With Respiri’s (ASX: RSH) stage launch of wheezo across select Australian pharmacies and online underway, the company has revealed further major cost reductions resulting in improved margins.
The cost reductions are a result of “significant gains” in accelerated design and manufacturing efficiencies combined with a decrease in cost of goods sold.
As a result, Respiri anticipates the gross margins for its version 3.0 wheezo device and technology will be about 30% lower than previously forecast for 2021.
Additionally, instead of relying on external providers, Respiri has moved its mission critical competences, and IP development in-house. The company claims this will reduce its reliance on external providers and remove and potential conflicts of interest.
Higher efficiencies in Entech agreement
Today’s news follows a manufacturing agreement with Entech that was inked in late September.
Since the agreement, Respiri and Entech have worked together to identify additional manufacturing efficiencies to reduce overall input costs while developing wheezo at a higher scale.
Due to the identified efficiencies, Respiri expects gross margins through the pharmacy channel will increase from an estimated 40% to about 55%.
Respiri claims this is in line with other medical device manufacturers.
Additionally, Respiri has negotiated changes to its payment terms, with payments to be made on delivery of manufactured units rather than upfront to Entech.
Respiri anticipates these new terms will add materially its working capital requirements in 2021 and beyond.
According to Respiri chief executive officer and managing director Marjan Mikel what the teams have achieved in such a short time-frame has been “exceptional”.
“These improvements have been detailed and agreed approximately 12 months ahead of plan, which is testament to our culture of continuous improvement and innovation as a company.”
“Our lower cost of goods sold and improved product gross margins, not only improves the financial performance of the business as volumes increase over time, it also affords Respiri the flexibility to adjust pricing models, if required, across different jurisdictions to reflect different demographics and capability to pay.”
He added this will be important in Asian territories over time.
The latest improvements follow a previous identified reductions to the cost of manufacturing wheezo devices.
These were due to design and material optimisation, combined with decreased labour rates and assembly and test procedures.
Respiri noted this represented an 85% decrease in manufacturing cost per unit from earlier batches.
Under the exclusive international pharmacy sales and marketing, distribution and logistics agreement with Cipla, Respiri anticipates gross margins of 40% for wheezo devices sold the pharmacies.