OPRX - OptimizeRX

[yadayada]

These guys have a software platform that let's EHR (electronic healthcare record) and eprescribe users (doctors basicly) hand out coupons for mostly brand name drugs. Write ups here:

http://moatology.com/

http://microcapclub.com/2012/10/optimizerx-an-emerging-e-prescription-giant/

And something on seeking alpha.

 

Now it seemed like a dream stock to me. Huge operating leverage, no debt, no serious competition, reasonably large barriers of entry due to regulation requirements. And seemingly very cheap.

 

They current make 8 million$ on 100k (out of the 600k) healthcare professionals that have access to this system. They use it once every 3 weeks to give out a coupon. So that is like 1.6 million coupons a year, and OPRX gets 5$ per coupon. They split this with epresribe platforms they are on.

 

 

Now their operating cost is relatively fixed and no higher then about 5 million$ (currently 3million$ and barely going up with revenue growing a 100%). So they made 8 million$ this year, split 50/50 that is 4 million$ -3$million or about 1 million$ in income this year if they don't grow.

 

Now let's imagine they get to 300k professionals, and with the new standard opt-in instead of opt-out as default they give out a coupon once a week on average instead of once every 3 weeks. That is 300kx52x5$ = 78 million$/2 = 38million$ to OPRX - 5 million$ in operating costs =34 million$ in operating income on a 40 million$ market cap. So there is a huge margin of safety here.

 

Given the limited options out there, the patents they have and the added value proposition over competition (and regulation preventing new competition entering easily) they have reasonable leverage on pharma and eprescribe company's.

 

If you read those write ups you may think this offers a value proposition for everyone, but looking under the hood might suggest otherwhise:

http://en.wikipedia.org/wiki/Drug_coupon

 

Unions have filed several lawsuits seeking to ban drug coupons, characterizing them as illegal kickbacks. As of June, 2013 Three of these lawsuits have been dismissed. Six more are pending. This ruling is seen as vindication for the Pharmaceutical industry that drug coupons are an acceptable business practice.

 

Coupons are mostly used for branded drugs and not generic drugs. You  might have brand drug A and generic drug A. Brand drug costs 60$ and insurance pays 30$. Generic costs 20$ and insurance pays 15$.

 

So generic is cheaper for the consumer. But what they do with coupons is basicly make them free for consumers to incentivize them to pick brand over generic. This way they get to collect 30$ from insurance which is still more then 20$ that the generic drug makers collect on mostly the exact same drug (?) And consumers get a better (or perceived better) drug for free instead of paying 5$ for a perceived lesser drug.

 

More here:

http://www.pharmacybenefitsacademy.com/sites/www.pharmacybenefitsacademy.com/files/assets/9,%20Wilkinson%20Presentation.pdf

 

Thoughts on this?

 

I am having mixed feelings on this. I mean even if this picks up for a few years before it gets heavily regulated, there is  a large margin of safety given how little good things are priced in here.

[yadayada]

Nobody? It seems there is a very decent margin of safety here, almost no competition (they actually stole a decent chunk of business from their main competitor who is much smaller) and huge upside.

 

I did find another thing I don't like tho:

audit statement latest 10k:

To Whom It May Concern:

 

Silberstein Ungar, PLLC hereby consents to the use in the Form 10-K, Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934, filed by OptimizeRx Corporation of our report dated March 20, 2014, relating to the consolidated financial statements of OptimizeRx Corporation, a Nevada Corporation, as of and for the years ending December 31, 2013 and 2012.

 

Sincerely,

 

/s/ Silberstein Ungar, PLLC

 

Audit statement second latest 10k:

To the Board of Directors

OptimizeRx Corporation

Rochester, Michigan

 

We have audited the accompanying consolidated balance sheets of OptimizeRx Corporation as of December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OptimizeRx Corporation, as of December 31, 2012 and 2011 and the results of their operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

 

 

/s/ Silberstein Ungar, PLLC

Silberstein Ungar, PLLC

 

I think there is a very small chance this is a fraud tho. But why didn't they audit last year? Could this be a potential red flag?

[Packer16]

Given that it is 6x revenue and the revenue declined last Q is what keeps me away.  It may be a great company but it appears more a bit of a concept stock, no?

 

Packer

[yadayada]

they lost about 300-400k$ in revenue because one large customer halted their business with them to research ROI (results came back very favorable). And Allscripts was down for a month, that is about another 100k$. Allscripts total marketshare is 10%. But they dont sit on every EHR, so it is probably larger for OPRX.  So revenue was flat since last quarter.

 

They will do standard opt-in instead of opt-out now tho. And adding in veterinarian business is at least several million$.

 

I think you need to look at the fact taht they have like 1-2% market share of coupon market so far. And these digital coupons offer a clear advantage over printed coupons. One competitor and large barriers of entry.

 

It just seems odds are heavily in favor of revenue skyrocketing for these guys, even if regulation cracks down.

 

Also the 400k$ in stock compensation was a one time severance fee.

 

to add one more thing. They will likely double their network this year.  If you assume about 50-70% growth in revenue because of that, it means about 3 million in 2015 earnings (with not much growth after that).

[yadayada]

http://sites.duke.edu/cylee/files/2013/11/JMP_CopayCoupon_Lee.pdf

 

So the coupon  market is 4 billion$ (in 2011) and on one of the largests coupon websites, about half was for drugs that had a generic alternative.

 

It does not really seem like a majority part of the coupons are used to exploit insurance company's. So I don't think that is a big risk. And so far they still only have a tiny slice of that market and are relatively new. The e-presribe industry is not even matured yet.

 

http://www.pharmexec.com/pharmexec/article/articleDetail.jsp?id=755091&pageID=1&sk=&data-ipsquote-timestamp=

 

not sure how much you can trust that, but they make a good argument on why probably a good part of coupon market won't go anywhere anytime soon. The results of these lawsuits seem to back it up so far.

 

So that leaves 2 key risks, their latest audit report, and  how well their one competitor does.

[yadayada]

https://merriman.bluematrix.com/sellside/EmailDocViewer?encrypt=a58d2732-2e06-4c07-99a4-02731ef5146b&mime=pdf&co=Merriman&id=capitalmarkets@merrimanco.com&source=mail

[yadayada]

http://www.sec.gov/Archives/edgar/data/1448431/000125529414001272/mainbody.htm

 

Ok, so this would double their number of EHR's? Im not sure what the number before this was. I think it was between 100-160k. So 112k new ones is a significant % either way. Im curious how this will translate into revenue. It is nice they came through on their promises though.

 

[60North Investments]

Q2 sales growth 20% YoY, 15% QoQ. Expect faster growth in H2 and 2016. Signed exclusivity with Allscripts, a very big deal that has potential of +$40m sales alone they say. Merriman initiated a $2 price target after the Allscripts deal was announced, with $13m sales in 2016 and $2.5m EBIT (adjusted for stock compensation expense).

 

Can't say I understand the business or the industry well at all, but they seem to be positioning themselves quite well for the future. Hopefully it will start showing in the bottom line as well. Anyone with thoughts? Packer was worried about the revenue decline earlier, but now it seems that they're getting on the faster growth track again as things are picking up.

[yadayada]

Yeah it is interesting that Ronald Chez, who is co chairman of Merriman, actually personally bought like 1.5m$ of stock. So they actually believe their own price target.

 

I think that it seems very likely now they will do at least 1m$ in earnings next year (but could be a lot more). So at this valuation there does not seem to be a lot of risk.

 

I usually hate these type of valuations, but the total market for this is huge. In the billions. So if they would do let's say 50m$ in revenue, that is 25m$ after profit share, and only 4-6m$ of costs. So that is 20m$ in operating profit. And then they only captured a tiny part of the market. This stock could be a ridiculous home-run. And it seems the market is sort of fed up with waiting judging by valuation.

 

I don't like management too much though. They make a somewhat amateurish impression. It kind of feels like a OTC traded start up company.

 

[Guest Schwab711]

I've been watching this for a couple months. I always like to build a bear case first and see how easily defeated it is. Let's try it with OPRX.

 

First, OPRX has a history of restating filings. They ended up restating their 2012 annual report (material change to the income statement) and they have had many other restatements of quarterly reports, 8-k's, and nearly every other type of form. Some of the inaccuracies  include incorrectly stating the date they received monetary compensation (saying they received $ months before they actually did), incorrect conference call numbers (the restatement has a missing "space" typo), and overstating and incorrectly implying the beneficial ownership of 3rd parties. To go with this, on 6/17/13 they filed a DEF 14C which stated that the majority of shareholders (52% voting power) agreed to suspend the AGM and provided a purely informative proxy that stated they could issue up to 1.5m shares (~6.5% shares outstanding). They haven't restated a filing in ~1 year, but this history of mistakes and oversights is a big red flag to me. How can you be so careless about what you send to the public. On 05/28/14, most of these shareholders, representing >40% of total shares, who had the AGM suspended less than a year earlier ended up selling their stake in the company for ~$1.09 net (actually $1.20 with 9.7% placing fee). This doesn't seem so bad except the last reported sale at the time was for $1.72. These major shareholders were willing to take ~36.5% discount on their shares to sell in bulk and, just to keep with tradition, the S-1 was amended 3 times. Anecdotal, but my largest holding is a microcap that requires a fairly large premium to buy sizeable stakes and there are very few investors looking to sell after the 100% run-up over the past year. We still haven't discussed the 2012 annual report and 2-3 quarterly reports that had material downward revisions to revenue!

 

Only recently (OTCQB certified on 05/13/2015) have they created some liquidity in their shares by uplisting within the OTC market and adding publicly available Level 2 trading info. These do not seem like very shareholder friendly actions since OPRX is so small and growing, yet they are willing to pay relatively high annuals fees just to provide slightly higher liquidity. This almost seems like a set up for the same trap PFHO has just experienced over the last 12-18 months. All you need is "The Specialist" to write 5 articles in a month on SA to be assured there's no value :) (sarcasm, I hope). Seriously though, this money would be better spent trying to improve customer implementation delays then creating a temporary and artificial pop in their stock price.

 

Here's a quote from the Zach's research piece. Some things never change. This was done just a few months prior to 40% of shareholders selling at a >36% discount.

In February 2014 OPRX announced an accounting change. OPRX had previously been using cash accounting

methods to recognize revenue share payments. In February the company announced that they will now be

recording this expense as it occurs (accrual accounting). Revenue share is also now being recorded in a COGS

line where previously it was being captured in operating expenses. While the change has no effect on historical or

estimated future revenues, it does not allow for below the line (op expenses, op income, net income, EPS, shares

o/s) quarterly comparisons to year-earlier periods in the absence of filed 10-Q restatements.

http://www.optimizerxcorp.com/investors/OPRX_Q4_2013_04_04_2014.pdf

 

I really should go into more detail about why they restated the 2012 annual review and various other quarterly reports, including material restatements. At some point, there were so many negatives that it wasn't worth the time to continue researching. I think it's important to understand the EMR industry and Epic's competitive advantage and culture. There's a good chance that >50% of large hospitals are not even possible clients because of Epic's culture. I was first interested in OPRX because of their relationship with Duke University Hospital (Epic's largest customer while I was there), but it's not that surprising to learn of the delays. I'm not sure either of the 2 Epic hospital groups (or any Epic client) will ever become customers OPRX. Once they start generating revenue from Duke, I might be interested again.

 

Finally, I'm not sure why OPRX would be the best entity to bring this product to market. There is zero barriers to entry and nothing patentable from what I understand. The entire business relies on connecting private physician clinics and hospitals (for their associated physicians) with pharmaceutical companies so the hospitals can receive a small commission for pushing specific pharmaceuticals. Getting pharma companies involved is beyond easy. They just want to see drugs and they probably post the exact same coupons on their company website. Training physicians and integrating this functionality into EMR software is the biggest challenge for OPRX. The hospitals have little to gain (revenue-wise) and a lot to lose since there is a possible conflict of interest when a physician prescribes something with an OPRX coupon. I'm not sure the industry needs OPRX even if this feature ultimately becomes standard (I think Epic already provides information about possible savings opportunities when using their pharmacy software - it was being discussed when I was leaving). As mentioned, I sincerely doubt Epic will let any customer of theirs integrate this non-Epic functionality into their software. Epic has the resources and relationships to add this feature on their own if they desired and it was demanded (at one point something similar was being considered for coupons on pharma company websites). I doubt the majority of physicians want this feature because of the possible conflict of interest so I don't see it being added. It's not surprising Allscripts was willing to partner since they are considered the cheapest EMR option for major hospitals and could be described as "desperate". I haven't worked at Epic in 3 years so I'll leave open the possibility that things may have changed (once you start reading about Epic I think you'll see what I mean about the culture and my hesitancy).

 

@yadayada

http://www.optimizerxcorp.com/investors/OPRX_Nobel_April2015.pdf

This report seems to have less optimistic projections then you even though it requires a 50% revenue increase y/y, <10% growth in employee wages, and total expenses declining from 66.2% to 40.5% of revenue! Even if the business model requires little expense growth in theory, how many companies actually avoid giving significant salary/bonus increases when their company is growing at a 50% clip? It's not realistic to expect expenses to decline by 17% when revenues increase by 50%. This ignores common human behavior. To add to this, Noble Financial has given a SELL rating on less than 1% of the stocks they cover and they have never issued a SELL rating for a stock whose company is an IB client.

 

How did you come up with $1m in earnings for 2015 (or 2016)? Why do you believe the risk is so low? Is it solely due to the most recent quarter?

 

I actually think the total market for this is incredibly small. The entire EMR market is $9b. Providing coupons through their physician relationships (the hospitals will certainly have to cut the physicians in) is probably a drop in the bucket compared to the total market (maybe $100m, max). OPRX can only receive up to 40% of the total market size because of revenue sharing. Revenue sharing has already declined once (in 2013?) from 45% to 40%. I think OPRX's negotiating leverage is extremely low since their software is worthless without the physician relationships that hospitals and clinics provide. Why can't pharma companies work with Epic/Allscripts directly to provide this service?

[yadayada]

Thanks for the feedback Schwab. I got my estimate by assuming about 10-11m$ of revenue. They say one of their EMR's had some problems, and growth would have been 30% if it wasn't for that.  Given all the recent developments with auto option of Allscripts, Nextgen and Practice Fusion starting to count in H2 (both quite large), I figured 30-40% growth isn't too unlikely in the next 6 months or so. Then there is the veterinary network being added as well.

 

That assumes 4m$ of OPEX (noble uses less) and 45% profit share going by latest quarter. So I guess 11m$ will get you 1m$ profit.

 

As for the restatements, I chalked that up to whole start up incompetence, they got a new CFO now though who seems more professional. I dont think fraud is likely? So im assuming that won't happen again? And I dont like their promotional behavior either.

 

Some reasons why EMR's don't take this in house is because a lot of them don't have the relationships with pharma's like OPRX has? They already got a large part of EMR's? And I think that Pharma's prefer to work with a platform that captures a lot of the EMR's at once without having to deal with them separately? And for EMR's this is easier, since they just get revenue share and don't have to deal with this, which would now be a small part of income anyway.

 

I do think that when profits grow, this becomes a risk somewhere down the road.

 

And barrier to entry seems their first mover advantage + regulatory headaches that take several years to resolve if you want to enter this industry now (judging by only one competitor who is much smaller). And are you sure none of those patents have an impact, I mean there are some really ridiculous enforced software patents out there.

 

Can you elaborate on conflict of interest issue? I didnt really get what you meant there. And why is total market only 100m$? How do you get that number?

 

And judging by this, Epic has not yet got a coupon platform in place (this was november last year):

And in fact, one of the biggest ones is Epic, and they have never worked with anybody essentially, but there is such a demand for our eCoupon solution because of the adherence impact, that we have multiple health systems that have brought Epic to the table and we are working with Epic to actually look at formalizing the final work flow and the scope.

 

And the exciting thing is that we can crack those first two health systems. We have our pharmaceutical partners ready to go to every single Epic health systems.

 

[yadayada]

That was a very helpful comment :) . Nice to have some intelligent discussions going. I actually sold 80% of my stake. I guess we will have room to get in if they sign up Epic then.

The patents are actually weak, they lost a case in august 2013 when they sued. There are too many unknowns surrounding this thing. The quote is from a conference call.

[60North Investments]

Q3 saw sales increase 10% YoY. During the quarter in October WPP (largest marketing services company in the world) bought a stake for $4.3m (@ $0.79/share, hope they bring value for that!) Waiting to read the CC transcript to hear more.

 

http://irdirect.net/filings/viewer/index/1448431/000121390015008507/