Wheezo by the numbers

Hi all.

With the CY21 first quarter sales figures on the horizon, I thought it might be useful to have a place to work through Wheezo’s revenue figures for CY21, and then see how we can extrapolate this out to explore possible revenue potential in key overseas markets. Apologies for starting a new thread for this, but having explored many other RSH Hot Copper threads in detail (including the ‘Sales figure’ one started by Stern in February) for me there were too many distracting comments to be able to build a clear picture, so I’ve tried to do it in one post.

With that in mind, the purpose of this post is chiefly two things; firstly to explore the numbers behind Respiri’s revenue guidance of $6M to $8M (which can be further unlocked using the various projected pharmacy / RRP figures they’ve provided to the market) and secondly to conservatively apply a market-penetration-revenue-factor to overseas Asthma markets. The first part is hopefully a combination of logical maths and sensible assumptions, whereas the second is a bit of blue-sky-thinking fun.

Apologies also for the length (!) but the first part was a necessary to make the second possible. Additionally, I hope it is a useful exercise to do so that as the 4C announcements are released over the coming year we have one thread to come back to, in order to benchmark the progress and discuss how results are tracking.

Hope this is useful. Here we go:

Part One: the Australian opportunity (CY2021)

Total Addressable Market Figures
- 2,900,000 asthma sufferers
- 5,500 pharmacies; 4,000 covered by Cipla; 1,000 targeted for recurring sales by Respiri (i.e. 25% of market within Cipla’s network).
- Pharmacy visits by addressable asthma patients: 14 per day, 70 per week (averages)

Respiri Revenue Guidance
- $6,000,000 to $8,000,000 for CY21 (for simplicity, assuming mid-point of $7,000,000 for this exercise)
- Conversion sales target per visit is one patient per pharmacy, per week – but more on that below.

Wheezo RRP figures (iteration 1 – mid July 2020)
- Unit cost: $299.00
- Subscription: $8.00 per month ($96.00 ARR)

Thus in the real would, the RRP is $395.00. However as has been explained (numerous times to one or two here) this does NOT represent the revenue to Respiri. The device is sold upfront to Cipla with Respiri receiving an as-yet unknown X% of the sale upfront; Cipla on-sell to pharmacy who on-sell to customer. On the other hand, the SaaS revenue is retained 100% by Respiri. For direct-to-customer web sales, Respiri retain 100% of the unit price as well, so these metrics make it difficult to pin exact sales forecasts. However I think the online sales will be a lot lower than those done through pharmacies, so the deviation is not likely to be material.

Wheezo RRP figures (iteration 2 – announced 9th December 2020)
- Unit cost: $99.95
- Subscription: $9.95 per month ($119.40 ARR)

In this case the RRP for device + subscription is $219.35. Worth noting that on the website there are package deals i.e. 12-months-for-price-of-10 (which explains why the total cost on the website is $199 not $219.35 – it’s $99.95 + 9.95 x 10). Whilst my assumption is that sales via pharmacies will far outstrip sales over the website, I imagine that package deals are likely available through pharmacy sales too, so to be conservative let’s use a $199.00 receipt per customer figure. We’ll have to bear in mind that this will really fluctuate depending on a) the sales distribution channel and b) the period the purchaser signs up for).

The big unknown is what % of the unit cost Respiri is paid by Cipla – but more on this below. Going through many old threads over the weekend (notably one called ‘Sales figures’ started by Stern on 03/02/21) there’s no consensus on what this might be so I’m using their CY21 Revenue Guidance as a clue. Spoiler alert – I get to a 50%.

Revenue Guidance Upheld
An important point to note: I notice certain people started raising questions about the integrity of the company’s forecasts when pricing was changed yet the revenue guidance was upheld. I think the answer to this can be found comparing the pharmacy penetration figures provided in a 23 September 2020 investor presentation, compared with comments MM made during the recent 19 March 2021 NWR presentation with Ausb*z. On the slides for the September 2020 Zoom presentation, slide 4 ‘MODELS AND BUSINESS CHANNELS’ notes Respiri is targeting 1,000 pharmacies, and says “selling one wheezo per fortnight; Respiri hits guidance”.

However on the 19 March 2021 NWR interview (time: 14:14), MM says “we need one patient out of seventy a week and we will hit our numbers for 2021”. Hence I think the adjustment in timeframe from per-fortnight to per-week must be the answer. This is also corroborated by my calculations below. I can only assume they’ve come to this decision after observing sales during end of CY20 Q4 and start of CY21 Q1 and feel confident that 1 sale per pharmacy per fortnight was too conservative, and can be doubled.

Australian Sales Figures
This is simply a reverse-engineered *estimate* to try and determine how revenue guidance has been calculated based on the figures provided, and what this might tell us about the % of the unit cost received by Respiri from Cipla – which as I noted earlier I think is 50%.

Firstly, the key figures provided by the company (based on pricing iteration 2) are as follows – and if this gets too confusing there’s a diagram below:

- 1,000 target pharmacies selling 1 device/subscription per week for 52 weeks of CY21.
- Using my earlier annual customer receipt figure of $199.00 I get the following: $199.00 x 52 x 1,000 = $10,348,000.

As an aside, using the pricing iteration 1 figures, but with fortnightly sales verses weekly, we get a very a similar figure: $395.00 x 26 x 1,000 = $10,270,000. Hence I think the revenue guidance was upheld. (Very important note: under iteration 2 the overall revenue gross margins are much better because the SaaS is 24% higher and this portion of revenue goes 100% to Respiri; so if you’re still complaining about the company’s changes to the pricing, you may have missed the school bus).

Now $10.34M is much higher than the CY21 revenue guidance of $6M to $8M but this is clearly because we are talking about revenue derived from RRP to the customer. Evidently a significant portion of the ‘unit RRP’ is retained by Cipla. My gut feeling is that the % they retain would be fairly chunky, as not only do Cipla, the big Pharma company, need to make a handsome profit, but there needs to be enough ‘fat’ in there for the pharmacy to make their required margin too. As an aside, if anyone has any inside knowledge about what sort of % margin a pharmacy would expect to make via on selling a product (especially a medical device) please share.

We can break down the $10.34M figure further via % unit cost vs % subscription costs. This is of course predicated on my assumption of a $199.00 receipt per customer but it’s all I have for now so let’s go with it – and it’s more or less an even split between unit at $99.95 (50.2%) and subscription at $99.05 (49.8%). If we apply that to our total anticipated RRP (on the assumption Respiri hit their 1,000 pharmacies, 1 device each per week) we get:

- Unit revenue: $5,197,400 (XX% of this goes to Respiri)
- Subscription revenue: $5,150,600 (100% of this goes Respiri)

Two important adjustments now need to be made:

1. On the subscription revenue, you can’t assume 100% retention; even across a 12-month period there will be X% churn, i.e. people who cancel their subscription and receive a refund before the year is up. From what I can tell Respiri are anticipating annual churn of around 11% so at the very least we should reduce the subscription revenue by that amount.

2. Furthermore, let’s assume – for now – that Respiri receive 50% of the RRP upfront for each unit from Cipla.

On that basis the forecast revenue for CY21 (hitting the 1,000 x 1/per week target) would be:

- Unit revenue to Respiri: $5,197,400 less 50% = $2,598,700
- Subscription revenue to Respiri: $5,150,600 less 11% = $4,584,034

Total CY21 revenue to Respiri = $7,182,734

This is more or less bang in the middle of guidance provided for $6M to $8M.

If this is a bit too messy to read in text, here’s a visual representation:



You may think Respiri retaining only 50% of the unit cost on-sold to Cipla is too conservative but my non-scientific, non-sales gut feeling is that it would be around that number given:

a) this is a pharmaceutical giant dealing with a very small company, so guess who is calling the shots
b) Cipla are bearing the brunt of the sales and marketing campaign through their own network, and
c) assuming a 50% unit cost going to Respiri puts us bang in the middle of CY21 guidance provided (maybe that’s just a fluke though).

The other reason I think these calculations largely stack up is because hitting this revenue guidance will indicate a market penetration in line with what MM has forecast.

Assuming Respiri hit that mid-point above, that’s 52,000 sales per year. It’s safe to assume 1 sale per patient (apart from the odd replacement device) so in terms of a total addressable market of 2,900,000 Australian asthma sufferers, 52,000 sales is 1.8% of the market. I note this is above the estimate MM provides of capturing 1% to 1.5% of the market. However if we go with hitting the *low* end of guidance at $6,000,000 then working backwards that would be 1,000 pharmacies making 0.84 sales per week, applying the 50% and 11% revenue adjustments, getting us to $6.033M. That’s a reduction in annual sales from 52,000 (one per week) to 43,680 (0.84 per week). 43,680 customers out of 2,900,000 is 1.5% penetration.

Again, if you want a visual representation of what hitting low-end revenue guidance looks like, here it is. The only change to the table above is a reduction in sales per pharmacy from 1.0 per week to 0.84 per week:



One obvious conclusion to me is that the unit revenue won’t be there the following year – people already have purchased the device. So that will drop off (unless it can be replaced by new sales to new users) however the subscription revenues will continue to flow through.

So that’s where I got to with my calculations on the Australian revenue. I’d love to hear any alternate views or further refinement as I’m sure LTH’s will have given this plenty of though. Please let me know any glaring errors in my assumptions, or any tweaks to the overall model.

Part Two: Going Global (2022 onwards)

OK, so this is very high-level, so pardon the swathes of assumptions. However for my own mind I wanted to use Australia as a rough guide to see what kind of revenue figures we *might* be thinking in overseas markets – bearing in mind I believe the Australian market is tougher to crack given the lack of reimbursement in the healthcare system at present.

The purpose is to take the market penetration in Australia at the end of CY21 and apply this to the TAM’s in UK, US and Europe. This will give us a very rough guidance on possible revenues. The reason I don’t think this is too ambitious is because in theory the sales penetration in overseas markets should be higher where there’s a hospital/insurance reimbursement scheme. One point of difference is that for the US I’ve gone with an estimate from another thread via @lucasq on A$470 per patient per year in the US, based on RSH anticipating they’d get around USD 30 per month per patient (this was in the NWR presentation as well). The difference between our overall figures is because @lucasq was talking about capturing 5% of the US market for children under 14, whereas I’m simply applying an overall capture of 1.5% of the whole market (including adults). Part of the reason I’m doing this is for simplicity, the other is from a presentation I read where MM pointed out that during the PEP, even though they were targeting children, they had got around 50% adults involved as well.

So here’s a table to show what extrapolating the Australian figures looks like in UK, US and European markets (all figures in $AUD):



If we take these numbers assume a factor of say x15 on ARR then we’re looking at a Market Cap of $3.015 billion dollars. If I drop the US receipt per customer figure back to $199 that’s still a Market Cap of $1.966 billion dollars.

Using the higher figure ($3.0B) – there’s currently ~722.8M shares issued, so if we add another 150M for the various options due over the coming years, all in all it would imply a share price in the region of $3.46. Given Monday’s open was $0.165 that’s an appreciation in the SP of $1,994%.

If you want to use the lower Market Cap figure ($1.966B) and apply the same rationale as above, then your implied share price is $2.25 or an appreciation of 1,265% from today’s open.

These aren’t hugely robust numbers – I know, for example, that not all of the $201M noted above is Annually Recurring Revenue, because a chunk of it is for units sold in one year that won’t be sold again the next year (as the customer already owns the device), but it’s a bit of fun if we assume the two following points:

1) Australian CY21 guidance is met at the *low* end, and
2) Overseas markets perform in a similar way, but with a higher annual earn per customer in US

However remember there’s still a lot of upside here given all the different factors already mentioned, chiefly around higher prices / larger market penetration given there would be multiple distribution channels (OTC Pharmacy sales, online, hospital reimbursement). Furthermore, once you start changing the ‘Market Penetration’ % figures in my table the numbers get very large very quickly.

Finally – let’s not forget Cipla’s homeland. According to some 2016 WHO data I found, there’s estimated to be around 15-20 million sufferers in India. Obviously it’s not a country with a fully developed health system, but we’d be dreaming if Cipla didn’t have plans to take it into their local market, assuming all goes well in other overseas ones.

Here’s to an exciting few years’ ahead! Those with the patience to wait will, I believe, be richly rewarded. That’s enough from me (phew, what an essay) – but would love to hear other people’s calculations / projections / general thoughts. This is all my own research and assumptions, and is not financial advice.

Cheers
mondy