ReWalk Robotics: Riding The Frenzy
Mar. 16, 2021 10:57 AM ETReWalk Robotics Ltd. (RWLK)
Summary
ReWalk Robotics' value has more than doubled since December on higher trading volumes.
The progress of new German insurance contracts has been steady, and revenue should rebound substantially in 2021.
The value has outpaced any reasonable justification on fundamentals, yet the overall risk / reward potential remains favorable.
This week marks my fifth anniversary of writing at Seeking Alpha, and it seems history has a way of looping around to visit. My very first piece came out on 14 March 2016, and considered the implications for competition from Parker-Hannifin's (NYSE:PH) creation of a medical exoskeleton on this little company, ReWalk Robotics (RWLK), that was trying to make a go of it with similar technology and much smaller scale. Five years later, ReWalk is still standing, has grown its product offerings, and appears to be laying the necessary groundwork for long-term viability.
ReWalk family of products
(image source: provided by ReWalk)
Interestingly, in some ways there has been more change for ReWalk compressed into the last three months than in the few years I have been covering it. While the basic story has not yet fully changed - I'll get to that soon enough - the market's willingness to bid up its valuation has brought significant volatility since my last article in December 2020; my title referring to a turbulent journey in the right direction actually unfolded much faster than I anticipated, even relative to its industry peers.
Chart
Data by YCharts
Shares have more than doubled over the last 90 days, running temporarily to over $5 per share, but fallen back significantly, accompanied by a higher daily average volume. Since 2020 full year results were released in February, I am going to try cutting through the noise of market swings and update what is going on internally.
A Status Update and Thoughts on 2021
With another full year on the books, it worth taking stock of the results of 2020 and give some consideration to how things might look for 2021 and beyond, primarily at top line results. For 2020, total sales clocked in at $4.4 million, a decrease of only $0.5 million over 2019, not bad considering Covid-19 interruptions. Fourth quarter sales included no material contribution from the ReStore product line, which is a soft suit used in rehab settings rather than individual at-home use, nor any commissions from MYOLYN or MediTouch. Most the of the year was a lost cause for these ancillary products, and will basically be starting from scratch in 2021. In other words, sales throughout 2020 were essentially dependent on the signature ReWalk 6.0 product, the rigid exoskeleton that can help certain people with spinal cord injuries to walk again.
In December, I wrote that I expected cash at the end of 2020 to be around $20 million, and that was spot on, as cash as of December 31 was $20.3 million. The final portion of the outstanding debt owed to Kreos Capital was paid off, so coming into 2021 the company was already in a better net cash position than it has seen in some time. In the first few weeks of Q1, an additional $13.2 million in cash came on the exercise of warrants, so we'll call cash on hand about $33.5 million in cash on hand to start out the new year, and if the average cash burn of $2.5 million from the last two quarters holds, then I expect the company to have around $31.0 million at the close of Q1 2021.
Estimating sales for 2021 might be a fool's errand, but I am encouraged that 2020 sales held up; I expect to see revenue growth in 2021 off a low baseline. In my December article, I wrote that I anticipated something like $6 million in sales for 2021, with as much as $5 million coming from German coverage of claims. Nothing has really changed since then based on the company's guidance, and I feel that this is reasonable, even conservative.
ReWalk's major accomplishment in 2020 was getting multiple German insurance contacts in force for coverage of the ReWalk exoskeleton, ending the year with 6 such contracts covering some 25 million people, and more discussions ongoing. Heading into 2021, there were a total of 84 cases pending in Germany, and many of those cases are with contracted insurers. Based on management's comments, there are currently in the range of 35 to 45 cases with contracted German insurance. If only 30 of the current cases convert to sales, that would come out to about $2.5 million (per unit cost of $80,000 on average). Between three other factors, German sales in 2021 could double that figure:
More claims being submitted through the course of the year
A higher rate of approved claims with contracted payers, and
Payments from non-contracted payers or new contracts coming into effect are possible; 2 additional contracts are being worked on.
This is considering only the cases that have to be approved by insurance at all; individual sales, ReStore and other products, spare parts and warranties are not factored into this.
The US revenue picture seems cloudier. On the one hand, ReStore, MYOLYN and MediTouch, while individually likely to remain to small, taken as a whole should well be in the hundreds of thousands of dollars (every 5 units of the ReStore should work out to around $100,000 in sales). I do not know about the actual per unit pricing on the MediTouch products or MyoCycle product lines, or ReWalk's terms for distributing them; these products are from separate companies for which ReWalk has some distribution rights in the United States. The mere existence of the HCPC coding for exoskeletons approved last year by the Centers for Medicare and Medicaid will make American insurance claims easier to submit to all variety of payers, even if not easier to get payment for. If claims are easier to submit, then I hope to see the volume of submissions increase, leading to perhaps marginal sales as ReWalk still pursues denied claims on a case-by-case basis. The bulk of 2021 US sales for the ReWalk exoskeleton, per management guidance at least, will be in relation to the Department of Veterans Affairs, which has offered coverage for qualified patients going back to 2015, with expansion into the Veterans Choice program in 2018. The VA is currently the only available insurance in the United States to cover the ReWalk, and it does not appear that there is strong momentum to add more coverage in 2021. Rather, the company is taking concrete steps to try and get closer to that goal.
On an interesting side note that could prove to be significant, ReWalk is exploring ways to possibly tap into the Medicare Coverage of Innovative Technology executive order issued in January. This order arranges for Medicare coverage to begin swiftly on FDA approved devices that meet certain criteria; this coverage would last for four years from the time of FDA approval. From the summary of the rule, it states:
The breakthrough device designation is only given to devices that meet specific criteria from the 21st Century Cures Act. A breakthrough device must provide for more effective treatment or diagnosis of a life-threatening or irreversibly debilitating human disease or condition and must also meet at least one part of a second criterion, such as by being a “breakthrough technology” or offering a treatment option when no other cleared or approved alternatives exist. For beneficiaries impacted by these diseases, MCIT will provide assurance that they will have access to the latest breakthrough medical devices to treat their condition, provided the devices have a Medicare benefit category.
The consideration for this designation on select technologies will be pursued simultaneously with seeking normal CMS coverage determination for its original exoskeleton. The potential here for impacts on 2021 revenue is minimal, but is continuing to push ahead on as many fronts as possible for growth further out.
One aspect that appeared new to me was the involvement of England's National Health Service in evaluating the ReStore soft suit. England has not been a significant market for the exoskeleton for individual use, but the rehab application for stroke victims looks like it could be shaping up differently. CEO Larry Jasinski made brief reference to it on the Q4 earnings call in February, and then ReWalk issued a small update on March 3, pointing back to a generally positive assessment written in December 2020. From this review, I learned the ReStore is being used in 2 private practices in England, and ReWalk was working to have the ReStore trialed at 1 NHS facility. I am not familiar enough with the British NHS to have a sense for how long it might take for the proposed trial to be set up, much less the timing of any decisions down the road for possible approval as a standard of care, but is one more positive development.
Evaluating Valuation After Taking Off
For all the time have spent following and thinking about ReWalk's development, it was not until last December that I really started to consider the question of valuation. At the time, shares were trading between $1.25 and $1.50, and I felt they were slightly undervalued on conventional metrics, which in my view would have supported a value around $1.85. However the risk in the name would not necessarily justify getting in back then unless you really believed the company could deliver much greater returns, which I expected would require all or most of 2021 to establish. Instead, valuation took off separately from any fundamental reasons.
Value is in the eye of the beholder to a degree, so I confess to struggling with evaluating ReWalk as suddenly a $140 million market cap company with what I think are rational assumptions. My brain looks at what is going on and concludes that the party has started early, and the company remains overvalued by 50% or more, even as the air has come out of the shares from the $5 trading level back closer to $3. Since the recent moving averages are close enough to that threshold (10 day moving average of $2.99, 50 day average of $2.69), I am taking $3.00 as my reference point (although it made a move up to $3.40 as I am writing on Monday 3/15).
At this price range, the P/S ratio is sitting at 24 on a forward sales assumption of $6.0 million. Whether or not that is too much depends, of course, on whether not the sales assumption is close to accurate. Consider for comparison its most accessible peers, Myomo (MYO), a company serving those with robotic limbs for the upper body, and Ekso Bionics (EKSO), who focuses mostly on walking therapy for stroke and brain injury patients. ReWalk's valuation certainly is either out whack, or the other two are ridiculously undervalued.
comparison chart(image source: author's spreadsheet; ReWalk 2021 sales is author's estimate; other data calculated from Seeking Alpha).
It is possible that both conditions would be true, but what I see is paying relatively more for the company expected to see the lowest sales growth in 2021. Is there any appeal left? And why has ReWalk, the smallest of these three companies in revenue terms, moved ahead of Ekso and Myomo in market capitalization?
About 5 or 6 weeks ago, I ran a search for ReWalk on Reddit, and relatively little came back that had been active recently. If I recall correctly, at the time there was one active thread that was bullish due to a perception of the company having the support of the Biden administration in terms of supporting American veterans, a reasonably fair point of view to consider regardless of anyone's political persuasion. Today, if you search Reddit, you'll find about 10 mostly bullish threads active in the last 60 days, including boards with themes like "If you knew Elon Musk was about to buy ReWalk Robotics would you buy ReWalk shares?" I wish this was an exaggeration, and it is not to my personal taste, but for some reason ReWalk seems to have been discovered by this sort of investor to larger degree than Ekso Bionics or Myomo (based on a non-scientific search on Reddit for these other two companies). They each have noticeably less activity at Reddit than ReWalk, and today's investors need to account for this variable. This is not necessarily a major factor contributing to ReWalk's chart - 10 threads with only dozens of comments does not support that argument very strongly, but for me is more just a sign of the type of broader changes afoot in how individual investors, or traders, engage with markets. Given the increase in ReWalk's trading volumes, I have to think it at least offers a clue.
Conclusion
Beyond the financial fundamentals of the present moment, past the potential for higher than normal volatility, and even looking further ahead than the end of 2021, I think there is another simple factor at work. The market is starting to give credence to the potential ReWalk has. Growth investors may now be recognizing that the potential is nearer to fruition than ever before, and determining that the risk/reward profile is still in favor of ReWalk being able to outperform.
I am switching from bullish to neutral for the near term, on account that I do not expect the sort of frenetic price action of the last 3 months to be sustained for the next three, six or nine months. However, even at the current valuation, I am bullish for the long-term, solely because of steady fundamental progress within the business that has already been years in the making. I am long a half-sized position, and now that things appear to have modestly settled, I intend to slowly add to my position.
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