MedAvail Holdings, Inc.
Q4 2021 Earnings Call Transcript

Published: 24 Mar 2022

[Operator:]

Good afternoon. And welcome to MedAvail's 2021 Fourth Quarter Earnings Conference Call. My name is Sam, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for question-and-answer session. . At this time, I'd now like to turn the call over to our host, Caroline Paul, Investor Relations. Caroline, please proceed.

[Caroline Paul:]

Thank you. And thank you all for participating in today's call. Joining me are Mark Doerr, Chief Executive Officer; and Ramona Seabaugh, Chief Financial Officer. Earlier today, MedAvail Holdings, Inc., referred to as MedAvail or the company, released financial results for the fourth quarter and full year ended December 31, 2021. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call, including statements or responses in addressing your questions that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call are in response to your questions that relate to expectations or predictions of future events, results or performance or similar statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance, the impact of COVID-19 and the military action launched by Russian forces in Ukraine on our business and prospects for recovery, expense management, expectations for hiring, growth in our organization and reimbursement, market opportunity and expansion and guidance for revenue, gross margin and operating expenses in 2022 are based upon our current estimates and various assumptions. Any forward-looking statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements and do not guarantee future performance. Accordingly, you should not place undue reliance on these statements and should not rely on them in making an investment decision without considering the risks associated with such statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section in our most recent periodic reports, including our annual report on Form 10-K and our quarterly report on Form 10-Q filed with the Securities and Exchange Commission. In addition, as part of this earnings call, the company's management team is providing additional financial information related to adjusted EBITDA. The company calculates adjusted EBITDA, a non-GAAP financial measure, by including interest, expense, depreciation and amortization, stock-based compensation and excluding non-recurring expenses and other income to net loss. The company has included adjusted EBITDA in this earnings call because it is a key measure used by the company's management and board of directors to evaluate and compare the company's financial and operational performance over multiple periods identifying trends affecting the company's business, formulating business plans and making strategic decisions. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates operating performance comparability across reporting periods by removing the effect of non-cash expenses and certain non-recurring variable charges. In addition, the company believes that providing each of EBITDA and adjusted EBITDA, together with a reconciliation of net loss to each such measure, helps investors make comparisons between MedAvail and other companies that may have different capital structures, different tax rates and/or different forms of employee compensation. Adjusted EBITDA should be viewed as measures of operating performance that are supplement to and not substitute for operating loss, net loss and other U.S. GAAP measures of income and loss. Non-GAAP financial measures used by the company may be calculated differently from and, therefore, may not be comparable to similarly titled measures used by other companies. This conference call contains time sensitive information, and is accurate only as of the live broadcast today, March 24, 2022. MedAvail disclaims any intention or obligation except as required by law to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. And with that, I will turn the call over to Mark.

[Mark Doerr:]

Thank you, Caroline. Good afternoon, everyone. And thank you for joining us. I'm very pleased to be participating in my first earnings call as CEO of MedAvail. It is a privilege to be leading this company. And I thank the Board for this opportunity. By way of background, I've spent my entire career in pharmacy, starting as a pharmacist and working across this industry in various other capacities, including leading national and regional retail pharmacy chains. Most recently, I was CEO of eRx Network until its acquisition by Change Healthcare in 2020. Under my three-year tenure, the company's revenue and EBITDA increased in each year before the acquisition. I believe that pharmacy is a big business with a significant opportunity for novel models to improve efficiency and patient outcomes while achieving discipline with respect to cost and quality. And I strongly believe that our new team at MedAvail is uniquely poised to address this opportunity. I was attracted to MedAvail for two reasons. First, I was impressed by MedAvail's differentiated technology platform, our MedCenter and its supporting system that enables our on-site pharmacy at the point of care in a cost-effective way. Second, I believe in the opportunities that our solutions provide given how strongly positioned we are to solve a multifaceted problem that challenges pharmacy services today. There's a clear need for solutions to address the gaps faced by both retail pharmacies and at-risk value-based medical providers. Retail pharmacies struggle with labor shortages and higher costs, resulting in reduced operating hours and compromised service levels, which effectively limit patient access to their medications. These factors contribute to reduced patient satisfaction and lower medication adherence. Poor Medicaid adherence tends to result in suboptimal patient outcomes and impact the Star Ratings for at-risk providers, which in turn, affects the reimbursement levels provided by TMS. Moreover, many medical providers don't have adequate connectivity to the many pharmacists that their patients utilize, constraining their ability to gain insights on medication adherence for their patients, which limits their ability to impact patient outcomes. To address these challenges head on, we deliver flexible and comprehensive solutions to our partners with a model that I believe is increasingly essential for value based care delivery. At the core of our offering is our proprietary MedCenter platform through which we deliver cost effective pharmacy prescription dispensing and advice at the point of care to provide better and more convenient patient access and drive improved outcomes and provider satisfaction and reimbursement. Since joining MedAvail, my confidence in our business and the opportunities for it has grown. There is a tremendous market opportunity to be realized with our solutions, and we have a definitive road map intended to meet this rising demand. I also believe that we have a clear pathway to deliver profitable growth in the business. To that end, as some of you already know, our business model has two segments

[Ramona Seabaugh:]

Thank you, Mark. Turning to our fourth quarter results. Net revenue for the three months ending December 31, 2021, was $7.3 million, a 135% increase from $3.1 million in the same period of the prior year. This was aided by 170% increase in Retail Pharmacy Services revenue. As we've indicated in the past, Pharmacy Technology revenue can be variable from quarter-to-quarter due in large part to customer purchasing patterns associated with enterprise level capital sales. As Mark mentioned, we deployed 46 new MedCenters in 2021. At the end of 2021, we had 81 net cumulative deployments to date and 68 dispensing units, representing 76% and 79% growth over the prior year, respectively. I want to take a moment now to define these metrics. We have excluded the previously discussed non-revenue generating sites from our deployment metrics such as pilot, decommission equipment and demo site. We define dispensing unit as the sites that are live, that is have payer network acceptance, pharmacy board approvals and trained clinical staff or clinical account managers. Moreover, we work closely with pharmacy and our clinic partners to reduce the time to progress from deployment to becoming dispensing units, which generally takes 4 to 12 weeks. Gross margin for the fourth quarter of 2021 was negative 5% as compared to negative 7.9% in the fourth quarter of 2020. The negative margins were a result of inventory write downs of $626,000 and $352,000 in the fourth quarter 2021 and 2020, respectively. The inventory write downs in the fourth quarter of 2021 was specific to the M5 model of our MedCenter within the Pharmacy Technology segment and is not related to the M4 models currently being sold to third parties and deployed within SpotRx. We now carry our M5 inventory at zero, given that we and our customers are focused on the M4 models. Without inventory write downs in both the fourth quarters of 2021 and 2020, gross margin was 3.6% and 3.4%, respectively. Total operating expenses for the fourth quarter of 2021 were $12 million, a 5% increase from $11.4 million in the fourth quarter of 2020. Our operating costs have increased primarily as a result of our pharmacy operations and clinical account manager labor costs in support of additional MedCenter deployment. Notably, our general and administrative costs have stabilized quarter-over-quarter. Adjusted EBITDA, which we calculate by adding back interest expense, depreciation and amortization, stock-based compensation and exclude non-recurring expenses and other income to net loss, was a loss of $10.9 million in the fourth quarter of 2021 compared to a loss of $8.9 million in the fourth quarter of 2020, reflecting growth in place. We ended the fourth quarter of 2021 with $19.7 million of cash and cash equivalents. We have a number of options we're actively pursuing to extend our runway. Turning to our outlook. For the first quarter of 2022, we expect approximately $8.8 million in total revenue. We expect 25 to 30 net dispensing units in 2022. Regarding our gross margin outlook, we remain focused on improving our adjusted gross margins and operating costs throughout the balance of 2022. And with that, I'll turn the call back over to Mark for closing comments.

[Mark Doerr:]

Thank you, Ramona. Thank you for joining the call today. We look forward to updating you on our progress as we continue to execute across our strategic initiatives and drive profitable growth. With that, we will now open it up to questions. Operator?

[Operator:]

Thank you, Mark. We will now begin the Q&A session. Our first question is from Charles Rhyee of Cowen. Charles Rhyee?

[Unidentified Analyst:]

Hey, guys. This is actually James on for Charles. Previously, it's been noted that on average, each deployment generates about $1 million in revenue at full run rate. Can you give us an update on this revenue target? Are MedCenters a year or more -- deployed a year or more ago generating about $1 million in revenue on average? Maybe you can give us some color on what revenue looks like on like a median basis, 75 percentile basis for those that have been deployed over a year ago?

[Ramona Seabaugh:]

Sure. Hi, James. This is Ramona. And in the past, we have used net deployments as a leading indicator. And now we're focused on the number of dispensing sites as those are the ones generating revenue and were associated with that $1 million target. As we look historically at our mature sites. We're seeing that in year one, we're typically finding $200,000 to $250,000 in annual revenue. In years two, rate $500,000 to $600,000. By year three, we're in $700,000 to $800,000. As of the end of last year, we have 68% units that were generating revenue. We expected as Mark said, an additional 25 to 30 units in fiscal year '22. So as we look to how we're qualifying sites now groupies in the past, we're seeing and believing that the new sites are performing better than the median rate. So we're leaning towards the 75th percentile to be our target, which would start seeing that $1 million come in year three. We feel comfortable with the goal of $1 million for the site set maturity. But I want people to understand that we have impacts to our revenue ramp such as like timing for a new or existing clinic. If it's a new clinic, it's going to take longer for it to ramp up. We call this de novo clinics. We also -- if we're entering into a new market, it could take us time to get accepted into insurance plan. So that could take a few weeks to get into all the plans. I think we said in the past four to 12 weeks to be fully ramped up. We can also have impacts to our volume through clinic staffing and patient penetration rate. And then finally, like the average sales price is impacted by our payer mixes and the types of prescriptions we're filling. So we expect to continually improve the ramping for our revenue with the new clinics we're bringing on and the selection process that we have in place. And we're seeing that our clinics are generating some those, plants that are generating over $1 million. Mark, maybe can you add to what we're doing that kind of moving the median rate up towards the 75th percentile?

[Mark Doerr:]

Sure. Thanks. I think the key to what we're seeing with the most recent clinics are our qualification process. So we're really selecting the right clinics that we go into, but we're also doing a much better job as we go live and really around our training, both for our clinical account managers as well as for the provider themselves so they feel comfortable in recommending our services. And then the last thing is we're using data more effectively once we're in market to both monitor the performance of the clinic itself and also adapt to the clinic such as the prescribing patterns, making sure that we have the right inventory in the MedCenter to capture the first fill dispensing.

[Ramona Seabaugh:]

Does that answer your question?

[Unidentified Analyst:]

Okay. Great. Yeah, that's very helpful. In the prepared remarks, I think you had mentioned that you're looking to ramp up sites more efficiently. Can you maybe give us some color on what you're doing to maybe accelerate or enhance this ramping process?

[Mark Doerr:]

Yeah. I think I'd go back to just the comments I just made similarly. I think we're really doing a better job in selecting those sites, right? And then the other thing is it's really the end market performance. And again, it's now using that data. We're starting to get appointment data so we know when patients are coming in to make sure that we're focused on those high value patients for our partners as well as, like I said, making sure we have the inventory and stock to dispense prescription while they're in the clinic at the point of care.

[Unidentified Analyst:]

Okay. I mean, we appreciate you providing first quarter 2022 revenue guidance. But is there any color you could give on, I guess, revenue growth for the entire year or at least the key puts and takes we should be considering? Maybe some details on like the progression of the 25 to 30 net dispensing sites would be helpful.

[Mark Doerr:]

Yeah. We're not providing sort of the full year revenue guidance at this time. I think that's why we went and want to provide the information on the 25 to 30 dispensing units for the year, given that's how they drive -- how we derive revenue. And that's very similar to last year's sort of overall deployment, right, would get us from 68 to roughly 95 to 100 total dispensing units. And I would say we're continuing to assess and I'm working with the Board, provide guidance, revenue guidance in a future update.

[Unidentified Analyst:]

Okay. And similarly, I guess, sequential improvement expected in 1Q '22 on an adjusted gross margin basis. Should we think that margins sequentially improve throughout the course of the year? I know you're not giving full year guidance, but anything on that front would be helpful.

[Ramona Seabaugh:]

Yeah. So we finished the full year about 1.4% unadjusted with 4.3% adjusted. We do expect that those will continue to improve quarter-over-quarter. We're targeting between 8% and 9% in adjusted gross margin within the next four to six quarters with our long-term goal being right around 15%, aligned with the industry average. We have a lot of initiatives that we're putting in place in like four key buckets, utilization, mix, cost of goods sold and reimbursement. And Mark, do you want to add some things that the team is working on?

[Mark Doerr:]

I think you covered it really well. When you start to think about it and I said we're putting in sort of a full procurement strategy around how we buy at the lowest cost, but that we actually followed through making sure that our pharmacists are purchasing those items, dispensing those items and looking at how that rolls into the reimbursement that's coming in. I think the other thing we're very focused on is generic substitution. And -- because generics typically will carry a higher gross margin, and that will help us achieve that 8% to 9% that Ramona spoke about. The last thing I would say on the mix is we do want to continue to drive technology sales, which has a much higher gross margin associated with it. And we'd like to get that to be a larger portion of our total revenue.

[Unidentified Analyst:]

Okay. That's a good segue into my last question on Pharmacy Technology, which seems to be a greater focus. I guess, what percent of total revenue do you think Pharmacy Technology ultimately could represent in the future? And maybe you could talk about what the sales pipeline in Pharmacy Technology looks like now, given the new sales leadership that you just hired?

[Mark Doerr:]

Yeah. I think previously, the company has talked about targeting 20% for the technology revenue segment. I'm continuing to do an assessment on that. But I think that, that's probably a realistic target for us as we go forward. When I think about the sales pipeline. I mean, for 2021 this year, we're going to expect the revenues to be flat. Our -- for 2022, we expect the revenues to be flat to 2021. But the pipeline is really going to be strengthened as we complete our Epic integration. And Epic integration is sort of twofold. One, we need to get our MedCenter app in the Epic App Orchard, and we did just get approval in the month of March for our app to be in the Epic App Orchard. So that was the first step. The second step is we're working with our first Epic partner to complete an integration. And that should be done by the beginning of Q3, which will expand the number of outlets that we can go after. Specifically, it opens up about 350 health systems to us, which could represent thousands of placements. And I also would say, we have an integration with the McKesson enterprise system, which represents thousands of potential placements within retail. So we see both retail and health systems being viable channels for expansion as we move forward.

[Unidentified Analyst:]

Okay. Thank you for all color.

[Mark Doerr:]

Thank you, James.

[Ramona Seabaugh:]

Thanks, James.

[Operator:]

Thank you, James. Our next question is from Brooks O'Neil of Lake Street Capital Markets. Brooks, you may proceed.

[Brooks O'Neil:]

Thank you. Good afternoon, Mark and Ramona. I have a few questions, I guess. So just following on with the last question on Pharmacy Tech, do those -- do you expect those deployments to include a MedCenter unit ultimately? Or is it 100% of software sale?

[Mark Doerr:]

Brooks, it's a good question. Always we'll have the hardware associated with it. Because the MedCenter is the platform for the dispensing. And then the software, as you recognize, we license the software with the MedCenter, and then we bill monthly for software and maintenance. So there'll always be a hardware component.

[Brooks O'Neil:]

Okay. Cool. And then I'm just curious, were there any incremental terminations or reductions in deployment here either towards the end of the year or early in 2022?

[Mark Doerr:]

No, there were not.

[Brooks O'Neil:]

Okay. So would you say those units that are out in the field, you're either optimistic or you're pleased with the performance?

[Mark Doerr:]

Yeah. We're continuing to assess the performance of all the MedCenters inside of the SpotRx hub pharmacies that we run. And I would say that we are pleased with the MedCenters that are out in the field today, but we'll continue to monitor performance to ensure that we're maximizing the return from each MedCenter and each clinic.

[Brooks O'Neil:]

Sure. That's great. So let me ask just one more. I'm curious what I hear in general, obviously, there are regional variations, but I hear that the impact of COVID has continued to decline, that there was quite a bit of impact in January but less in February and even less in March in most areas. And I'm curious if you can comment at all about how that's affected the utilization of the MedCenter pharmacy, and I'm thinking about it in terms of patients. Was there more in-clinic utilization? Was there more delivery, home delivery? Thinking about it in terms of the response you saw from the physicians that had access to MedCenters units. Was there any big change that you saw through the quarter? And do you expect any change as we move into the middle part of 2022?

[Mark Doerr:]

Brooks, it's a good question. I would say we didn't see a substantial change in sort of the existing MedCenters from a utilization called the first fill dispensing versus delivery to home. I will say as we brought Florida online right in the last six months and they've become a significant portion of our dispensing MedCenters. We've actually seen an increase in the utilization of the MedCenter itself comparatively correct . So that's been a really -- a key focus for us. And we want to continue to optimize the MedCenter. And that's utilizing the data from the prescribers and from our clinic partners to make sure we have the right inventory in the MedCenters.

[Brooks O'Neil:]

Yeah, that’s great. Thanks a lot. And I’m optimistic about better year for you in 2022.

[Mark Doerr:]

We appreciate that, Brooks. Thank you.

[Ramona Seabaugh:]

Thank you, Brooks.

[Operator:]

Thank you, Brooks. And there are no further questions waiting at this time. So I'll hand the call back over to Mark for any closing remarks.

[Mark Doerr:]

Just want to say thank you, everyone. Stay safe, and have a great night.

[Operator:]

That concludes the MedAvail's 2021 fourth quarter earnings conference call. Thank you all for your participation. You may now disconnect your lines.