MedAvail Holdings, Inc.
Q3 2022 Earnings Call Transcript

Published: 13 Nov 2022

[Operator:]

Hello, everyone, and thank you for joining the MedAvail's 2022 Third Quarter Earnings Conference Call. My name is Daren, I'll be your operator for today. [Operator Instructions] I now have the pleasure of handing you over to your host, Ji-Yon Yi, Investor Relations. Please go ahead.

[Ji-Yon Yi:]

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 third quarter ended September 30, 2022. 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 or in response to your questions that relate to expectations or predictions of future events, results or performance or similar statements are forward-looking statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance, the impact of COVID-19, the ongoing military action launched by Russian forces in Ukraine, the impact of other global economic conditions, including any economic effects stemming from adverse geopolitical events and economic downturn and inflation or interest rates 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 margins 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. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 10, 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, Ji-Yon, and good afternoon, everyone. We continue to make meaningful progress in the third quarter on our growth strategy and pathway to profitability. Net revenue in the third quarter was $11.5 million, increasing 98% over the same period in 2021. Retail Pharmacy Services generated $11.2 million in revenue for the third quarter of 2022, representing 105% growth over the same period in 2021. Year-over-year Pharmacy Technology revenues were essentially flat at approximately $300,000. While our overall revenue growth was strong and in line with our expectations, we experienced 2 events, which negatively affected revenue in the quarter, which we expect to be largely transient. Ramona will walk through them in more detail. However, we believe we remain firmly on track to deliver our net revenue guidance of at least $42 million for the full year 2022. We are also raising our projections of 30 to 35 net new dispensing MedCenters to at least 40 net new dispensing MedCenters for this year. Importantly, we remain confident that we are well poised to deliver on our strategic objectives of

[Ramona Seabaugh:]

Thank you, Mark. Turning to our third quarter results. Net revenue for the 3 months ended September 30, 2022, was $11.5 million, a 98% increase from $5.8 million in the same period of the prior year. As Mark noted earlier, we experienced some transient headwinds in the quarter that impacted our revenue in the third quarter, including with our patient engagement tool for refills, pharmacy closure in Florida due to Hurricane Ian and a small portion from increased generic dispensing, which carries a lower average sales price. Our team rallied in the face of these challenges, and we're able to mitigate the impact of these factors to deliver strong year-over-year and clinic-by-clinic growth. We have largely resolved this issue with our patient engagement on refills with a centralized solution that we expect will optimize performance and reduce costs. Further, with the exception of one clinic, all of our Florida clinic partners were open and operating as of the start of the fourth quarter, demonstrating the resiliency of our partners and of our MedAvail team and our commitment to serve patients even in the face of a natural disaster. As a result, we do not anticipate a significant impact from these factors to our net revenue in the fourth quarter. In spite of these events, in Q3, we achieved a record revenue quarter in Retail Pharmacy Services. Net revenue in the third quarter was aided by 105% increase in Retail Pharmacy Services revenue over the same period in 2021. As we have 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. We ended Q3 2022 with 103 net dispensing units, a 13% increase from 91 at the end of Q2 2022. We are now ahead of our year-end milestone of achieving 100 net dispensing units. Net cumulative deployments at the end of Q3 2022 was 104. As a reminder, we define net dispensing units as sites that are live, meaning that such sites have payer network acceptance, pharmacy board approvals and trained clinical staff or clinical account managers. Gross margin for the third quarter 2022 was 11.3% or $1.3 million as compared to 3.2% or $0.2 million in the third quarter of 2021 and 8.2% in the second quarter of 2022. 11.3% is one of the highest quarterly gross margin rate achieved by the company in its history, continuing to reflect our commitment and ability to optimize gross margins. Consolidated margins in the third quarter 2021 benefited from a higher contribution from the Pharmacy Technology segment. Our Pharmacy Technology segment gross margin improved from 1.5% in the third quarter of 2021 to 10% in the third quarter of 2022. Profitable growth is the focus of the company and the team set out to improve gross margins from just over 4% in fiscal year 2021 to between 8% to 9% by Q1 of fiscal year 2023. Total operating expenses for the third quarter of 2022 were $12.8 million, a 14% increase from $11.2 million in the third quarter of 2021. Selling and marketing costs increased as a direct result of our growing pharmacy and MedCenter portfolio. General and administration costs in the third quarter increased $800,000, due primarily to increased wages and noncash share-based compensation. Notably, while net revenue increased 98% in the third quarter of 2022 from the same period of the prior year operating expenses, excluding increased noncash accelerated amortization expense of $1 million in the third quarter of 2022 decreased for the comparable period. Specifically, pharmacy operation costs decreased 10% from the third quarter of 2021 or approximately $400,000. The accelerated amortization is driven by the company's decision to change our patient engagement tool for refills in order to optimize performance and reduce operating expenses further in 2023. Importantly, this reduction in cost reflects our objective to improving operating leverage with our existing pharmacy operations and work by our team to achieve greater efficiencies. I want to take a moment to walk through another example of a cost savings measure we have implemented that we believe is contributing to our improved bottom line relating to contracting with de novo sites. To address initial lower volumes at these new sites while addressing the needs of our clinic partners for our MedCenters. We have implemented a patient activation model with our partners in which we have a virtual clinic team rather than on-site clinical account manager to support patient initiation with our MedCenters. We are already encouraged to see greater patient adoption of our services and improved workflow efficiencies with our virtual [cams]. We expect that over time, this approach will result in better patient engagement and medication adherence, increased prescription volume and reduced costs. Adjusted EBITDA, which we calculate by adding back interest expense, depreciation and amortization, stock-based compensation, and exclude nonrecurring expenses and other income to net loss was a loss of $9.3 million in the third quarter of 2022 compared to a loss of $10.1 million in the third quarter of 2021 and $10.3 million in the second quarter of 2022, reflecting growth in new deployments and improvements in operating costs. We ended the third quarter of 2022 with $27.2 million of cash and cash equivalents as a result of our private placement completed in April. The second closing of our placement occurred on July 1, 2022, and yielded $10 million in additional gross proceeds. We continue to believe that we have sufficient capital to fund our current operational needs. As of the third quarter, we now have approximately 80 million shares of common stock outstanding, and we expect to have a weighted average share count for the fourth quarter of approximately [80.1] million shares. Regarding our outlook, we are reaffirming our full year 2022 net revenue guidance of at least $42 million. Additionally, as we are already ahead of our expectation of 35 to 40 net dispensing units in 2022, we are increasing this range to at least 40 net dispensing units. Regarding our gross margin outlook, we remain focused on improving our adjusted gross margins and operating costs throughout the balance of 2022. Our target of 8% to 9% gross margins within the next 4 quarters remains on track as we have made significant progress already. Long term, we continue to target gross margins in the mid-teens. And with that, I'll turn the call back over to Mark for closing comments.

[Mark Doerr:]

Thank you, Ramona. We remain committed to disrupting the traditional retail pharmacy industry with our differentiated MedCenter technology solution and putting patient experience and outcomes first. We look forward to updating you on our progress in the coming months as we continue to execute on our mission. With that, we will now open it up to questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Brooks O'Neil from Lake Street Capital Markets.

[Brooks O’Neil:]

Congratulations on the solid results. So I have a couple of questions. I guess the first one is, you talked quite a bit about expansion in Florida, and I'm excited about that. But are there any other meaningful areas where you see expansion opportunities in the short or medium term?

[Mark Doerr:]

Yes, Brooks, thanks for the compliment and the question. We continue to focus on all of our markets for expansion. Florida just happens to be one where we've seen acceleration. Continue to work with partners in Arizona, both in Phoenix and Tucson at SpotRx clinics as well as California. The only state right now where we're not anticipating expansion in Michigan, and that's because of the board regulations there.

[Brooks O’Neil:]

Okay. Good. And then I heard you talk a little bit about pharmacy tech and what's going on there. I don't think I heard you mention Epic and any progress you're making in the arrangement with Epic.

[Mark Doerr:]

Yes. Brooks, we remain confident that we're going to have our full integration completed by the end of the year with our first Epic partner. That's consistent with our past guidance is there. So nothing new there. We do anticipate that, that's going to help us with the pipeline to build for 2023.

[Brooks O’Neil:]

Okay. Good. And then I think when we were together in September, we talked a little bit about the opportunities with specialty and with generics. Is there anything to say about development there?

[Mark Doerr:]

Yes. I split those 2 parts. I think on the specialty, we continue to work on that program in a, what we would call specialty [light] or specialty for retail, and we're making good progress along that initiative. When we look at generics, it's one of the places where it really helped us expand our margins. We got focused on this in the second quarter and reemphasize that focus in Q3, where we make sure that we were maximizing the dispensing. So our overall generic dispensing rate is now what I would call close to the industry standard, the high 80% to maybe 90% brand versus generic. Secondly, the teams have done a really nice job in using the preferred generic which provides the best cost benefit both to the patient, to our clinic partners and obviously to SpotRx. So I look at the generic dispensing rate and the utilization of the preferred generics is the main reason that you're seeing the margin expansion in the business.

[Operator:]

The next question comes from Charles Rhyee from Cowen.

[Unidentified Analyst:]

This is [Lucas] on for Charles. I have a question on the revenue headwinds you guys experienced, obviously, Hurricane Ian is something that happens and you just have to deal with. Can you maybe elaborate on the generic dispensing issue and what led to that? And also if you can give us a size of the overall revenue impact.

[Mark Doerr:]

I think -- [Lucas], thanks for joining. When we think about the headwinds, obviously, we can't control the weather with Ian. When you're referencing the other issue, generic dispensing when you increase that, obviously, can have a near-term impact lowering your average sale price. [And] generics cost about 1/3 of what a brand has. But that was fairly minimal on the headwind. The other headwind we talked about was having an issue with our refill management tool. And that's a tool that we developed ourselves. We had an issue with the data coming in. We're not identifying all of the opportunities with refills with our patients. We did mitigate that issue in the current tool. And as we referenced in the prepared remarks, we've selected a centralized solution that's widely used in the pharmacy industry to track refills and more efficiently and easier execute against those. We did implement the first phase of that tool already, and we expect to have it fully implemented by the end of the year. The impact [to] the business in Q3 was relatively small and transient in nature, such that we don't believe it's going to carry forward into Q4.

[Unidentified Analyst:]

Okay. Great. And then Walgreens has recently mentioned getting into telepharmacy and prescription kiosk. Has there been anything that's changed with the relationship there with Walgreens? Have there been any new discussions? Just looking for an update on that.

[Mark Doerr:]

We have ongoing discussions with several partners. I can't really speak to any specific one partnership along those lines. We're seeing retail adoption of patient-facing technology such as the MedCenter increase, and we think that's going nicely based on the headwinds that pharmacies experience with pharmacy labor shortages and increasing costs. And so I think we're really starting to see the pipeline build for 2023 around our technology segment, but I can't speak to any single ongoing discussions right now.

[Unidentified Analyst:]

Got you. Understood. And maybe if we could talk about the way that you guys are staffing or maybe not staffing on site for new clinics, if I heard that right. Is that something where you will roll out new sites with a virtual manager? Then once volume ramps up at that specific MedCenter, you will look to deploy an in-person manager? Or is that something that you will end up converting maybe to more virtual managers over time? Just kind of looking to understand the strategy when it comes to that.

[Mark Doerr:]

Yes. I think you've contextualized the strategy pretty well. What I would say is what we're doing with that strategy, we're implementing it with de novo clinics, right, clinics that are brand new, they're building their patient [panels], and we know that there's going to be low volume. So we're working with our highly qualified partners. And in that model, our partners are actually helping to activate the patient where we don't have to have a clinical account manager on site and we support that what we call the virtual clinical account manager. We do anticipate that as volume build and get to a certain level that we would support with more of an on-site clinical account manager. But we're testing in that [pilot] to understand how impactful it can be and when we would need to add a clinical account manager into the labor model. And that's ongoing right now. We've really started it late in third quarter. We don't have any results to speak to at this point.

[Operator:]

We do not have any further questions at this moment. So I'm going to hand back to Mark Doerr for any final remarks.

[Mark Doerr:]

I just want to say thank you again for everyone that's joined the call. Have a good evening, and stay safe.

[Operator:]

This concludes today's call. Thank you for joining. You may now disconnect your lines.