Respiri — Investor recap of Respiri’s strategic focus

Respiri’s partnership with Access has been the lynchpin in growing its commercial footprint in the United States to date, with 10 healthcare clients signed, several of which are onboarding patients for wheezo prescriptions and RPM services (over 200 patients have been onboarded; 3,500 additional prospects in the pipeline). While Respiri and its differentiated respiratory device wheezo have been garnering significant market interest, management notes that patient onboarding has been slower than anticipated and we believe this to be one of the core reasons for Respiri to acquire its commercial partner in the United States. We also maintain that this acquisition accords Respiri multiple growth opportunities, including potential acceleration of new customer acquisition and patient onboarding with a more direct oversight of operations, as well as an increased monthly RPM annuity stream – US$70–100 per patient per month versus US$10–20 currently. This involves a broader coverage of RPM current procedural terminology (CPT) codes versus what the earlier business model entailed (see Exhibit 1). Note that RPM reimbursement in the United States is physician led (ie reimbursement is directed to the healthcare provider for providing the monitoring services), although since 2020 these services are allowed to be outsourced to third-party providers such as telehealth companies. These companies assist healthcare providers in implementing and running the RPM programme, eg with patient enrolment, monitoring, compliance and billing in return for a share of the reimbursement pie (as a pay-for-service fees). Whereas earlier Respiri was eligible to receive a proportion of the reimbursement under the CPT code 99454 (automated data transmission from the medical device to the provider’s RPM platform), the acquisition of Access should allow it to tap the other RPM codes as well, increasing the potential annuity stream by five- to 10-fold. This should also allow the company to reach break-even at a much lower number of recurring patients – 9,000 versus 30,000 previously. Management anticipates reaching this target by H2 CY24. We see this as achievable, provided the revised business strategy is implemented and executed as per plan.

Further leveraging the acquisition in the longer term, we expect Respiri to position itself as a diversified and differentiated RPM provider with an in-house intellectual property (wheezo), which we anticipate will be used to spearhead discussions with relevant stakeholders and hospital networks. We note that Access already has an established footprint in managing other chronic indications such as cardiovascular conditions, diabetes and obesity, and expect subsequent discussion to focus on the entire suite of services across indications, led by the wheezo programme. We believe that this can materially increase the revenue opportunity from each client and potentially generate customer stickiness for Respiri. According to the company, the acquisition will result in a threefold expansion of its US addressable market, from the current c 50 million asthma/ chronic obstructive pulmonary disease (COPD) patients to c 150 million including other chronic indications currently tracked and monitored under RPM programmes (see Exhibit 2).

A broader coverage of chronic conditions should also allow Respiri to become eligible for reimbursement under the CCM codes, which involve care coordination and management for patients with co-morbidities or multiple chronic conditions (Exhibit 3). According to the US Centres for Disease Control and Prevention, over 50% of the US adult population has at least one chronic condition with c 27% of the population having multiple co-morbidities. This figure stands at 47% for the population over the age of 55.

We also believe that access to real-world data from a broader number of disease areas should allow Respiri to develop more robust artificial intelligence driven algorithms and programmes over and above those used with wheezo to detect abnormal breath sounds, which should aid in developing improved products and services in the future for the company.

The proposed acquisition will be headed by Respiri’s newly appointed head of US business and chief commercial officer, William Sigsbee, with Access continuing to operate under its own brand and workforce.

Total acquisition consideration for the deal has been pegged at US$3m (A$4.5m) to be paid in three tranches:

The transaction is subject to conditions, including Respiri raising a minimum of US$2.5m in funding. We believe that this milestone-based payment reduces the financing risk associated with the deal by spreading out the payment over a period of time. Access currently has 10 healthcare customers, including from large healthcare providers and smaller primary care physician clinics. In addition, management has indicated that a further six potential contracts are in the advanced stages of discussion, with several others in the pipeline.

Respiri plans to fund the acquisition, US commercial roll-out and near-term working capital requirements through a A$6.5m fund-raise. This includes convertible notes worth A$4.5m to a US-based institutional investor, Obsidian Global Partners (non-binding term sheet signed). In addition, Respiri aims to raise another A$2m under a share purchase plan (SPP), with each shareholder entitled to subscribe for up to A$30k worth of shares. The offer will include one attached free option for every two shares subscribed (offer closure expected by 20 June 2023, with the new shares entering circulation by 27 June).

The pay-out for the A$4.5m convertible note to Obsidian Global will be made in two tranches of A$2.5m (upfront) and A$2m (subject to mutual agreement and shareholder approval). Tranche one of the convertible notes will be issued after the signing of the definitive document. The notes will have a face value of US$1.15/unit with the face value on the remaining balance rising by 10% after 12 months. The maturity date will be 36 months from the date of issue (June 2026). The conversion price will be fixed at 30% premium to the volume weighted average price (VWAP) in the five days prior to the execution of the definitive document. If the VWAP after 90 days is lower than the fixed conversion price, Respiri will be required to redeem a specified number of convertible notes, either through cash payment or by issuing shares at a 10% discount to the average of the lowest five daily VWAPs in the 15 days prior to the notice date. Conversely, Obsidian Global would be bound to convert 50% of the remaining convertible notes if any month’s VWAP is a 75% premium to the fixed conversion price. This will be conditional on the average trading volume over this period being at least A$50,000 per day. The maximum number of shares to be issued on conversion of tranche one will be 117.8m shares (without needing shareholder approval). Obsidian Global will be entitled to a 25% option coverage as part of the deal (strike price of A$0.0650/unit).

We adjust our valuation for the latest available net cash figure at end-March 2023 (A$0.9m) while keeping our underlying assumptions unchanged as of now, pending completion of the acquisition of Access and the concurrent A$6.5m fund-raise. Our valuation remains virtually unchanged at A$164.2m (A$165.5m previously) or A$0.2/share. We will present our revised estimates and valuation following completion of the acquisition and fund-raise, which we anticipate by early July 2023.