive as it is," said Joanne Wuensch, analyst for BMO Capital Markets.

But Wuensch also said "the mask is by no means the panacea" for patients with obstructive sleep apnea, and it has a high drop-out rate. Levy of Deutsche Bank said that 50 percent of apnea patients using the mask eventually give up on it.

But Restore Medical needs to ramp up its small sales force to expand, according to Levy at Deutsche Bank, noting they had just 14 sales reps at last count.

And the company needs to do more to reach out to doctors and back its product with additional tests, said Warren of Janney Montgomery Scott.

"The task for Restore is to provide medical data to the medical community showing their product is superior to the products that are on the market for sleep apnea," said Warren. "There may be that niche, but they need to get that clinical data out there."

Restore's Paulson said his company will announce the results of six additional clinical trials in September.

The analysts interviewed do not own stock in the companies they discussed. Deutsche Bank was a lead underwriter of Restore Medical's IPO and Janney Montgomery Scott has solicited banking business from the company.


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