Can investors breathe easy with Respiri?

Alan Kohler here with today’s CEO and it’s Mario Gattino, the CEO of Respiri. Now a couple of years ago I interviewed them and got quite excited and said it was a very exciting business and of course like a lot of these things it has not been exciting. At least it’s been slowly exciting, let’s put it that way. And the shares are still at about 10 cents. They haven’t really done much. Every now and again they have a bit of a run and everyone gets excited. And finally, it doesn’t quite get there. And all during this time, they’ve been living hand-to-mouth on cash. They’ve basically been running off the smell of an oily rag. And basically replenishing their cash with placements and raisings to the extent that they can. And they just did another raising recently which they reckon will last another 6 months. Which is not very long, let’s face it. Which is $3.4 million and they’re down to burning about $500,000 a month which is not very much.

But anyway, they’re about to start selling the product in India which they reckon will be good because the air quality in India is not great. And they need to know what’s going on. So the product is, it’s called Wheezo, and it accurately measures wheeze in the lungs and tells you how much of your lungs are working. So it’s an asthma monitoring tool. It would replace the peak flow monitor in use at the moment where they breathe into a tube.

I still think it’s an exciting product. I think it is likely to become the standard of monitoring asthma. In which case, they could make a lot of money. But they’re not making it yet, that’s for sure. I’ll leave it to you to decide whether it’s worth investing in. It’s certainly closer to making money now than they were 2 years ago but still a little way off. So here's Mario Gattino, the CEO of Respiri.

We always start these interviews about cash.  You’ve done a recent raising of $3.4 million, how long is that going to last?

Thanks, Alan, good to talk with you again.  Alan I suspect you conduct very few interviews with the CEO of a small cap company in biotech or life sciences that’s transitioning from development phase to commercialisation, and he or she would say I have all the capital I need.  It’s a continuous priority for myself and the board to monitor, optimise and preserve that capital to achieve our stated milestones and trying to add value to shareholders and the company.  As recently communicated in our September 4C were are now focussed on three key priorities for the company that are completely going to de-risk our plans to launch our first product, the Wheezo technology for asthma self-management.

Those three priorities are to optimise our manufacturing and supply chain to meet the anticipated demand that is emerging particularly from India which is a market that we have only recently started to engage in and I am happy to talk about that.  We’ll be looking to have the highest quality at the lowest cost and really look to maximise automation to improve our margin and enterprise value in that supply chain.  Secondly we’ve got to complete two quite fundamental clinical studies that will give us that medical validation for Wheezo and how it can be adopted within today’s asthma plans and replace existing competitors and finally we must achieve the CE mark which is the European approval in order to sell the product in the UK and the EU immediately and then that gets recognised in India, Australia, Singapore for subsequent approval in those markets and so by achieving those three key milestones pretty much we are ready to launch the product. 

The 3.4 that we have recently raised we expect that to give us 6 to 8 months at a minimum and you’ll see in the 4C we have already signalled a pretty significant decline or reduction in our expenditure in this quarter, around 18% over the previous quarter.  That’s because development was starting to wind down and over 50% of every dollar that we spend has been on the development of the product.  Clearly without the product you don’t have much more but really our job is to have some tight fiscal control and just focus on delivering on these priorities.

How much cash are you burning each month now?

We will be averaging around $500,000, maybe $550,000, going forward for the next two quarters.

Per month?

Correct.

Right, and so because you ended the last quarter, I think, with only about $300,000, you’ve got $3.4 million.

We’re expecting another $400,000 to $500,000 from our R&D tax incentive to come in through that period, so that will help.

So are you saying that in six to eight month’s time you’ll need to raise more money or that you reckon you’ll start to get some cash in from product sales?

Two things can happen.  The way things are evolving in India, we were just there recently and so we have got major hospitals there and our strategy in India is to launch into the top 200 tier hospitals in the major cities where people have got the spending power in order to buy the product at our prices and so they’re going to be conducting some pilot studies with our devices early on to evaluate and then to look to implement within their institutions and then sell them to their patients as they leave the hospital. 

It’s a slightly different business model to what we’re going to be using in countries like Australia and the UK which is a business to consumer and we go directly to the consumer.  Here the hospital will purchase the product from us or our joint venture partner and then use it within the hospital and then the patients will be instructed to buy it and get it dispensed from the hospital pharmacy and purchase it from the hospital.  Those orders, if we get our manufacturing up and running over the next four to five months could be coming in, we could have genuine orders which will drive revenue early on. 

Alternatively we feel that once we have crossed off these three key milestones that we are in a really strong position to either be looking to some of the global partners in either med tech pharmaceuticals or even technology, even the appers of the world who have had some discussions with and see whether they would like to collaborate or partner in our commercialisation or we continue to target strategic investors who might be willing to provide sufficient capital to support our launch and we might go it alone.  We’ll have our options open but we feel that we’ll be in a really strong position once we have ticked off these last three key milestones.

Mario, if things go well in India you’re going to have to start making more of these things, quite a few more of them.  It’s a nice problem to have, I guess, but you’re going to need to some capital I presume to ramp up manufacturing as well.  Is that something you’ve got on your mind as well?

Absolutely.  Firstly again having been just there and met with some of the Indian government officials and ministries, and our JV partner is leading a lot of the discussions there, MedAcheivers and Dr Harsha Vardhan.  The Indian government is willing to provide working capital, is willing to provide tax credits, is willing to support local Indian manufacturing and so we’re going to explore that option very carefully with our JV partner.  Having said that also we have got our manufacturing partner here in Australia which is SRX and they have got a large facility in Malaysia.  Having just completed the development phase and we have got now a dossier in order to build the breath censor component of our device. 

Our first target is to build the first 500 units and through that process we’ll get a really good understanding of how to build this device and what are the risks associated with it.  Those first 500 devices that come off the line will be used for these pilot studies in both the UK and in India for the hospitals that expressed interest.  Then we slowly ramp up, we look at moving operations to Malaysia, we look at what’s required to run multiple lines and the timeframe in order to ramp up to 2,500 units per month, then potentially 5,000 units a month and we have already got a preliminary plan that will take us out to manufacturing 20,000 units per month as a blue sky.  But as you say if things really take off in India I think we’re going to have to be even more aggressive and that’s why an Indian plant in parallel with what we’re doing with SRX might make a lot of sense, the investment that we can get from our Indian partners through the government is very attractive to us.

We’re just getting into putting that detailed plant together working on base case scenarios and best case scenarios, and we’ll be communicating that as we progress. 

Will you be looking for payment terms from SRX or do you think you’ll get some cash out of the Indian government or the Indians in general?

Both.  I expect our partner SRX given that this will be quite a large contract, if things progress the way that we expect, will share with us some of the risk and we’re discussing that right now but clearly if someone puts in an order for let’s say 5,000 units they will pay a deposit, a significant deposit to allow us to buy the components and to assemble that.  That’s the way that we see this operating and anything that we can get from the Indian government which has indicated it will provide working capital for the benefit of the Indian market will also look to be taking advantage of that so we’re quite open to funding this but we see this as being absolutely critical at this time.  It really demonstrates that there is a demand for our product and it will generate our first revenues so nothing is more important for us right now.

What are you going to sell them for in India?

As I said there’s this perception that is lagging the reality for a market like India.  Half the population, which is almost 700 million people, are characterised as middle class or wealthier.  They can certainly pay the equivalent prices to what we would pay here in Australia.

Which is what?

So we’re charging around $200 to $300 for the purchase of the product and we believe in that target population in the major cities that that is quite reasonable and we have already had those discussions with our JV partner.

What’s your margin on that?

When we do get to steady state, and this is clearly something we’re going to continue to work on in our manufacturing process and supply chain, but when we get to steady state we anticipate it costing around 100 AUD to manufacture these initial batches of the product.  Anything we can do to reduce that – if we can get it down to $75 through labour costs or more efficiency in getting components, location, we’ll do that because it’s important, it’s material, and it flows right through to the bottom line.  There’s still a nice healthy margin there and remember our joint venture partner in a market like India is doing an incredible job of creating the awareness and the appetite and the demand so our marketing costs, traditional kind of marketing and awareness costs, will be quite low compared to what we would have expected to pay if we tried to enter that market on our own.

How much of your margin do you have to share with your partner in India?

We have got an agreement where we will retain between 80 to 85 cents in every dollar that we make in India.  We think that’s a pretty good deal.

Obviously, India is not the only place with bad air, are you looking elsewhere or are you concentrating on India at the moment?

Absolutely, we’re looking elsewhere and we have been communicating consistently.  As I said India came into play about 3.5 months ago and as a small agile company we’re responding to that and we’re trying to maximise the opportunity but we have always indicated by getting CE approval, which is the European approval, that the UK and EU was going to be our first launch markets with Australia and Singapore following close behind, probably two months behind once we get regulatory approval in those countries so I was also recently in the UK following up with our medical experts over there because we now have got a finished product and was able to demonstrate to them the Wheezo product and the Wheezo technology first hand. 

I’m talking about some of the very best experts in the world from legendary hospitals like the Royal Brompton, Great Ormand Street in London, up in Edinburgh, down in Southampton, every one of them the reactions were incredibly positive and excited.  We spoke also to the health technology assessment agencies like Nice and the equivalent in Scotland because we wanted to start working towards the NHS, which is the national insurance there, to start subsidizing this product at some point and making it the standard of care in asthma self-management.  They also have been incredibly supportive and encouraging that we submit the information and applications to them to review the technology and potentially provide a positive advice.  That puts it on the radar of the medical community and also on the radar of the national health service there, the NHS.

Then it’s quite easy to go into the rest of Europe, so Germany is clearly the next big market, the rest of Europe and we also have an eye towards the US because we anticipate submitting our FDA package to the US either the end of 2019 or the end of 2020 and based on an approval in the US we would then expect to get approval and be able to launch in the US some time in 2020 and that’s going to be a very critical launch because the US is such an amazing consumer market.

Mario, obviously your product is a diagnostic tool rather than a treatment.  Perhaps you could explain to us why your diagnostic tool works better or is important in helping the treatment.

This is actually not diagnostic, Alan, this is self-management and home monitoring of your asthma.  Up until now the standard of care is what’s called a peak flow meter and it’s a rather crude piece of hollow plastic that you blow into three times as hard as you can, there is markings on it that give you a reading or a number and today the most common practice is to write that number on a piece of paper.  That’s your written asthma plan.  What we’re bringing to the market is a breath sensor technology with state of the art microphones, noise cancellation where you simply hold it to your trachea and you breath normally for around 30 seconds.  It is actually recording the sounds in your lungs, and this is the first product that is able to do this, and it then provides through the algorithm and the smart app in the phone, both iOS and Android, a wheeze rate, so a number. 

For example if that number was 10 it means that 10% of your airways are closed, 90% of them are open.  This will be a world first technology, the data will be stored on the phone and the phone and the app will give you the opportunity to enter your symptoms to enter one of the many triggers and there’s almost 60 triggers and counting for asthma, the medications that you’re taking, when you took them, there’s a reminder there to take your medications and finally all of this will be captured in a digital history that you can send to your doctor or you can take with yourself when you go for your review with the doctor. 

They’ll be able to see has your asthma been managed correctly and appropriately since the last time they saw you.  There will be a dash board where they’ll be able to see, were you in that green zone which is the good part of the asthma plan or did you have any episodes or spikes, did you go to hospital, were you hospitalised because of your asthma during this time.  Because of that digital record they’ll be able to see what actually happened on that day, what were your symptoms that day, what do you think triggered this attack?  That’s incredibly valuable information.

That’s why we believe our technology with the machine learning capability can truly be a personal asthma coach for that individual.  What’s important is for children, who we’re targeting, if you’re under the age of 14 or 15 depending on the experts your lungs are not fully developed and so the standard of care which I mentioned, the peak flow, it’s not a reliable tool because you can’t breath properly, you can’t breath hard enough just to get an accurate measurement so there is a large population, 25% to 30% of the asthma population, that truly doesn’t have a solution until our Wheezo technology is made available so that’s incredibly exciting to us.  The other thing is we know we will be first to market.  We scan the literature, we scan the conferences, there is no one else who will be coming to market ahead of us with this kind of breakthrough technology.

We think we have really got a game changer, the experts that we have demonstrated the product to in the UK and Australia and India, they all shared our ambition for this to become the standard of care, the new standard in self-management and monitoring of asthma and other respiratory diseases.

Mario, what’s your patent protection and what’s going to stop the Chinese or even the Indians stealing it?

Really the most powerful and most protected thing we have, Alan, is the algorithm which is something that has been developed over 20 years.  This is a technology that started a long time ago in Israel, it was developed into hospital diagnostic products that received FDA, CE and TGA approval and every file, every recording that goes into that algorithm, makes it better and more reliable.  That’s why we believe it’s impossible for anyone to be able to replicate that in a hurry no matter who you are and how much money you have.  That’s our trade secret, that’s our secret sauce let’s say, and then also some of the software we’re patenting that around the breath censor that we’ve just developed, it’s a far superior product to our first generation product that was approved by CE and TGA in 2016.  Yes, they could pull it apart, they might be able to do something similar to the breath censor but really that’s nothing more than a recording device or a digital stethoscope, it’s what’s happening in the app and the algorithm, and the data capture and machine learning, that is really where the proprietary knowledge and trade secrets lie.

Clearly, we’re going to continue to add t4o our IP suite and our IP portfolio as we innovate with the platform technology.

Obviously, your predecessors were talking up the product a couple of years ago as well, and obviously the shares had a big un up at that time but it’s been very disappointing since then, it’s just taken a long time.  Can you just fill us in briefly on what’s been going on there, why has it taken so long?

To bring this technology to market?

Yeah, it seems to have taken longer than everyone thought it would.

Firstly, it’s not an easy technology to develop and I think that’s something that needs to be appreciated or else there would have been products out there already.  It’s too big an opportunity, the asthma market is enormous, there’s a clear need that needs to be met and so no one else has been able to take that place during this period.  From our perspective I think we spoke last time in November, things were on track and we were expecting to have approval in the first half of 2019. 

We ran into a slight problem around one of our components, the plastics that cover the breath censor, we had a couple of iterations where the raw materials failed the testing and because we’re following a very well-defined process in order to get that CE approval it has to be exactly the product that you intend to sell in the market place so it can’t be close, it has to be exactly every component and so we had to wait until we sorted that plastics issue out even though we had 99% of the other components sitting there ready, they were all good to go, before we could start safety and compliance testing which is required to complete the dossier for market approval.  That in reality delayed us by four to five months and so that’s why if you add that to our initial timeline we are looking to get that approval around the end of this year around December 2019.

Very good.  It’s really good to talk to you, Mario, thanks very much.

Thanks, Alan, good to talk to you.

That was Mario Gattino who is the CEO of Respiri.