ReWalk Robotics' (RWLK) CEO Larry Jasinski on Q2 2016 Results - Earnings Call Transcript

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ReWalk Robotics Ltd. (NASDAQ:RWLK) Q2 2016 Results Earnings Conference Call August 4, 2016 8:30 AM ET


Lisa Wilson - President, In-Site Communications, Inc.

Larry Jasinski - Chief Executive Officer

Kevin Hershberger - Chief Financial Officer


JP Peltier - Piper Jaffray

Kyle Rose - Canaccord Genuity

Christian Moore - Jeffries


Good day, ladies and gentlemen, and welcome to the ReWalk Robotics' Q2 2016 Results Call. [Operator instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Lisa Wilson, Investor Relations for ReWalk. You may begin.

Lisa Wilson

Thank you, Melissa. Good morning and welcome to ReWalk Robotics' second quarter 2016 results call. This is Lisa Wilson, Investor Relations for ReWalk. With me on today's call are Larry Jasinski, Chief Executive Officer; and Kevin Hershberger, Chief Financial Officer of ReWalk.

This morning, the company issued a press release detailing financial results for the three months ended June 30, 2016. This can be accessed through the Investor Relations section of the ReWalk website at and you can also access the webcast of this call from there.

Before we get started, I would like to remind everyone that any statements made on today's conference call that express a belief, expectation, projection, forecast, anticipation, or intent regarding future events and the company's future performance may be considered forward-looking statements as defined by the Private Securities Litigation Reform Act.

These forward-looking statements are based on information available to ReWalk management as of today, and involve risks and uncertainties, including those noted in this morning's press release and ReWalk's filings with the SEC. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those projected in the forward-looking statements. ReWalk specifically disclaims any intent or obligation to update these forward-looking statements except as required by law.

A telephone replay of the call will be available shortly after completion of this call for the next two weeks. You'll find the dial-in information in today's press release. The archived webcast will be available for one year on the company's website,

For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on August 4, 2016. Since then, ReWalk may have made announcements related to the topics discussed, so please reference the company's most recent press releases and SEC filings.

And with that, I'll turn the call over to ReWalk's CEO, Larry Jasinski.

Larry Jasinski

Thank you, Lisa. Good morning, everyone. Thank you for joining us. On today's call, we will provide you with an update on the progress we're making in our business. We're going to review our second quarter financial results, provide financial guidance for the second half of the year and discuss the exciting developments on the R&D front that will maintain our position as the leader in exoskeleton technologies.

In Q2, we made meaningful progress in the business, placing 25 systems and securing a record number of reimbursed units with multiple insurers. Revenue of $817,000 was less than expected due to a transition in our business model to a larger proportion of rent-to-purchase units.

16 of the systems are in rent-to-buy programs. We expect that many of these rental units will convert to direct purchases in Q3 and Q4 of this year. And we believe this pattern of a short rental period prior to purchase will become an ongoing factor driving our revenue models for the foreseeable future.

As a result, we are adjusting our revenue expectations for the balance of 2016. We are providing Q3 2016 revenue guidance of approximately $1.3 million and full-year guidance of $6.2 million to $7 million. Our Q3 guidance reflects growth in the number of units placed, unit purchases globally and conversion of units from our rent-to-purchase program.

In Q4, we are factoring in growth and variability from our international markets, a potential uptick in German conversions, an increase in reimbursement decisions and more clarity on the timing of VA-SOP conversions. Overall, we are encouraged by our second quarter unit placements and the progress we made with the VA and commercial payers. We continue to focus on executing our strategy and building long-term value for shareholders.

Some of the key milestones during and since the quarter ended include a ramp in VA activity, including the number of VA centers training patients under the SOP, a record number of commercial payer case by case favorable decisions, another favorable court decision in Germany, the kickoff of our 522 post-market study with Stanford University School of Medicine, and importantly, the collaboration with the Weiss Institute at Harvard University developed a soft-suit exoskeleton device for lower limb disabilities, including stroke and MS.

Before I cover these in greater depth, I will turn the call over to Kevin to review our second quarter financial results.

Kevin Hershberger

Thanks, Larry. Unit volume was strong, with 25 units placed during the second quarter, including 13 in the US, 10 in Europe and two with distributors in other regions of the world. Of the 25 units placed, 18 units, or over 70%, were covered under an insurance policy, including the VA, demonstrating that the ongoing efforts of our commercial and reimbursement teams are delivering results. 16 were rent-to-purchase units, including six with the VA, and nine were outright sales.

Our revenue for the second quarter was $817,000. This reflects a year-over-year increase of 34% compared to sales of $610,000 in Q2 of last year. Finally, revenue in the quarter included the conversion of two units rented in Q1. We currently have rent-to-purchase units representing approximately up to $1.1 million in backlog revenue, much of which we expect to convert to sales in the upcoming quarters.

The increase in rental units this quarter was driven by commercial payers in Germany and units placed under the VA policy. Under the terms of the SOP, the VA rents units for a period of 90 days with training provided at the center for 45 days, followed by 45 days of use at home. Upon successful completion of training and home use, the rentals convert to purchases, with the rental income applied towards the full purchase price.

With commercial payers, we also saw an increased interest in short-term rentals prior to converting to sales, particularly in Germany. While this will impact revenue in the short-term and provide some level of quarterly fluctuations, we believe this will support the growth with commercial payers we are targeting.

Based on the increase in rental placements during the second quarter, we believe a portion of our revenue dollars have shifted into subsequent quarters. As a result, we are providing top line guidance of approximately $1.3 million for the third quarter and $6.2 million to $7 million for the full year. Our guidance reflects approximately 30 units placed in Q3 and 35 to 50 units in Q4.

While we continue to make strong progress in achieving our commercial milestones, the timing of certain key business catalysts during the second half of 2016, such as timing of reimbursement decisions, rental conversions to purchases and growth in our international markets may impact our top line results.

Turning now to operating expenses, R&D expense was $3.1 million for the second quarter of 2016 compared to $1.5 million during the same period last year, reflecting cost of increased investment in our product development programs and clinical activities, and a one-time charge related to our collaboration agreement with the Weiss Institute at Harvard University.

SG&A expense grew to $5.6 million for the second quarter compared to $4.5 million in the prior year period, primarily reflecting our investment in reimbursement activities. Net loss for the quarter was $9.2 million compared to a net loss of $5.8 million in the second quarter of 2015. We ended the quarter with $15.7 million in cash and are focused on ensuring that we have the resources to advance our strategic market development and reimbursement activities.

I’ll now turn the call back over to Larry.

Larry Jasinski

Thank you, Kevin. The market for exoskeletons is at an exciting pivot point and we believe we are well poised to take advantage of it. Acceptance of the ReWalk technology is growing. It's clear that patients want to build on their experience in the rehab centers and use the product in everyday life. Training occurs in the rehab clinic, but taking the equipment home is the end goal.

The body of published data supporting the health and economic benefits of exoskeletons for SCI is expanding. In particular, the VA's large-scale, 160-patient randomized study is now active and will add greatly to the body of knowledge. In parallel, ReWalk has initiated enrollment of patients in a study that will focus on the health and well-being of the end user, with Stanford University as the lead center. This will provide further data about how the patients use the device in their everyday lives.

In May, ReWalk announced an IP licensing agreement and collaboration with the Weiss Institute at Harvard University. This agreement provides ReWalk with the intellectual property that has an early and well-established priority data on four patent families. Together, these families have over 365 pending claims for the field of soft, lightweight exosuits. This agreement provides us with access to designs that can be applied to individuals with limited mobility, including those affected by stroke, multiple sclerosis, Parkinson's, age-related disability and other disorders.

The current design is a working, lightweight exoskeletal power unit worn like a belt that delivers source through a textile garment on the legs. It has demonstrated effectiveness in the clinical setting, and with ReWalk's expertise, is now poised to advance to the next stage. This technology is likely to be a core driver in the world of exoskeletons.

Turning to our immediate business measurements for ReWalk's structural exoskeleton, I'll begin with demand and reimbursement efforts. We generated 316 qualified leads in this quarter. This builds on 255 in Q1 and gives 571 year-to-date. We had 419 in the same period in 2015. We ended Q2 with 109 pending insurance claims, which was an increase from 94 in Q1. We placed 24 individual personal use systems during the quarter, of which a record 18 personal units were covered by insurance reimbursement. This compares to 10 and seven in the two preceding quarters.

While we have made a lot of progress, the need for broader coverage to increase penetration of the marketplace is still critically important. Our reimbursement strategy includes achieving large scale coverage decisions and key contracts, case by case payment authorization, peer reviewed publications and supporting clinical studies. We are actively engaged in discussions with multiple groups on coverage. Recent court cases and appeal verdicts should aid us in those discussions. At the end of Q2, we have 14 United States and 18 German pending external legal appeals.

On July 28, a written court decision was issued by the Social Welfare Court of Speyer, Germany, which determined that ReWalk restores function and meets the legal requirements for coverage. The social courts in Germany are highly influential and we expect this will be a precedent-setting decision, likely to influence other cases and insurers.

In California, on June 15, an independent medical review organization determined that the ReWalk exoskeleton is likely to be more beneficial for treatment of the enrollee's medical condition than any available standard therapy and issued a binding decision for the ReWalk system in this case.

Now, let me turn to what we are doing to create a new industry. The development of this market will be driven by milestones. Though these will occur over the next six quarters and beyond, we have identified eight specific milestones that are market and R&D based.

The first one, expansion of the VA's SOP clinical trial capacity. The VA successfully set up two clinical training centers in Q1 and added five more in Q2. In addition to this base of seven, we expect five additional centers to be trained and resourced during Q3 and Q4. By the end of this year, we expect 12 of the 24 VA SCI centers to be actively training SCI patients. Achieving the 12 active SOP training centers is an important milestone.

Two, growth in the number of patients trained under the SCI OP. We had two users in Q1, six in Q2, and we expect to have trained a total of 30 veterans under the SOP by year-end. These patients will be the examples for others about what is possible in the VA. There are currently three active centers with the SCI patients where veterans are waiting in line for expanded resources to be able to get trained.

Overall, we have 78 qualified veterans that are awaiting local options and resources for training. Of the 42,000 veterans with spinal cord injury, we estimate 10,000 veterans will potentially be candidates as the program is established. Reaching the milestone of the first 30 SOP patients is significant.

Milestone number three, SCI coverage by national commercial insurers in the United States. We have active ongoing discussions with multiple groups and anticipate one or more will decide to cover the system within the next six to 12 months. This milestone will overcome the limits and timing of case by case efforts.

Fourth milestone, SCI coverage by a contracted large commercial group in Germany. We anticipate we will also achieve coverage in the next six to 12 months with one of the – one or more of the larger German commercial insurers. This milestone will allow many users that are waiting for a device to advance to training and prepare for life with a ReWalk system.

Fifth milestone, SCI coverage by a corporate self-insuring company in the United States. As many companies self-insure, we have begun discussions for direct coverage of employees. We anticipate favorable decisions in the year ahead, which is a milestone that will broaden our penetration.

Now, the last three milestones are R&D-driven. So number six, next-generation ReWalk SCI. ReWalk was the first exoskeleton approved by the FDA and has reached the milestone of having over 100 users successfully walking in their everyday life. We have focused on developing enhancements to the design and are approaching a design for use in mid-2017. This milestone ensures that ReWalk will stay far ahead of the first-generation efforts by the companies that are following us.

Milestone seven, ReWalk Stroke. While we believe there are many potential applications for exoskeletons, each segment will have its own unique requirements. For stroke, the capacity to retrain and assist a stroke patient in being able to walk can be very effectively met with exoskeletons.

Stroke patients need the ability to lift their affected foot and to propel their leg. We believe a lightweight exosuit worn like a belt can meet this need. This system incorporates the exoskeleton software with motors, batteries and cables that can deliver force to the legs during the essential points of the gait cycle.

The ability to eliminate the size and expense of a large, structural SCI-designed exoskeleton will be a game-changer that will allow exoskeletons to significantly expand the treatment options for stroke patients. In 2017, we expect to reach our milestone of the design freeze and announce our plans for clinical studies along with a timeline for our expected FDA submission.

And the eighth of the milestones, for multiple sclerosis, the requirements are more extensive than for stroke as most patients will have a bilateral need, both legs, and many will require hip actuation. As with the stroke population, these patients will not require the large structural components of the SCI-based exoskeletons and can benefit from a soft exosuit with a belt-based design. We are still in the definition phase with a high level of activity underway with key physician advisors to establish the final design. We will provide further information as we approach a design freeze. These eight milestones are the drivers for the industry and significant measurements of our value and our progress.

We find there is always great value also in looking at the daily developments with the SCI product. One example is a young man being trained in Albuquerque, New Mexico. In a story aired on NBC affiliate KLB Channel 4 on July 27, he told the press that he was shot on his way to a party and was informed there was little possibility of walking again. He is one of eight individuals being trained at HealthSouth Rehab Center in Albuquerque. Now, once he re-walked, he spoke of switching his name to exoman. His mother exclaimed, I saw my son walking, and this is just – I thank God.

On June 16, a man told a story in the Star News in Milwaukee about how after three days he was paralyzed he got out a piece of paper, and he wrote the words self-pity, and then placed a big X through it. He was determined to walk again. He had to lose about 70 pounds. He had to rebuild muscle and stretch out ligaments. Now he plans to use his ReWalk in everyday life and to stand in a system when making presentations at work. He stated, "If anyone wants to know how I feel about standing, I think you can see it in my face. This is pure pleasure."

As a wrap-up, I'd like to remind you that, today, ReWalk has a fully commercial organization, significant partnerships with the leading experts in our industry, a deep base in rehabilitation clinics in the United States, Europe and parts of Asia, growing reimbursement success and increasing demand for our technology. The future of ReWalk remains bright and we intend to focus on executing on the strategy that we've outlined today.

With that, I'd like to open the call for questions. Operator, if you could please proceed with the instructions?

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Matt O'Brien with Piper Jaffray.

JP Peltier

This is JP in for Matt. My first one is just around the guidance. I don't think you've given guidance before, so I'm just trying to figure out what changed in the business to give you that kind of visibility, you feel comfortable of giving it for Q3 and Q4 the way that you have today, is that based upon the VA more insight there or is it based upon just more rentals?

Larry Jasinski

Our primary purpose in giving guidance was, at this point, we have built a greater base of data than we've ever had due to software programs such as and just what we're learning in all our different points of connection. And we felt we could best help lead the marketplace about how this industry is developing by giving guidance and make sure that we've given good alignment with how the industry is progressing.

JP Peltier

And then digging deeper into the rental aspect that emerged more pronounced this quarter, is the VA rental – that's not for the trial except for the six units placed were for personal units and then have you ever had a rental not convert? These are highly customized systems right, so I'm not sure you can just return it.

Larry Jasinski

In the VA, there are two distinct areas. They have the study that is ongoing which is not a part of our components and that is a three-year randomized trial with 160 patients. The SOP is not in the research chart of the VA. It's in the clinical department. So anybody who's being treated at any of the 24 centers and the SOP is written where they have a 45-day training period followed by 45 days at home, and then they decide that it's working for that patient or not.

It's too early for us to give true percentages. In the first quarter we had two, and they both converted, but that's just too small of a number. Overall, we do anticipate that some will drop off over time or will be delayed. They could have other things that happen in their life that just have them delay. But we expect a high percentage of them to convert based on past history, because before they are getting into the training program, they're pretty well qualified, but you can't predict it exactly. So that was one of our reasons. We can look at what we have in the pipeline and that's how we determine part of our guidance.

JP Peltier

And then last one from me on the German court appeal, it seems like it's – you've had appeals in Germany before that have been successful, but for some reason and maybe you can tease it out more, the language that they gave in meaning that you don't – recommended by the German Joint Committee or in a catalog, it just seems like it's more definitive and it could set a better precedent than what's been out there. Is that fair?

Larry Jasinski

Yes. This was one of the more influential settings. The Social Court in Germany is a higher level in terms of impact compared to the ones we've had in the past. And there's a very distinct statute within German law that if you can restore a function, then the device should be paid for. It must be paid for. And this ruling specifically addresses that. So we believe it is more influential than our prior decisions and it was very meaningful. This one also just occurred. We got the letter – the decision was issued I believe July 27.


And our next question comes from the line of Kyle Rose of Canaccord.

Kyle Rose

Just wanted to see if we could dig in a little bit more on the rental aspect here, I understand it's becoming more of a mix of units moving forward. So for modeling purposes, how should we think about how ASPs look and how we flow those through? And then, also from a gross margin perspective and COGS there, how does the rental aspect of that impact from that side of it as well?

Kevin Hershberger

In terms of the ASP, we rent the units and the rental ranges, but on average it would be about $3,000 per month for a rental fee. And that's typically applied to the final purchase price when it converts. We haven't seen any significant deterioration of our ASPs with insurance providers. So what we've always said is $77,500, and that still is the base, and that hasn't deteriorated. But you will see a blended ASP a bit lower given international distributor pricing, which we discount those units a little bit lower for that.

Kyle Rose

So what we're looking at in this quarter is we've got 25 units placed, you've got the rental components, but then you've also got the two components from the Q1 rentals that are converting in Q2, and that's how we should think about that moving forward, is it a pretty standard conversion of – I realize it's still early, but when we think about 18 units converting again in the Q3, potentially some of that dripping into the Q4, that's how we should get confident about when we think about Q3 guidance and then again in Q4?

Kevin Hershberger

We would expect those units to convert. The units that convert would be in Q3 and Q4. It's still early to tell what their timing of conversion will be. The VA has specified 90 days, but it could slip over beyond 90 days there. And in Germany, it tends to be a little bit longer than that. So the way we built our guidance, we would see more of the conversions coming in through Q4, some in Q3, but more in Q4.

And then in regards to your other question for gross margin, the gross margin was down this quarter, so we were around 10% gross margin, down a bit this quarter from Q1 primarily driven by volume, by revenue rate. But there's a portion of the cost of sales of the unit that's applied towards the rental.

Kyle Rose

One housekeeping and then another larger question. On the housekeeping side, I think in the past you've given conversion metrics from insurance claims to actual conversion. I think you said 109 pending claims now. Could you just, one, clarify is that the correct number? And then two, what your conversion rate was? And then secondly, I know you don't provide longer-term guidance, but when I think about where Street estimates are now and where the guidance is coming in for the back half of the year, are you comfortable with where the Street is modeling 2017 revenues and how should we think about that?

Larry Jasinski

I'll cover the conversion piece just so you have an idea what we had. We ended Q1 at 94 and then we had 12 that were successfully finished, so we had a net gain of about 27. That's how we get to the 109, so it was an increase of about 30% just on the numbers of claims. We are modeling the expected outcomes mostly based on the past, generally in about the 70% range, but the timing is a little hard to predict. So that gives a little more color on the conversion.

Kevin Hershberger

And Kyle, in terms of guidance, we're not giving guidance beyond the back half of this year, so we're not ready to talk about 2017 in any way, and can't really comment on the Street models at this point.


Our next question comes from the line of Matt Taylor with Barclays.

Unidentified Analyst

This is [Young Lee] in for Matt. I guess first on the P&L, noticed that your expenses ticked up quite a bit in R&D, SG&A. Just in general, can you provide some comments on your liquidity and any plans around that?

Kevin Hershberger

Primarily what you're seeing in the increase in OpEx this quarter is, as we noted, we had a $1.1 million one-time charge related to our collaboration agreement with the Weiss Institute, so that's coming through in R&D. We also had some additional clinical work there. As you know, we kicked off our 522 study. And then finally, the increase is really focused on reimbursement. In terms of liquidity, we ended the quarter with $15.7 million in cash. And as we noted, we're focused on ensuring that we have resources available to expand this business.

Unidentified Analyst

You listed out your eight milestones. Can you just talk about balancing the short-term versus these longer-term goals?

Larry Jasinski

The milestones I think were very good to be able to understand a lot of what we expect for this relative to reimbursement and particularly on product development were the two areas we were trying to focus on. And the company has to keep a balance, but in creating a new industry, we felt those milestones are really the way to understand where we're going, both in terms of how we're focusing on a day-to-day basis, but also for the industry to realize – for us to create a sizable industry, those are the types of categories that we have to lay out.


[Operator instructions] Our next question comes from the line of Christian Moore with Jeffries.

Christian Moore

I know it's been harped on a little bit on the rental side, but just when we look into last quarter, you mentioned that the four rental units from the previous quarter were all converted to sales – or no, three units from previous were converted, and then four units last quarter were rentals. If those were all converted, that would leave about three units in incremental sales in US this quarter. Am I thinking about that the right way as the core number?

Larry Jasinski

A big portion of the incremental sales in the US were additional rentals, so you didn't see a lot of revenue around those, particularly the ones that came in June. So the growth in the rental units has been significant.

Kevin Hershberger

Also we did say that we had nine outright sales during the quarter.

Christian Moore

But those were probably mostly in the OUS segment. I'm guessing most of the rentals are coming in the – were all falling in the US.

Kevin Hershberger

No. So the rentals really fell into two buckets. First, the VA, so we had six VA rentals in the US and the remaining rentals were primarily in Germany. We're seeing much more focus in Germany at this point on the short-term rental and then convert to purchase.

Christian Moore

But were all four units that you mentioned were rentals last quarter converted to sales this quarter in one of the segments?

Kevin Hershberger

No, they didn't. So we had four last quarter; two converted and one is still – I think one dropped, and one is still out there.

Christian Moore

It was also interesting to hear you guys talk about the opportunities in stroke and MS further down the road. Can you provide any general sense of where you see the market opportunity there in terms of – you mentioned 10,000 vets could be candidates for this, how many stroke patients and MS patients do you think would be candidates for the lightweight suit, if you have any idea at this point?

Larry Jasinski

The market sizes are equal or larger to the opportunity with spinal cord injury. And I don't have all the global numbers. We'll put them out. But in the worldwide, we estimate about 2 million stroke patients on a global scale. MS in the United States has about 400,000 individuals. And I think as we get a little closer and also in our ongoing presentations, we will outline that deeper.

But if you look at all of these sub-segments, every one of them is a very sizable market, almost where it could standalone on its own. The numbers are higher with stroke than any other segment. The price point will probably be a little lower because it's a simpler design. MS is a little more complex. Parkinson's is closer to MS. And just helping or assisting the elderly – unfortunately, we're all going to get old, so that's going to be a market that continues to grow.


Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Larry Jasinski for closing remarks.

Larry Jasinski

Thank you everybody for participating. We look forward to having continued discussions and being able to report our progress in future calls. Thank you very much.


Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

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