ReWalk Robotics: Taking The Next Steps

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About: ReWalk Robotics Ltd. (RWLK)
by: Larry Saunders
Summary

ReWalk's CEO has now clearly stated publicly that the company is fully in the commercialization phase.

While the Q2 2019 results looked weak, much of it related to sales deferred into early Q3, and margins are continuing to improve.

ReWalk is in an overall better cash position, and early results for the ReStore soft suit are promising.

However, the risks in this company remain substantial due to irregular coverage decisions from insurers.

When I wrote my very first piece for Seeking Alpha about the Israeli nano-cap medical technology company ReWalk (RWLK) back in March 2016, I was addressing the introduction of more competition into the space for its only product at the time, an exoskeleton suit used primary to assist those with spinal cord injury be able to walk again. Specifically, at that time Parker Hannafin (PF) was bringing out its similar product, the Indego.

(image source: here)

Now just over three years on from that writing, looking back, there's no particular evidence that ReWalk has suffered as a result of any additional particular competition. However, the market three years ago was still just in its infancy, and Parker Hannafin coming in has probably helped create more of a market. Taking a look now, after ReWalk has released its Q2 2019 results, should help shed some light on where the company is headed going into 2020.

A Quick Summary of Q2 2019

ReWalk Q2 '19 results were released in early August, and on the surface, to say they were "underwhelming" would be too generous. Primarily, the top line looked atrocious, with revenue of less than $1 million for the quarter at $0.9 million. This is a low level it hasn't breached in years, with an average quarterly revenue over the last few years in the $1.7 million range, and this whopper of a miss came without warning.

Chart Data by YCharts

However, it did come with some explanation, primarily that a good deal of sales were pushed into July. On the earnings call, CEO Larry Jasinski stated that within the first five weeks of Q3, $900,000 in orders had been received, and $700,000 delivered, so the explanation appears valid. If there was much of a silver lining, it would be that even on sharply-reduced revenue, somehow gross margin went from 43% to 50%, which may bode well for future results if anything like 50% gross margin be maintained on a larger scale. An additional good result for the quarter, although in and of itself fairly meaningless from the financial results, was reporting the first sale of a ReStore unit, the company's new softsuit product designed for helping stroke victims. The significance of the sale is that the product only gained FDA approval in early June, product was available for making sales demonstrations on June 21, and so within a few days it had sold one unit already.

Peeking Ahead

In last week's earnings call I would say there are two broad points of interest beyond reporting the results for the quarter: 1) overall goals and strategy moving into the back half of 2019 and into 2020, and 2) laying out specifically the business value for the new ReStore product. Mr. Jasinski's closing remarks from the call were definitely instructive, as he laid out where the points of emphasis will be, and most interestingly to me, stated plainly that (starting at around 15m:15s mark):

we have now transitioned primarily to commercial activities... (referring now to new goals and laying them out) One, sales growth with the SCI line based on completing operating contracts with at least two German insurers. Two, demonstrating market acceptance and penetration of ReStore in more than 40 accounts and building a strong pipeline for 2020 placements. Three, broad distribution and presentation of supporting white papers on the value proposition for the soft suit. Four, continued support of the USVA (Veteran's Administration) ongoing engagement with national and regional US insurers to support broader reimbursement coverage. Five, China ...during the second quarter, we have continued the discussions with Timwell Realcan about a modified working arrangement. (NOTE: As of this writing, Seeking Alpha does not yet have the Q2 transcript of the earnings call, all quotations are my own transcription from the audio here; the quarter's 10-Q can be found here)

After a quarter with the headline results like Q2, I think management is as focused as ever on finding ways to produce more predictable revenue and even out some of the uncertainties in the timing. That goal should be helped by both expanding into the ReStore product that does not depend on insurance decision directly for ReWalk, as well as by finalizing those contracts with a few German insurers. For clinics leasing the ReStore units, the expected lead time will be at least 60 days, and for purchases the timing will vary more depending on individual facility's budget cycles. In the United States alone, the number of facilities that might be considered potential customers is a little more than 1,500, with the understanding that any facility that purchases is ultimately likely 1) purchases more than 1 unit, and 2) provide some recurring revenue due to the need to replace certain parts after a given amount of usage (estimated to be 15% of the purchase price per year, I believe). With sales outside the United States considered as well, the goal of 40 accounts (which would mean on the order of 75 units) seems easily achievable within 2019, and growing into 2020. The goal of greater commercial insurance coverage has been the continual stumbling block for the ReWalk 6.0 exoskeleton, but the first cracks may be showing with Cigna's decision not to automatically deny coverage and now automatically review each situation on a case-by-case basis (thus reducing the number of appeals needed for positive outcomes), and ReWalk expects that Cigna's new policy will be published during the third quarter. For those not necessarily familiar with the final point, ReWalk had previously started down a path to form a joint venture with a Hong Kong based partner Timwell on the order of $20 million that unraveled in its first iteration, but the discussions appear to be ongoing in some fashion.

The second point of emphasis is describing more clearly the way ReStore is expected to create value for both ReWalk and clinics.

ReWalk logo and FDA seal (image source: here)

To that point, Mr. Jasinski explained (starting at 8m:30s)

The business value of this technology is demonstrated in its ability to facilitate clinic's justification for insurance coverage of additional patient therapy sessions by enabling and documenting patients' continued progress. Additional benefits of the ReStore technology includes improved clinical staffing allocation due to few therapy sessions requiring multiple therapists.

On the surface, this value proposition looks straight forward enough, but the proof will take some time to bear out. Should clinics ultimately run into resistance themselves from insurers covering the sessions, then the ReStore sales will most likely come to a standstill (in the United States). If the insurance claims go relatively smoothly for the clinics, then I expect sales will be strong. I do not think there's any question regarding the efficacy of the ReStore technology to genuinely help stroke patients in aspects of their recovery, but alone may not be enough to keep the order book going.

Conclusion

Establishing success at ReWalk will continue to be a long road, one that has always depended on insurers coming around to pay out for ReWalk's products instead of letting patients live out their days confined to a wheel chair or similar device. That road has gotten somewhat shorter in certain regards, as I noted in my last article in April that a steady drip of modestly good news continued to flow in ReWalk's direction. After successfully clearing the CE and FDA hurdles on the ReStore technology and starting the sales process, there's now another road that ironically still has the potential cloud of insurance rejection hanging over it, but is sort of one step removed from being a direct risk to ReWalk's revenue and shifting some of that risk to the clinics. Still, if this wasn't a concern for ReWalk at all, the CEO probably would not be calling for more white papers on it.

With $24 million in cash, much of its raised on the back of the CE and FDA approvals for the ReStore during the last quarter, there should be enough cash to stay afloat for the short-term while the goals for finalizing contracts with German insurers are completed and possible investment or joint-venture with Timwell Realcan is revisited for making a play into China.

The vast majority of investors in ReWalk to date have most likely lost a chunk of their investment, but every new development merits taking a new look. In my view, I would not consider this name unless you have both a very high risk-tolerance and a long-term time horizon.

Disclosure: I am/we are long RWLK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.