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OptimizeRx Update: Gearing Up for a Big Second Half of the Year

It’s been an eventful three months for OptimizeRx (OPRX) since my initial write-up in February. Let’s recap what has unfolded and why I have decided to make OPRX one of my largest positions.

Financing

OptimizeRx announced on March 17th, 2014 that it had completed the long-awaited financing necessary to buy out Vicis Capital by the month-end deadline. The key terms disclosed in the filing:

On March 17, 2014, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with the purchasers identified on the signature pages thereto (the “Investors”), pursuant to which the Company sold to the Investors an aggregate of 8,333,333 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share (“Common Stock”), for $1.20 per Share, or gross proceeds of $10,000,000 (the “Offering”).

The company also paid the underwriter, Merriman Capital, 9.7% of the gross proceeds and issued them 804,139 share purchase warrants exercisable at $1.20 per share. The financing was below my anticipated pricing but did not require warrant coverage. Appetite for the deal appeared strong and the company came away with $3M of growth capital after taking out Vicis.

Here is how OPRX’s simplified capital structure looks post-financing:

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I view the deal as very positive for the company, reducing the diluted share count by 7M, separating themselves from Vicis, and adding large, sophisticated investors to the shareholder base.

LDM Lawsuit Settlement

On the negative side, OPRX took a hit in their legal dispute with LDM. Buried in Note 19 of the latest 10-K, was this nugget:

“…On April 23, 2013, however, LDM reinstituted the patent infringement action in the United States District Court for the Eastern District of Missouri, Eastern Division claiming that OptimizeRx breached the Settlement and Patent License Agreement. The Company continued to vigorously defend the OptimizeRx technology, preparing for litigation, depositions and patent protection while also positioning for legal actions against LDM. On February 28, 2014, a Settlement Agreement was reached with LDM, and the judge dismissed the case with prejudice on March 18, 2014. Per the terms of the settlement agreement, the Company paid a one-time fee of $400,000 and will pay LDM the greater of $0.37 per patient discount distributed by OptimizeRx or 10% of the total revenue earned by OptimizeRx for distribution and redemption of all patent discounts.”

Essentially, the company will now pay out 10% of their gross coupon revenues to LDM in perpetuity (split between them and the EHRs). This is a big hit for the company. Management spun the development as a positive, citing a partnership that now allows them to integrate SampleMD in LDM’s network of 100K doctors. Perhaps things will equal out in the short-term, but LDM will surely be the winner as OPRX’s business grows down the road.

In my opinion, management could have done a better job disclosing the development to shareholders but hopefully they can move past this overhang and reap some benefits from the partnership.

Q1 Results

For Q1, the company reported revenues of $1.3M, a 97% y/y increase, and a net loss of $600K. On the face, these results seem disappointing but were impacted by a few factors:

1. Novartis Suspension

Novartis suspended SampleMD use from January through April to assess the ROI of the program. An independent firm found SampleMD delivered a 3:1 ROI and Novartis has since resumed their program. The company estimates the impact at $100K/mo.

2. Allscripts Technical Issue

Allscripts encountered a privacy issue that brought the system down for one month. The issue was resolved and Allscripts is now rolling SampleMD out to their entire user base on an opt-out basis. Management indicated the issue caused one month of lost revenue, which I estimate to be ~$100K.

3. LDM Settlement

The company booked a one-time $400K charge to cover the settlement payable to LDM.

Accounting for the above, I estimate revenue growth would have been closer to $1.7, representing 150% y/y growth and a slight sequential decline from Q4:

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Adjusted net income would have been break-even, and likely even higher if not for abnormally large stock-based compensation booked in the quarter. Despite the mixed results, OPRX confirmed a strong outlook. Management expects distributions to double y/y and reach a 1M quarterly run-rate by year-end.

CFO Appointment

Management introduced Doug Baker as OPRX’s new (and first) CFO on the conference call. Doug was most recently CEO of Applied Nanotech Holding (APHD) and before that, served as CFO of APHD from 12 years. Last year’s accounting restatement demonstrated the company needs help in this function. It’s too early gauge his impact, but hopefully Doug can help OPRX raise their profile and achieve a NASDAQ/AMEX listing in the near future.

Summary

Putting it all together, here’s how I see the next few years playing out for OPRX:

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Note: From the restated financials, it appears revenue share will be closer to 40% than my initial estimate (45%).

Based on continued EHR integrations and new drugs coming on the platform, I think OPRX can double their business annually over the next few years. Putting a conservative multiple on 2015 EBIT, shares are easily worth $3.00 or double the current price.

The biggest risk remains management execution, as no one on the team has experience building a public company to uplist on a reputable exchange. Against this risk, new partnerships, new drugs, and industry tailwinds should make the second half of this year an inflection point for the company. I have been a buyer at the $1.50 level and OPRX is now my second largest position.

16 Comments

  1. Your last post on OPRX got me to take a deeper look at this company, and the most recent filing did have some promising news. My only worry so far has been the management. The most recent stock compensation seems to be unnecessary. And what they mention in their most recent conference call did not really inspire confidence that they were looking out for shareholders rather than themselves. The 10% of gross revenues is also pretty big news that they should have made much clearer. They have a great first-mover advantage and sustainable business model but I’m not confident the shareholders will be the ones getting the majority of the upside.

    • Fireman,

      Can’t argue with you here. Management is a big risk with the story.

      One hand, management has been excellent – growing the business with limited capital and landing deals with the largest EHRs and pharma companies. They also negotiated with Vicis and reduced the FD share count by 7M.

      But on the other hand, the LDM lawsuit, the accounting restatement, and the stock option bonanza have been concerning. My hope is with a CFO, 2 board members coming on, and new large shareholders, these issues will improve going forward. And if the company grows as I expect, managements would have to be quite egregious to rob shareholders of the majority of the upside.

  2. is the 400k charge reflected in revenue? Or is it in costs? I supose without these items, it would have been about 1.7 million$? which is a nice improvement

    • Well the $400K charge for the legal settlement was included in costs. In addition to this, I estimate OPRX lost another $400K from the temporary issues I discussed above. Accounting for these items, the company would have been comfortably profitable for the quarter. Next quarter should see a nice improvement from a weak Q1.

  3. Mackie what do you think about threats from prescription software company’s taking this inhouse? What is sampleMD doing that for example allscripts cannot just copy? Are these patents that valuable? I am having some trouble with that still. It is also easier to get through regulation for these company’s probably.

    • This is an important question to consider. The regulation barrier is significant. As are the patents. Although, OPRX has had some difficulty in court with respect to patents.

      I have no doubt Allscripts could recreate this software. The difficulty is getting the pharmaceutical brands on to the platform. Allscripts is a systems integrator and really doesn’t have relationships with these companies. Also a pharma company gains access to many EHRs by partnering with OPRX, but just one if they used a proprietary Allscripts offering.

      From Allscripts point of view, it likely makes more sense to partner with a company that brings these relationships. They are also getting a sweet deal in that SampleMD splits the revenues with them.

      Perhaps down the road if this niche expanded in size, Allscripts would look at recreating it. In the meantime, I think they will be content to collect the revenue share.

  4. Hey Mackie I found the reason this was cheap, I dont think you touched on this (or maybe I read past it).

    It seems drug company’s use coupons to exploit insurance company’s to make more money on branded drugs. So there is some serious regulatory risk here. What are your thoughts on the size of that risk? Since most of their business comes from branded drugs.
    http://www.pcmanet.org/research/5-questions-for-brand-drug-copay-coupons-defenders
    http://www.kaiserhealthnews.org/stories/2012/october/02/drug-coupons.aspx

    • Hey JJAAP,

      I’m hesitant to call this “the” reason OPRX is cheap. People buy and sell micro-caps for all sorts of reasons, rational and otherwise. The weak Q1 and insider selling could also be keeping a lid on the shares right now.

      You bring up an excellent topic for discussion. This is a risk I have been monitoring closely.

      One scenario is where the government doesn’t intervene in the private market and insurers and pharma companies are left to duke it out. Insurers will try to limit their use, whereas doctors, patients, pharma companies, and retail pharmacies will want coupon use maximized. This has already played out with UNH attempting to ban all coupons and then reversing course after the backlash from their pharmacy “partners.” (http://hl-isy.com/Healthcare-Reform-Blog/April-2014/Copay-coupons-pharma-benefits-041514). My sense is coupons will not be so easily banned due to their popularity.

      If the government does intervene with a ban, it will likely be for branded drugs that have a generic alternative. This would be a big hit and cut out about half the coupon market for OPRX. But remember e-coupons represent only a few percent of the 100M annual market – there is plenty of room for OPRX to grow their business even as regulatory risk hampers them.

      Now let’s say coupons do become banned in all forms. OPRX goes to 0 right? Well, I’m not so sure. Their true value is in their reach of 250K+ prescribers across 350+ EHRs. Pharma companies will always have use for this network at the point of prescribing. OPRX will have to build new business lines, but I think management has already started the process with patient education, rep-on-demand, etc.

      It would appear a good amount of risk, both execution and regulatory is baked into the stock price. I remain optimistic for the rest of 2014, but will be watching the story closely.

  5. I have a question regarding your 2015 projections: are you being conservative in your projections for # of distributions in 2015? If mgmt hits their target of 1 million distributions in Q3 2014, or even the more realistic scenario of Q4, then your run-rate of 4 million distributions in 2015 assumes 0 growth in 2015.

    Also, I’m wondering if there is a difference in growth rate between coupons for drugs w/ a generic alternative vs. drugs without. Regulatory risk seems to be one of the two big risks, and purely based on logic, it seems that the most likely regulation would be to ban coupons where generics are available like you mentioned. If that were to happen, then knowing if there is any difference in growth rate between the two groups would be important. I might shoot this question over to management to see if they’re willing to break down the numbers.

    • Yes being conservative. Management has made projections in the past that were not achieved so I think haircutting is prudent. Hopefully with a CFO, projecting and communicating with the market will improve. My own opinion is they will hit the 1M quarterly run-rate but it will be in Q4 or 1H of 2015.

      I don’t think we have data that granular on the coupon market. You could ask management but I don’t they will have an answer for you. The best we have is the coupon market size (~100M) and the split of coupons w/ generics vs drugs without (50/50).

      Keep in mind this is not a coupon market growth story. In fact, the coupon market may decline because of the regulatory risk and pushback by insurers. This is an electronic adoption story. OPRX is the e-Coupon market leader and has only 1.5% of the total coupon market (electronic + print). If we take e-prescribing projected growth as a proxy for e-Couponing growth, then we are looking at a 36% CAGR through 2016.

      So if coupons where generics are available get banned, OPRX’s TAM gets cut in half to 50M. But even if they can only capture 10% of this market, that is still 5M distributions and $20M in revenues. The business would $6M in profit and easily be worth over $4/share.

      I agree there is a good deal of risk with this one. But not much has to go right at the current price IMO.

      • Hey Mackie, do you have a source for the 50/50 split between generic and branded for the coupon market? And any about ratio of branded drug coupons with or without a generic alternative? I am under the impression that most of the coupon market currently in existance is just exploiting it to keep up for a while against the generic drugs.

        thanks

        • JJAAP,

          Source: http://www3.med.unipmn.it/papers/2013/NEJM/2013-09-26_nejm/nejmp1301993.pdf

          Key text: “We found that a lower-cost FDA-approved therapeutic equivalent was available for 8% of the drugs in our sample (31 or 374). For more than half the remaining products (58%, 200 of 343), there was a lower-cost generic alternative within the same drug class.”

          We need to make a key distinction here. The is a big difference between therapeutic equivalent and therapeutic alternative. For cases where there is a therapeutic equivalent, then coupons are doing nothing but undermining the system. It makes sense for them to be banned, and that is exactly what the 2012 Massachusetts coupon law specifies. But that only takes out 8% of the coupon market.

          The other 50% is less clear. The brand may be the best treatment option for the patient or it may be no better than a generic. A recent court ruling held “neither precedent nor logic” supports assigning to patients a duty to “pressure physicians to choose generics.” The duty falls on the doctor to select the treatment option most likely to achieve the best outcome for the patient. Insurers should want this to as complications and extended treatment will cost them more than the price difference between brands and generics.

          I disagree that coupons exist only to ward off generics (though this is part of it, of course). You can’t forget the other side, that in cases where a brand really is required, lowering co-pays has been shown to increase adherence. The patients achieve better outcomes and the manufacturers benefit from longer use of their products.

          I think there is a compromise in all of this. If I didn’t, I couldn’t justify owning the stock.

  6. Another disapointing quarter. I wish i waited some with buying. Quarterly revenue in december was 1.8 milion and another quarter now only 1.4 million. Actually down from adjusted revenue in Q1. I was expecting explosive growth really. Thoughts on this?

    • Disappointing is a good word for it. I put together some thoughts in a post today:

      http://moatology.com/2014/08/21/thoughts-on-optimizerxs-q2/

      I also bought way too much at higher prices but added a few at $1.15 following the release. Execution has been spotty but stock remains very cheap in my view. Barring further delays, I think Q4 will show some very significant growth. I think its worth waiting for those numbers before revisiting the thesis.

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