MedAvail Holdings, Inc.
Q4 2022 Earnings Call Transcript

Published: 14 Apr 2023

[Operator:]

Hello, everyone, and thank you for joining the MedAvail's 2022 Fourth Quarter and Full Year Conference Call. My name is Doug. I'll be your operator for today. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder this conference is being recorded. I now have the pleasure of handing you over to your host, Steve Halper, Managing Director at LifeSci Advisors. Please go ahead.

[Steven Halper:]

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, 2022. 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 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, general market and macroeconomic conditions, including the effect of inflationary pressure, including any impact of adverse developments effecting the financial services industry, such as those based on liquidity, constrains or concerns of events including the outbreak of war in the Ukraine, or the impact of COVID-19, 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 2023 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 which we plan to file after the market close tomorrow and other filings with the Securities and Exchange Commission. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 30, 2023. 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, Steve. And thanks to all of you for joining us this afternoon for our fourth quarter and full year 2022 financial and operational update. On January 19, MedAvail, announced the shift in focus from our SpotRx Pharmacy Services business to our emerging Pharmacy Technology business. The underlying technology of MedAvail, which includes our MedCenter dispensing kiosk, and the associated proprietary Med Dispense software remains the core of the value proposition for the company. Through the MedAvail technology business, we offer partners the ability to purchase or lease the MedCenter and to license our software in order to provide point of prescribing dispensing solutions under their own brand. In the MedAvail Pharmacy Technology model, partners employ their own pharmacy staff and procure their own inventory. MedAvail Pharmacy Technology enables providers to dispense medications at the point of care, with the following expected appreciable benefits to the patient, more easily initiated medication therapy, reducing prescription abandonment and avoid an additional trip to the pharmacy. Additionally, pharmacies are suffering a current and worsening shortage of both pharmacists and pharmacy technicians, which is resulting in restricted or delayed patient access to medication. The MedCenter is designed to provide patients with enhanced quality and safety through an integrated barcode technology, and convenience with expeditious dispensing times that average five to seven minutes while offering access to a live pharmacist when needed. There are additional benefits to the clinics that offer the convenience of point of prescribing medication dispensing, such as improved quality ratings associated with medication compliance, and corresponding potential incremental reimbursement revenue. The now discontinued SpotRx Pharmacy Services experience showed there is a recognized need and demand for this type of solution. What we learned from our pharmacy business will be of material benefit to us going forward. SpotRx grew revenue approximately 100% for two consecutive years and beat the expectations this management team set since it joined. The SpotRx business however, required significant cash resources and was low margin. And our scale and market value further led to our decision to pivot away from the Pharmacy Services business. More importantly, we believe the technology business is a business that is better aligned with our targets of sustainable, healthy margins, and significant growth potential. Efforts to develop the MedAvail Pharmacy Technology business began when the new management team joined this company just over a year ago, and we have identified several solid leading indicators of success. Revenue for the technology business is lower without Pharmacy Services. But we believe in the value proposition of the technology business, which is projected to grow over 100% in 2023 as compared to the technology business in 2022. Many in the industry agree in the improvement of the pharmacy business through technologies that streamline and enhance the consumer experience, while also potentially reducing the cost of delivery. There are many potential important applications for the MedCenter. And I will elaborate on our initial two target markets later. The remaining MedAvail team is excited about the technology focused path. And I want to acknowledge that it has been a challenging process for them. I want to publicly thank them for their very hard work under tough circumstances. As part of the process, we reduced our headcount by approximately 75%, bringing projected net cash burn $18.5 million, including cost from the now discontinued operations of SpotRx, which is a 66.4% reduction over our 2022 cash burn. We expect that our MedCenter hardware sales will generate upfront revenue for our company. Although the exact timing of sales can be difficult to predict because they are an enterprise level capital expenditure. By contrast, our Pharmacy Technology software subscriptions are expected to generate a profitable recurring revenue stream. Overall, the technology business, as planned, has favorable unit economics with a blended gross margin for 2022 that was approximately 45% on a standalone basis. The restructuring was accompanied by a recently completed $16 million financing, which has further strengthened our balance sheet. Together with cash on hand and proceeds from the sale of certain SpotRx pharmacy assets to CVS, we have approximately $20 million of cash and cash equivalents today, which we believe is sufficient to allow us to pursue the many growth opportunities that are in our pipeline for the Pharmacy Technology business. As currently planned we believe we can reach breakeven without the need for additional equity financing. After the discontinuation of retail MedCenters including SpotRx, we currently have 32 net cumulative dispensing MedCenters in our continuing operations. For the full year 2023 we project an additional 25 net new dispensing MedCenter units in the field, which will bring us to 57 cumulative net dispensing MedCenters by the end of 2023. Note that we define net cumulative dispensing MedCenters as cumulative, recorded after completion of shipments and training, such that the MedCenter is ready to dispense and is generating revenue for MedAvail, but excluding decommissioned units, and demo units. We define net new dispensing MedCenters as units recorded after completion of shipment and training such that the MedCenter is ready to dispense and is generating revenue for MedAvail which were not previously included in net cumulative dispensing MedCenters. We currently have an inventory of more than 100 prebuilt MedCenter kiosks that are ready to be shipped to customer sites. We believe this inventory results in higher gross margins than previously mentioned in the near term, as some of the costs associated with building those machines have already been absorbed in our previous operating expenses. For clarity, we predict full year next gross margins to be around 60% in 2023. A key element of our growth strategy is to integrate the MedDispense software so that it can seamlessly communicate with leading industry pharmacy management systems. We have significant experience with integrations including the recently completed integration with Epic Willow. There are approximately 1,800 integrated delivery networks and acute care sites across the country that use Epic, including a number in our existing customer base, which provides us with a potentially very fertile growth opportunity. Having the ability to seamlessly integrate with the customers' pharmacy management system is a significant catalyst to future adoption of our kiosk dispensing technology. We are also integrated with McKesson's EnterpriseRx system. And we are working on additional pharmacy management system integrations that we plan to roll out over the course of 2023. Together, these integrations are facilitating a sales pipeline that provides us with very good visibility into future growth and confidence in our guidance of 25 net new dispensing MedCenters in 2023. Looking now at the market opportunity for our MedCenter technology business, both our total addressable market and our serviceable addressable market are substantial. Just taking into account urgent care clinics and primary care clinics, the two channels that we are focused on initially, the associated opportunity for MedCenter revenue is estimated to be approximately $3.6 billion, with an additional $1.1 billion in annual recurring software license and maintenance fees. Our proprietary research indicates that our total addressable market is comprised of more than 52,000 potential sites across the U.S. Urgent care clinics can use the MedCenter as a point of differentiation, for the purpose of creating a one-stop shopping experience for patients to get their diagnosis and medication at the same site of care. Urgent care clinics typically have tight drug formularies, which make them ideal locations for the MedCenter, which can store between 500 and 1,000 medications depending on the prescription formula. Again, this potentially save an injured or ill patient the additional step of having to travel to a pharmacy, endure long wait times, with the added risk that the needed medication is not in stock or the pharmacy being closed. And having convenient access to kiosk pharmacy dispensing is meant to increase patient adherence, particularly first-fill prescriptions, which can ultimately positively impact reimbursement for our partners. Our serviceable addressable market for the same two channels is estimated to be nearly $1.3 billion, with more than $500 million in annual recurring software license fees and maintenance. This estimate includes only the 13 states that have enacted regulations which provide for the MedCenter remote pharmacy dispensing. Primary care clinics are further limited to clinic operators that have 15 or more locations and participate in the Medicare MIPS Program. Urgent care refers to clinics only. Together they comprise more than 20,000 potential sites. Long term we see opportunity in other channels such as retail and health system pharmacies, which could expand our addressable markets by several billion dollars. Given the superior margin characteristics of the technology business as compared to the Pharmacy Services business, we believe that after a certain inflection point, a primary [ph] technology focus will be more profitable for our company. I would now like to turn the call over to Ramona to review our financials. Ramona?

[Ramona Seabaugh:]

Thanks, Mark. I will begin with a review of the fourth quarter results before summarizing the full year and touching on our 2023 outlook. For the fourth quarter of 2022, we generated total revenue of $11.4 million, representing growth of 56.9% over the comparable periods in 2021. Revenue from Pharmacy Services was $11.1 million, and revenue from Pharmacy Technology was $326,000. Looking at gross profit, total gross profit for the fourth quarter of 2022 was 1.7%, which the breakdown between divisions being negligible for the Pharmacy Services division, and 56% for the Pharmacy Technology division. Total operating expenses for the fourth quarter 2022 were $11 million, down approximately 9.1% from $12 million from the prior year period. Adjusted EBITDA for the fourth quarter was a loss of $8.8 million, representing an improvement as compared to an adjusted EBITDA loss of $10.9 million for the fourth quarter of 2021. Now turning to the full year, for the full year 2022, we generated total revenue of $43.2 million, which surpassed our prior guidance of at least $42 million. This represents a substantial increase as compared to $21.1 million for the full year 2021. Looking at revenue by segment we generated total revenue of $41.7 million for the Pharmacy Services segment, representing an increase of 107% over $20.2 million for the full year 2021. In Pharmacy Technology, we generated total revenue of $1.4 million for the full year 2022, representing a year-over-year decrease from $1.9 million for the full year 2021. However, our Pharmacy Technology revenue did come in at the high end of our previous guidance range of $1.2 million to $1.4 million. Looking at gross profit for the full year 2022 we generated gross profit of $2.9 million, or 6.7%, with the breakdown being 5.3% for Pharmacy Services segment and 49.1% for Pharmacy Technology segment. For the full year 2022 we had 80.2 million weighted average shares outstanding. In terms of our guidance for 2023, as Mark indicated, we have 32 MedCenter kiosks currently dispensing in the field, and we anticipate adding 25 more throughout the course of the year, such that we would exit 2023 with a network of 57 revenue generating MedCenters. We anticipate that full year revenue will be approximately $3 million, which represents growth of well over 100% as compared to our standalone technology revenue of $1.4 million for the full year 2022. We further assume a full year gross margin of about 60%, well in excess of the 45%, which represents a fully costed [ph] margin at current volumes. To assist with modeling purposes, we assume a blended average selling price of $65,000 per MedCenter kiosk. The actual price to purchase a kiosk is higher, but $65,000 reflects our current mix of business between sales and leases of approximately 50-50. We further assume $25,000 per year per machine for the software license and maintenance. Given the late date of our fourth quarter report, as our auditors work to complete their yearend work we wanted to comment on our first quarter revenue since the quarter is complete. Note that we will not be providing next quarter revenues on a go-forward basis but given the delay in reporting on fourth quarter, this is a unique situation. With that said our preliminary unaudited revenue for the first quarter of 2023 is approximately $600,000, and as just mentioned, puts us on track to generate full year revenue growth in excess of 100% over 2022. Turning to our balance sheet, as Mark indicated, we recently completed a successful financing that raised gross proceeds of $60 million, or approximately $15.5 million net of fees and expenses. In terms of cash, we ended 2022 with cash and cash equivalents of $12.1 million, including $676,000 of restricted cash. If we factor in $15.5 million in net proceeds from our recent financing, plus $2.8 million in proceeds from the CVS transaction, less approximately $6.5 million of onetime cash costs associated with the restructuring, we currently have pro forma cash of approximately $24.2 million. We anticipate our recurring cash is sufficient to fund our operations at least through 2025, at which time, we believe we can achieve profitability and therefore potentially eliminating the need for additional diluted equity financing. That concludes the financial overview and I will now turn the call back over to Mark.

[Mark Doerr:]

Thank you, Ramona. To sum up, I'm excited about the new higher value focus for MedAvail. Going forward, our company consists of the Pharmacy Technology business, for which we've identified significant growth opportunities across numerous customer channels. And we have secured funding that can support the business through to profitability. This redirection of the company means that subsequent to the end of 2022, we made the difficult decision to exit our SpotRx pharmacy business and sell certain of its assets to CVS. This allowed us to significantly reduce our operating expenses, and our cash burn and focus on a higher return on investment opportunities. I believe we are on the right track to be a leader in the field of pharmacy kiosk dispensing to the benefit of both clinics and patients while creating enduring value for our shareholders. At this point, we'd like to open the call for your questions. Operator.

[Operator:]

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions]. We have a question from the line of Charles Rhyee with Cowen. Please proceed with your question.

[Charles Rhyee:]

Yes. Thanks for taking the question, guys. Hey, just trying to understand a little bit here, obviously, you understand the market opportunity. Anything in -- when we think about the 25 units you expected to spend -- start to sort of put in the field this year, I might have missed it. Are these all contracted for already? Or does this assume some level of selling effort that needs to get accomplished as we move to the year?

[Mark Doerr:]

Charles, thanks for the question, and thanks for joining the call. I would say that on the 25 units we expect to deploy this year, about half of them are contracted for currently.

[Charles Rhyee:]

The other half, has there been -- is this with existing clients where there's some interest expressed or is this sort of an estimate of where you think the pipeline currently is?

[Mark Doerr:]

Yeah, no. We have a much more robust pipeline than that. We have also customers -- current customers that expect to expand with us that are just not contracted yet. So we have a line of sight that says the 25 -- are highly confident on the 25 at this point, and with line of sight to more than that.

[Charles Rhyee:]

Okay, that's helpful. And then the 60% gross margins for the full year. Is that something we would expect to see here even in the first quarter with the $600,000 of revenues or is that something where we're going to average at $60,000 so that actually our 4Q gross margin, for example would be would be about that, just trying to understand sort of how to think of that ramp in margins to the year as well?

[Mark Doerr:]

Ramona, do you want to guide that?

[Ramona Seabaugh:]

Sure. Gross margin, we would expect to have that throughout the year, starting even in Q1. And that's primarily based on having those units available already without having to expense additional dollars to purchase those since we have those on hand. So we're using a lower depreciated cost.

[Charles Rhyee:]

Okay. And then in terms of the 25 that you're contracted for, like, is there kind of -- should we just -- would you think that these are going to be sort of put in the fields sort of rateably across the year or are becoming sort of big -- in kind of in kind of bunches, I guess?

[Mark Doerr:]

Yes, we would anticipate to see more of them be deployed in the second half of the year than in the first half of the year, the way that they're lining up for deployment at this point.

[Charles Rhyee:]

And then, if I recall, Margie, you kind of said before that the way you've done it, you can start to recognize revenue pretty much as soon as it's installed. Is that correct?

[Mark Doerr:]

Yeah, that's how -- when it's installed, and it can dispense, that's when we can start to recognize the revenue both the onetime revenue from the sale, as well as start the monthly recurring revenue stream.

[Charles Rhyee:]

Okay. I know that you talked about we have enough cash flow through '25. Ramona, I don't know if you made any comment about sort of what the cash burn in the quarter was, which might think for the course of this year?

[Ramona Seabaugh:]

We have not yet provided that information. But we do believe that we have enough cash for 2025 plus, and that by that time we'll be generating enough revenue to be cash flow positive. So I think maybe in our next quarterly, we might consider providing more information about our cash burn.

[Charles Rhyee:]

Okay. And last question for me, what's happening for all the facilities like, Oak Street and some of the other clinics in Florida that you had MedCenters in place? What is happening with those? Have those been pulled out, and that's what's just sitting in inventory? Just understanding what the dynamics for those clinics have been.

[Mark Doerr:]

Yes, Charles. The vast majority of the MedCenters themselves that were placed in the clinics have been retrieved. Probably around 90% have been removed from the clinics and put into storage for resale. We do think there could still be an opportunity for going back into those clinics with companies, such as Oak Street. They have a pharmacy that CVS deal would close, but we're about 90% done and wrapped up on retrievals. And that work will be done this month.

[Charles Rhyee:]

Okay, yeah. So I guess that's my question. Like, is there any reason why Oak Street couldn't come back and be a technology customer?

[Mark Doerr:]

They absolutely can. Really, the key with the clinics being a partner is usually having a pharmacy partner or running a pharmacy themselves. And that's Oak Street and the CVS potential acquisition could be a positive sign for going back in, because Oak Street was, again, one of our larger partners and saw the value proposition both from improved customer satisfaction as well as the impact that we were having on medication adherence in a way that that drives more reimbursement in those value based contracts.

[Charles Rhyee:]

Okay. I'm sorry, one last question. You guys in this total addressable market slide, you kind of point out urgent care and primary care. What about Retail Pharmacy? Because I know years ago that was sort of an original idea for the use of MedCenters. In your plan and maybe in your sort of sales force, is there anyone that's targeting the retail pharmacy market as a potential customer base?

[Mark Doerr:]

Yeah, good question. The retail channel it's large, as you've stated, and what I would say over the near term, we're really optimizing our sales initiatives based on the channels that are more easily penetrated, given our proven value proposition that I just talked about as well as with scalable partners that we have. So we have prioritized urgent care and primary care clinics right now. We believe they're more cost effective and represent a significant opportunity in the near term. It doesn't mean that we're not seeking, not pursuing opportunities that come to us from retail. It's just a matter of prioritization and where we see the pipeline right now is with urgent care, primary care clinics.

[Charles Rhyee:]

Right. Okay. That's all I have. Thanks a lot.

[Mark Doerr:]

Charles, thanks for your questions.

[Operator:]

I'm showing no further questions at this time. I'd like to hand the call back over to Mr. Doerr for closing remarks.

[Mark Doerr:]

I just want to say thank you again to everyone that's joined the call or webcast. We look forward to our next quarterly update in May. Have a good night and stay safe.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.