Summary Business: Oxygen systems manufacturer Headquarters: Chatsworth CEO: Thomas E. Jones Market Cap: $29.7 million Dividend Yield: N/A* Total Liabilities: $1.6 million P/E: No earnings Long-Term Debt: None * CHAD Therapeutics does not pay dividends Tom Jones could tell a few stories about business recoveries. The CEO of Chatsworth-based CHAD Therapeutics Inc., which manufacturers portable oxygen systems primarily for the home health care market, is just coming off a near-five-year slump fueled by cuts in Medicare reimbursements couched in the Balanced Budget Act of 1997. Under the measure, Medicare reimbursements to health care providers were cut by 30 percent. As a result, many of those providers also cut back on spending, including purchases of products like portable oxygen systems. Initially, CHAD could do little but watch as its customers slowly began to drop off. But a new line of products, in development through the last half of the 1990s, came onto the market last year, stabilizing the company’s bottom line. As a result, CHAD recently posted its first quarterly profit since 1998. For the quarter ended June 30, CHAD reported net income of $13,000, or zero cents per share, on $4.8 million in revenues, an improvement over the same quarter in 2000 when it reported a loss of $720,000, or 7 cents per share, on revenues of $3 million. “Clearly, the numbers speak for themselves,” said Jones. Driving the sales surge are two core products introduced last year. CHAD’s OXYMATIC 400 Series oxygen conserver, coupled with the TOTAL O2 Delivery System, helps conserve oxygen use and gives the patients the means to refill their own tanks when they are low, resulting in reduced operating costs for the supplier. Typically, CHAD’s customers are medical supply companies who then sell or lease the equipment, and supply oxygen, to health care providers and patients. Lower costs to the supplier make CHAD’s products more attractive to them. “If you can find a way to cut down on the number of times a patient needs a refill for their tanks, you’ve saved the supplier time and money, and that ultimately is good for us,” said Jones. CHAD was forced to lay off about 10 percent of its staff during the downturn, cutting roughly 12 employees. But as its new products have come on line and sales growth has returned, the company is back up to 100 employees the same number it had prior to restructuring in 1999. In hindsight, Jones said, the budget constraints imposed by the government actually helped weed out some of the company’s competition, putting CHAD in a stronger position to capture market share. “What happens if you are a home-care provider and your cash flow is cut, your immediate reaction is to quit buying products and make do with what you have,” said Jones. “Now, although we were once-removed from the cuts, and it hurt us, in some ways (that process) actually flushes out inefficiencies in the marketplace.” Tony Ramos, publisher of the Los Angeles-based Home Health Care Dealer magazine, agreed. “Oxygen equipment and delivery is the largest product in the home health care market, behind wheelchairs and crutches,” said Ramos. “So, when the cuts hit, everyone got whacked, and obviously anyone who was selling oxygen devices got hit big time. “But it also worked to slim down the marketplace, both on the supply side as well as the manufacturing side, and I think it put CHAD in an excellent position to gain market share.” Jones said that, if sales continue at their current pace for the rest of its fiscal year (which ends in March 2002), CHAD should have no trouble generating net earnings of between $800,000 and $1 million, or roughly 9 cents per share. The Medicare cuts also affected the industry in another way: Analysts who once touted the growing home-care market dropped their coverage like a hot potato when Uncle Sam got involved. “Analysts are people who chase after sunshine,” said Ramos. CHAD’s stock was trading at $2.65 on Friday, Aug. 3, 2001. But, if growth projections for CHAD are on target, Wall Street may want to take a second look. According to Ramos, the industry is poised for a comeback. And CHAD, said Ramos, will certainly be a company to watch as the industry recovers. “The cuts really affected the industry and many suppliers closed down,” said Ramos. “But manufacturers like CHAD were smart to wait it out and come up with new products that would please both sides of the industry: cheaper, more efficient to use.” Ramos said CHAD has also made a name for itself in the industry because its customers can count on the company for assistance in marketing the products to patients, through financial help with TV ad campaigns and brochures. “What makes CHAD a solid company is its commitment to its customers and a willingness to get involved with the marketing side of the industry,” said Ramos. “They are clearly a solid company, and their relationship with their suppliers is part of what’s behind that.”
