MedAvail - Q1 2022

Transcript

Operator (participant)

Hello, and a warm welcome to the MedAvail 2022 Q1 earnings Conference Call. My name's Louise, and I'll be your operator today. If you'd like to ask the management team a question, you will have an opportunity to do so at the Q&A portion. Please press Star followed by one on your telephone keypad if you wish to ask a question. I have the pleasure of handing over to your host today, Caroline Paul, Investor Relations, to begin. Caroline, please go ahead.

Caroline Paul (Investor Relations)

Thank you, and 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 Q1 ended March 31, 2021. 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, the impact of COVID-19, the ongoing military action launched by Russian forces in Ukraine, or the impact of other global economic conditions, including any economic effects stemming from adverse geopolitical events, an economic downturn and inflation or interest rates on our business and prospects for a recovery, expense management, expectations for hiring, growth in our organization and reimbursement, market opportunity and expansion, and guidance for revenue growth margin and operating expenses in 2022, 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 and our quarterly report on Form 10-Q, filed with the Securities and Exchange Commission. This Conference Call contains time-sensitive information and is accurate only as of the live broadcast today, May 12, 2022. 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. With that, I'll turn the call over to Mark.

Mark Doerr (CEO)

Thank you, Caroline. Good afternoon, everyone, and thank you for joining us. Following four months as CEO of MedAvail, I am more confident than ever in the tremendous opportunity we have ahead to deliver cost-effective pharmacy prescription dispensing and prescription counseling at the point of care and directly address the gaps in appropriate medication utilization faced by value-based providers. During this call, I'll start with a review of our Q1 performance and then turn to our business objectives. Ramona will then provide more details on our financial results. In the Q1, we continued to focus on execution, and we're pleased by the strong momentum that we delivered across our businesses. Net revenue in the Q1 was $9.1 million, representing 126% growth year-over-year.

Retail pharmacy services generated $8.8 million in revenue for the Q1 2022, representing 159% growth over the same period in 2021. While pharmacy technology revenues declined 130% year-over-year in the Q1 2022 to approximately $265,000. Pharmacy technology revenue can be variable from quarter-to-quarter, due in large part to customer purchasing patterns associated with enterprise-level capital sales. Pharmacy technology represents a significant growth opportunity for MedAvail and is a key component of our path towards profitability. As a reminder, we sell our hardware and, importantly, license our software and systems and provide maintenance to our platform, which creates highly predictable and profitable recurring revenue.

In the Q1, we achieved a milestone with the completion of our integration with Epic Willow and the availability of our MedCenter platform in the Epic App Orchard Gallery. The App Orchard program enables developers to integrate their healthcare IT solutions with the Epic EHR and allows healthcare providers who use Epic Willow, Epic's outpatient pharmacy management system, to access the MedCenter platform. As a result, we expect to expedite deployments with Epic Health system customers and drive adoption across enterprise partners using Epic Willow. Notably, we are currently working with our first Epic Willow partner to complete our full integration, which we are targeting to be completed later this year. Currently, there are approximately 350 integrated delivery networks using the Epic Willow pharmacy software in the United States.

Additionally, our technology team recently completed a rewrite of our MedDispense software that is intended to enable greater flexibility and faster deployments of our MedCenters. We believe that this new version of our software will enable an easier user interface to facilitate faster enhancements of our technology program for patients and providers. Finally, we welcome industry veteran Matthew Broome, who joined our team to lead the initiatives in pharmacy technology. Matt will be instrumental in implementing and optimizing our strategies to accelerate the growth of this segment. As a former customer, Matt understands the strong value proposition that we offer with our MedCenter platform to improve provider satisfaction, reduce costs, and positively impact patient medication access and outcomes.

Turning to retail pharmacy services and SpotRx, our highly scalable hub and spoke pharmacy model, we ended the Q1 with 88 dispensing units, representing a 29% increase from 68 at December 31, 2021. Net cumulative deployments at the end of Q1 2022 was 92 units. We continue to drive our corporate strategy to leverage our expansion with current clinic partners and broaden our footprint as they continue to build their networks. For example, our partnership with Oak Street continues to grow. In the Q1, we contracted to add 4 de novo sites in Arizona, one of our key target markets, which will utilize both of our existing Arizona hub pharmacies in Phoenix and Tucson. Oak Street entered Arizona in 2022 with value-based primary care centers located in Phoenix and Tucson for adults on Medicare.

Importantly, Oak Street Health has agreed to deploy SpotRx in all of their clinics in Arizona in line with our past installation practices, and we are excited to continue to build our partnership and become Oak Street Health's pharmacy partner of choice. Oak Street Health operates more than 100 comprehensive primary care centers across 19 states for senior adults. Another example is our partnership with the IMA Medical Group and our growth alongside their network expansion. We previously highlighted that in the Q1, we deployed and began installations for 11 SpotRx locations at IMA sites in Central Florida to enable SpotRx access to patients across the IMA network of 21 medical centers, leveraging our pharmacy hub in Orlando. We are pleased to announce that we have plans to open five additional sites with IMA in Orlando and Tampa.

The majority of these sites will be de novo clinics and continue the partnership expansion with IMA to embed these medical centers directly into all IMA medical centers. With the SpotRx model, IMA patients will receive immediate access to prescriptions at the IMA medical centers, free contactless next day home delivery for all prescriptions and over-the-counter medications, follow-up care calls from a local SpotRx pharmacist after receiving the prescription, refill reminder calls on all chronic medications to schedule free delivery or in-clinic pickup, and instant access to SpotRx pharmacists via kiosk or phone. As a reminder, IMA serves patients in medical centers across Central Florida with over 70 physicians and nurse practitioners servicing over 40,000 Medicare patients. We are encouraged by this continuing momentum with each of our partners that leverages our current hub pharmacy infrastructure.

We anticipate most of these sites will be dispensing by late this year. Expectedly, ramping of revenue is anticipated to be longer in de novo sites as our partner clinics are building their patient panels and scaling the sites. Importantly, we believe we are effectively positioned to realize our large market opportunity, and we are currently focused on three key objectives. One, increasing dispensing MedCenters and optimizing utilization to drive profitable growth. Two, expanding pharmacy technology, leveraging Epic Willow and McKesson EnterpriseRx integrations. Three, reducing costs across the enterprise. As part of our focus on driving profitable growth, recall we previously laid out our objectives to achieve improved margins, driving prescription volumes, optimizing our prescription mix, reducing cost of goods sold, and improving reimbursement.

Part of our strategy is to standardize processes and reduce inefficiencies, such as our reliance on ineffective vendors with respect to our patient contact center to drive efficiencies, cost savings, and better patient care. We have also highlighted a procurement strategy for sourcing pharmaceuticals at optimal costs to drive utilization and the appropriate mix of medications. As an example, most recently, we benefited from the inclusion of hepatitis C antivirals as part of our efforts to add in high-value specialty medications. Patients often face barriers to access these specialty medications, such as obtaining prior authorization. Our team is leveraging our embedded pharmacy model, powered by our MedCenter technology, to directly address patient access to these medications in collaboration with providers while delivering any counseling needs at the point of care.

While dispensing specialty medications can fluctuate quarter-to-quarter because of the high-cost and relatively low-volumes, we are excited for the opportunity to use our data for purposes of determining the most effective medication mix to deliver better patient care. Overall, we delivered growth and expansion in the Q1 and made meaningful progress in pharmacy technology with the Epic Willow integration. As we march into the remainder of 2022, we continue to be focused on driving efficiencies and refining our operational strategies in order to deliver long-term profitable growth and maximize value for our shareholders. With that, I'll now turn the call over to Ramona to provide a review of our Q1 financial results.

Ramona Seabaugh (CFO)

Thank you, Mark. Turning to our Q1 results, net revenue for the three months ended March 31, 2022 was $9.1 million, a 126% increase from $4 million in the same period of the prior year. This was aided by a 159% increase in retail pharmacy services revenue over the same period in 2021. As we have indicated in the past, pharmacy technology revenue can be variable from quarter-to-quarter due in large part to customer purchasing patterns associated with enterprise-level capital sales. As Mark mentioned, we ended Q1 2022 with 88 dispensing units, a 29% increase from 68 at the end of Q4 2021. Net cumulative deployments at the end of Q1 2022 was 92. As a reminder, we define dispensing units as sites that are live.

That is, have payer network acceptance, pharmacy board approvals, and trained clinical staff or clinical account managers. Gross margin for the Q1 2022 was 5.5% as compared to 7.9% in the Q1 2021. Consolidated margins in the Q1 2021 benefited from the higher contribution from the pharmacy technology segment. Our pharmacy segment gross margin improved from 2.6% in the Q1 2021 to 4.1% in the Q1 2022. Total operating expenses for the Q1 2022 were $13.3 million, a 34% increase from $10 million in the Q1 2021. Our pharmacy operations and selling and marketing costs increased as a direct result of our growing pharmacy and MedCenter portfolio.

General and administrative costs increased due to higher employee compensation and executive severance costs in the Q1, 2022. Adjusted EBITDA, which we calculate by adding back interest expense, depreciation and amortization, stock-based compensation, and exclude non-recurring expenses and other income to net loss, was a loss of $11.8 million in the Q1 2022, compared to a loss of $8.9 million in the Q1 2021, reflecting growth in placements. We ended the Q1 2022 with $5.3 million of cash and cash equivalents. Subsequent to the end of the quarter, on April 4, we completed our first closing of a private placement financing of common stock that yielded gross proceeds of approximately $40 million.

The second closing is expected to subsequently follow on July 1, 2022, following the satisfaction or waiver of the conditions to closing and yield approximately $10 million in gross proceeds. We believe that we have sufficient capital to fund our current operational needs. Turning to our outlook, we continue to expect 25-30 net dispensing units in 2022. Regarding our growth margin outlook, we remain focused on improving our adjusted growth margins and operating costs throughout the balance of 2022. With that, I'll turn the call back over to Mark for closing comments.

Mark Doerr (CEO)

Thank you, Ramona. Thank you for joining the call today. We look forward to updating you on our progress in the coming months. With that, we will now open it up to questions. Operator?

Operator (participant)

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. Our first question today comes from Charles Rhyee of Cowen. Charles, please go ahead.

Charles Rhyee (Managing Director and Senior Research Analyst)

Yeah. Thanks for taking the questions, and congrats on the quarter here. Great progress being made. You know, maybe first if I could just, I don't know, in the press release I didn't see if there's a share count that you could share for the quarter.

Mark Doerr (CEO)

Thanks, Charles. I'll let Ramona answer that question.

Ramona Seabaugh (CFO)

Hi, Charles. I don't have the share count, offhand, but we'll get you that.

Charles Rhyee (Managing Director and Senior Research Analyst)

Oh, okay. All right. In that case, just wanted to move on here. Obviously a lot of great progress with your partners. You know, maybe talk about sort of the discussions with someone like an Oak Street, for example. You know, the decision to pick Arizona, you know, after going with Michigan. Has there been any discussions with some of these companies in terms of partnering into their existing sites? Because it seems like right now, particularly with Oak Street, they're all de novo. Cano seems a little bit obviously a little bit more mixed. Just curious how those you know, what is that discussion like and any opportunities to move into existing places?

Mark Doerr (CEO)

Yeah, Charles, that's a great question. I think we have ongoing engagement with all of our partners around both de novo sites and existing sites. I think in the case of Oak Street coming to Arizona, they follow a specific pathway for de novo sites rather than acquiring new clinics in a new market. That's why we're following that pathway with them in the Arizona market versus in a Cano setting, where they're having existing clinics in the Tampa market, where we'll actually be able to work with them on those. We're balanced between de novos and existing sites, and we're balanced based on their progress. We're also looking at additional markets with them where they have existing sites that would make sense for us to potentially open up new hub pharmacies.

Charles Rhyee (Managing Director and Senior Research Analyst)

Great. That's helpful. You know, maybe talking about IMA, I mean, the 17 initial sites and the 5 de novo. Was this always contemplated when you guys announced this partnership last year? I guess the question is this sort of on track with your expectations or, you know, is this perhaps moving faster than you might have anticipated?

Mark Doerr (CEO)

Yeah, Charles. I think when the original agreement was signed in the fall timeframe, it was for 4 initial clinic sites. Once we began to implement and our partner, IMA, was able to see the benefits from having the SpotRx pharmacy embedded in their clinics, they wanted to accelerate the partnership, which is what we expected, and that opened up the additional 17 through the end of last year, sort of contracting and getting them ramped up this year. It's now opening up the rest of their sites as they bring them online. That's where the 5 additional clinics will get added. They're similar to sort of an Oak Street Health, where they want us to be in each one of their clinics, and obviously that benefits us because they're in the Central Florida market, which lines up very nicely around our Orlando hub.

Charles Rhyee (Managing Director and Senior Research Analyst)

Great. Thanks for that. Hey, just wanted to obviously you kind of reiterated sort of your outlook for net dispensing sites and margins. You know, Ramona, just looking at the OpEx, G&A kind of had a step up here. How should we think about overall OpEx as we move through the course of the year and then similarly around stock-based compensation?

Ramona Seabaugh (CFO)

Thanks. Yes. You know, as we look at Q1, we had some costs associated with the transition of the new senior management team as well as conversion from a third-party development resource for a new vendor. However, that will not be expected to continue into the remaining quarters. I would say there's about maybe 10%-15% overstatement in the expenses in Q1. For the rest of the quarters, you know, you can adjust appropriately. As far as the stock-based compensation, all of those were disclosed when the executives came on board. Just to get to your other question, your earlier question, I apologize. It was 32.9 million roughly in outstanding shares as of March 31, 2020.

Charles Rhyee (Managing Director and Senior Research Analyst)

Great. That's helpful. I'm sorry, I might have just missed it just now. You're saying in the G&A line there's about 10%-15% that was sort of one-time that will kind of come off? Was that in the G&A line?

Ramona Seabaugh (CFO)

Yes

Charles Rhyee (Managing Director and Senior Research Analyst)

...or is it-

Ramona Seabaugh (CFO)

Yeah, that will not continue. That's correct.

Charles Rhyee (Managing Director and Senior Research Analyst)

Okay. You know, I guess lastly for me really, as we think about moving through the course of this year, Mark, you know, the technology side, you know, has always been, you know, I think, an opportunity for the company, and I know you and I have spoken about it in the past, where, you know, this could, there's a lot of, you know, places where this, you know, the MedCenter would make a lot of sense for health systems to implement. I know you brought on a lot of new leadership to help in this regard. Can you kind of give an update here, you know, what's going on this side of the business, and sort of how to think about the outlook for this, you know, going forward here?

Mark Doerr (CEO)

Yeah, I appreciate the question, and I appreciate the acknowledgement. We've brought on, you know, a new sales leader as well as a VP of sales to focus on technology first and foremost that we announced before. Also very excited to have Matt Broome join the technology group. He's actually the Executive Vice President and GM over the entire business. Former customer, so he understands the product very well, the value proposition, and any potential innovation that we need to do to increase that value proposition to set our sales team up for success. Also, like we talked about, we've completed the Epic app integration work, and now we're gonna do our first Epic partner full integration. That'll allow us to just understand how fast we'll actually be able to deploy. It'll help us build a playbook for deployment and reduce the time to implementation.

I really do feel like the team's building a pipeline. We have a lot of inbound requests for information, and we're moving those through our, you know, our sales funnel appropriately. I do believe it's gonna take some time to set that up and build. What we're doing in this year is really setting up 2023 for substantial growth. I believe we've said this before, but for this current year, we anticipate that the revenue will be very similar to the revenue from 2021 for the technology business itself.

Charles Rhyee (Managing Director and Senior Research Analyst)

That's helpful. Just to be clear, right, the Epic integration that you guys have been working on, that's really geared for the technology business. You know, I guess most group practices don't really run Epic as often. Is that a fair way to think of it? Maybe any kind of progress on, you know, integrating with Cerner and some of the other major hospital EHRs?

Mark Doerr (CEO)

When I think about Epic Willow, I mean, there's about 350 integrated delivery networks, right, health systems that leverage that pharmacy management system component of Epic, and that's really our target audience. You know, roughly 350 sites, but they have multiple places where you could place the MedCenter inside of a site. Think urgent care, think emergency room, et cetera, and so, you know, the community-based practices that they participate in. We think there's a large opportunity in that group, in and of itself. I think the other thing is we do have the interface with the McKesson EnterpriseRx, which, previously was not being, you know, advertised and sold. We've made an effort to actually identify and go after that particular market as well.

You know, we're trying to expand inside of the two integrations we have, and then we'll let customer demand really drive what our next integration point will look like, whether that's to your point, Cerner, or some other ambulatory EHR product that really will be driven by customer demand.

Charles Rhyee (Managing Director and Senior Research Analyst)

That's great. I'm sorry. May I... If I can ask about then, you know, you talked about building the pipeline. You're getting inbounds. I guess two questions around that. Your existing sales force, how much do you have to complement or add to to be able to take advantage of these kind of inbounds and building this pipeline? Then second, on the implementation side, you know, is it the same kind of team to that you have currently that implements at the clinics that could also implement at a health system, or is it a very different skill set that's needed?

Mark Doerr (CEO)

Yeah. It's a good question. On the sales side, we're actually restructuring the team slightly. We're bringing in account management to actually help our sales team as they are, you know, transitioning a partner from sort of the sale into the integration and implementation phase. We think that's gonna be a significant help to the existing team, such that we don't have to augment our current sales team. We'll keep monitoring inbound. If the pipeline gets larger, the sales team can support. We would certainly add. At this point, we don't have the kind of site that we'll need to add sales as we've added in account management. On the implementation front, we do have a team that's already focused on implementations for technology sales, so there's no need for us to add additional resources there.

At this point, again, we think we're largely scaled appropriately for the implementations that we have, and we have the skill set inside such that we can ramp up and ramp down. Those skills are transferable, whether we're implementing a clinic or whether one of our SpotRx clinics or whether we're gonna implement a technology sale. They're largely very similar, and the minimal differences, our team can actually flex between the two business segments.

Charles Rhyee (Managing Director and Senior Research Analyst)

Great. Then, you know, apologize just to keep going on here, but when we think about the dispensing sites, you have 88 dispensing sites in the market. You know, I know when you guys did the raise, you kind of gave some details around sort of what the median revenue per site was versus sort of the 75th percentile, which kind of gets you to the $1 million per dispensing site kind of bucket.

Can you give us some? You know, characteristics around the new sites that you're going into, particularly, let's say in this Q1, you know, how do you feel about sort of what the revenue opportunity, the, is on the current sites and, you know, and maybe tied to that, what are you seeing in sort of the utilization environment? I know some of the hospital companies, you know, had kind of maybe revised a little bit on their assumptions for utilization. Just curious your thoughts there on what you're seeing.

Mark Doerr (CEO)

Yeah. I'll take the question, and then I'll let Ramona add any specifics she wants. As far as the sites that we've brought live, largely have been in the Florida market, and we track them on a weekly basis against our expectations. Again, the majority of those sites are tracking at or above our expectations, such that the entire market is at least at what we would have expected at this point. Again, that market's fairly young for us, being less than a year old, obviously. You know, what we do is track our expectations, which is in line to sort of what we talked about in the Q1 around those historical ramps.

I think that is a reflection on the work that the team's done to qualify and quantify each one of those individual clinics such that they're performing within the range of expectations. I think on the utilization side, we've seen utilization, I think, come back to sort of the pre-COVID market, you know, based on what we're hearing from our partners with their patient visits and that component. And then also what we're seeing on the prescription side coming out of not only our new clinics, but our new SpotRx MedCenters as well as our existing base. Ramona, I don't know if you have anything else you want to add.

Ramona Seabaugh (CFO)

No, Mark. I think, Charles, you covered everything.

Charles Rhyee (Managing Director and Senior Research Analyst)

Great. Then maybe one for Ramona then. Just on inflationary pressures, obviously, wage inflation, you know, supply chain issues. Curious anything, particularly as you think for manufacturing new MedCenters, anything there to consider as we think about sort of the forward outlook and your expectations for OpEx?

Ramona Seabaugh (CFO)

Sure. Yeah. As we, you know, continue to monitor the market and the inflation pressures, we have not yet seen a large impact to our business. We'll continue to monitor that, where we feel good about where we are today with the components we've put in place to risk mitigate any inflation with respect to MedCenters, et cetera. With the labor market, we've been very fortunate to be able to fill our positions at the rates that we've expected. So far, we have not had a large impact, but we continue to monitor and be on top of that issue.

Charles Rhyee (Managing Director and Senior Research Analyst)

Great.

Mark Doerr (CEO)

Thanks, Charles.

Charles Rhyee (Managing Director and Senior Research Analyst)

Thanks a lot. I really appreciate all the comments.

Ramona Seabaugh (CFO)

Thanks, Charles.

Operator (participant)

Thank you for your questions, Charles. I'll now hand back the call to Mark Doerr for any final remarks.

Mark Doerr (CEO)

I wanna thank everyone for attending the call this evening. Have a good night and take care.

Operator (participant)

Thank you for joining today's Conference Call. You may now disconnect your lines.