We are initiating coverage of OptimizeRx Corporation (OPRX.OB) with an Outperform rating and $5.00 price target.
Business
Electronic prescriptions, or e-prescriptions (eRx), accounted for just 6% of all drug prescriptions written in 2008. By 2010 that number had grown to approximately 25%, equal to roughly 326 million prescriptions. e-prescriptions are expected to be at the top of the list in terms of growth of all electronic health applications (the broader healthcare IT market is forecasted to grow at a CAGR of 11% through at least 2015) and, according to some estimates, could account for over 90% of all drug prescriptions in just the next few years.
Fueled by recent healthcare reform legislation, the rapid growth in healthcare information technology has created new markets, facilitated growth of others and sprouted a slew of novel technologies and new companies. Allscripts, the largest electronic prescribing provider with almost 100k U.S. physicians using their service, is expected to be a direct beneficiary, as are the handful of other major e-prescribers and complementary service providers. OptimizeRx Corporation (OPRX.OB) is one such complementary service that hopes to capitalize on the swift trend towards e-prescriptions, largely through partnerships with these major e-prescribers and agreements with large drug manufacturers.
OptimizeRx's SampleMD software, which can be integrated into these major e-prescription systems, allows physicians to seamlessly provide drug manufacturer vouchers (i.e. - coupons) simultaneously with an electronic prescription. In addition to the major e-prescription providers, OptimizerRx is also targeting large health care systems (i.e. - multi-hospital/clinic systems) for integration of SampleMD into their respective electronic medical records systems. OptimizeRx generates revenue from drug manufacturers every time a physician prints a respective manufacturer's voucher as well as for every (printed) voucher that is redeemed by the patient. If generated through Allscripts, OptimizerRx passes approximately 40% on to the e-prescription provider. OptimizerRx also receives a one-time set-up fee for every drug that is promoted through SampleMD.
SampleMD may be a win-win for all participating stakeholders. Drug companies' sales representatives are increasingly being shut out of face-time with physicians (especially in closed hospital networks), reducing the opportunity for conventional "sampling" (i.e. - providing free drug samples, drug reps' ace-in-the-hole) and, as a result, severely weakening big-pharma's marketing muscle. SampleMD, essentially allows drug companies to continue to sample (i.e. - a coupon in lieu of a physical sample) to physicians without the rep face-time - the cost of SampleMD can also be significantly less than conventional sampling, an added bonus for drug companies. The patient benefits from prescription cost savings when they redeem the vouchers at their pharmacy. SampleMD gives e-prescribers (i.e. - Allscripts, et al.) a high-margin source of revenue with the added kicker of an enhancement to their product. And finally, hospitals and physician practices benefit with SampleMD as a result of helping patients lower their out-of-pocket healthcare costs without the time, hassle and expense associated with their physicians heeding drug reps' sales calls.
OptimizerRx recently entered into an agreement with Allscripts for integration of SampleMD into the e-prescriber's system - the initial version of the integrated system launched in December 2010. In addition, the company has agreements with several health care systems to integrate SampleMD into their electronic medical record (EMR) systems. OptimizerRx currently has contracts with eleven major pharmaceutical companies, covering 45 brand name drugs. OptimizeRx's near-term strategy is to further refine the software, partner with additional e-prescribers, increase the number of installations at hospitals/clinics and significantly grow the number of drugs eligible for vouchers through SampleMD. The company is also in the midst of ironing out legal and compliance hurdles which have slowed the initial launch of SampleMD.
As the SampleMD launch is still in its infancy, revenue to-date has largely been from set-up fees (voucher printing and redemption revenue has been minimal). The expectation is that sales should significantly ramp as revenue is generated from voucher printing and redemptions - which should pick up once the integration with Allscripts is completed and the installed base expands. Sales will be handled by a small internal sales team. As OptimizeRx's cost base is relatively low and largely fixed, depending on the actual rate of revenue growth, profitability could materialize fairly rapidly.
Outlook
Revenue was $200k and $594k through the first three and six months of 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 their 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 their greatest near-term opportunity.
Revenue
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 45 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. We look for $684k in total revenue for the second half of 2011 ($294k in Q1, $389k in Q2), with 65% 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.
EPS
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 they 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 $1.4MM at 6/30/2011 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 ($0.10) in 2011, $0.03 in 2012, $0.22 in 2013 and $0.31 in 2014.
Valuation
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 $1.13 market price, we feel the shares are significantly undervalued and are initiating coverage with an Outperform rating.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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