Rex Bionics — Update 5 January 2016

The company released its interim results on 8 December 2015, with several positive metrics. The company sold three Rex units during H116, with two sales in the US and one in Hong Kong. Importantly, these sales represent the first revenues the company has recorded from sales of exoskeleton units since its 2014 IPO and are thus an encouraging sign of the commercial potential the device has, in our view. Of the two sales in the US, one was made to TIRR Memorial Hermann in Houston. With additional customer orders already in place, the company expects H216 sales to be higher than H1.

Reflecting the sale of the first three Rex units, the company generated product revenues of £0.18m during H1. By way of comparison, Rex generated no product sales revenue in the same period of FY15. The three units included two that were sold to distributors essentially at cost, with the third to a hospital at the list price. The company provided a fourth as a replacement for an older unit that a US hospital had been using for patient rehabilitation. This likely affected the total cost of sales. The upgrade is consistent with the company’s US commercialisation strategy, as we believe the new unit can better show the efficacy of the Rex device. The company recorded a negative gross profit of £0.1m for the period reflecting the manufacturing costs associated with the units that Rex sold and upgraded in the period.

Rex reported total administrative expenses of £2.5m, including amortisation of £0.38m on acquired IP related to the company's acquisition of its New Zealand subsidiary. The company recorded a net loss of £2.2m in H116 versus £2.3m in H115 (six months to 30 September 2014).

The company’s cash reserves at 30 September 2015 were £3.7m compared to £4.4m at 31 March 2015. Net cash used to fund operating activities was £1.9m in H116, down from £2.5m in the same period of FY15. This was offset by net proceeds of £1.9m from the equity fund-raising Rex conducted in June 2015, which it expects will qualify for Enterprise Investment Scheme (EIS) tax relief, although it must still obtain formal confirmation from HMRC.

The company’s cash balance declined by £0.7m in H116, driven by investment spending of £0.1m and a negative foreign exchange impact of £0.6m related to the translation of New Zealand dollar-denominated net assets into sterling (GBP). During the period, the NZ dollar depreciated by approximately 20% relative to GBP. A significant proportion of Rex’s expenditures, particularly R&D and manufacturing costs, are NZ$-denominated. Management expects that if the NZ$ remains relatively weak compared to GBP and US$, it could have a further positive impact on the company’s operational results, as revenue is generally denominated in US dollars and GBP.

We are trimming our sales forecast for FY16 to £910k from £1m, as sales to distributors could reduce the average selling price per unit in the near term. However, this change in revenue is nearly offset by our revised lower operating expense forecast, largely reflecting the company’s cost containment efforts (as shown in the H116 results) and the benefits of recent FX trends. As a result, our FY16 EBITDA forecast remains largely unchanged. The company has indicated that it will probably need to raise additional funds within the next 12 months – we have reflected this in the assumption of debt of £10m from the beginning of FY17 (compared to the assumption of £10m debt from FY16 as per our previous model). This reduces our interest expense forecast for FY16, resulting in a change in PBT and net income from -£5.7m to -£5.3m. We have also reflected the June equity raise, resulting in normalised EPS moving from -40.1p to -33.2p in FY16e and from -38.4p to -30.7p in FY17e.

Rex has been demonstrating the Rex exoskeleton at the DMC Rehabilitation Institute of Michigan, where it has received positive feedback and has generated media coverage. In our view, this is the start of a phased-in commercialisation strategy for the US market, where the company expects to place several units in 2016. As noted, the company sold Rex units in the US during H116 and established a sales distribution relationship, which management believes will be key to developing the US market for the Rex exoskeleton.

Separately, the New Zealand government's international business development agency, New Zealand Trade and Enterprise, has agreed to provide up to NZ$100,000 in funding to support Rex's ongoing development of its business initiatives in the US, which we view as another positive factor supporting the company’s commercialisation efforts.

Another positive move, we believe, is the recent relationships Rex has formed with distributors in important markets. In fact, one of the company’s primary goals in H116 has been to secure relationships with key distributors and commercial partners to facilitate its international commercialisation strategy. During H1, Rex appointed specialised distributors and strategic partners in the US, China, Hong Kong, Scandinavia, the Benelux countries and Russia.

Rex completed its first clinical trial, RAPPER I (Robot-Assisted Physiotherapy Exercises with Rex) in Q115, which was an 11-patient study to assess the feasibility of carrying out sophisticated physiotherapy with the Rex. There were no adverse events (injuries or undue stress) and 10 of the patients were able to complete the exercises and use the Rex joystick effectively. The 11th patient could not participate in the trial because that person did not meet the size requirements.

A second trial (RAPPER II) involving 100 patients is underway. RAPPER II focuses on the safety and feasibility of the Rex as an assistive rehabilitation device from both the patient’s and the rehab centre’s points of view. On 1 June 2015 the company announced the enrolment of the first recruit into RAPPER II.

Management has noted that recruitment rates have been strong at the first trial centre, located in PhysioFunction in Northampton, UK. Moreover, management expects recruitment to accelerate in the near term, as it adds five new trial centres at major neuro-rehabilitation units in the UK, Australia and New Zealand.

Recruitment is also likely to be supported by positive results from an interim analysis of data from the first 20 patients involved in the trial. The interim results were recently presented at international neuro-rehabilitation conferences in Perth, Australia and Vienna. The key findings from this first interim analysis are shown in Exhibit 2 below.

RAPPER II clinical trial interim data were also presented at the Australia and New Zealand Spinal Cord Society meeting last month. With these interim results showing that the Rex unit is safe for patient use, they are expected to facilitate the company’s commercialisation strategy for the Rex exoskeleton.

The first phase of the trial consisted of a single visit to the Rex clinic, a walk test and a set of exercises, with immediate follow-up. Interim analysis of the data based on the first cohort of 20 volunteers shows that the Rex unit can be used safely by people with spinal cord injury. 19 out of 20 volunteers (95%) were able to complete the walk exercise, with no serious adverse events and no treatment-related adverse events. Importantly, 95% of volunteers indicated that they would like to use the Rex unit on a weekly basis and 100% said they could "see the benefits of using Rex regularly”. Overall, management believes the Rex unit tests well against exoskeletons that do not provide hands-free aid, with volunteers indicating no upper body fatigue or pain. The next cohort will be designed to verify therapeutic value, including contribution to reduced pain and improved sleep patterns. Therapeutic designation would facilitate Rex’s ability to qualify for insurance reimbursements and commercialisation.

The next cohort of 20 patients will also include new and more detailed questionnaires, as well as an extended follow-up after seven days. Management expects to present results from the next cohort in around mid-2016.

Down the road, the company also intends to conduct trials for other indications such as stroke and MS, which would occur separately from the RAPPER I and RAPPER II trials because of the different levels of mobility and rehabilitation requirements those studies would require. Clinical trials will also be important in persuading insurance companies to reimburse users for both personal injury claims and health insurance purposes. One of Rex’s peers has announced that its device is covered by a major German insurance company, which is good news for the whole industry because it shows that at least some insurers are willing to reimburse users for exoskeleton devices.

Funding is crucial to adoption in the personal use market. There are a number of funding methods that could be used to purchase Rex devices: healthcare providers, charities, health insurance companies, personal injury claims and private payment from individuals. We view charities and healthcare providers as the main source of revenue initially, followed by personal unit sales paid for either by charities or through personal injury claims. Estimates on jeffries-solicitors.com suggest that up to 1,200 spinal cord injuries occur every year in the UK with most of these caused by road traffic accidents. According to claims.co.uk there are 50,000 people in the nation who must live with paralysis. The National Spinal Cord Injury Statistical Center at the University of Alabama estimates that there are roughly 12,000 new spinal cord injury cases in the US each year.

For funding to be provided through personal injury claims it is important that the courts set a precedent for awarding these devices for home use. Claims awards are likely to be driven by positive user statements, case studies and positive outcomes from clinical trials. Rehab facilities and providers of healthcare funding may also be incentivised to use the Rex unit because of the cost savings from requiring fewer physiotherapists per patient and the reduced cost of medical complications as a result of the patients sitting or lying down for long periods.

In terms of personal injury claims, the company is optimistic as a result of two recent judgements. The two main categories of customer for Rex Bionics are healthcare providers and individuals that request mobility devices such as Rex’s through personal injury claims and charities. This implies that the potential for funding a Rex device through awards under personal injury claims will be an increasing focus for management. The potential of this channel is illustrated by a recent award. Specifically, in September 2015, Ben Barnes became the first recipient of a British High Court damages settlement, enabling him to purchase his own Rex for use at home. Ben Barnes had sustained a spinal cord injury in a road traffic accident. He was awarded £550,000 for orthotics as part of his overall settlement, which included the cost of a Rex unit for home rehabilitation, as well as replacement Rex devices and associated maintenance costs. 

Separately, another UK man who sustained spinal cord damage as a result of alleged clinical negligence was recently awarded interim funding for an intensive course of robot-assisted physiotherapy with Rex, pending a final settlement of his insurance claim. The company has indicated that it expects to realise its first sale of the Rex P unit for personal use in FY16.

The exoskeleton market is an emerging one and therefore still relatively unknown in the broader medical and patient communities. We view it positively that the company and other exoskeleton producers are engaged in promotional activities to support greater awareness of the devices, their benefits to patients and, in turn, to launch and grow this young market. Rex Bionics continues to conduct marketing and promotional efforts to drive greater awareness of Rex in international markets.

In H1, the company exhibited at several major international neuro-rehabilitation conferences, including in Boston, Dallas, Dubai, Rome and Shanghai. Rex was also featured on local and national television. Given how little known this emerging technology and market is, we view it positively that the press has begun to take notice.

The company’s R&D in H1 was focused on design improvements, laying the groundwork to launch the next generation of Rex exoskeletons.

While using the exoskeleton with mind control technology probably does not have near-term commercial implications, the company’s device is being used in mind control research that could point to future trends. The Rex that the company sold to Houston’s TIRR Memorial Hermann marks the hospital’s second Rex unit, which we view as another positive sign. TIRR Memorial is conducting research on the feasibility of controlling the device with non-invasive Mind Control technology compared to the waist high control stick through which users currently control the Rex exoskeleton.

In addition, at the Rome 2015 meeting of Robotics: Science and Systems, there was a successful demonstration of the direction of the Rex exoskeleton using Mind Control technology. A young quadriplegic man from the UK with a C3 level complete spinal injury walked in the Rex device using Mind Control technology that was developed in collaboration with the Laboratory for Non-invasive Brain-Machine Interface Systems at the University of Houston in Texas and TIRR Memorial Hermann hospital.

Rex is also working with the Centre for Neuroprosthetics in Lausanne, Switzerland on research to advance the use of mind control of robots. To further this technology, Rex has developed an upgraded version of its software that allows researchers and therapists to record all the movements of a Rex in real time. Management believes this will be a valuable tool in the study of the biomechanics of the Rex system.

Rex continues to make progress on the five commercialisation priorities that management detailed in December 2014: 1) clinical data; 2) distributor recruitment; 3) reference centres; 4) US development; and 5) new medical applications. As noted, recently published analysis of interim data from the company’s RAPPER II clinical trial illustrates that the company’s device is safe for use by patients with more severe spinal cord injuries and effective for clinicians as a rehabilitative device. The company’s progress on its primary commercial priorities is illustrated in Exhibit 3 below.

As the company announced in September 2015, co-founder and chief technology officer Richard Little intends to resign from his position to develop a new business in a non-competitive field. He intends to continue working with Rex Bionics on a consultancy basis. We do not anticipate a significant impact on the company’s business, as Rex’s management team and board of directors have extensive experience in developing and bringing medical devices to market.

Following a 40% ytd drop in shares, Rex is trading at a significant discount to its peers on a price to sales basis, at only 1.5x FY17e sales vs an average of 11.9x CY16e (see Exhibit 4). Moreover, based on our current estimates, a reverse DCF with 15% WACC and 3% terminal growth implies that annual sales need to reach only c 130 units by 2020 to justify the share price. If the company’s sales follow an upward trend, clinical trials continue to show positive metrics and FDA clearance for the US personal market is obtained, we would expect these catalysts to help close the gap between Rex’s shares and those of its closest peers. That said, we note that execution remains key and any material delays in implementing the company’s growth strategy could affect our forecasts and valuation.