25-Nov-2019: Martyn Jacobs from Canaccord Genuity (Australia): Initiation of Coverage - Pain management for dementia sufferers with global reach
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.