IPO Update: Trxade Readies $6 Million IPO Plan

Summary

• Trxade has filed proposed terms for its U.S. IPO.
• The firm provides an online marketplace for pharmacies to order products.
• MEDS has grown from a small revenue base and is slightly profitable; however, the business is going in multiple directions and the IPO isn't cheap.
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Quick Take

Trxade Group (NASDAQ:MEDS) has filed to raise $6 million in an IPO of its common stock, per an amended registration statement.

The company provides pharmacies with an online purchasing platform and also has several other business lines.

MEDS is growing revenue from a small base and has promise, but its unfocused approach and pricey valuation expectations lead me to sit on the sidelines for this IPO.

Company & Technology

Land O' Lakes, Florida-based Trxade was founded to enable the U.S. pharmacy industry to purchase and sell products online via its marketplace of accredited pharmaceutical suppliers.

Management is headed by Chairman and CEO Mr. Suren Ajjarapu who has a background in the energy industry and IT industry, who has been with the firm since 2014 and was previously Co-founder and COO of Global Information Technology.

The company's primary offerings include:

• Trxade.com online purchasing system

• RxGuru product information

• DelivMed pharmaceutical products delivery app

• Other related services

Below is a brief overview video of the firm's DelivMed app:

Source: Proactive

The company's stock is currently traded on the OTCQB market under the symbol "TRXD" and its last reported sale on January 23, 2020, was at $7.44 per share or $1.24 before the reverse stock split.

Customer/User Acquisition

The company has a number of subsidiaries in and around the pharmacy industry and has ongoing relationships with large buying groups and major regional suppliers. The firm obtains customers and suppliers via word of mouth, online marketing, and direct marketing, although management does not break out its sales & marketing expense.

General administrative expenses as a percentage of total revenue have been fluctuating as revenues have increased, as the figures below indicate:

General Administrative	Expenses vs. Revenue
Period	Percentage
Nine Mos. Ended Sept. 30, 2019	54.7%
2018	90.6%
2017	86.5%

Click to enlarge

Source: Company registration statement

The general administrative efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of G&A spend, was 1.0x in the most recent reporting period, as shown in the table below:

General Administrative	Efficiency Rate
Period	Multiple
Nine Mos. Ended Sept. 30, 2019	1.0
2018	0.3

Click to enlarge

Source: Company registration statement

Market & Competition

According to a 2017 report by GlobalData, the U.S. market for pharmaceutical products is expected to grow from $354 billion in 2015 to $497 billion in 2020.

This represents a forecast of an average annual increase of nearly 8.1% from 2016 to 2020.

The main drivers for this expected growth are an increasingly aging population, growing costs of prescription drugs, and entitlement spending increases.

Major competitive vendors include:

• McKesson (MCK)

• Cardinal Health (CAH)

• AmerisourceBergen (ABC)

• SureCost

• PharmaBid

• RxCherrypick

• PharmSaver

• MatchRx

• GenericBid

• Amazon PillPack (AMZN)

• Capsule

• GetRoman.com

Management says its advantages include the 'ability to be flexible and fast moving in adjusting our business model to address the needs of our customer base.'

Financial Performance

Trxade's recent financial results can be summarized as follows:

• Growing top-line revenue

• Increasing gross profit but reduced gross margin

• Uneven operating profit and margin

• Growing cash flow from operations

Below are the relevant financial metrics derived from the firm's registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Nine Mos. Ended Sept. 30, 2019	$ 5,740,361	126.2%
2018	$ 3,831,778	30.7%
2017	$ 2,931,280
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Nine Mos. Ended Sept. 30, 2019	$ 3,620,467	42.8%
2018	$ 3,382,729	-14.0%
2017	$ 3,931,280
Gross Margin
Period	Gross Margin
Nine Mos. Ended Sept. 30, 2019	63.07%
2018	88.28%
2017	134.11%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Nine Mos. Ended Sept. 30, 2019	$ 482,317	8.4%
2018	$ (87,616)	-2.3%
2017	$ 395,095	13.5%
Net Income (Loss)
Period	Net Income (Loss)
Nine Mos. Ended Sept. 30, 2019	$ 210,775
2018	$ 9,038
2017	$ 288,983
Cash Flow From Operations
Period	Cash Flow From Operations
Nine Mos. Ended Sept. 30, 2019	$ 324,565
2018	$ 273,386
2017	$ 171,670

Click to enlarge

Source: Company registration statement

As of September 30, 2019, Trxade had $3.4 million in cash and $2.0 million in total liabilities.

Free cash flow during the twelve months ended September 30, 2019, was $351,630.

IPO Details

MEDS intends to sell 806,452 shares of common stock at an expected price of $7.44 per share for gross proceeds of approximately $6.0 million, not including the sale of customary underwriter options.

Assuming a successful IPO at the midpoint of the proposed price range, the company's enterprise value at IPO would approximate $51.9 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 10.98%.

Per the firm's most recent regulatory filing, the firm plans to use the net proceeds as follows:

We intend to use the net proceeds from this offering to fund working capital and general corporate purposes and possibly acquisitions of other companies, products or technologies.

Management's presentation of the company roadshow is not available.

Listed underwriters of the IPO are Aegis Capital Corp. and WestPark Capital.

Commentary

Trxade is seeking public investment capital for unspecified reasons.

The company's financials show revenue growing at an accelerating rate from a very small base, but the firm is generating a net profit and increasing cash flow from operations, albeit at a small scale.

Management doesn't break out its sales and marketing expenses, but the total G&A expense line, which presumably includes these amounts, is becoming more efficient as revenues increase.

The market for pharmaceutical products is, of course, large and the firm's ability so far to create a network of pharmacists willing to purchase products via its marketplace is laudable.

However, the company has a 3.6% net margin, which at scale would, theoretically, translate into strong profits, but at a low revenue base is still small.

Additionally, management has developed numerous disparate operational elements, which leads to an unfocused approach, which I do not favor.

As a comparable-based valuation, the firm is asking IPO investors pay an EV/Revenue multiple of 7.38x.

A basket of publicly held healthcare information and technology firms indicated an EV/Revenue multiple of 5.41x, so management is asking investors to pay a 36% premium, assuming an IPO price of $7.44 per share.

While the tiny firm has promise, its unfocused approach and pricey IPO give me pause.

Expected IPO Pricing Date: To be announced.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.