Description

Company Overview:

OptimizeRx Corporation (“OptimizeRx”, “OPRX”, or the “Company”) is a leading provider of digital health messaging services for pharmaceutical companies to communicate with healthcare providers and patients. It is a cloud based application that supports patient adherence to medications by providing real-time access to financial assistance and critical clinical information.

OPRX has built a strong network with access to more than a half million healthcare providers. This network provides value to pharmaceutical companies, electronic health record (“EHR") vendors, doctors, and patients. With a strong footprint and scaling business, OPRX is in a unique position to capture changes in the industry and should have a long runway for material and profitable revenue growth.

Executive Summary:

Network Effect Value Proposition:

The main driver to the investment case in OptimizeRx is simple: the network. There are two main industry trends behind the importance of the network: (1) the transition towards electronic health record (EHR) vendors and (2) the reduction in access to physicians for pharmaceutical sales reps. To capitalize on these phenomena, OptimizeRx has developed a strong network in providing value to all users groups across the industry.

First, the pharmaceutical companies. The pharmaceutical companies continue to lose access to doctor offices and hospitals. For example, ~60% of doctor offices now ban or limit access of pharma reps to deliver samples and saving coupons. This percentage continues to increase and in a more competitive environment, access becomes more valuable. Pharmaceutical companies increasingly see a need for new avenues to influence and educate medical practitioners to improve volumes for their drugs. This is even more important for specialty drugs which are lower volume. These are becoming an increasingly higher percentage of new drugs being manufactured so the opportunity to educate physicians is increasingly valuable. This is a unique opportunity for OPRX as marketing budgets for pharma companies remain large and OPRX provides direct access to over 500,000 healthcare practitioners representing over 60% of non-hospital ambulatory providers.

The way that OPRX provides access to the doctors is through its electronic health record (EHR) vendors. The EHR industry is very fragmented with the largest provide representing less than 15% of domestic market. Due to the fragmented nature, it is not feasible for an EHR to build out its own platform as pharmaceutical companies do not want to deal with dozens of EHR’s. This is further supported since EHR providers outside of the top 10 are under resourced to build out the capabilities. OPRX is the aggregator that makes a single point of contact. OPRX currently partners with 370+ EHR vendors and can continue to grow relationships. Almost 90% of physicians use an EHR on a daily basis with average time usage of 5.9 hours per day. In return, the EHR’s get a much needed new revenue source that is all 100% margin through the sharing agreements.

As noted above, physicians spend a significant amount of time on EHR systems. OPRX helps the doctors by providing valuable information (access to new studies and drug comparison) and cost savings opportunities for the physicians patients (through drug discount vouchers and patient co-pay coupons). The pharmacies want to give doctors access to the information and discounts because it increases usage of the drugs. For example, a large scale study on heart disease from New England Journal of Medicine (2007) looked at over 10M prescriptions and found that copays of $25-$50 resulted in 2-3x abandon rates versus non-copay prescriptions. OPRX has more than 100 brands currently supported by platform and estimates that ROI for customers ranges from 2x to 20x depending on the situation.

Because of the value noted above, OPRX can continue to build out its network by reaching more EHRs and advertising for more drug brands. Additionally, the recent partnership with Patient Connect adds access to the Europe market as well as with network of pharmacy partners estimated to reach another 200 million patients and over 50% of prescriptions dispensed annually in the top European markets (Germany, UK, France, Italy, Spain and Others). OPRX recently migrated its platform to Oracle database software and moved software to Amazon Web Services which makes integration much easier for new partners as they continue to expand the network.

Increasing White Space and Diversifying Customer Base:

One of the faster growing markets in healthcare is point of care. OPRX is developed to close the communication gap between pharma, physicians, and patients. This is becoming increasingly important as a new wave of specialty medications come, and the rising medical costs increase the value of the patient following medication adherence. It is estimated that medical adherence costs healthcare providers over $540 billion annually. Over the past two years, OPRX has made significant investments through acquisitions and internal program development to diversify away from financial messaging (low margin, maturing product) towards new end markets with larger white space opportunities. The Company, in addition to financial messaging, has brand and clinical messaging, brand support, patient engagement products, and digital therapeutics.

•  Financial Messaging – integrated financial messaging platform that allows doctors and staff to access a universe of sample vouchers, co-pay coupons and other patient support through their EMR and/or e-Prescribe systems

• Brand and Clinical Messaging – include a variety of brand awareness and clinical messaging services that can be tailored to meet the needs of a brand. These messages can include brand awareness messages, reminder ads, clinical messages and unbranded messages that can be targeted by specialty, diagnostic code and other criteria.

• Brand Support –focused on educating and working with pharma manufacturers on implementing new eRx media strategies for promoting their products.

• Patient engagement – provides digital messaging services through their cloud based Mobile Health Messenger (“MHM”) Platform. OPRX provides interactive health messaging for improved medication adherence and care coordination. (acquisition of CareSpeak in 2018 that saw 100% growth)

• Digital Therapeutics – consists of delivering patient programs with treatment and affordability information, lifestyle and condition trackers, Internet device connectivity, forms and surveys, with this all supported by a wide range of communication capabilities delivered via chat, bots, audio and telehealth.

The acquisition of RMDY Health (~$2 million of revenue in 2019) enables health care stakeholders to launch digital care management and patient engagement programs. Its focused on care management, population health management, and patient support programs. This can be deployed through the website, an App, and text message. RMDY also has an AI powered chatbot that looks at patient data and usage patterns and proactively prompts the patient to take action to improve health. This acquisition both increases the white space several fold and diversifies client base to include payers, MedTech and wellness companies. This includes companies like Anthem, Medtronic, and The American Heart Association. This product is a SaaS based pricing model that provides recurring revenue stream with high gross margins and greater predictability. Management expects strong growth over next twelve months with gross margins of 90%. Recent quarters have showed continued interest in the product including its TeleHealth platform. This segment is growing faster than the core business so should provide a tailwind to margins as it becomes a more material portion (roughly $2 million of sales in 2019 expected to increase to $3 million in 2020).

OPRX also signed an Agreement with NewCrop which is an industry-leading e-prescribing platform use by more than 65,000 healthcare providers. This relationship had already been in place, but the new agreement gives exclusive rights to digital messaging of any type within platform helping build the competitive moat.

The Company is also developing its Innovation Lab which is an incubator for creating and testing point-of-care solutions for both pharma and payers and they are working with several brands on pilots. Furthermore, a Hub Enrollment Solution helps solve problem of access to specialty drugs and enhances speed to therapy. They are also collaborating with health IT companies to illustrate how technical interoperability is possible (two technology applications accept data from each other and perform a given task). These are all small but represent further opportunities for growth in the long-run.

In terms of expanding its client base, OPRX only serves half of the ambulatory physicians and few of the 500K non-ambulatory physicians in the hospital setting. It can continue to work to expand its EHR partners. They can continue to grow internationally leveraging the recent partnership with Patient Connect. And they also can expand relationships with current customers. OPRX works with the top 20 pharmaceutical companies and more than 60 other clients – all of which have multiple siloed businesses in need of services. They have identified 29 pharmaceutical manufacturers with multiple brands in each representing hundreds of millions of white-spaces.

Improved Sales Strategy:

In 2019, OPRX underwent a period of investment. This period of investment was important as they have improved their product offerings and look to expand their enterprise clients to provide more stable revenue growth. They doubled their overall headcount, increase the sales headcount by adding a direct sales team, and hired a Chief Commercial Officer to expand enterprise level offerings. These investments have shown as they have developed a strong pipeline, announced the largest ever Enterprise win with multi-million dollar annual revenue, and increased average deal sizes from $130K to $300K+. These enterprise deals are important as they can ramp up materially once closed. For example, the largest client went from $774K of revenue in 2018 to $4 million in 2019. This is expected to grow further in 2020 to $6-$7 million. They also noted that more than 20 brands are looking to increase spend in 2020. The further diversification of products also allows cross-selling opportunities as shown below. As OPRX shows the value of their network, they can upsell current customers and the business should show material operating leverage.

OPRX is also switching sales from pay-for-distribution model to more impact-driven model. They will get paid for revenue and efficiency. Management expects this to be a more recurring revenue (vs. lumpiness now) stream and increase enterprise engagements with top 20 clients. We think this sales switch will be material to improved monetization of the platform. From our expert calls, the drug manufacturers find value in the platform and even suggested this type of monetization would improve the spend with OPRX. As this implementation occurs, we expect the benefits to start to materialize in late 2020 and into 2021.

Management expects recurring revenue contracts to reach 20-30% of sales by the end of 2020. They have materially increased the annual contract value by signing larger enterprise agreements with ACV reaching $3.6 million. They have also decreased the amount of time to close a contract from 90 days to 30 days in the recent quarter (should normalize in the 60 day range) and increased win rates from 30-50% to 50%+ consistently.

Operating Leverage:

Due to the above factors, there is a large amount of operating leverage in the business. The Company has net cash on the balance sheet and does not expect to raise cash. As the business scales, they think can do 20-25% operating margins at $50 million of revenue. This is material improvement and is impressive for a business that should be able to grow 25%+ for the foreseeable future. The cash generation will allow them to re-invest in the business and pursue opportunistic M&A to build out product suite. Our conversations with management make us optimistic that the current personnel in place can get the business to $50 million of revenue before additional hires are needed. Because of this, along with higher margin products increasing as a % of revenue, by the end of 2021 we should see 20-25% operating margins.

Coronavirus:

OPRX is one of the businesses that has seen a benefit from coronavirus. Because pharma sales reps have lost access to doctors, it has put even more value on the OPRX platform. In addition, pharma companies are seeing good ROI’s which is shown by their decisions to maintain spend. The pandemic also should help speed up the timeline of recent acquisitions CareSpeak and RMDY Health as virtual options become more important. We think this will help them increase ad spend from clients which tends to be very sticky over time.

Why the Opportunity Exists:

There were three main issues that hit OPRX in 2019, 1) doubling the headcount cause operating margins to turn negative, 2) two large clients merged and froze discretionary spending, and 3) an early termination of another client’s product ahead of a 2020 move to generic. These issues have led to a “show me” story setup for 2020 where investors are looking for management to meet their expectations for growth and profitability.

Starting in the first quarter of 2019, salary and wage expense started to materially increase as the Company doubled their work force to be ready to meet anticipated growth opportunities. This caused Adj. EBITDA margins to decline considerably from 19.7% at the peak to negative in recent quarters. These initiatives have already shown positive results in terms of top-line and we think the Company is at an inflection point for growth. With this growth, we should start to see margin expansion.

Second, the merger of two larger clients resulted in a freeze in discretionary spending. This merger is now complete but pushed out $3 million of revenue from 2H19 to 2020. We don’t view this as an issue as the Company still expects to receive the revenue and no turnover resulted from the merger.

Third, one of the clients decided to stop supporting one of the brands about 12 months prior to their loss of exclusivity. This represented $2 million of annual revenue and was a big hit to expectations, but the customer was happy with the product and has visibility into future business with new brands they will be introducing. In addition, OPRX changed contract language to ensure that these agreements cannot be ended early in the future without a claw back provision.

Though Q1 was strong, investors look to still be waiting for consistent execution and the clarity on coronavirus impact. In addition, margins were below expectations so managing costs over the next few quarters remains a priority.

Valuation:

OPRX is in a position to leverage their strong network and diversified product base to take advantage of the large industry white space opportunity. We believe there can be material 20%+ growth for the foreseeable future. In addition, the business should show tremendous operating leverage as they upsell current customers and increase the mix of higher margin product lines like RMDY, CareSpeak, Brand Awareness, and Clinical Messaging. We think they can generate $55 million of revenue in 2022 with 25% EBITDA margins. At 18x 2022 EBITDA, you get ~$18/share value or 80% upside from current prices. $18 would translate to a 7.5x EV/NTM revenue. This valuation seems very reasonable for what should be a high growth business with positive free cash flow generation.

Company Overview:

OptimizeRx Corporation (“OptimizeRx”, “OPRX”, or the “Company”) is a leading provider of digital health messaging services for pharmaceutical companies to communicate with healthcare providers and patients. It is a cloud based application that supports patient adherence to medications by providing real-time access to financial assistance and critical clinical information. OPRX has built a strong network with access to more than a half million healthcare providers. This network provides value to pharmaceutical companies, electronic health record (“EHR") vendors, doctors, and patients. The Company generates revenue through Financial Messaging, Brand and Clinical Messaging, Brand Support, Patient Engagement and Digital Therapeutics.

The legacy product here is financial messaging. The financial messaging product is important because it allows doctors and staff to access vouchers, co-pay coupons, and other patient support through their EHR platform. Doctors try and reduce the cost for their patients and studies have shown that reducing co-pays or getting discounts through vouchers increases the usage of that drug. Pharmaceutical companies can pay OPRX to offer these discounts on the platform to try and drive volume. Financial messaging is the lowest margin product and has gone from 100% of revenues to below 50%. This will continue to decrease over time as OPRX drives the sales from higher margin products with better growth opportunities.

The next source of revenue is brand and clinical messaging. These are essentially banner ads that appear on the EHR platform that advertise certain drugs. They can be brand awareness ads, reminder ads, or clinical messages among others. For example, a pharmaceutical company could advertise that their drug has been proven to be X times more effective than a competitor. Another example could be advertising a new study that shows they are the best for treating certain patients. This allows pharmaceutical companies to advertise their drugs directly to the physicians that they are losing access to. This is viewed as a significant opportunity as they continue to work with more pharmaceutical manufacturers and expand their EHR clients.

In addition to the brand and clinical messaging, OPRX offers brand support. They can educate and work with pharmaceutical manufacturers on implementing new media strategies and promoting their products. The services include drug file integration, sales force training, and strategy development. Drug file integration helps ensure that the manufacturer’s drugs are present in every ePrescribing platform available. This helps drive volume growth and physician awareness of the drug. Sales force training can help pharma reps ensure maximum exposure of their brands in other marketing avenues. And Strategy development helps pharmaceutical companies take advantage of the new digital environment. This is less than 10% of revenue but is a big growth opportunity over time.

Patient engagement and point of care solutions was first formed with the purchase of CareSpeak in 2018. CareSpeak is an interactive messaging platform to help drive medical adherence, patient engagement, and healthier outcomes. By communicating directly with the patient, it increases the chance that they will follow the prescribed treatments and lower the costs. 

The RMDY Health acquisition in 2019 further adds end markets in the digital therapeutics space. This is a relatively new technology with strong growth opportunities. It delivers patient programs with treatment and affordability information, lifestyle, and condition trackers, etc. with a wide range of communication methods such as chat and telehealth.

Risks:

Healthcare regulation, loss of EHR partners, decrease in pharma spend, competition

Catalyst

Strong revenue growth, expense management/operating leverage, growth of higher margin products