In the extensive analysis that follows I have estimated ResApp Health Ltd (RAP) currently to have a base Equity Market Value of $1.511 billion (share price equivalence $1.76)
This reasoned estimation is derived solely from information available in the public domain, either in the form of prior expert Company valuations or by conservative revenue estimates from captured share of relevant product markets. The analysis is summarised in the table below. Timely receipt of some expected regulatory approvals is assumed.
View attachment 4337623
In the absence of a developed Covid-19 mass screening product the assessed current value would become $553 million (share price equivalence $0.64).
_______________________________________________1. IntroductionWith a Scheme of Arrangement on offer, ResApp shareholders soon will be presented with an expert opinion on the value of their Company. An opinion that the $100M offer by Pfizer is fair and reasonable to shareholders is key to the successful adoption of the proposed Scheme. There are however many credible expert company valuations that have been available already over several years to guide shareholders’ decisions. There is no reason why the Scheme opinion should have higher or lower credibility than those.
1.1. Historical ResApp ValuationsOver the period July 2016 to February 2021 there has been twenty-nine expert opinions on ResApp’s value collated for investor consideration on the Company website. The analysts involved, from Patersons Securities, NDF Research and Morgans Financial, are among the most experienced equity valuation experts in the Australian Life Sciences/Healthcare industry.
None of those opinions of course evaluated the now additional opportunities available from the contribution of potential Covid‑19 diagnostic products.
It would be easy to argue that these expert opinions have been placed on the ‘Analyst Coverage’ page of the website [1] in order to encourage investment in the Company, and some likely were used to support capital raisings at the time. Indeed it should be easy to find shareholders who would attest that their decisions to invest in the company were influenced by the expert valuations that the Company had made available at that source.
On that web page the Company disclaims endorsement of the content of those reports, although it seems unlikely that they would be made available there if the Company believed that the reports materially misrepresented its value or might misguide investor decisions.
With the initiation of research by Patersons Securities [2] in November 2016 an ASX release by ResApp specifically directed investors to the availability of the report on its website [3]. Employing a detailed DCF analysis that report gave RAP a base FY2019 Equity Market Value of $444.5M.
As an indication of that value a base-case share price target of $0.59 was calculated, extending to a high-case price target of $1.79 ($1.064B EMV). Timely FDA approval of the ResApp‑Dx diagnostic product was assumed [4].A similar ASX release in July 2017 announced research initiation by Morgans Financial, with a DCF valuation of $392.3M and target price of $0.48 [5].
Surely a reasonable person would conclude that by intentionally directing investors to the availability of these reports on its website the Company was endorsing the credibility of their content as a guide to investor decisions.
1.2. Pre-Covid-19 ValuationsThe results of those twenty-nine quantitative valuations, centred primarily on Telehealth as the Company’s major market opportunity, are displayed graphically in the chart below.View attachment 4337626In September 2016 RAP peaked with an on-market value of $362.5M, and again in October 2019 with a MCap of $287.6M. These were consistent with analyst DCF valuations at the time. Further significant value opportunities have arisen since then, not the least being Covid-19 diagnostics.
1.2.1. Discounted Cash Flow (DCF) ValuationsOn the chart the blue markers represent the base case Net Present Value (NPV) estimated at the time and derived from detailed DCF analyses that were discounted for opportunity risk (WACC) and probability-weighted for appropriate levels of uncertainty.
A simple unweighted average of the twenty-nine DCF base case valuations recorded up to early 2021, estimated primarily on the anticipated Telehealth contributions to the business alone, indicates a value estimate of $241.4M to that time.
1.2.2. NPAT-Multiple ValuationsThe yellow chart markers indicate the estimated market value derived from applying a conservative P/E multiple of 30x [5, 6] to the estimated net profit after tax (NPAT) that was projected two years ahead in each valuation document [8].
The Equity Market Value of the pre-2021 business derived from this 2-year NPAT-multiple method averages $425.8M.
2. Revenue-Based Market Multiple Valuations
2.1. Business Model ConsiderationsAs a small Australian company with limited resources ResApp has adopted a business model of commercialisation through partnerships. RAP’s products, classified as Software-as-a-Medical-Device (SaMD), generally are integrated into each partner’s platform, which then interacts with the consumer through its designed interface. RAP receives payments from these partners in accord with demand. This is an arrangement very similar to licensing of intellectual property rights with consequent receipt of licence fees and royalties in return. In this way advertising, promotional, payment-collection and other normal operating costs are met by the consumer-interacting partner. So also are the main operational risks.
Being a software product, manufacturing, inventory and distribution costs to RAP would be minimal or non-existent. As such RAP should be able to operate on a very high gross profit margin and abnormally high operating, EBITDA and net profit margins.
As an appropriate comparison, Pro Medicus Ltd (PME), a large (MCap $4.45B) Australian SaMD company, at time of writing reports a gross profit margin of 98.8%, a pre-tax operating margin of 66.7%, a price/sales (P/S) ratio of 54.9 and a price/earnings (P/E) ratio of 117.5 [5].
With the reduced operational costs described above RAP’s regular expenses should be relatively fixed and show little scale-up with cash inflow expansion. The only identified expense expected to scale would be licence fees payable to Uni Qld, the IP owner. This item is assumed to be ca 5% of RAP annual revenue.
With a simple fee-collection cashflow structure the majority of recorded revenue should correspond to an EBIT entry in financial accounts, generating a relatively high price/revenue multiple.2.2 Appropriate Market MultiplesIn the absence of regular historical cash flows it is common practice in the industry for valuations to be based on estimated annual sales revenues or net earnings projected forward 2-3 years from the time of analysis. An appropriate market-based ratio multiplier is applied to these estimates.
HealthCare and Information Technology historically have been among the highest growth and highest P/E multiple ASX sectors. Several of their constituents have multi-$billion MCaps even with negative net earnings.
Examples of price/earnings (P/E) and price/sales (P/S) metrics that the market currently applies to some relevant Australian companies are shown in the table below. These are prominent growth companies with products based on proprietary software. Unlike RAP, some of their operations include manufacturing and distribution costs that would justify lower P/S multiples.
View attachment 4337629In comparison with the examples above, multiples of 13x for P/S and 30x for P/E are chosen for this present analysis. These would be considered conservative if compared to the above examples and to the business model as described. The 30x P/E multiple was applied when determining the Equity Market Values depicted in the earlier Chart.2.3. SleepCheck ValuationIn April 2020 Morgan Financial’s estimate of the contribution of SleepCheck to annual sales revenue once FDA approved and partnered was ca $6.4M [9]. RAP Management has repeatedly iterated its confidence that FDA approval is soon likely, followed by partnership. Applying a 13x P/S multiple to this revenue amount would indicate a value contribution to RAP’s business of $83.2M. This present analysis assumes a 50% risk of that not occurring in appropriate time.3. Covid-19 Diagnostic Contributions
3.1. Market Size and TenureThe Company’s ASX release of 23rd March 2022 [10] announcing the development of a smartphone-based Covid-19 screening test emphasised its potential to replace rapid antigen testing (RAT) and to severely reduce the need for PCR tests. Professor Catherine Bennett, Scientific Advisory Board member, expertly opined that “The simplicity, ease of use and unlimited scalability of ResApp’s test will be welcomed by public health officials around the world”. An estimation of the size of the world market to which that unlimited scalability would apply is commented upon below.
3.1.1. Global Covid-19 test demandSo what proportion of the global population is likely to seek future testing for Covid-19?
Our World in Data [12] shows that in Australia an average of 2.70 Covid-19 tests per head of population were undertaken over the two years of the pandemic. In the table below this figure is compared with 7.32 tests per head for the UK, 2.62 for the USA and 6.38 for China.
In general the average number of Covid-19 tests undertaken per year in these countries therefore is materially greater than their populations. A majority of these should be rapid antigen tests, and in any case a RAP diagnostic might substitute for 80% of future PCR tests as an initial screen.View attachment 4337632Given the ready accessibility, simplicity-of-use and non-invasive nature of the RAP test it might well be expected to result in a marked increase in the rate of tests undertaken per population.
3.1.2. Rapid antigen test market size and tenureA July 2021 market analysis from Grand View Research judged the market then for rapid antigen tests to be US$8.5B annually, with the expectation that demand would be maintained with a projected 2027 market size of US$8.3B pa (A$11.6B pa).
Each 1% captured of that market then would equate to A$116M annual revenue for a RAP-developed diagnostic product. With a P/S multiple of 13x applied this would equate to $1.51B in Company value for each 1% unit of this market able to be added to RAP’s financials.
The ResApp product should be able to substantially cut the pricing on which the RAT market is based. Price reduction by a factor of 3 would reduce the value of a 1% unit of the market to revenue of $38.7M pa giving a unitised value amount of $503M.3.1.3. Smartphone market sizeAn alternative estimate could be derived from the size of global smartphone usage. Global smartphone subscriptions in 2021 were 3.94 billion with expected CAGR of 6% to 2027. As a basic metric, if RAP were to receive a cut of $1 per year for diagnostic use from 1% of a subscriber market of 4 billion, this would produce annual revenue of $40M. Application of the 13x P/S metric again would generate a Company value unit of $520M.3.2. Expansion of ResApp-Dx CapabilitiesPrior to Pfizer involvement the Company undertook preliminary trials that resulted in development of a digital cough signature capable of 92% selectivity in detecting Covid-19. Incorporation of that signature in the ResApp-Dx diagnostic product should materially enhance the value of that device.
It is assumed here that increased demand for telehealth and clinical use through Covid-19 capability will add a further 20% in value to the $426M pre-Covid valuation referred to earlier for this product. This value-adding contribution thereby calculates as $85.2M.3.3. A Covid-19 Consumer Screening ProductIt is the opportunity to develop this product that has attracted Pfizer’s interest via a licensing Agreement with income expected to derive from widespread Covid-19 screening or personal consumer home diagnostic use [13].
The Agreement terms are not exclusive to Pfizer, so that establishment of other partnerships remains a possibility. This analysis however will account for only the one partnership.
The terms recognise the intellectual property rights of both partners and allow Pfizer the right of “first negotiation for certain commercial transactions with third parties … in the COVID-19 field”. How the latter is to be interpreted is indefinite, but here an assumption is made that Pfizer will be entitled to a significantly higher proportion of revenues received.
A revenue split of RAP 25% and Pfizer 75% is taken as a conservative guess.
As well, although the high technical quality of the Covid-19 signature test seems proven and Pfizer’s involvement should mean substantial support for regulatory approval and commercialisation, a probability factor of 50% will be applied to allow for uncertainty risk.4. Estimation of Total Current ValueThe table below summarises value estimates as described previously.
For the Covid-19 screening diagnostic an average of estimated revenues from RAT and smartphone markets is used. An estimate of screening only 3% of the population is employed, which is highly conservative considering that the data included in section 3.1.1. above shows annual testing to have averaged well over 100% per head of the population during the last two years. It allows for very substantial lowering of demand. Use of a single test pack per year at $5.00 cost (pack of 10 tests) by that 3% of the market also is conservative.View attachment 4337635
Using the described conservative parameters the analysis concludes that a fair estimate for the current value of ResApp Health is $1.511B, with a share price equivalence of $1.76.
If a Covid-19 screening diagnostic were not to be developed the assessed value is $553 million (share price equivalence $0.64). This figure is consistent with the expert opinions already expressed prior to 2021, applying either NPAT P/E 30x or revenue P/S 13x multiples.
Considering the progress made since that time, particularly the immense potential for a global mass screener for Covid-19, any new expert opinion substantially misaligned with those earlier opinions would cast doubt on the credibility of any analyst research report, its own included.
5. DisclaimerThe content of this document is based solely on my opinions. It is general information only and is not intended as advice in any form. Nothing contained should be interpreted as a recommendation. Where assumptions have been made, including future projections, these should be viewed as highly uncertain. Numeric information has been obtained from sources in the public domain which appear reasonable. No responsibility is accepted for the accuracy of those sources. No opportunity has been available to undertake due diligence in support of this analysis6. Notes & References[1] https://www.resapphealth.com.au/investor-relations/analyst-coverage/
[2] https://www.resapphealth.com.au/wp-content/uploads/2016/11/RAP_Initiation_161116.pdf
[3] https://www.asx.com.au/asxpdf/20161116/pdf/43cyg13lnhnt9l.pdf
[4] RAP Management has indicated repeatedly its expectation for the success of its current ResApp-Dx FDA application.
[5] https://www.resapphealth.com.au/wp-content/uploads/2017/07/AUS_RAP_170707_What_s-in-a-cough.pdf[6] An earnings multiple of 30x is a conservative choice for high-growth technology-based businesses in the Australian Life Sciences sector. For example, some relevant current market PE multiples for high-profile companies with software-related products are: COH PE 55.6, NAN 99.5, PME 117.5, and RMD 38.6. Brainchip Holdings (BRN) has a MCap of $1.82B, negative earnings and a P/S multiple of 813.5.
[7] https://au.investing.com/indices/s-p-asx300-hlthcare-equip--service[8] In the absence of sufficient reliable data for a long-term DCF analysis extended to perpetuity, standard practice in the industry is to apply an appropriate multiple to estimated NPAT projected 2-3 years ahead..
[9] https://www.resapphealth.com.au/wp-content/uploads/2020/04/AUS_RAP_200403_Better_sleep_at_home.pdf
[10] https://www.asx.com.au/asxpdf/20220322/pdf/4577d1y053bqqt.pdf
[11] https://www.statista.com/statistics/748053/worldwide-top-countries-smartphone-users/
[12] https://ourworldindata.org/coronavi...-performed-relative-to-the-size-of-population
[13] Once the Covid-19 screening diagnostic is commercially established it should be sufficiently flexible to accommodate future respiratory pandemic events by substitution of its recorded cough signature.
[14] Technical Risk – the high quality of the ResApp-Dx and SleepCheck technologies has been well proven, being adjudged through multiple peer reviewed publications of clinical trial results as well as successful use in practice. There is little reason to doubt that the preliminary clinical trial results obtained for the Covid-19 diagnostic will not be repeated in a confirmatory trial.
[15]] Competitor Risk – ResApp has a unique set of digital cough signatures that has taken more than five years to develop, clinically trial and gain regulatory approval. These uniquely allow Covid-19 to be distinguished from other respiratory disorders. A potential competitor to the technology would be similarly time disadvantaged.
Use of a device requiring specific manufacture, requiring additional purchase cost, or not as readily accessible as a smartphone is not considered to be a competitor.[16] Regulatory Risk - ResApp-Dx already has TGA and CE regulatory approval for Australia, Europe and Asian markets. Managemant has many times indicated that it is confident of obtaining FDA approval, which would extend the available market size substantially. The SleepCheck device also has TGA and CE approvals and again Management claims to be very confident of FDA approval in the near future. The high technical quality of the developed Covid-19 signature seems well proven from clinical trial and Pfizer’s involvement should add substantial experience and support for regulatory approval.
