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Hi all,

I was hoping to get some opinions of whether or not CNS, Inc. is too focused on the BreatheRight line to sustain profitability once the patent runs out on the nasal strips.

Also, for how much longer do they hold the patent before other companies can start making the same strips and compete with BreatheRight? Most of this company's success comes from these strips and as a potential investor, I am worried that the inevitable competition from P&G or J&J will seriously damage the stock.

Any thoughts?

thanks,
m
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Look away. There are many better companies.
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Look away. There are many better companies.

Why is that? Is it because its too narrowly focused?

thanks,
m
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It's bread and butter is the nasal breathing strip whose patent will run out. Next up it's just a vitamin supplement me-too company. Take away the nose bandaids and it's a freefall.
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I just sold mine. I'm not any type of analyst, but there is nothing interesting to me about there new product and with the loss of market share of Breathe Right. I just couldn't go on. I got most of my initial money out.
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"I just sold mine. I'm not any type of analyst, but there is nothing interesting to me about there new product and with the loss of market share of Breathe Right. I just couldn't go on. I got most of my initial money out."

What loss of market share are you speaking of?
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In terms of market share, I'm sure I read somewhere(sorry) that although CNS beat expectations that it was because of their new product and not Breath Right. I remember reading that the Breath Right portion of earnings was down 5cents over last year.
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Fleabuss said:
”In terms of market share, I'm sure I read somewhere(sorry) that although CNS beat expectations that it was because of their new product and not Breath Right. I remember reading that the Breath Right portion of earnings was down 5cents over last year.”

Thanks for clarifying that fleabuss. Since I am long on CNS Inc., I wanted to get to the bottom of this. I just read through the recent 10-Q filing (filed Nov. 4, 2004 for the quarter ending Sept. 30), and found what you are referring to:

”Breathe Right net sales were $27.1 million, a decrease of 5.3% versus $28.6 million in the prior year and FiberChoice net sales were $5.2 million, an increase of 18.8% from $4.4 million for the same period of 2003.” Also the diluted net income per share was down $ .05 as compared to the year earlier quarter, at $ .24 versus $ .29.

But the question I had is what caused this? Was it a decline in market share, or were there other factors? In the section titled Management's Discussion and Analysis of Financial Condition and Results of Operations, I found the answers.

First off they said ”The Company has experienced in the past, and expects to experience in the future, quarterly fluctuations in both domestic and international sales and earnings. These fluctuations are due in part to timing and levels of marketing promotions and seasonality of sales, as described below, as well as increases and decreases in purchases by the Company's customers and distributors in anticipation of future demand by consumers.” Yep, I remember the deal about shipments to Japan distributors some time back causing a spike in demand that distorted earnings and required explaining last year. So lets see what is happening now.

”Breathe Right brand sales decreased by $1.1 million dollars primarily as the result of the 2003 comparable quarter including new product pipeline shipments of Vapor Shot! personal vaporizer.” Ah. When they introduced the Vapor Shot in the year ago quarter they had a large quantity of product shipments to fill up the pipeline, and this artificially inflated total sales for the Breathe Right brand which includes Vapor Shot. This explains most of the “decline” in Breathe Right sales. It wasn't really a decline in the sale of nasal strips at all. So there is not a loss of market share, but rather sales fluctuations mostly related to Vapor Shot.

Ok, so what about the 5 cent decline in earnings per share? I don't like that; lets see what management has to say. ”The decline in operating income as a percentage of sales was caused by the phasing of advertising and promotion programs and hence the related expense to earlier in the fiscal year, partially offset by improved gross margins.” OK, they are blaming it on advertising expense that they started earlier in the season. Lets see if the figures back this up. A look at the income statement shows advertising and promotion expense for the September quarter of 2004 was $5.7 million compared to $4.2 million for the same period of 2003. So if you look at Gross Profit before operating expenses (which would be the figure before advertising is deducted), we see gross profit really was higher this quarter than a year ago. So they are not blowing smoke, it was the advertising expense.

So while I am not thrilled with the performance this quarter, I think management has reasonable explanations about what is going on, and it is not loss of market share or erosion of gross margins. That's a relief. I still want to watch the situation closely, especially to see if this increased advertising has a positive impact. The coming quarter is supposed to be the good season for them, colds and flu and all that. So lets see how they do. I think it is pre-mature to bail out now.

Oh, and it wasn't all explanations of why things aren't as bad as they look; there was some good news in the 10-Q too:

”The Company has received notice of a favorable court decision relating to an import duty appeal that may result in the refund of previously paid European Community import duties on Breathe Right nasal strips. The estimated amount of the potential refund, payable in Euros, is approximately $1.0 million. Assuming satisfactory completion of audit procedures performed by Dutch customs, the Company expects to receive the refund during the current fiscal year and will recognize the refund at the time of receipt.”

Fool On,
–Bill
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Bill;

Thanks for sharing your legwork.

If I could give the post two recs. I would.

Stan
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Great post Bill.

You seem optimistic about the company - do you think they rely too much on the nasal strips? Do you know when the patent will run out on that and other companies will be able to make them as well?

thanks,
m
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You seem optimistic about the company - do you think they rely too much on the nasal strips? Do you know when the patent will run out on that and other companies will be able to make them as well?

m,

They definitely rely heavily on the nasal strips. According to their annual report, “Breathe Right nasal strip products currently represent the cornerstone of the Company's business.” But do they rely too much on the nasal strips? That's hard to say. Since their cornerstone product is making lots of money for them, it makes sense that they should market it in every way they can. “The Company intends to exploit new markets and opportunities that it believes exist for its current nasal strip products and plans to commercialize potential new Breathe Right branded products.” But they do have other products that are building strength, and management says they are actively seeking out other products and entire product lines.

Products now include nasal strips, snore relief spray, saline nasal spray, Vapor Shot personal vaporizer, and Fiber Choice tablets. Following are some quotes from the annual report showing their commitment to expanding their product line:

“In addition to expanding the Breathe Right® and FiberChoice brands and introducing other new products, the Company is exploring possibilities for acquiring or licensing new consumer health care products that have established consumer brands, particularly those that complement the Company's drug-free, better breathing and digestive health platforms. The Company is also considering opportunities for licensing new products and technologies.”

“The New Business Development Team is focused on the expansion of the Company's product base through the development, acquisition or licensing of promising consumer health care products. The New Business Development Team is responsible for identifying and evaluating potential new products, inventions and other business prospects that will enable the Company to achieve its long-term growth and profit objectives, including opportunities for the acquisition of established product lines and brands that may become the basis for a third brand platform.”

And you asked about their patent. I couldn't find any reference to when their patents expire, but they refer to multiple patents and trademark protection, and legal proceedings to protect them.
And they have some competition in spite of their patents.

“Although the Company is currently the leading manufacturer of external nasal dilation products, Schering Plough Corp. entered the market in September, 1998 with an external nasal dilation device. Schering Plough Corp. recently sold its nasal strip business to Aso Corp., a subsidiary of Aso International of Japan. In May 2003, Aso Corp. announced it was acquiring the marketing, sales and distribution of Schering Plough's nasal strip device effective June 3, 2003. Other companies have also entered the nasal dilation market with private label products.”

“Many of the Company's competitors have significantly greater financial and operating resources than the Company. The Company has developed and implemented marketing strategies aimed at minimizing the impact of competitive products. As a result of these strategies and other steps taken by the Company, the Breathe Right nasal strip has maintained approximately 90% of the nasal dilator market despite the entry of other competitors into the market place.”

“ The Company believes the patents owned and licensed by the Company on the Breathe Right nasal strip will limit the ability of others to introduce competitive external nasal dilator products similar to the Breathe Right nasal strip in the United States and most major international markets. The Company intends to aggressively enforce its patent rights covering the Breathe Right nasal strip and has engaged in litigation to protect its patent rights.”

Fool On,
–Bill
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>>Products now include nasal strips, snore relief spray, saline nasal spray, Vapor Shot personal vaporizer, and Fiber Choice tablets.<<

Run. Run. Run!!!!

When the follow-up products are me-too products competing with the Big Boys (Proctor and Gamble, Johnson and Johnson) rather than innovative new products, your odds of being able to promote this me-too product and establish Brand Dominance over the deep pockets of PG or JNJ are very close to ZERO.

The best you could hope for would be that JNJ or PG buys you out strictly to acquire the Breathe Right product.
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