Capnia, Inc. Announces Closing of Initial Public Offering and Partial Exercise of Over-Allotment Option
REDWOOD CITY, Calif., Nov. 18, 2014 /PRNewswire/ -- Capnia, Inc. (CAPN) announced today the closing of its initial public offering of 1,650,000 units, each unit consisting of one share of common stock, one Series A warrant to purchase one share of common stock and one Series B warrant to purchase one share of common stock, at a price to the public of $6.50 per unit. In addition, the Company announced today that it closed the sale of an additional 247,500 Series A warrants at a price of $0.005 per warrant and an additional 247,500 Series B warrants at a price of $0.005 per warrant, pursuant to the over-allotment option being exercised in part by the underwriters of its recently completed initial public offering. With this exercise, the Company's initial public offering amounts to a total of 1,650,000 shares of common stock, 1,897,500 Series A warrants and 1,897,500 Series B warrants, representing gross total proceeds of $10.7 million to the Company before deducting underwriting discounts and commissions and other offering fees and expenses.
We develop medical diagnostics and therapeutics based on our proprietary technology for precision metering of gas flow. Our first product, CoSense, aids in the diagnosis of excessive hemolysis, a condition in which red blood cells degrade rapidly. When present in neonates with jaundice, hemolysis is a dangerous condition which can lead to long-term developmental disability. CoSense received initial 510(k) clearance for sale in the U.S. in the fourth quarter of 2012, with a more specific Indication for Use related to hemolysis in the first quarter of 2014, and received CE Mark approval for sale in the European Union, or E.U., in the third quarter of 2013.
With respect to therapeutics, we have previously obtained CE Mark approval in the E.U. for Serenz, an as-needed treatment for allergic rhinitis, or AR, that has shown statistically significant improvements in AR symptoms in randomized, controlled Phase 2 clinical trials. Our research and development efforts are focused on additional diagnostic products based on our Sensalyze Technology Platform, a portfolio of proprietary methods and devices which enables CoSense, and can be applied to detect a variety of analytes in exhaled breath.
Approximately 143 million babies are born annually worldwide, with approximately 9.2 million of these born in the U.S. and E.U. Over 60% of neonates present with jaundice at some point in the first five days of life. We believe CoSense has the potential to become a part of routine pre-discharge screening for all newborns, by aiding in the differential diagnosis of hemolysis in infants that present with, or are at risk of developing, jaundice. Red blood cell breakdown is a normal phenomenon but in certain situations the breakdown is accelerated or is excessive, and is referred to as hemolysis. The most common cause of hospital readmission during the neonatal phase is jaundice, and we expect that CoSense will help reduce such readmissions. Many causes of jaundice do not represent a significant health threat. However, when severe jaundice occurs in the presence of hemolysis, rapid diagnosis and treatment may be necessary for infants to avoid life-long neurological impairment or other disability. Also, unnecessary treatment increases hospital expenses, is stressful for both infant and parents and may increase morbidity. There is an unmet need, therefore, for more accurate diagnostics for hemolysis, particularly if they are non-invasive, rapid, and easy to use. Currently, hemolysis is detected via a variety of blood tests, which are limited in their diagnostic accuracy and suffer from other drawbacks, including the need for painful blood draws and a waiting period for results. CoSense detects hemolysis by measuring carbon monoxide, or CO, in the portion of the exhaled breath that originates from the deepest portion of the lung. This is referred to as the “end-tidal” component of the breath, and the measurement we perform with CoSense is referred to as end-tidal carbon monoxide, or ETCO. This measurement is typically reported after being corrected for ambient CO levels, and is referred to as ETCOc. Throughout this document, ETCO refers to ETCOc levels. The American Academy of Pediatrics, or AAP, guidelines published in the journal Pediatrics in 2004 recommend ETCO measurement be performed to assess the presence of hemolysis in neonates requiring phototherapy, neonates unresponsive to phototherapy or readmitted for phototherapy and neonates with bilirubin levels approaching transfusion levels. Because CO is a direct byproduct of hemolysis, ETCO can measure the rate of bilirubin production from hemolysis. However, no device is currently commercially available for accurately measuring the ETCO levels associated with the rate of hemolysis in clinical practice in neonates. As a result, we believe that CoSense will be the only device on the market that enables physicians to practice in accordance with the AAP guidelines when evaluating jaundiced neonates for potential treatment. Physicians are free to practice in accordance with their own judgment; however, we believe that the current AAP guidelines will be a significant factor in the adoption of CoSense.
We are currently focused on launching CoSense commercially, which we commenced in October 2014 and intend to accelerate in the fourth quarter of 2014 with the proceeds of this offering. CoSense combines a portable detection device with a single-use disposable nasal cannula to measure ETCO. While our launch efforts will initially focus on establishing an installed base of devices and building physician support for the device, we expect sales of the disposable cannula to be the largest component of our revenue over time. An electronic interface between the device and the consumable cannula requires one-time use of our cannula, which also promotes good hygiene and is necessary to preserve the accuracy of the device.
Sales and marketing activities associated with the launch of CoSense comprise a significant portion of our planned use of proceeds from this offering. We plan to hire our own sales force to market CoSense to hospitals and other medical institutions in the U.S. We also intend to use our research and development expertise to develop additional diagnostic devices based on our Sensalyze Technology Platform that can also be sold by our sales force. Our current development pipeline includes proposed diagnostic devices for asthma in children, assessment of blood carbon dioxide, or CO2, concentration in neonates and malabsorption in infants with colic. We may also license elements of our Sensalyze Technology Platform to other companies that have complementary development or commercial capabilities.
Serenz, our therapeutic product candidate, is a treatment for symptoms related to AR, which, when triggered by seasonal allergens, is commonly known as hay fever or seasonal allergies. Several Phase 2 clinical trials have been completed in which Serenz showed statistically significant improvements in total nasal symptom scores, or TNSS, in symptomatic patients when compared to controls. AR is typically an episodic disorder with intermittent symptoms. However, there is no treatment currently available that provides truly rapid relief of symptoms, other than topical decongestants, which can have significant side effects. The more optimal therapeutic for an episodic disorder is one that will treat symptoms when they occur, and can therefore be taken only as needed. We believe that Serenz has an ideal profile for an as-needed therapeutic for AR and may provide advantages over regularly dosed, slow to act currently marketed products.
We currently plan to commercialize Serenz in the E.U. via distributorship arrangements. In the U.S., we intend to determine the regulatory approval pathway with the U.S. Food and Drug Administration, or FDA, for Serenz and subsequently to seek a partner or distributorship arrangements for commercialization.
CoSense is the first device using our Sensalyze Technology Platform to achieve regulatory approval. CoSense detects ETCO, which can be elevated due to endogenous causes such as excessive breakdown of red blood cells, or hemolysis, or exogenous causes such as CO poisoning and smoke inhalation. Our first target market is for the detection of hemolysis in neonates, a disorder in which CO and bilirubin are produced in excess as byproducts of the breakdown of red blood cells. Hemolysis can place neonates at high risk for hyperbilirubinemia and resulting neurodevelopmental disability. The AAP recommends the use of ETCO monitoring to evaluate neonates for hemolysis, but there is no device currently on the market for physicians to effectively monitor ETCO in clinical practice.
Hemolysis and Bilirubin
We estimate that 34% of the 9.2 million newborns in the U.S. and E.U. each year should be tested for hemolysis under current treatment practice, representing approximately 3.1 million newborns. We believe that many of these infants are tested, but using relatively inaccurate and invasive diagnostic methods. Retrospective analysis of data, including data from over 54,000 infants compiled by the Collaborative Perinatal Project sponsored by the National Institutes of Health, or NIH, suggests that the only factor that predisposes infants with jaundice to adverse neurodevelopmental outcomes is the concurrent presence of hemolysis. Hemolysis can be caused by a number of factors, including physical trauma and bruising, blood group incompatibility, autoimmune disorders, and genetic causes such as sickle cell disease and G6PD enzyme deficiency. Because bilirubin is the chemical byproduct of the destruction of hemoglobin within red blood cells, hemolysis causes bilirubin production to spike. Bilirubin is yellow in color, and if present in excessive amounts in the body, known as hyperbilirubinemia, it can be deposited in tissues such as the skin and conjunctiva. The condition manifests as a yellowing of skin and conjunctiva and is called jaundice. Elevated levels of bilirubin are particularly dangerous to neonates, who have immature livers and therefore lack the adult ability to excrete bilirubin. Neonates also lack a well-formed blood-brain barrier to prevent bilirubin from entering the central nervous system, or CNS, where bilirubin is known to be toxic to neuronal tissue.
Adverse Effects of Jaundice and Hyperbilirubinemia
Every year approximately 143 million babies are born world-wide, of which 4.0 million are in the U.S. and 5.2 million in the E.U. It is estimated that up to 60% of term neonates and 80% of preterm neonates may have jaundice. Most neonates have non-pathologic jaundice, which is related to a decreased capacity of the neonate to excrete bilirubin into the intestinal tract for elimination from the body. These neonates will often normalize their bilirubin levels without a need for treatment. When treatment is required, it is typically via phototherapy, which typically involves isolating the baby in a chamber that directs blue-wavelength light to the baby’s skin. The light penetrates the skin and breaks down bilirubin via a photochemical reaction over a period of several hours. When treatment is performed in a timely fashion, adverse outcomes can be avoided. Some neonates with jaundice, however, will develop adverse neurodevelopmental outcomes related to hyperbilirubinemia.
According to the Agency for Healthcare Research and Quality, part of the U.S. Department of Health and Human Services, neonatal jaundice is the single largest cause for hospital readmission of neonates in the U.S. This results in inefficient care and can also be highly stressful and disruptive for the parents and neonate.
Exposure to excess bilirubin in the CNS as a result of hyperbilirubinemia is toxic and may cause long-term developmental disabilities. These abnormalities may be subtle, and include hearing problems and low IQ. Subtle forms of disability are known as Bilirubin-Induced Neurological Dysfunction, or BIND. More severe bilirubin-induced disabilities, including respiratory failure and resulting death, can be referred to as Acute Bilirubin Encephalopathy, or ABE. Bilirubin toxicity can ultimately result in a chronic, severe, and disabling condition called kernicterus. Kernicterus is a cerebral palsy-like condition in which the patient lacks muscle tone and motor control, cannot operate self-sufficiently, and can require long-term care. The National Quality Forum has in the past described kernicterus as a “never event,” one which physicians should ensure never occurs in their practice.
Limitations of Current Diagnostic Methods
It has been reported in peer-reviewed publications that the presence of hemolysis in a neonate with jaundice is a predictor of adverse neurodevelopmental outcomes. If neonates with high rates of hemolysis could be identified before they are discharged from the hospital, treatment could begin earlier, exposure to excessive bilirubin would be minimized and readmissions for jaundice would be reduced. Currently, accurate tools for diagnosing hemolysis in neonates are not available in the market. Tests that are commonly done to assess hemolysis such as serial hematocrit levels, reticulocyte counts and peripheral smear, are all invasive blood tests and are less useful in neonates due to physiologic changes resulting from childbirth. Hematocrit levels and reticulocyte counts may be elevated in neonates unrelated to pathological conditions, and confound the diagnosis of hemolysis, which typically involves low hematocrit and high reticulocyte counts. The Coombs test, a blood test that detects antibodies that can cause hemolysis, is used extensively as a measure of hemolysis; however, it often requires a painful heel stick to draw a blood sample, and other conditions besides hemolysis may trigger a false positive or false negative Coombs test. In spite of these limitations, we believe that the Coombs test remains the most frequently used diagnostic for hemolysis by physicians.
Today, the AAP recommends that all neonates be routinely tested for bilirubin levels at some point prior to being discharged from the hospital, although other organizations such as the United States Preventive Services Task Force or USPSTF, have not made similar recommendations. In many hospitals this is done via a blood test, although transcutaneous bilirubin meters are now available to test bilirubin levels non-invasively through the skin. Inaccurate results with use of these devices have been reported based on serum bilirubin level, measurement site, race, and ethnicity. In addition, bilirubin levels reflect only a point in time rather than the rate of increase, and therefore, may not address the risk of subsequent adverse outcomes. These tests do not capture the rate of bilirubin production or the presence/absence of hemolysis, leaving the physician uncertain as to the patient’s level of risk. Since many babies have bilirubin levels in a zone described as “intermediate risk” by current treatment guidelines, it is difficult for physicians to decide whether to treat aggressively or more conservatively.
Phototherapy is widely used to treat jaundice, and applied to approximately 8% of all births in the U.S. However, phototherapy treatment disrupts the opportunity for parent-newborn bonding, and is often highly stressful for infants and new parents. In some cases, particularly among low-risk newborns who are jaundiced, but not hemolyzing, phototherapy may not be necessary. In other cases, observation of jaundice and early testing for hemolysis may accelerate diagnosis and treatment with phototherapy. In all cases, understanding the rate of hemolysis is a critical part of providing timely and effective care. There is a significant need for a test to aid in the diagnosis of hemolysis that is rapid, accurate, and easy to use across all acuity levels within neonatal care.
Also, neonates are typically discharged from the hospital at approximately 48 hours of normal birth in the U.S. Hospitals are under pressure to discharge even earlier, in order to reduce costs and manage inpatient capacity. Bilirubin levels, however, typically peak more than 72 hours post birth, as shown in Figure 1 below. We believe that neonates with hemolysis can experience bilirubin levels in the intermediate risk range at time of discharge, but can spike rapidly to neurotoxic levels in the post-discharge period, out of the range expected based on the “Bhutani nomogram.”
Figure 1: Survey-based “Bhutani nomogram” of bilirubin levels over time, based on data from 2,840 neonates
Curved lines represent 40th, 75th and 95th percentile levels of bilirubin at specific age in hours
Physicians need to identify the cause of the jaundice and, based upon these findings, determine whether the infant is at serious risk for BIND, ABE, or kernicterus. However, physicians often have a diagnostic dilemma as to what is causing the jaundice. It is often not possible, with current diagnostic techniques and clinical workflow, to test whether it is merely a physiologic jaundice that poses little risk, or some other process that presents a serious risk to the neonate. Risk arises primarily from the presence of hemolysis, which leads to hyperbilirubinemia that persists rather than resolving spontaneously. As a result of the serious consequences of hyperbilirubinemia, the AAP recommends that all neonates be closely monitored for jaundice, and has called for physicians to determine the presence or absence of hemolysis in order to make appropriate treatment decisions. As a result, there are both clinical need and physician interest in the development of accurate and non-invasive methods for detecting hemolysis. CoSense addresses this need to measure a baby’s exhaled CO to assess the rate of hemolysis accurately, and does so via a non-invasive measurement at the point-of-care. It delivers results within minutes, enabling more timely treatment than the current standard of care.
CoSense: FDA 510(k) Clearance and CE Mark Approval
CoSense, our first Sensalyze Technology Platform product to receive 510(k) clearance from the FDA and CE mark approved, is a monitor of ETCO. CO is a direct byproduct of hemolysis, and based on extensive published data such as that from Stanford University, the rate of bilirubin production can be measured by analyzing the concentration of CO in a neonate’s exhaled breath.
CoSense is a point-of-care device that consists of a light-weight, compact monitoring device and a single-use nasal cannula, both shown in Figure 2 below. The cannula is placed just inside the nostril of the neonate and is connected to the monitor. The CoSense device is turned on and acquires the breath signal while the neonate breathes. Appropriate sample acquisition takes an average of 30 seconds. The cannula can then be removed from the baby and the device takes another four minutes to report the test result.
Figure 2: CoSense
Dimensions: 9.7 x 7.8 x 2.7 inches
The AAP recommends the use of ETCO monitoring for the detection of hemolysis. We believe ETCO monitoring will enable more rapid and appropriate treatment decisions and reduce overall costs of patient care. However, there is currently no device on the market that effectively measures ETCO in neonates.
With CoSense data, physicians may be able to quickly identify neonates with jaundice who are at risk of adverse neurological outcomes or other disability because of hemolysis. The physician can then initiate earlier treatments for jaundice, such as phototherapy, when necessary. As shown in Figure 3 below, we believe the potential impact of CoSense should result in reduced development of hyperbilirubinemia in neonates. In addition, CoSense may also help identify neonates who do not have excessive hemolysis, and therefore may not require phototherapy or serial bilirubin measurements. As a result, these infants may be discharged from the hospital earlier, or with less intensive clinical follow-up. We believe this will reduce the total number of blood draws that are necessary. We also believe this will reduce the rate of readmissions, resulting in significant cost savings for the hospital.
CoSense has the following advantages that we believe will drive its adoption by hospitals, other medical institutions and physicians:
| ||• || ||rapid administration at the point-of-care, yielding results in approximately five minutes; |
| ||• || ||non-invasive and minimally disruptive to the neonate; |
| ||• || ||no requirement for specific breath maneuver; |
| ||• || ||simple user interface that allows the healthcare professional to use it correctly with minimal training; |
| ||• || ||no on-site calibration necessary; and |
| ||• || ||accuracy over a range of CO concentrations clinically relevant (less than 10 parts per million, or ppm) to detection of hemolysis. |
In addition, we believe the CoSense device is priced at a level that falls below the typical capital equipment purchasing threshold for a hospital or other medical institution in the U.S.
Figure 3: Guidelines for phototherapy from the AAP based on bilirubin levels (solid lines) at a specified age for infants at low, medium or high risk. The potential trajectory of bilirubin with early intervention based on CoSense testing, as estimated by us, is represented by dashed lines. This suggests that exposure to bilirubin in medium and high risk patients could be substantially reduced by testing with CoSense.
Independent market research that we conducted has identified a large market opportunity for the CoSense device in the well-baby nursery and labor and delivery units in term neonates (less than 37 weeks), as well as in the neonatal intensive care unit, or NICU, in preterm births (less than 34 weeks) and late preterm births (between 34 and 37 weeks).
In the U.S. and E.U., there are approximately 8.1 million term births and 1.1 million preterm and late preterm births each year. Approximately 60% of term births, or approximately 4.9 million births, and 80% of preterm and late preterm births, or approximately 900,000 births, are jaundiced and are at greatest risk for adverse outcomes. We believe that these neonates are at risk for hemolysis and are candidates to receive one or more CoSense tests during their hospital stay if our product was available for commercial sale.
Today, the presence of jaundice triggers either a transcutaneous or serum bilirubin test. With the availability of CoSense, physicians may complement bilirubin testing with hemolysis testing in order to perform a more complete clinical assessment. Neonates who are jaundiced but not hemolyzing may receive conservative management or phototherapy. Neonates with jaundice found to be hemolyzing will likely receive early phototherapy and also additional testing such as the Coombs test, Hct or Retic to diagnose the underlying cause of hemolysis. We believe that CoSense will allow physicians to reduce the number of neonates that receive these more invasive and more costly tests for hemolysis.
Sales and Marketing
We intend to market CoSense for evaluating neonates for the presence, or the rate, of hemolysis. In the U.S., we will sell via a direct sales force, with potential augmentation of our reach via distributors. In the E.U., we expect to partner with distributors in each country, with oversight and marketing assistance from our personnel that we intend to base in the E.U.
Our U.S. direct sales efforts will initially focus on large hospital systems with high volumes of births. Approximately 100 centers in the U.S. are responsible for over 5,000 births per center per annum, and collectively make up approximately 16% of all births in the U.S., according to public information from Billian’s HealthDATA. A second tier of approximately 300 hospitals, those with approximately 2,500 or more births per year, accounts for an additional one million births, approximately 25% of the U.S. total. With a field sales force of 12-16 representatives, deployed primarily in large metropolitan areas, including the New York Tri-State area, Los Angeles, Chicago and Atlanta, we believe we will have the sales force capacity to develop appropriate relationships with various stakeholders at these centers.
We expect the majority of our revenues to be sales of consumables. Because customers will order these repeatedly once they have adopted CoSense as part of their standard procedures, we expect that our sales force can drive higher revenue per salesperson than might otherwise be the case.
Dr. Robert Christensen, the Director of Neonatal Research at Intermountain Healthcare, and Director of the Intermountain Healthcare Clinical Neonatology Program for the Northern region, has signed a letter of intent, or LOI, with us, on behalf of Intermountain Healthcare System, or IHS to purchase CoSense devices. IHS has used CoSense as part of various ongoing and completed clinical trials. In conjunction with Dr. Christensen, we have conducted a usage analysis to forecast the potential volume of CoSense use within the IHS.
IHS consists of 21 hospitals, of which 18 have labor and delivery services. IHS has approximately 30,000 total births annually, of which approximately 20,000 are in the largest eight hospitals. Per IHS’ letter of intent with us, pending appropriate approvals within the hospital system, IHS intends to purchase 16 CoSense devices, with two to be deployed in each of these eight largest hospitals initially. We believe roll-out of CoSense to the smaller hospitals within IHS could then happen over time.
The IHS has indicated they will use CoSense to inform treatment decisions for infants whose serum bilirubin levels are at or above the 75th percentile, which includes 25% of the births at these centers. The premise of this case study provides that half of those tested with CoSense will require a second CoSense test (average of 1.5 tests per infant). We therefore estimate that approximately 7,500 tests would be performed annually at the initial-adopter hospitals within this system, with usage rising to approximately 11,250 tests annually if CoSense devices are deployed across the entire IHS system.
In addition, Dr. David Stevenson, the Director of Pregnancy and Newborn Services for the Lucille Packard Children’s Hospital at Stanford University, or LPCH-Stanford, has signed an LOI with us on behalf of LPCH-Stanford. This LOI indicates intent, subject to institutional approvals, to purchase six CoSense devices for placement at the Lucille Packard Children’s Hospital and four other joint venture neonatology centers operated by LPCH-Stanford. LPCH-Stanford faculty have used the CoSense device in the context of clinical trials.
LPCH-Stanford and its joint venture centers together host approximately 11,500 births per year. Dr. Stevenson has indicated that they intend for all babies with a bilirubin level in the 40th percentile or higher to be tested with CoSense, equating to 60% of the babies delivered in the LPCH-Stanford system and approximately 6,900 newborns/year. Again assuming an average of 1.5 tests per infant, potential usage of CoSense in this system is over 10,000 CoSense tests — i.e. consumables — per year.
In addition to the aforementioned, key elements of our sales and marketing strategy include:
| ||• || ||Subsequent efforts will focus on growing the volume of tests performed and associated consumables used. We plan to focus specifically on sales to the NICU, well-baby nursery, and labor/delivery units within each hospital. Because CoSense is a point-of-care device, each of these units of the hospital is a separate opportunity for CoSense placement. |
| ||• || ||Establish and engage a network of distributors in the E.U. We may establish continuing operations at a location in the E.U. to ensure close coordination and effective execution of the CoSense sales and marketing plan in the E.U. |
| ||• || || |
Price the CoSense device at a list price of $4,995, a level that allows hospitals to purchase it without protracted review via a “capital purchase committee” or analogous body. We believe that the cost of goods of CoSense devices allows us flexibility in setting this price, and we also believe we can
offer customer hospitals attractive financing options to smooth out costs associated with the device purchase.
| ||• || ||Price the CoSense consumable cannula at a list price of $50-100, a price that is competitive with the current costs of performing the Coombs Test and other associated invasive assays. We believe that this cost offset, complemented by potential improvements in readmission rates and clinical outcomes, will provide hospital decision-makers with a compelling economic case for adoption of CoSense. |
| ||• || ||Build awareness of the AAP treatment guidelines, and of the benefits of CoSense, via medical education efforts to key clinical audiences, including neonatologists, pediatricians, obstetricians, and pediatric nurses. |
| ||• || ||Collaborate with key specialty societies, including the Pediatric Academic Societies, American Academy of Family Physicians, or AAFP, and patient advocacy groups such as Parents of Infants and Children with Kernicterus, to ensure ongoing support for ETCO testing in clinical guidelines and to identify opportunities for expanding awareness of ETCO among their respective constituencies. |
| ||• || ||Support clinical trials and publications that expand the base of evidence supporting broad adoption and use of CoSense. We expect these efforts will build support for the clinical benefits to patients as well as economic benefits to various stakeholders in the healthcare system. |
We expect that we will expand our direct sales efforts to encompass lower-volume birthing centers in the U.S., once a sufficient proportion of the larger hospitals have begun to use CoSense. We may also selectively initiate direct sales to certain countries in the E.U. Furthermore, we see potential to use CoSense to make more rapid assessments of jaundiced babies in the outpatient pediatric setting, where new parents are frequently directed for followup care after hospital discharge. We will continue to evaluate expansion opportunities and pursue those where the potential to accelerate our business is deemed sufficient for the investment we put at risk.
Figure 8: Intended deployment of field sales personnel by hospital tier
Pricing and Reimbursement
We expect to sell the CoSense device at a price below the typical capital expenditure approval threshold levels of most hospitals and other medical institutions in the U.S. The decision to buy, therefore, would likely be driven at the departmental rather than at the institutional level. The primary decision makers are expected be the neonatologists and nurse managers in the pediatrics and neonatology departments. Our initial efforts will be to expand the install base of devices, and will be followed by efforts to increase use of the disposable cannula. The business model anticipates a significant proportion of the revenues coming from the disposable sales, even more so in later years as the number of total CoSense devices in use in the field increases. With manufacturing scale up, we expect to drive our cost of goods below fifty percent for devices and below ten percent for disposables. We believe this will lead to scaleable future growth.
Since the use of CoSense is almost entirely in the inpatient setting around the time of birth, reimbursement would be in the form of a Diagnosis-Related Group, or DRG. Frequently referred to as a bundled payment, the DRG is a specific flat-fee payment amount for all services performed by a medical institution pursuant to a single diagnosis. We can, therefore, be reimbursed for the cost of a test directly from an institution without the need to approach payors such as insurance companies, or to obtain a separate reimbursement cost code. Hospital decisions to adopt new technologies for inpatient care are usually driven by improved outcomes and reduced costs of patient care. We expect that the use of CoSense will both improve outcomes related to hyperbilirubinemia and reduce the need for certain diagnostic tests in a subset of neonates with jaundice, which, as a result, will reduce overall testing costs. We also believe that positive identification of infants with hemolysis will lead to a reduced rate of readmissions for jaundice, and this array of benefits may support adoption of CoSense by clinicians and their institutions. We also plan to undertake a comprehensive effort to partner with key physician specialty societies, physician opinion leaders and patient advocacy groups to educate and inform payer stakeholders. The AAP guidelines recommend ETCO detection to confirm the presence of hemolysis in neonates requiring phototherapy, neonates unresponsive to phototherapy or readmitted for phototherapy, and neonates with bilirubin levels approaching transfusion levels. In general, payer policies related to the care of neonates with jaundice reflect third-party treatment guidelines, and in this case the AAP guidelines favor use of ETCO testing, which CoSense is able to perform.