ReWalk Robotics: Plenty Of Runway To Re-Establish Growth
Jun. 15, 2021 8:53 AM ETReWalk Robotics Ltd. (RWLK)
Summary
ReWalk has started 2021 on track to grow sales again, with $6 million in view for 2021.
In the short term, there is uncertainty over the outcome of a major court case in Germany regarding insurance coverage there; Germany is ReWalk's largest and best-covered market.
With no debt, 75% of the share value currently comes from the cash position on the balance sheet.
The true launch of sales efforts of the ReStore soft suit will start to provide clarity on the market potential for this new product.
Since I last took up a review of the Israeli med tech company ReWalk Robotics (RWLK), the company behind the exoskeleton system that helps some patients with spinal cord injury gain mobility, there has been a significant development announced in the broader exoskeleton industry. In April, the private company Sarcos Robotics announced that it would turn public via a SPAC transaction with Rotor Acquisition Corp (ROT). Sarcos focuses only on industrial use cases for outfitting workers in physically demanding jobs, but I find it an important and interesting development; in a very broad sense it is positive for bringing market attention to the exoskeleton space generally. This deal is sizable one within the space; at an enterprise value of $1.3 billion for Sarcos / Rotor, it dwarfs not only ReWalk at $18 million, but others like Ekso Bionics (EKSO) at $24 million, who competes in both the rehab space as well as offering a vest product for industrial workers. Even though the Sarcos product line is compared to the Marvel comic book character Iron Man (only somewhat tongue in cheek), the opening up to public markets and the scrutiny it will entail will hopefully shed ever more light to the general public on the potential benefits of an array of exoskeleton uses. I do not claim there is any direct connection between how Sarcos is valued and a specific investment thesis for ReWalk, but rather I find it one more data point to keep in the background as I try and breakdown where ReWalk is heading now.
ReWalk: On Track In Q1
Q1 2021 revenue came in at a reasonably healthy $1.3 million. With my previous estimate for full year 2021 sales at $6.0 million, this appears to be potentially on track for now, although my assumptions for the geographic breakdown are looking off-base. I was expecting up to $5 million from German placements alone for the year, but Q1 resulted in a more diversified regional breakdown than I anticipated. Specifically, the first quarter sales derived $837,000 from Europe (presumably 100%, or nearly 100%, in Germany) and $476,000 from the United States.
While I still hope to see a major uptick in German sales, management is guiding conservatively in terms of signing on additional insurers for now. A major German Federal Court case has been working its way through the legal system, and is creating some uncertainty until a ruling is issued, which ReWalk expects sometime in the middle of the year. The case, brought to court by an insurer apparently to clarify whether providing a ReWalk exoskeleton constitutes direct or indirect compensation to the patient, and it only directly impacts some 30 individual German cases. In the 2020 4th quarter earnings call, CEO Larry Jasinski described the case this way:
This case was advanced by one of the larger insurers in Germany. . . ruling as a direct compensation basically would eliminate any of the other challenges to the use of this product. Direct compensation is meaning does a ReWalk or an exoskeleton in general provide an ability to walk that you cannot otherwise get. If it were considered indirect compensation, it would suggest you could go back to a wheelchair.
He followed up with additional color in the Q1 call for 2021, rounding out what is at stake for ReWalk and its patients:
a ruling is expected to decide if an exoskeleton, which is an orthopedic aid that replaces the function of legs, enables independent walking and standing, whether it serves to directly compensate for disability. . . the court does not provide a specific guideline on timing for a ruling, but our best estimate is mid-2021. A positive ruling would have a significant impact on the landscape by all payers in Germany.
Expenses continue to be kept in check through the quarter, as gross margins have held fairly steady over 50% even though turning down somewhat at the end of 2020. SG&A expenses did grow again over Q4 coming out of the Covid-19 restrictions. At $2.9 million for the first quarter, is just enough to be back in line with Q1 of 2020, and to be expected as sales efforts resume again in earnest. Over a longer historical trend, both gross margins and SG&A have been moving in positive directions, and I am optimistic that the gross margins will steadily approximate 55% in the near-term, even if SG&A has some pressures assuming continue re-opening and sales growth opportunities.
Chart
Data by YCharts
This generally accounts for the reversal in trendline in cash burn from operations, which had been clearly getting narrower through 2020. Last quarter, it expanded from $2.5 million in Q4 2020 back to $3.2 million, but still well under any operational use of cash throughout all of 2019 and the first half of 2020.
In fact, cash is the biggest change in the narrative for ReWalk going into the middle of 2021. The company has a cash balance of $67 million after a capital raise in shares and warrants of $50 million; the 10.9 million new shares were priced "at the market" in late February 2021, about $3.66 at the time. The timing brilliantly took advantage of a frothy run-up, and a per share valuation double that of the current share price. The result, besides the dilutive effect, is a company with far more runway than it has had to work with in years, the flexibility to be patient, and in the event a suitor would come calling with an acquisition offer, several million shareholder votes with reasons not to sell for a lowball offer.
In the short to medium term, the dilution risk that has been so destructive of value in the past, is at least temporarily shelved. At a steady-state use of cash between $3 to $4 million per quarter, or up to $12 million per year, ReWalk would still have basically 5 years of cash on hand to navigate through that period and make adjustments. With that particular risk moved to the back, other risks move more front and center in the near term. Specifically, at this juncture, I believe there is a short-term risk over the next 6 months that the German court case goes against ReWalk's interests, which could be a noticeable weight on building long-term sales growth, but the opposite is equally true - if the case goes in their favor, it could well act as catalyst. While I still think that $6 million in full-year 2021 sales is on target, if the case goes in favor of ReWalk, the revenue could grow substantially into 2022 on German contracts alone.
Concluding Thoughts
I said in the previous article that the shares were inexpensive enough to be thought of as options with no specific expiration to them. That was in August of 2020, and they have returned just over 60% since that time, but the relative amount of cash backing each share has generally been trending up, from representing about half of each share's value to now around three quarters.
Rewalk cash per share(image source: author's spreadsheet; weekly price data sourced from MarketWatch.com; Q2 2021 cash balance is author's estimate)
Other the rather extreme anomalies of Q1 2020 when the pandemic fear rattled markets severely pushing the average price down, and Q1 2021, when ReWalk's market cap briefly more than doubled, the trend has clearly been that each share's value represents more and more underlying cash as a percent of the average market value; in fact the cash per share and book value per share are even closer, as the book equity is nearly equal to the cash balance. At the end of Q1, the firm's book equity value was $1.46 per share, basically identical to the cash on hand. As the cash balance is chipped away by a slow cash burn, the market value may or may not align itself to reflect those changes. However, on the basis of the current market price, the implication from this is that the other underlying business assets (inventories, intellectual property, equipment and plant, etc.) and operations of ReWalk are worth in neighborhood of $23.5 million. Whether these other assets and operations have any value is the crux of the question.
In my view, the value here is in the growth. While I have mostly focused on the impact of the German court case on sales, that will only apply to the ReWalk exoskeleton device. What is largely missing in the growth story is the ReStore soft suit, ReWalk's second product, a device used in clinics for rehabilitation with stroke victims. Though it was brought to market in late 2019, last year was supposed to the year to start seeing a real impact from the device on sales. Clearly Covid-19 interrupted those goals, but 2021 should start to provide a much clearer picture of the potential for this product to convert to sales; it has the dual advantages of being less expensive than the rigid exoskeleton, and not needing to go through insurance approvals for use, but relies on direct sales to facilities conducting the rehabilitation services. Nobody outside of the company likely has much data to go from in predicting how sales will develop, but broadly I think the market is ascribing little to no present value to the ReStore for the moment. Understandably, the market is known to prefer certainty, but I anticipate that there is more top line growth on tap in the back half of 2021 and lining up for 2022 than the market realizes. If 2021 sees $6 to $7 million, it could easily bump to $8.5 million in 2022 as ReStore really delivers strong sales and if the German court case goes in ReWalk's favor.
What I am driving at is that ReWalk does not yet need to rely on the Centers for Medicare and Medicaid ("CMS") in the United States to grant approval for exoskeleton coverage. CMS approved the HCPC coding last year needed for making medical claims submissions more straight forward, and the impact of broad American insurance coverage would lead to sizable growth if it ever comes. Eventually, that risk overhang will need to be resolved, but ReWalk is wisely pursuing other opportunities for growth at the same time.
With ReStore, the risk is that it ends up not being adopted very widely; I am reminded slightly of the worker vest from Ekso Bionics. For context, Ekso Bionics makes an exoskeleton device for assisting stroke patient as well, used in rehab centers, but Ekso also attempted to create a product to be used in labor-intensive settings to help workers and prevent injury. While the vest they created seems to be a perfectly fine bit of engineering, it has not sold well for a couple of years, although the company is attempting to revive its sales with more of a subscription model.
Until more data comes in, adoption of ReStore will be an open question, but all told, I believe that the company's assets and operations other than their cash are worth more than $23 million, so I personally continue to build up a modest position and wait patiently.
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.
