It's unfortunate that management has done a poor job of setting investor expectations. The fluff PR last month preannouncing "improved operating results" for the quarter is the latest example. Some of these operational issues may have been beyond management control, but overpromise and underdeliver enough times and you end up with the valuation we have now. At least we now know that Q3 will be more of the same and that operational and financial improvement should come in Q4 with the resolution of Allscripts issues (technical and opt-in), integration with new platforms (Quest, eHealthline, NextGen, LDM), and end of the excessive stock comp. It's also good to see the settlement with Physicians Interactive, as this removes the outside risk of another LDM-like royalty or worse.
I suspect the average revenue per distribution has declined a bit from the $4.25 a year ago. The release cited a 30% rise from Q1, while revenue increased just 10% sequentially. This was at least partially due to a higher share of setup fees in Q1 as indicated on the call. However, even if we were to assume that Q2 revenue was 100% distributions (it wasn't, as indicated by the gross margin), this would yield only 342k dists at $4.25. A 30% rise from last quarter would suggest just 263k in Q1. These numbers are low relative to the publicly stated figures last year, Allscripts issues aside. I mention this because we're no longer given distribution figures or revenue per distribution, yet the loose target of 1M dists for Q4 was reiterated on today's call. I know some (myself included) were previously modeling this guidance to mean a quarterly run-rate of $4M+ by Q4, but this is clearly no longer the case. On the positive side though, the gross margin of 63% (likely 60% on the distributions themselves) is considerably higher than I was expecting at the time of the LDM settlement.
On the macro front this quarter, I've only seen a few items impacting the copay coupon market.
- UnitedHealthcare rescinded their March plan to ban coupons, probably due to pushback from at least one of the national pharmacies (CVS, Walgreens?). I doubt such efforts will gain traction, as pharmacies have nothing to gain and plenty to lose by yielding to such a ban (loss of customers, potential loss of higher branded dispensing fees), nor does an insurer have any enforcement (or even knowledge of) coupons processed as secondary claims.
- In June, NJ courts denied Merck's motion to dismiss so the case against their use of copay coupons may proceed. However, similar cases have been heard and none (to my knowledge) have succeeded.
- The more worrisome news is this month's formulary announcements from CVS and Express Scripts. There are a number of new exclusions targeted at drugs with the most prevalent coupon programs. Worst case scenario, it's important to remember that only about half of coupon programs target drugs with generic competition.
I was unfortunately a buyer at higher prices earlier this year but see no rush to accumulate more. The bottom may be in at $1.10 but I expect we'll be rangebound for a few months. After the past two disappointing quarters, I believe investors (including myself) are going to want to see results before bidding this materially higher.
