Aged care rollout seems slow, as I feared. Still at 70,000 licences of 100,000 contracted. It seems like they've been referring to that 100,000 mark for a year now. They are working on improving the onboarding speed, there must be training bottlenecks.

85-90% retention. 50% have now renewed over 3 years.

News flow will be good this year, but there's still a need for more cash than they have:

• FDA clearance expected this half
• Infact app market testing and marketing plans underway, Aust launch by July
• Push into Aust and UK care homes and hospital markets (larger than aged care) but will the same training bottlenecks apply?

Not holding just watching.

Raised $30m since backdoor listing in October 2016. Today market cap is $49.1m

·      March 2024 Raised $5m, Placement $2.5m, $2.5m SPP at $0.0251 per Share

·      September 2023 Raised $3.55m Placement at $0.027 per share

·      June 2022 Raised $4.55m, Placement $3.0m, $1.555m Entitlement offer at $0.028 per share

·      August 2020 Raised $10m Placement at $0.11 per share

·      June 2019 Raised $4.15m Placement at $0.145 per share

·      September 2017 Raised $2.75m Placement at $0.05 per share

·      Backdoor listing October 2016

Quick check of Boards inside ownership, was less than 4% of total shares on issue.

I’m having a hard time figuring out if this pain assessment product would/should be sticky, and could ultimately become a part of standard care for non-verbal patients. 

Retention

The promising early uptake I suspect has been somewhat supported by sentiment and government intervention (who can deny the sad plight of non-verbal pain sufferers and the tragedy of our aged care system) and the last quarter showed only 88% percent retention. The CEO explained away the low retention as ‘smaller providers who didn’t have the resources to properly integrate the system and we’ll go back to them’. Which makes sense but long term I imagine you need high 90s retention given that the pool of aged care centres and hospitals is not infinite.

The product

You can’t actually test the ap without an invitation. But I’ve watched a few videos of zoom call presentations by Painchek representatives to aged care staff. My first impressions are that it is simple to the point of simplistic. The facial scan registers micro-expressions of pain, and the ap also has as a formalised checklist of behaviours associated with pain. A checklist is useful to avoid subjective judgements about the patient but a checklist doesn’t require an ap - so the USP appears to ultimately be the facial scan. 

Apparently it is all IP protected, which it better be because one of this year’s high powered AI models could probably eat Painchek’s lunch, as an entree. So, can they role out this product quickly and get it to become a part of standard care?

Is this really a $50 million dollar ap? 

There is the a whole other potential source of revenue in the yet-to-be-released infant ap, but I’d imagine that either it goes viral or it doesn’t. It doesn’t lend itself to retention so it therefore require virality and the approval of family doctors.

Monday meeting

@Strawman , I feel that you have to be somewhat nice to your guests so they keep coming back, but I’d be happy to see Philip properly grilled on Monday. If this is a flash-in-the-pan I would love to know! I listened with alarm to your most recent Baby Giants discussion about ASX scams involving backdoor listings where Claude said ‘it has to be a WA company with a history in both mining and biotech’ and thought, oh crap, that’s what Painchek is! Philip is ex-Cochlear, so I can’t imagine he’d bother taking on a crap product to launch just before his retirement, but I don’t actually know him so that might be wishful thinking on my part.

After presumably getting coat-hangered by COVID, Painchek are back on their feet. Growing revenue, globally expanding, but not yet breakeven and still plenty of risks. They just did a raise.

Product: Their Aust and UK regulator-approved mobile app and system allows carers to scan the faces of non-verbal patients to detect expressions of pain. The app helps to distinguish distress caused by pain from other kinds of distress, to allow for more appropriate care and treatment decisions. They have data from 4 milllion pain assessments conducted on their platform.

Hurdles: Carers require some training in how to appropriately use the app and sales require deals with each aged care provider, and system integration, which I guess is a hurdle but perhaps also a moat-builder if they can become a part of regular workflow.

Strategy:

1. They have a steadily growing presence in aged-care facilities in Australia (30% of market) and the UK (5%) with a focus on larger companies who can roll out the product across thousands of beds.
2. The USA strategy is underway as described below under 'Near-term catalyst'
3. They plan to expand to home-care which is 10x larger market than aged care.
4. They plan to expand into hospitals, where dementia patients take up a meaningful proportion of beds.
5. They have an infant app in the works to market to new parents - that will listen to the cry as well as scan the face.

Revenue: Their Australian and UK aged-care revenue has grown quarter by quarter for 60% ARR increase in a year and they claim 92% retention. They charge $50 'per bed' per annum. They are fast approaching 100,000 beds, which would cover operating costs but not expansion costs.

They just did a raise, dilluting by 10%, but reading between the lines they are attempting to time raises with an eye on milestones. USA has 2 million aged care beds.

I've jumped in early as a gamble, because the marketcap of sub $50 million seems reasonable if they can reach a small part of their addressable market. I'd be glad if someone more confident than me has anything to say about revenue verses market cap, I'm happy for a reality check. Thesis here is that the below catalyst will meaningfully lift the SP before any further raise, which the CEO basically alludes to if I heard him correctly.

Recent CEO presentation here: https://www.youtube.com/watch?v=mXo9DpekINs

Near-term catalyst: A validation trial is underway at two aged-care facilities in the US with the purpose of submitting results to the FDA for approval this year, maybe even this quarter. They already have 3 major partnerships in place with some aged-care providers covering half the market to begin selling once the approval is granted. CEO seems entirely confident that since the product is non-invasive and approved and in-use in Australia, the UK, and maybe EU, it should be approved by the FDA.

The infant app will also be launched this year in Australia. Considering $10 per month.

Leadership: I have little insight but CEO Phillip Daffas seems good on paper, was Global VP of marketing for Cochlear. He appears to be at the end of his career and this must be his swansong.

Ownership: I'm not sure what is a reliable source for insider-ownership data (if someone could please tell me) but Simply Wall St suggests 25%.

Competitors: Googling I could only find an iris-scanner startup which is privately funded, but that seems more invasive and would require more cooperation from the patient.

Discl: Own IRL and Strawman. Comments welcome as this is my first attempt to write an overview.

Solid update from Painchek. They manage to get around 60% market share in Australia, covering 120K beds.

Painchek is a very interesting startup focusing on the niche dementia/cognitively impaired market and made it clear that FY22 is centred on international expansion. Getting more CMS integrations in the UK was a big achievement as it unlocks 90,000 beds. History has shown us that even though the system is integrated, it does not mean that Painchek would fill 90,000 contracted beds quickly. It most likely takes 2-5 years to win the beds, with 2 years being very optimistic. 

They are a startup, so looking at the current financials is not a good strategy for assessing the long term prospects. The most important metric to measure Painchek's success is revenue retention during revenue growth. The new contract wins for Q4FY21 are not yet implemented and will be under commercial pricing, meaning they are finally moving away from the government trial. The key question is how many beds can they retain during the transition? If they can retain more than 95% that would be a win for the company. 

The current quarterly cash burn is around $1M per quarter with ~ $11M cash in the bank. So milestones that they must deliver by FY22:

1. Prove the UK business model and grow sales.
2. Enter Homecare through existing customers. 
3. Start commercializing the kid's app (not expect anything special until mid-2022).
   • I particularly like the fact that Painchek is in discussions with Cochlear to monitor Post Procedural pain for young children. I like the chances of this being a reality if there is evidence where Painchek is a better tool to assess the pain than doctors. 
4. Complete the FDA trial 

Overall, don't expect exponential revenue growth. However, they are proving themselves by reaching milestones like RAC bed growth. Unlike many startups with unproven products or no customers; they have customers and proven products. They have not grown them in international markets with larger addressable markets. 

From an investor POV, it's still a long way before they make meaningful revenues. Hence, Painchek is low weighting in my portfolio but they are a cool startup for the really long term investor (I am talking 2025+). Ageing population increases the TAM for Painchek so it's not a fixed number in residential aged care. I predict the share price to swing violently in both directions via news flow. An excellent trading stock.  

Now that Painchek achieve this milestone, let’s see how quickly they can get customers using the app. I think they are starting with hospital before going straight to direct consumer. 

The final regulatory hurdle is to clear FDA for both adult and children’s app in 2022. After approval let’s see the rollout. If past history has shown us anything, the company is very slow to commercialise. 

Painchek is an interesting company providing a valuable service but struggling to get over the commercialisation hurdle. As explained previously, covid halted progress on their international sales growth. The primary risk for the business is execution. The technology is great, product is essential for aged care but commercialisation is slow. I underestimated how long it takes to win customers after clinical trial. This is a painful lesson to remember when investing in early growth health technology companies. 

We are seeing prolong delays with Phillips healthcare. The delirium trial is essential for Painchek to prove the product to Phillips. Upon completion, they could monetise facial pain monitoring by integrating with Phillips hardware. In my earlier valuation, I did not include revenue for homecare and hospital segments. However, I projected 1m beds by 2030. That assumption no longer makes sense when looking at the context of the national rollout.    

Thus, my initial valuation made assumptions that made them look better than what they are capable of achieving. Guessing when Painchek reach commercialisation has the same likelihood of throwing a dart 100m away and expecting a bullseye. Unfortunately, for a DCF you are basically trying to predict future cash flows. It’s the most flexible tool we have as analysts. Revenue uncertainty is very high so making slight errors in the forecast will change the valuation greatly. 

My initial valuation is a valuation gone wrong. All my assumptions have to be rechecked: 

• 1m beds (15% global penetration rate) by 2030 (how could they get there?) 
• Operating margin of 70% in 2030 makes no sense. As the company gets bigger they need more staff. I can see gross margins being 70%+ but not operating margins.  
• risk free rate no longer 0.5% it is 1.5% or whatever the 10yr government bond rate is. 
• Perpetual growth rate of 6% is faster than inflation from 2030 onwards, so it has to be a special business to reach that. I very much doubt that to be the case. 

In saying that, I have not considered the other business lines that are primed for commercialisation - homecare, hospital and (children's app + children's hospital). Pretty much have to do sum of the parts valuation without going over board with the assumptions.

I will put my thoughts on the valuation section. Please see attachment on the DCF snapshot. I am still making bold claims of the future but thanks to DCF, it is worth less today. Most of the revenue growth happening from 2025 onwards. The stock price will remain volatile for quite a while. You can get away trading this stock. 

Painchek achieved regulatory clearance on the universal painchek app that caters to not only cognitive impaired patients but also for patients that can verbalise their pain. The company is taking the medical device route for any new products and I guess that explains the slow growth. It is frustrating for shareholders as new products need approval before use, even if the product is technology based. Despite this, it is a good sign for existing customers as now all residents can be monitored using Painchek. The care industry has struggled with pain management reporting and I can see Painchek being useful for that need on a broader market. 

My new valuation will have to take residents who can verbalise pain into account. Especially looking at the % of residents per care facility with cognitive impairment and how much more revenues Painchek can extract per customer. I still feel the larger markets are hospital and children. Therefore long term, bulk of he valuation should come from segments not penetrated by Painchek. There’s also a webinar coming up, so more questions should be asked.

25-Jan-2021:  Canaccord Genuity: PainChek (PCK): DecQ update - COVID-19 impact defers adoption

Analyst:  Martyn Jacobs | Canaccord Genuity (Australia) Ltd. | mjacobs@cgf.com | +61 3 8688 9164

• Rating: BUY (unchanged)
• Price Target: A$0.35 (down from A$0.49)
• Current price: A$0.07
• 52-Week Range (A$): 0.06 - 0.20
• Avg Daily Vol (M): 3.7
• Market Cap (A$M): 83.4
• Shares Out. (M): 1,126.8
• Dividend/Shr (A$): 0.00
• Dividend Yield (%): 0.0
• Enterprise Value (A$M): 71.0
• Last Cash Balance (A$): 12.4
• Last Quarter Cash Burn (A$M): (1.4)

--- click on the link above for the full CG report on PCK ---

[I do not hold PCK shares.]

Painchek sent out their quarterly last Friday night and it was not good. 

• The contracted bed uptake grew slightly 
• Homecare pilot launch on January (I thought it was happening this quarter) So it is delayed by a quarter.
• Phillips not much progress on the delirium trial due to COVID 
• Children's app - surprisingly good news here with an expected TGA application during Q3 FY21 just using pain faces. This is to enter the early child monitoring market. 

Overall, it was a very disappointing result and makes up quite a lot of weighting in my strawman portfolio. Will lower the weighting. Have to revalue the business at the end of next quarter to see if things are progressing slowly or if it is a one-off quarter. Prior assumptions are challenged by this quarter's performance. 

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 

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.

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.

Management Experience

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.