Chad Therapeutics Inc., the once high-flying Chatsworth maker of portable oxygen systems for the home health market, has come crashing back down to earth.
The $26 million (fiscal 1997 sales) company, which pioneered the portable oxygen system market, has been hit hard by the entry of up to a dozen competitors and recent changes in Medicare reimbursements.
As a result, sales in the second half of 1997 fell more than 40 percent from the like period a year earlier. The rapid sales decline led to a loss of $286,000 for the first quarter ended Dec. 31 the company’s first quarterly loss in several years.
As of last week, the company had not yet released its year-end financial results for the fiscal year ended March 31. John Raaf, an analyst with Red Chip Review, a small-cap stock research firm based in Portland, Ore., estimates Chad Therapeutics’ fiscal 1998 earnings per share at 12 cents, compared with 49 cents a share for fiscal 1997.
That would be Chad Therapeutics’ lowest annual earnings per share since 1993, when it moved from the Nasdaq pink sheets to the American Stock Exchange.
Its average return on equity, which had hovered in the healthy 40 percent range for most of the last four years, is projected to plummet to about 5 percent, according to Earl Yager, the firm’s chief financial officer.
Based on its deteriorated performance, the stock price has fallen by more than 65 percent from a high of $20 a share in late 1996 to the $7 range last week.
On top of this, Charles Adams, the company’s 70-year-old founder, chairman and chief executive, stepped down as chief executive in March. Vice chairman Tom Jones has taken on the additional duties of CEO.
Jones now faces the task of returning Chad Therapeutics to profitability in a marketplace that has dramatically changed in the past year.
Chad Therapeutics was founded in 1982 to develop, manufacture and market devices for patients requiring supplementary oxygen. The company went public in July 1983, raising $4 million. Those funds were exhausted by 1987 as marketing costs were higher than expected. There were several additional private placements before Chad moved to the American Stock Exchange in 1993.
For much of the mid-1990s, the company had the portable oxygen system market pretty much to itself, with a potential market of over 1 million patients nationwide who require supplemental oxygen to treat emphysema or chronic bronchitis.
But over the last 18 months, up to a dozen competitors have come out with similar and often cheaper portable oxygen machines.
“We’ve seen competitors take hold, and that has cost us market share,” Yager said.
In addition, the federal government reduced the Medicare reimbursement for home oxygen equipment by 25 percent, effective Jan. 1 of this year. The move was part of a series of reimbursement cutbacks aimed at saving money and combating fraud in the home health care industry.
“With the Medicare cutbacks, purchasers of portable oxygen equipment have to find options that cost less,” said Raaf.
Yager said many major customers have either stopped purchasing portable oxygen units or slowed their timetables for ordering.
Company officials hope to turn around this situation with their new oxygen system, which came to market last fall. Called “Total O2,” the new system allows patients to use stationary oxygen generators to fill the portable cylinders, sharply reducing the need for service visits.
“This combines the best features of the stationary and portable oxygen generators,” Yager said.
Yager acknowledges that will be a challenge to win back its market share with the new product.
“When we released our first oxygen system, we had several years before competitors caught up with us. This time, the competition will catch on much faster,” he said.
Raaf said the next few months will be critical for the company.
“Without showing progress fairly promptly, the shares may face renewed pressure,” he said.
