Working in the industry I have heard very positive reviews about the app. The facility I work for will be implementing the app in the near future so I will be able to gather firsthand experience.
Feedback from nurses is why do they need an app when they can basically perform the assessment themselves in less time.
From a quality improvement perspective, which is a major focus due to the royal commission, managers are loving this app. As it can be integrated with the major resident management systems the scores from the assessment automatically transfer to the residents progress notes.
Predicting a 75% penetration (conservative estimate) of the 210,000 residential aged care beds in Australia. This would give an annual recurring revenue of $7.4 million. Once the yearly trial period is over facilities will continue to pay for the product as part of their commitment to pain management, one of the major accreditation standards.
I recently took my time and attempted to value this company using Damodaran's valuation course. This is what I came up with $0.45. The valuation is almost likely to be wayy off but it's my guess on how they could perform just with the enterprise app during the next decade.
For valuing growth company with negative FCFF, I looked at next 10 years and made the following assumptions.
1. First assumption I made is 1 million beds globally by 2030 which is a 15% penetration rate worth $50M of revenue in 2030. I worked backwards to get a CAGR of 32% Estimated that revenue in 2020 to be $3.2M with apporval of government grant for FY20.
2. I assume that since it's a SaaS business the margins will be high so a 70% margin in 2030. Also, if they were to grow, they would need to increase reinvestment as they mature.
3. For young companies, it is really hard to work out reinvestment as usually that would be (Net capex + change in WC) but I can't forecast it well as compared to sales/cap ratio of 3 in year 2030.
4. Worked out Cost of equity using COE = rba risk free rate + levered Beta*(equity risk premium) apparently equity risk premium is (company + Country). I split revenue by country and did a weighted average to work out country risk. I assumed that as the company matures the equity risk premium go down by 0.25%.
a) levered Beta = unlevered beta * (1+(1-tax)*(debt/equity)) (I used Yahoo finance for unlevered beta by doing a simple average on 12 comparable health tech company betas.
b) Intentionally made cost of equity high in the begining by attaching a 5% premium on top of country risk premium as it is a young company.
c) cost of debt to stay the same as I feel the company won't make profit tlll 2022. Afterwards, I did (1-tax).
5. Valued operations using = EBIT*(1-tax)*(1-stable reinvestment rate)/ (cost of capital - stable revenue growth rate)
6. Total value = value of operations + cash - debt - unexpired equity options
Rating: "Buy". TP: $0.55.
Painchek Ltd (ASX: PCK) is a health technology company that uses artificial intelligence to assess, score pain levels in real time and update medical records in the cloud. Put simply, caregivers record a 3 second short video of the patient’s face and Painchek analyse the images to detect presence of pain from 9 micro expressions. The current target market for their pain detection app are dementia suffers and future target market are children who are yet to verbalise.
Residential aged care market for dementia patients
Globally, it is estimated 47 million people are currently living with dementia and it is expected to grow to 75 million by 2025. Dementia is currently the second major cause of death globally (after cardiovascular disease) and is projected to become the leading cause of death during this period. In Australia, there are 950 Residential Aged Care (RAC) operators who manage a total of 2,700 RAC’s with 210,000 resident beds. Around 400,000 people live with dementia in Australia of which 115,00 are within RAC.
Currently, Painchek have signed one-year subscription agreements with 140 RAC facilities. Their business model is to make $5/month average revenue per licensed bed (ARLB) across RAC customers and range from $6-$10/month based on the usage of active residents. They grew from 3 customers with 65 license beds in January 2018 to 23 customers with 2380 license beds in February 2019. The numbers give a strong indication for the potential exponential growth in RAC customers during the international expansion phase.
Why I like Painchek shares
Firstly, they have made significant progress in their international expansion in Asia Pacific, Europe and US where the projected market size would increase from 500,000 healthcare professionals in Australia to 14.5 million.That is a 2900% increase in market size allowing better commercialisation opportunities. They entered their first international market through a distribution agreement with UK’s Person Centred Software which provides mobile care monitoring for over 1200 care homes across the UK. They penetrated European market after clearing CE Mark regulatory hurdle. The European market have potential of 8 million healthcare professionals who could use PainChek. They have also entered the Asian Pacific market after gaining regulatory clearance in Singapore. The Asia Pacific market has currently 23 million people with dementia. Currently, Painchek is in the FDA regulatory clearance process for US market entry (representing 70% market share). Management have forecasted that they will be granted FDA approval in 2020. The recent US patent approval for its pain assessment invention allow PainChek to protect the intellectual property of its invention in the United States and provides a platform for growing the brand in international markets. The US market have potential of 6.5 million healthcare professionals who could use PainChek.
Secondly, they are entering multiple market segments which cross over and expand Painchek solutions beyond dementia care and aged care segments. They can enter multiple segments as their software can be used by multiple healthcare professionals to validate and revalidate pain levels. Painchek refer this as their “Shared Care” model which allows healthcare professionals to provide consultation for patients in their own home as oppose to a RAC centre. Expanding market segments give rise to the pre-verbal children market where management forecast a 400 million market opportunity that far exceeds the Adult (dementia) app market. They have successfully developed the facial recognition capability for the children’s app and is expected to launch in Q4 2019.
The Bottom line
Painchek is expanding their service offering to different market segments due to the flexibility of their facial recognition algorithm and they are expanding globally for better commercialisation opportunities. Despite being loss making company, they have made significant progress towards commercialisation and have government backing in the form of $5M grant from the Morrison government to facilitate the implementation of the pain recognition app in the Australian RAC centres. Also, Painchek have strong defensibility characteristics with IP protection, cutting edge technology and difficult market entry barriers for potential competitors. Competitors face regulation in US (FDA App de-Novo application), Europe (CE Mark clearance) which comprise 70% of market share in the dementia market.
Managing director and CEO Philip Daffas is a highly accomplished global business leader (Ex Cochlear) and people manager with an international career spanning more than 25 years with leading blue-chip healthcare corporates and novel technology start-up companies. In my opinion, Philip is ideally placed for Painchek’s international expansion phase.
PainChek Limited (PCK) has developed a patented technology in the form of a mobile app that uses existing smartphone and tablet hardware, along with AI technology, to analyse facial expressions that indicate pain in real time. The technology can help carers identify the presence of pain when it isn’t obvious, quantify the severity of pain when it is, and monitor the effectiveness of interventions by aged care staff/medical personnel. Importantly, the device assesses pain criteria for accreditation and provides evidence to facilitate aged care operator funding. PCK’s Adult App has been approved by the Australian (TGA) and European (CE) regulators, and it will be seeking a De Novo clearance from the US FDA in CY20. While PCK is not yet profitable, we are attracted to the global opportunity, the traction in the Australian market, recent $5m Government grant and opening up of the UK market. These factors represent positive signs for this emerging operator that services a critical need. We initiate coverage on PainChek (PCK) with a BUY recommendation and a DCF based valuation of $0.55/share.
[Note: PCK closed at 21.5 cents on Friday (29-Nov-2019), so Canaccord's Martyn Jacobs is suggesting there's +155.8% upside in PCK - to reach his valuation of 55 cents.]
Target markets: PCK has two essential markets: those living with dementia and infants who suffer pain but cannot communicate it. Globally there are c.47.5m dementia sufferers, and the number of infants is c.400m. Importantly, the users of the device are the carers, health professionals, etc., and therefore the number of devices is actually multiples of the number of people experiencing pain.
Automating existing process in aged care: The device automates the existing Abbey Scale standard of pain assessment, which has been conducted manually. The data collected by the device can be seamlessly integrated into operator backend IT and administration systems, and these service providers represent a key distribution point for entering the aged care market. It is interesting to note and PCK advises that this is the first time a medical device has entered the aged care market before the hospital market. Note that the hospital and home care markets represent opportunities for PCK over time as well.
Infant's market entry expected FY21: The pre-verbal children’s application is currently undergoing a trial at the Murdoch Children’s Research Institute, with the study expected to be completed in 3QFY20.
Valuation: We use a two-stage DCF valuation and arrive at $0.55/share price target (WACC: 11.5%). While PCK is in its early commercialization phase, even revenue multiples don't do justice to an assessment of the potential for this business. It will clearly need to grow into its valuation to justify the premium in the share price. Yet we consider PCK is worthy of broad investor interest. This unique technology provides a breakthrough to an intractable problem in the aged care sector, which is in desperate need of technological solutions to support the care of the elderly and particularly those living with dementia.
Disclosure: Not held.