Originally published at IPO Candy on September 8th, 2014

Positioning 

ReWalk (RWLK) makes an FDA-approved exoskeleton that enables disabled people, even those mostly paralyzed, to walk upright. Exoskeletons have been a hotbed of research and development over the last decade and they are now entering commercialization.

It’s still very early in the adoption cycle because these devices are new and expensive. The ReWalk, for example, is $70K. But exoskeleton technology in general, and the ReWalk in particular, are in the process of coming of age for military, medical, and ultimately for more utilitarian purposes.

ReWalk is positioning itself as the leader to allow paralyzed people to walk. There is some direct competition, however, from already-public company Ekso Bionics (OTCBB: EKSO). There have also been a few other IPOs like LDR, AMDA, and KTWO that target the same area with different therapies that are worth looking at in the context of this deal.

Market & Competition

Exoskeletons have been of particular interest to the military – both for increased strength and rehabilitation. The technology is also being developed into advanced “suits” for space or underwater exploration. (Think of the mechanized version Sigourney Weaver climbs into during the climax of Alien.)

The core market for ReWalk will center on medical use for patients confined to a wheelchair. Beyond the obvious attraction of being able to walk upright, even limited use has a number of health benefits ranging from prevention of bone loss to improved circulation, skin tone, and cardiovascular health.

In simple terms, the market for ReWalk is some portion of the nearly 300,000 people in the US with spinal cord injuries. The company estimates that 80% of these are candidates. There are also 12,000 new cases of spinal cord injuries each year. That would make the total market opportunity at $10B using a $50,000 unit cost. Obviously these are very round numbers.

ReWalk will face competition from other companies, but even if they fail to maintain the largest market share there is plenty of runway to build a $1B revenue company. The timing and pace of the commercial adoption is less clear than the potential market.

We are surprised that competition isn’t more intense at this point. Could be that it’s just too early for larger companies like Parker Hannifin (who licensed some technologies in this area in 2012[1]) to be interested. Only when a $1B market size is realized will they be seriously interested.

Cost and “who will pay” are probably the biggest market-related issues facing the company. It’s worth noting that those popular scooters for seniors retail for around $1,000 and more serious motorized wheelchairs cost $2000 to $3000. Of course, none of these have the ability to provide an upright walking experience and have the same limited access to places that wheelchairs do.

Strategy & Management

Management recognizes the market challenges and has focused on a few insurance companies that do pay while catering to those who have the ability to self-pay, sometimes when a legal settlement is involved. This allows the company to generate sales and get units deployed while working on the larger opportunity of the broader private payer insurance market.

The path to acceptance is less about what a huge improvement it is for people and more about reducing high costs of subsequent health problems and medical dependency. Since many of these costs are real and clinical studies provide strong support for the benefits of walking for these patients, it is just a question of time.

Longer term ReWalk plans on targeting other medical conditions while continuing to improve their technology platform (think smaller, lighter, more capable, and cheaper.) Other possible conditions to target include MS, strokes, palsy, and quadriplegia.

They have done the requisite IP work to create a solid foundation for being able to continue to operate and increase their value in the market. They do have an interesting partnership and investment from Yaskawa, which is a major player in industrial robotics. The relationship includes joint development and reciprocal marketing and distribution.

Clues from the Comparable

Shares of ReWalk will be tough to value given their early stage. But we have some comparable companies to look at for clues to how the market might react in the near-term, and what kind of intrinsic value this company would have if it is successful.

First of all, the companies that have come public in the spinal therapy area have been a mixed bag in terms of performance as shown in the table below. We’ve included a non-spinal company, Inogen, in the mix here for reasons we will come to in a moment. None of these companies are a close match for ReWalk, but they are at least operating in a similar area of medical treatment. Inogen is unrelated to spinal therapies, but rather has developed a portable device for delivering oxygen to patients that need it. This is orthogonal to the market setup that ReWalk is in. New, superior technology with substantial quality of life benefits that needs to get through the adoption and regulatory process to become mature.

We also had a closer look at Intuitive Surgical (ISRG) which is very mature, but an example of a high end robotic medical technology that took many years to adopt. ISRG has stunning gross and operating margins which at least informed us in building a prototype IV model for RWLK. We don’t expect RWLK to be the next ISRG at this point, but we can surmise that if they deliver over the next several years to close in on $1B in revenue, they can do it with 50% gross margins and at least 14% net operating margins. Based on those numbers, the IV would be $112/share.

Conclusion

So what we have here is an “opportunity stock” with a real market opportunity, good technology, solid management, and a good partner in Yaskawa. (Yaskawa was founded in 1915 and has revenues of $3.5B.)

The prospective market capitalization of just under $200M feels pretty attractive based on the opportunity, but we don’t know if investor enthusiasm will elevate the final price and inflate the stock in the aftermarket. If this one comes quietly, we’d probably include it in our IPO Folio and monitor their progress. As we can see with a very rough IV analysis, the company will be worth quite a bit if they can execute on their plan.

Bullets and Tickers

• ReWalk is an early leader in the emerging space of using exoskeletons to allow paralyzed people to walk again. It’s not only a life-changer, but reduces or eliminates a number of health problems that stem from being wheelchair-bound.

• Revenues are nascent, but they are FDA approved and working to expand coverage and adoption. The company has good technology and a solid management team.

• The proposed market capitalization of $180M (at the $15 mid-point) looks very attractive given the market opportunity and margin potential.

• Their partnership with the much larger Japanese company Yaskawa helps limit the risk for investors if the company founders badly in terms of execution.

Tickers: Primary (RWLK), Secondary ISRG, LDRH, AMDA, KTWO, INGN, IRBT

Industries: Healthcare, Technology

Themes: Robots

Appendix A – Comparable Company Descriptions

K2M develops proprietary complex spine technologies and techniques in the United States and internationally. The company markets and sells implants, disposables, and instruments primarily to hospitals for use by spine surgeons to treat spinal pathologies, such as deformity, trauma, and tumor. K2M Group Holdings, Inc. was founded in 2004 and is headquartered in Leesburg, Virginia.

Inogen makes portable oxygen concentrators. Its oxygen concentrators are used to deliver supplemental long-term oxygen therapy to patients suffering from chronic obstructive pulmonary disease and other chronic respiratory conditions. These are portable devices that concentrate the air around them to offer a single source of supplemental oxygen; and related accessories to patients, insurance carriers, home healthcare providers, and distributors. The company sells its products in the United States and internationally. Inogen, Inc. was founded in 2001 and is headquartered in Goleta, California.

Amedica offers a range of medical devices including the Valeo silicon nitride interbody spinal fusion devices for use in the cervical and thoracolumbar areas of the spine; Valeo stand-alone anterior lumbar intervertebral fusion device; and a line of non-silicon nitride spinal fusion products used by surgeons to promote bone growth and fusion in spinal fusion procedures. The company also develops femoral heads for use in its total hip replacements; and femoral condyle components for use in its total knee replacements. It markets and sells its products to surgeons and hospitals in the United States, Europe, and South America through a network of independent sales distributors. The company has research and development agreement with Kyocera Industrial Ceramics Corporation to manufacture silicon nitride-based spinal fusion products and product candidates. Amedica Corporation was founded in 1996 and is headquartered in Salt Lake City, Utah.

LDR designs and markets various surgical technologies for the treatment of patients suffering from spine disorders. The company’s products are based on VerteBRIDGE fusion and Mobi non-fusion platforms for applications in the cervical and lumbar spine. The company was founded in 2000 and is headquartered in Austin, Texas.

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[1] http://news.vanderbilt.edu/2012/10/exoskeleton/