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Somanetics Reports Fiscal 2008 Results

Somanetics Corporation (Somanetics) has reported net revenues of $47.5 million for the fiscal 2008, up 23%, compared with the net revenues of $38.6 million in the previous year-end. It has also reported net income of $10.4 million, or $0.76 per diluted share, for the fiscal 2008, compared with net income of $9.6 million, or $0.67 per diluted share, in the previous year-end.

“We achieved our fifth consecutive year of strong growth in revenue and income before income taxes in 2008, reflecting continued market adoption of our INVOS System,” said Bruce Barrett, Somanetics’ president and chief executive officer (CEO). “The more compelling results in 2008 were strategic achievements that create major new opportunities for our business. Our entry into the neonatal ICU and expansion of our labeling more than double the size of our addressable market for the INVOS System. Inclusion of cerebral oximetry in the STS Database puts us on a course that can result in practice standards that establish the technology as standard of care in adult cardiac surgeries. And, the acquisition of ICU Data Systems provides us an additional means to advance and differentiate our INVOS product offering as well as a new product with significant revenue potential.”

“We are accelerating investments to capitalize on these new opportunities in the neonatal ICU and with the ICU Data Systems technology,” said Barrett. “However, we expect the economic downturn to limit capital spending and slow adoption of new technologies, constraining revenue growth in the near term.”

Fourth Quarter Results

Net revenues for the fourth quarter of 2008 increased 21% to a record $13.7 million from $11.3 million in the same period of 2007. U.S. net revenues increased 16% to $11.0 million from $9.5 million in the same period of 2007. International net revenues increased 51% to $2.7 million compared to $1.8 million in the fourth quarter of 2007.

Gross margin was 87% compared to 88% in the fourth quarter of 2007.

Fourth quarter income before income taxes was a record $5.1 million, compared to $4.5 million in the fourth quarter of 2007. Net income in the fourth quarter of fiscal 2008 was $3.3 million, or $0.25 per diluted share.

Fiscal Year 2008 Results

Somanetics ended fiscal 2008 with cash, marketable securities and long- term investments of $70.0 million and no borrowings.

Somanetics Acquires ICU Data Systems, Inc.

In November 2008, Somanetics acquired substantially all of the assets of Gainesville, Fla.-based ICU Data Systems, Inc., a technology development company, for approximately $2 million in cash plus the assumption of minimal specified liabilities.

ICU Data Systems has developed a patented technology that integrates data from a broad array of hospital bedside devices, such as physiological monitors, ventilators and infusion devices, into a single bedside display for comparison, data management and storage. The patent underlying the technology was licensed from the University of Florida College of Medicine and Engineering and expires in 2023.

The data integration technology offers Somanetics’ customers several benefits, including the ability to easily customize the presentation of data from various bedside devices for comparison on the same display and on the same timeline. Once data from various devices are integrated, customers can also customize the calculation and display of derived parameters, or calculated parameters based on the combination of two or more discrete parameters.

In addition, customers can create user-defined, automated event marks and alerts. All resulting information can be stored for inclusion in the patient record and clinical research.

Somanetics intends to further develop and launch its newly-acquired data integration technology as a stand-alone device in mid-2009. The INVOS System is one of many devices whose data can be integrated into the stand-alone device. To support the addition of the derived parameter features to the system, the Company will pursue a new FDA 510(k) clearance in 2009. Additionally, the company will invest to combine the ICU Data Systems and INVOS System technologies in a single product for launch in the second half of 2010.

“There is an important unmet clinical need in the acute care setting for a more intelligent approach to data integration, presentation and management to support clinical decision making and research,” Barrett said. “We believe this new technology will differentiate our INVOS System, accelerate understanding and adoption of the INVOS System and provide us with a new revenue generating product.”

Somanetics plans to account for the acquisition by allocating the purchase price to an intangible technology asset of about $246,000, which will be amortized over 20 years, with almost all of the balance allocated to Goodwill. In 2009, Somanetics plans to invest approximately $2 million in the product development and launch of the stand-alone system and further development of the technology integrated with the INVOS System. The Company believes the acquisition will be accretive to earnings in 2010.

Neonatal ICU Market Entry

Somanetics obtained FDA clearance to expand its labeling for the INVOS System to support its entry into the neonatal ICU, which began in the first half of 2008. The new labeling provides for monitoring “any tissue” beneath the sensor. In neonates, the tissues beneath the sensor can be vital organs, like the kidney and bowel. Many clinicians in the neonatal ICU apply the INVOS technology to assess changes in kidney and/or bowel oxygen saturation in addition to cerebral oxygen saturation. Somanetics estimates that its entry into the neonatal ICU more than doubles the addressable market for the INVOS System.

Somanetics is supporting its marketing initiatives with clinical research related to the use of the INVOS System in the neonatal ICU. Such research has shown that placing the sensors over the abdomen and flank provides important information about the bowels and kidney, respectively. During the first half of 2009, the data from many of these research projects is expected to be presented at various medical conferences and create significant interest in the INVOS System.

Somanetics also is sponsoring medical education and quality improvement initiatives, particularly quality programs relating to applications of the INVOS System in the neonatal ICU.

“We have an opportunity to make an important contribution to the care of these most vulnerable of patients in the neonatal ICU,” Barrett said. “We believe the combination of the INVOS System and the ICU Data Systems technology, along with our evidence-based approach, intellectual property and medical education support, position us to lead this market.”

Sales and marketing developments

In the U.S., Somanetics plans to significantly increase its investment in medical education to develop the neonatal ICU market. These plans include increasing its U.S. field clinical specialist team by 15 members in the first half of 2009 to 37 and increasing its investment in marketing and medical education focused on the neonatal ICU by approximately $1 million. Somanetics also plans to add two new US sales employees to bring the total to 33 and hire several international sales employees to support its distributor’s efforts with the INVOS System and to lead the launch of the new data integration technology.

In early 2008, The Society of Thoracic Surgeons (STS) began collecting cerebral oximetry information as part of its STS Adult Cardiac Surgery Database, which is used to develop practice standards intended to improve quality and safety.

“We continue to believe this data, which is expected to be reviewed, analyzed, presented and published over the next two years, if consistent with prior data, has the potential to drive further adoption of the INVOS System in cardiac surgery and establish our technology as a standard of care for this patient population,” Barrett said.

Business guidance

Somanetics’ financial outlook for fiscal year 2009 is based on market and economic conditions, including the assumption that the current economic downturn continues throughout 2009.