ReWalk Robotics Ltd. (RWLK) CEO Larry Jasinski on Q2 2020 Results - Earnings Call Transcript
August 12, 2020 8:30 AM ET
Company Participants
Ori Gon - Chief Financial Officer
Larry Jasinski - Chief Executive Officer
Conference Call Participants
Swayampakula Ramakanth - H.C. Wainwright
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2020 ReWalk Robotics Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there’ll be a question-and-answer session. [Operator Instructions]
I would now like to hand the call over to Ori Gon. Please go ahead.
Ori Gon
Thank you, Michelle. Good morning and welcome to ReWalk Robotics' second quarter 2020 earnings call. This is Ori Gon, ReWalk's Chief Financial Officer. And with me on today's call is Larry Jasinski, Chief Executive Officer.
This morning the company issued a press release detailing financial results for the three and six months ended June 30, 2020. This press release and a webcast of this call can be accessed through the Investor Relations section of the ReWalk website at www.rewalk.com.
Before we get started, I would like to remind everyone that any statement 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 the 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.
And with that, I'll turn the call over to ReWalk's CEO, Larry Jasinski. Larry?
Larry Jasinski
Thank you, Ori. Good morning, everyone. We are satisfied with our second quarter results and the progress we have made with key initiatives in 2020 as they are beginning of a fundamental change in the industry and for ReWalk Robotics. The advent of meaningful reimbursement pathways is the transition point to true penetration of a significant market. We have relied on case-by-case battles over the past few years as we expanded the evidence to support the safety and value of walking again for the paralyzed community.
With an established insurance based infrastructure with the German government and multiple German insurers, we can now demonstrate the results of the new structure. In the United States, a pathway has been established with the government through the center of Medicare & Medicaid Services decision to issue the first ever distinct billing code for an exoskeleton as a result of the ReWalk application.
The first measure of success is operating and supplying ReWalk systems for spinal cord individuals through the contracts established so far this year. All systems placed in Germany this quarter were processed through these new agreements. While we have limitations on our capacity and training and access due to the COVID virus we were still able to place eight systems exclusively under the contracts in Germany in the second quarter.
This demonstrates to users and the clinicians that there is now a clear and well-defined path for medically qualified patients to utilize the ReWalk 6.0 system to improve their quality of life and to walk in their community. In parallel, we are actively advancing to complete multiple additional contracts during 2020.
In the United States, a process via a formal application to create a distinct category for billing and payment for the Rewalk exoskeleton started in 2019, after an extensive review of the data provided on the ReWalk device, in May 2020 the government issued a preliminary decision that a code be issued.
Process then progressed to public hearings, which included a presentation by the company, presentation by medical experts on the need for this coverage of this technology, statements given by a paralyzed party who represented many in the community, followed by questions from the panel that was charged with the decision.
In July 2020, the HCPCS Level 2 code, K1007, which identifies and describes that exoskeleton device was issued to facilitate insurance claims submissions and processing. The code is effective October 1, 2020.
Over the past six years our company and the industry has relied on case-by-case battles to provide systems to users. During this period we placed close to 600 ReWalk systems. This allowed establishment of community experience by paralyzed individuals via rewalking, expanded the base of published data, allowed clinicians to understand the value and safety of rewalking, and allowed ReWalk to build an infrastructure support that was capable of expansion.
The U.S. and German populations include over 350,000 paralyzed individuals. From that population we will target 45,000 individuals that we believe best qualified with the criteria for the ReWalk system.
Until now we have not been able to achieve meaningful market penetration as economic resources in terms of insurance policy and coverage had not yet shifted to this technology. We have now entered the beginning of that shift in Germany and anticipate that the United States will follow the process from a code to coverage contracts in a pathway that is similar to Germany in the coming 12 months to 24 months. We are now on the doorstep to market penetration after years of effort.
Now let's turn to specific results from Q2 2020. 14 SCI personal systems for home use were placed in the quarter for revenue of $1.668 million. ReStore activity was limited to existing clinics due to the shutdown or limited operations due to COVID. ReStore data for my multicenter clinical study and additional publication from Harvard's exosuit research and a field-based publication of market experience were each published in Q2.
Our overall margin was at 61.3%. Operating expenses were reduced to $3.574 million. Our operating loss was reduced to $2.552 million. We continue to pay down our long-term debt and will completely eliminate it over the next three quarters. CMS issued a payment code in July for the ReWalk exoskeleton.
Training was completed for our July one launch of the MediTouch systems for therapy of the hands, arms, legs and overall balance. Training was completed for our July one launch in the MyoCycle system for home and clinic exercise of the spinal cord injured community.
I'd next like to turn over the call to Ori for a financial review.
Ori Gon
Thanks, Larry. Our Q2 revenue was $1.7 million compared to $900,000 in the prior year quarter and $800,000 in the previous quarter. This quarter we delivered several units that we could not complete in the first quarter due to COVID restrictions. As Larry mentioned, the rehab products have generated limited revenue due to the COVID-19 effect during the quarter.
On the reimbursement side, we had five new rental approvals and six conversions of previously rented units during the second quarter. At the end of the quarter, we had 12 active SCI rentals and in addition four restored trials remained active. This rental pipeline represents $1.3 million in revenue.
Our total number of SCI pending insurance cases was 98 at the end of the quarter compared to 115 in the previous quarter. 89 of the current cases is in Germany and 9 is in the U.S.
Our VA SCI pipeline has currently 40 candidates, which shows great potential as VA clinics start to reopen. Our quarterly gross margin in the second quarter of 2020 was 61.3%, a 0.6% increase compared to our prior best quarter. This is a small, but very important milestone as it shows that we have the ability to get to the level of margin we want to achieve and are shown in stable medical device companies which is to be around a 65% margin.
As we completed our unit cost reduction at this stage the gross margin increase is coming mainly through higher ASP. This quarter we sold 15 units and the average selling price was $89,000 not including rental or warranty deferrals and other fees. This is compared to $79,000 in the prior year quarter.
Now let's take a look at our operating expenses. Our second quarter operating expenses landed at $3.6 million compared to $4.7 million in the prior year quarter and $4 million in the previous quarter. The main decrease compared to the second quarter of 2019 was in the R&D as we completed the ReStore development and clinical trials in 2019. The current quarter results represent our lowest operating expenses since we became public.
Although some of this is affected by COVID-19, especially, due to travel restrictions and several initiatives we took to reduce our spending during this period we are expecting to keep our OpEx at this range. And of course, we remain alert and flexible to require changes in this aspect in the future.
To recap the quarterly results, our net loss for the second quarter was $2.9 million which marks the first quarter our net loss is lower than $3 million since we became public and shows our overall operational focus. This is compared to a net loss of $4.6 million in the second quarter of 2019.
Our non-GAAP net loss for the second quarter of 2020 was $2.7 million compared to a non-GAAP net loss of $4.2 million in the second quarter of 2019. We ended the quarter with $14.1 million in cash and our long and short-term loan balance was $4.8 million as of June 30, 2020. The cash balance does not include additional $9 million of equity rates we closed in July.
With that, I'd like to turn the call back to Larry for additional remarks.
Larry Jasinski
Thanks, Ori. I'd now like to discuss the activities within each of our four product franchises and then close with an outline of the key objectives for the second half of 2020.
I'll start with the ReWalk system for community use. Targeting the next 12 months to 24 months, we currently have 89 German submitted insurance cases. And in the U.S. we have 143 qualified patients in the pipeline covered by different payers and 40 qualified VA patients. The pace and success with processing these will be determined by the insurance payment process.
We believe that the German cases with insurers where we already have contracts to move forward reasonably quickly and the contracts we expect to add in 2020 will drive many of our 2021 placements.
Our current German contracted coverage includes 83 million lives with 36 payers in the public arena through DGUV for workplace and other public groups for injuries along with over 20 million covered lives through commercial insurers. We presently in contract negotiations with groups covering an additional 39.6 million lives and expect to end the year with commercial contracts covering approximately 70% of all German cases. The process of expanding placements and infrastructure will be deliberate over the next 24 months, but it represents a fundamental change in the manner in which the ReWalk exoskeleton is provided for home and community use in everyday life.
The U.S. cases for the VA and Workers' compensation will advance as COVID allows the markets to reopen. The majority of the remaining total within the Medicare Medicaid and private payers groups will depend on our progress with pricing, contracts and policies in 2020 and 2021. The pathway with the centers for Medicare & Medicaid Services has multiple steps. The establishment of a specific code from the ReWalk application has enabled the stages of establishing the CMS fee schedule or pricing for the code, meaning coverage by government and private payers and setting policy all in a manner that was similar to our experience in Germany.
We have also applied for accreditation to be recognized as a supplier who meets the quality standard set forth by CMS an important step in our goal of achieving Medicare coverages and facilitating billing for ReWalk devices. We have the personnel and support and materials in place to move forward within our existing team and network. These steps to seek in coverage policies will occur over the next one to two years. And if we have continued success it will change the landscape for those who are medically qualified, who wish to begin rewalking in their community and everyday life.
In parallel, ReWalk has the largest database of SCI community users worldwide and specifically within the VA. As these have been built over the last six years, we have a database of medical experience and will be able to build effectiveness use data and economic data from the space that we will seek to publish in the early part of this cycle.
Second, I want to move on to our second franchise the ReStore system. The results of the multi-site clinical study conducted at five of the leading U.S. centers were published in June. The primary outcome measure of the study was safety, but several secondary outcome measures were also explored. ReWalk achieved the safety-related expectations and promising results such as the majority of participants increasing their walking speeds by a clinically meaningful margin in just five treatment sessions. These improvements in such a short timeframe are encouraging and we eagerly anticipate results of longer-term intervention and exploring of further endpoints in studies that are currently being conducted.
We also had a publication in neuro rehabilitation times from a ReStore customer in the U.K. In this editorial, the lead clinicians noted using ReStore led to better gait biomechanics, which in turn led to increases in walking distances, faster walking speeds and greater confidence to walk. Importantly, for the clinic business models the therapists also note that traditional gait training often requires two therapists and the effort is extensive by the therapy team.
ReStore allowed them to reduce the need for the second therapist, which can lead to a reduction in the clinic's labor cost. The launch of the ReStore system and many of the capital planning applications were paused by the onset of the COVID virus. While the initial centers have had good results, they have had limited numbers of patients. We continue to see limited activity within the clinics and expect the effective launch will not restart in full until 2021.
Our focus will be on the continuing studies, establishing educational content to inform the market and working with selected national accounts to build data on effectiveness and economic value. Longer-term, we may pursue a CPT code for robotic stroke therapy.
Our third franchise with MediTouch rehab systems for home and clinic use. We have completed training and are launching the product during Q3 as clinics reopen. This rehab glove, leg, arm and balance system will apply to the stroke segment we serve as well as other rehab needs. We expect this product to be synergistic with our ReStore stroke launch and also to be an attractive product for the growth of home, telehealth, rehabilitation particularly with concerns of COVID or other viruses in the clinics. The launch will be limited by the capital equipment cycle and the access to clinics and we are exploring the direct-to-patient acquisition pathway.
And our fourth franchise, our Myolyn systems for exercise in the clinic and at-home. The functional electrical stimulation product known as FES complements our SCI offering as any rewalker can also benefit with a home-based cycle per exercise. This home exercise can help with conditioning to complement the use of ReWalk in the community, at work or at home.
This product has been placed on the ReWalk Federal Supply Schedule FSS with the VA and is under contract for supply to any qualified veteran. It does not fall under the capital equipment requirements for the VA and many workman's compensation groups.
The product is easier to use and its simple design is less expensive than existing therapies. We expect this line to gain some reasonable home penetration along with being an effective product for the clinic. It should also help increase rehab leads for ReWalk as we build the reimbursement systems.
So to conclude today, here are our key measurements and objectives for the remaining six months of 2020. Number one, expansion of contracts in Germany. With four contracts in place to cover over 20 million lives, we are seeking to add two to four more contracts by year's end.
Number two, with CMS achieve accreditation, establish pricing and initiate interaction on contracts that we target for closure in 2021. Third, expansion of data with ReWalk through use of medical records and experience now that we have a database of users with longer-term use of over three years.
Fourth, expansion of supporting data for ReStore through targeted strategic locations utilizing the system. Fifth, an effective relaunch of ReStore once clinics reopen at a higher level. And sixth, measurable placements of MyoCycle and MediTouch.
In conclusion, we are encouraged by the Q2 revenue results that we achieved through the contracts in the last few weeks of the quarter as the clinics partially reopened. As we achieved growth in all four product categories through contracts and access have a level of margin improvement, expense management to further reduce our operating burn and complete paying off all debt in the next three quarters. We can now see the pathway to achieve breakeven to profitable operations.
Thank you very much for your time and interest today. And I'd like to turn the call over for questions at this stage. So operator, if you can move forward with the instructions for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Swayampakula Ramakanth of H.C. Wainwright. Your line is open.
Swayampakula Ramakanth
This is RK from H.C. Wainwright. Good morning, Larry and Ori. Congratulations. Obviously, this is one of the best quarters for your folks and both on the top line and also on the gross margin. So as you said that you had some spill-over from the first quarter into the second quarter. And how should we think about what sort of backlog you could be having into the third quarter? Is there anything of that sort? Just to see -- just to think of the rhythm of the top line for the next half of the year?
Larry Jasinski
Both Ori and I can answer. We placed almost everything that we wanted to in Q2. So there's not a specific backlog of patients that didn't make it in, but the clinics are operating at a reduced rate still. So we're just not moving as fast as we'd like. And our expectations in Q3 and Q4 are that the clinics are going to stay at least at the current levels. So we will be able to place a number of products, but it's going to be some variation on what COVID may or may not do to us so that's the risk we have. And I think, we gave the general numbers on what we have out there. There's -- the German contracts will move nicely, the U.S. will be a little bit slower. Ori anything you'd add?
Ori Gon
Yes. Just on the Q2 question, RK. So this quarter, we had approximately $300,000 that we wanted to complete in Q1, but could not do that due to the shutdowns and lockdowns, we had in different regions. So that's also something that kicked in this quarter. And as Larry mentioned, there is -- we completed everything we wanted to complete in the second quarter. So I can't -- we don't have any same type of deferrals this quarter. We have our normal regular warranty some rentals stuff like this. But that's in the ordinary course of business I would say.
Swayampakula Ramakanth
Okay. And then on the question in terms of Germany with eight systems being placed during the second quarter and I would think most of these obviously are with the current contracts that you have. What have you learned in terms of working with these different organizations that you could apply with the 89 systems that are still pending in the pipeline?
Larry Jasinski
Well, all of the units -- all eight that we placed were under our contracts which was very encouraging and exactly what we hoped for. And as we do have four other groups we're talking to that also I hope we will complete this year until they're signed they're not signed. So, we've got to be careful on that for timing.
But if you took that group of 89, I believe 83 of them fall within contracted groups that we either currently have or the four that were late-stage negotiations. So, that pipeline does tie nicely to this whole contracted effort and what will be really important for us longer term is keeping that pipeline filled and getting patients into it. Ori anything you'd add to that?
Ori Gon
Yes, I think that we don't have yet a lot of data as contracts completed and announced in the first quarter. But we do have -- we do see the cases and the submissions and the approvals coming in a much more orderly fashion I would say.
In general, all of the conversions we had over the last quarter or three to four months since we announced it, we're generally between -- first placement and conversion were in the range of two -- in average two quarters or three quarters depending on the time it took for the trial itself for the rental and the training itself which is still three to six months process, but could also be a little bit faster or slower.
But -- so I think that's also a good point to see that we don't see a lot of the suddenly cases being paused and not being approved or not being moved through the process I would say because the process is not defined. So, now it's much smoother. But we will have -- but I think we will have more data to provide in the next coming quarters in a more organized way about that.
Larry Jasinski
A little more -- I can be a little more specific on the ones. It's a 35 of the 89 are the companies that currently have contracts and 48 are with the new groups that we're talking about. So, of the 89 that I believe accounts for 83 of them.
Swayampakula Ramakanth
Okay. So, actually -- thanks for all this color both of you. And also out of this 89, I don't know if you want to do this publicly, but in the sense do you know how many are in trial basis, or how many are just kind of basically starting off their application? And based on what Ori was saying and if I understood it correctly, trial can be anywhere between two and three quarters before they can get converted in totality. Is that normal for -- in Germany?
Larry Jasinski
In the contracting phase, when the application goes in, we have taken the patient through medical qualification and an initial trial of the unit that they can stand and be comfortable and we know that they physically can manage the product.
Training comes after that and that's usually either a rental or a purchase depending on how well they do in the specific group. So, the 89 applications that is more definitive those that have gone into the application process. And then there's a subset of them that are already in training at this time which is -- I don't have a specific number. But it's in the--
Ori Gon
It's 12 Larry and RK. We have 12 active rentals in Germany currently being conducted and paid for. This is a -- we get payment for the rental fee.
Swayampakula Ramakanth
Okay yes. Then of the 16 units that were sold at an average price of $89,000. I think that's the statement that picked up from what you folks were saying earlier. So, do the -- I know because different contracts run differently. Do the contracts make up most of these $89,000 price in a sense would the Germany units be at a little bit of a lower price point than what you would -- what would -- what it would be either with the VA with the U.S. -- in the U.S. when it finally come -- gets going here. I'm just trying to understand where -- how we should think about this $89,000 average price?
Ori Gon
So, I can explain a little bit. So, first of all, so we sold 15 units during the quarter. 10 of them arrived from Germany and five in the U.S. Now, when I'm referring to the $89,000 what I -- what we are doing is we basically take only the revenue from the sold units. We’re taking out all the rental fees and warranty deferrals and service fees and stuff that are more – not specifically connected to the transaction, the conversion of the sale.
And what we see generally is I would say more or less the same ASP currently in Germany and also in the U.S. as we had some nice increase in this region as well. And that's generally the conversion, the average conversion price that I think is something that we should also expect.
In – if you're in 2018 we made – approximately two years ago, we made a change to the – to our price lease and included a five-year warranty and then took an increase at that point. It took the market a little bit time but now I think it's more or less stabilized. The contracts are also good at this aspect. And so I think the 90 for the conversion on average, right is something that makes sense.
And obviously, there are still some warranty deferrals that we have to do accounting-wise and rental fees that sometimes fall within the quarter or maybe stopped in the prior quarter. So it's all part of the transaction. But generally the price itself or the conversion is – this is the average.
Swayampakula Ramakanth
Okay. Perfect. And then coming to the VA, could you provide us some commentary on the 40 or so cases that seems to be pending approval at this point. How should we think about those units? Obviously with the VA, you already have a code. So how – what sort of the timeline can we expect on that?
Larry Jasinski
Well, I can answer it in two parts. The number of patients that have been flowing into us with interest since the study accrual was completed has increased significantly. So that's why you see the total of about 40 that are there. The process of them is not moving along very well, primarily because of the virus and the VA clinics simply not really reopened at a assertive level.
So until those clinics open we're sort of building a number of patients. And most of them are forecasting reopening in Q4, but they've gone a little slower than the private clinics. They've been more cautious with their patient population. So we anticipate, we'll see some placements as the year goes on and a lot of them probably will fall into next year.
Swayampakula Ramakanth
So again in the VA, it would be the same process, right, the two to three quarter time point in terms of them getting the device and getting trained and finally converting. Is that how it works, or in VA it's the other way around they buy the unit and then get trained?
Larry Jasinski
There'll be a mix. The majority of them will be a little longer process like you described a subgroup of them, for example, patients who participated in the clinical studies that are already trained will get their units more quickly. So you've got roughly 80 patients that fall into that category and the subset of those fall into the 40. But generally speaking, a new VA candidate, I would assume a six-month cycle type of thing is going to be the norm.
Swayampakula Ramakanth
Okay. Thank you. I’ll step aside and then come back later. Thank you. Thank you for taking my questions.
Larry Jasinski
Thanks.
Operator
[Operator Instructions] There are no further questions. I'd like to turn the call back over to Larry Jasinski for any closing remarks.
Larry Jasinski
Thank you, Michelle, and for everybody who joined us today. I appreciate the time. Please stay tuned to our ongoing publications at our data and have a great day. Thank you.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.
