Q3 2011 Results
OptimizeRx (OTCQB:OPRX) filed its 10-Q for the third quarter ending September 30, 2011 on November 14th. Revenue was $192k, compared to our $294k estimate. The miss on revenue was almost entirely offset by operating expenses coming in $97k lower than estimate ($483k A vs. $580 E). EPS was ($0.07), well below our ($0.03) estimate but the difference is entirely due to ~$500k in additional debt discount amortization hitting interest expense as a result of OptimizeRx and Physicians Interactive (PI) terminating their sales/marketing partnership during the quarter. The debt discount related to the cancellation of warrants that were amortizing and were part of a $1.0 million loan from PI to OptimizeRx.
OptimizeRx exited the quarter with $1.0 million in cash and equivalents, compared to $970k at 6/30/2011. Cash used in operations and investing activities were $379k and $72k, respectively. The sequential increase in the cash balance was a result of the closing of the first tranche of the new Vicis financing agreement in which OptimizeRx sold Vicis 15 shares of Series B preferred stock (including common stock warrants) for $1.5 million. $1.0 million of these proceeds were used to retire the aforementioned promissory note from PI. OptimizeRx has the option to sell Vicis another 15 shares (with warrants) for $1.5 million beginning on December 1, 2011 and another 20 shares (with warrants) for $2.0 million beginning on May 1, 2012. Cash balance will also benefit from a September 30, 2011 arbitration judgment in OptimizeRx's favor against Beringea in the amount of $203k plus $88k in attorney's fees, which OptimizeRx has yet to receive.
A brief business update was also provided in the 10-Q. OptimizeRx notes that it continues to gain interest in SampleMD from health systems and eprescription services as well as with pharmaceutical companies for promotion of their drugs. Through the end of the third quarter, OptimizeRx notes that it had contracts with twelve pharmaceutical companies, covering 45 brand name drugs. This is up from nine companies and 40 drugs at the end of Q2. OptimizeRx is already seeing some traction from its expanding portfolio of covered drugs and expects revenue to grow sequentially from Q3 to Q4.
While we have made some minor adjustments to our model following Q3 results, our Outlook, Outperform investment recommendation and $5.00 price target all remain unchanged.
Revenue was $192k and $786k through the three and nine month periods ending September 30, 2011. Revenue to-date has been largely from set-up fees (voucher printing and redemption revenue has been minimal). The expectation is that sales should significantly ramp with growth in revenue from voucher printing and redemptions - which should pick as SampleMD's distribution is further expanded, especially as it relates to Allscripts' user base. Sales will be handled by a small internal sales team. OptimizeRx's cost base is relatively low and largely fixed - this coupled with what we model to be quickly ramping revenue, means profitability could materialize in short order.
OptimizeRx continues to make enhancements to the software, with its 3.0 version expected to have capabilities such as simplified access to formulary information, greater search functionality and the ability to schedule meetings with drug reps. The 3.0 version is also expected to have the ability to integrate within electronic health record and electronic medical record systems (the current version only integrates with e-prescription systems and is available as a stand-alone desktop system). While these enhancements are currently under development and not expected to be fully functional for about 6 months, OptimizeRx expects the current version to be sufficient to continue to facilitate the further roll-out of SampleMD throughout the Allscripts user base - which is by far its greatest near-term opportunity.
Our revenue model is based on certain assumptions including the rate of growth in the number of subscribers using SampleMD, the number of drugs promoted through SampleMD and their respective aggregate prescription volumes, the number of voucher prints per physician and the rate of voucher redemptions. As SampleMD is still very much on the front of its roll-out, there is little to anchor on relative to any of these metrics which presents significant challenges in forecasting revenue.
Relative to the drugs that are being promoted through SampleMD, as OptimizeRx has not disclosed the names of these drugs, it is impossible to comfortably gauge related prescription volumes (i.e. - we do not know how if these are top-20 drugs or top-200 drugs). This makes it that much more difficult to forecast potential physician coupon print and patient redemption volumes - revenue from which is expected to account for the majority of net sales in 2012 and beyond (we model it to account for almost 100% of revenue by 2014). And even if we did know which particular drugs were being promoted, until there's some available historical information related to print and redemption rates, revenue forecasting will be tricky.
With only limited information relative to revenue driver metrics and SampleMD still on the front end of commercialization we feel it is prudent to be conservative on our model inputs. The major inputs to our model along with our assumptions are:
- SampleMD Users (i.e. - prescribers): This currently stands at about 20k. Per our discussions with the company, management expects this to grow to 200k+ over the next 12 months, largely driven by deeper penetration of Allscripts' user base and agreements with other e-prescribers for integration of SampleMD into their respective systems. We more conservatively model ~ 100k users by the end of 2012. Our model assumes SampleMD does not hit the 200k users mark until the end of 2014.
- Drugs Promoted: This currently stands at about 46 drugs. OptimizeRx hopes to have 100+ drugs onboard within the next 12 months. We more conservatively model 74 drugs at the end of 2012. Our model assumes the 100-drug mark is not reached until Q3 2014.
- Voucher Prints Per Physician: This, along with voucher redemption rates, are not only the most difficult to estimate, they are also likely the most influential driver of revenue (given that they have a significant multiplier / leverage effect). This metric could also be highly influenced by the number of drugs promoted and, more importantly, the prescription volumes (i.e. - popularity of the drug) of those particular drugs. Our model uses a potentially extremely conservative estimate relative to prints per physician. We assume initially this is only 1 coupon printed per day for every 50 physicians that have SampleMD - said another way, if 50 physicians have SampleMD, our model assumes only 1 coupon is printed among them each day. Even in later years our assumptions remain arguably very conservative. In 2014 we assume 1 coupon is printed per day for every 7 physicians. To emphasize how much leverage this metric has in our model, if we assume 1 coupon is printed per day for every 5 physicians in 2014 (instead of our currently modeled 1 for every 7), our estimated 2014 net revenue figure moves from $32.9MM to $48.3MM.
- Redemption Rate: Management has indicated that voucher redemption rates (i.e. - the % of printed vouchers that are ultimately redeemed by a patient) are running at about 20%. We more conservatively model a static (i.e. - no improvement in later years) 10% redemption rate.
…Near-Term Revenue Forecast
We model little in the way of print and redemption revenue through the remainder of the current year and look for $1.1 million in total revenue for 2011, with the majority of that coming from new drug set/up fees.
In 2012, with assumed deeper penetration of Allscripts' user base, new deals with other e-prescribers, a moderate number of additional drugs being promoted and a slight uptick in the voucher print rate (to 1 coupon printed per day for every 22 prescribers using SampleMD), revenue from voucher prints and redemptions should begin to become more meaningful. We model net revenue of $4.9 million in 2012, with 90% ($4.4 million) of that coming from voucher prints and redemptions. All of our net revenue figures are net of an estimated 40% royalty to Allscripts for print / redemption revenue related to vouchers originating from Allscripts' system users.
…Mid-Term Revenue Forecast
In 2013 and 2014 we model revenue of $18.2 million and $32.9 million, reflecting only very modest assumptions relative to growth in the number of drugs promoted (from 74 at 2012 year end to 85 in 2013 and 105 in 2014) as well as prints per physician (from 1 for every 22 prescribers per day in 2012 to 1 for every 11 in 2013 to 1 for every 7 in 2014). We think it bears repeating that due to the leverage effect, if actual voucher print rates prove to be only very slightly better than our estimates, OptimizeRx's actual revenue (as well as net income and EPS) could be significantly greater than our estimates. We will update our model regularly as more information becomes available over the next several months.
The business model should be super scalable and as it relates to operating expenses, OptimizeRx runs fairly lean. SampleMD will continue to be enhanced with additional functionality and management indicated that it may slightly scale up marketing / sales. Slightly more capitalized web development costs will also begin to amortize going into 2012 (although amortization should remain relatively minimal as total capitalized intangibles was only about $1.3MM at 9/30/2011 with most amortizing straight-line over 17 years). While we think this may push SG&A up very modestly through 2012, based on our model, OptimizeRx could see positive net income by the end of next year. We see no reason why OptimizeRx could not continue to gain even greater operating leverage in the following years. We model EPS of ($0.14) in 2011, $0.03 in 2012, $0.22 in 2013 and $0.31 in 2014.
As the launch of SampleMD, OptimizeRx's flagship product, is still in its infancy, using P/E ratio based on a near-term EPS estimate would unfairly penalize valuation. Instead we think it is more appropriate to use our EPS estimate for 2014, at which time SampleMD should be fully commercialized and OptimizeRx's financials should more accurately reflect the earning power of the company.
As there are no publicly traded direct competitors to OptimizeRx to use for comparable P/E multiples, we think it is appropriate to use the average valuations of a handful of indirect competitors to price OPRX. Our comparable base is represented by MDRX, MDAS, QSII, ATHN and ESRX, all of which operate in the healthcare information technology space and most of which are involved to some extent in e-prescription services or EMR / EHR.
These five companies currently trade at an average of 16.1x analysts' estimated 2014 EPS. Applying this multiple to our 2014 EPS estimate of $0.31 values OptimizeRx at almost exactly $5.00 per share. Although our valuation could change based on potential future changes to our model, as it is now, we value OPRX at $5.00 / share. Based on the discrepancy between what we calculate as fair value and OPRX's current $1.02 market price, we feel the shares are significantly undervalued and maintaining our Outperform rating.