MERRIMAN CAPITAL Pharma/EHR Conference Revelations Strengthen Our Long-Term Outlook; Reiterate BUY, $3.00 Target Brian Murphy (646) 292-1411 bmurphy@merrimanco.com October 3, 2014 Key Metrics Price: $1.20 Price Target: $3.00 52-Week Range: $0.91-$2.12 Cash (M): $3.5 Debt (M): $0.0 Net Cash/Share: $0.15 Book Value/Share: $0.20 Market Data Market Cap (M): $28.0 Enterprise Value (M): $24.5 Shares Out (M): 14.8 Float (M): 13.3 30-Day Avg. Vol: 27,695.0 Merriman Estimates Sales (M) EPS Stock Performance 2.5 2 1.5 1 0.5 FY14E FY15E FY16E 1Q $1.4A -- -- 2Q $1.5A -- -- 3Q $1.7 -- -- 4Q $2.1 -- -- FY (Dec) $6.6 $11.2 $18.4 EV/S 3.7x 2.2x 1.3x 1Q $(0.04)A -- -- 2Q $0.00A -- -- 3Q $0.00 -- -- 4Q $0.01 -- -- FY (Dec) $(0.02) $0.05 $0.15 Company Description Founded by a group of pharmaceutical industry veterans, OPRX develops software solutions for the health care industry to facilitate information exchange between pharmaceutical manufacturers and physicians, thereby improving affordable medication delivery and adherence to patients. OCT-13 FEB-14 JUN-14 SEP-14 Investment Conclusion OPRX's flagship product - SampleMD - allows doctors to access sample vouchers and co-pay coupons directly from pharmaceutical manufacturers through its e-prescribe systems to search, print, or electronically dispense drug samples directly to patients and pharmacies. We attended the CBInet EHR Pharmaceutical Industry Conference on Wednesday in Philadelphia. Discussions with industry practitioners, key channel partners, and OPRX personnel bolster our long-term bullish thesis on OPRX shares. Separately, we adjust our model to reflect a smoother near-term revenue growth curve and introduce our 2016 revenue and EPS estimates of $18.4 million and $0.15, respectively. We maintain our BUY rating and $3.00 price target, which is now based on 20x our 2016 EPS estimate of $0.15. Investment Summary Our work at the CBInet EHR Pharmaceutical Industry Conference increases our conviction in OPRX's strong value proposition and leadership position in the underpenetrated and rapidly-growing e-couponing niche. Our discussions with conference attendees, OPRX executives and senior field personnel, as well as key OPRX channel partners bolster our conviction in the company's long-term outlook. The conference (in just its second year) drew roughly 145 attendees, up about 25% from last year. We were encouraged by the broad-based industry endorsements we encountered for e-couponing in general and OPRX in particular. We found multi-channel marketing managers from blue-chip Pharmaceutical companies as well as representatives from leading EHR software vendors that actively evangelized and testified to the virtues and high ROI of OPRX's solutions. Overall, we came away very comfortable with OPRX's strong competitive position in the e-couponing niche, the company's ability to continue to grow its EHR distribution reach, the healthcare industry's secular e-prescribing adoption trends, and OPRX's long-term growth opportunity. Institutional inertia among many Pharmaceutical companies, with respect to allocation of marketing channel budgets, appears to be the greatest nearterm impediment to adoption. Despite the clear benefits and high ROI of e- couponing, multi-channel marketing managers at many Pharmaceutical companies still face an uphill battle with respect to the "internal selling" of marketing via EHR channels. In institutions that have been traditionally dominated by sales cultures and with EHR marketing and e-couponing still in its infancy, getting marketing budgets allocated to new initiatives can be challenging, particularly the way large companies guard their brand assets and require lengthy legal and compliance reviews. These issues, which are common to all technical products early in the adoption curve, typically require a fair amount of "missionary work" and customer education. Here we find OPRX's strategic partnership with Grey Group to be right on time. We saw tangible evidence at the conference that GHG was already having an impact on improving OPRX's messaging and marketing collateral. We think GHG is a great ambassador for the OPRX brand and suspect that their efforts will help to overcome some of the typical early-adopter issues that OPRX may be facing on the Pharma side. We adjust our model to reflect revised assumptions for a more modest nearterm revenue growth curve and introduce our 2016 estimates. With OPRX facing difficult revenue comparisons in 2H:14 (revenue grew about 180% in 2H:13) and with the realities of Pharma adoption discussed above, we are updating our assumptions to reflect a smoother revenue growth curve through 2015 and introducing our revenue and EPS estimates of $18.4 million and $0.15, respectively. Our full-year 2014 EPS estimate moves to a loss of $0.02 (from breakeven) and our 2015 EPS estimate moves to $0.05 (from $0.13). Nevertheless, our revenue outlook through 2016 still factors a robust 65% growth rate. We maintain our BUY rating and $3.00 price target, which is now based on 20x our 2016 EPS estimate of $0.15 (assuming 27 million shares outstanding in 2015). See page 2 for Valuation and Risks. PLEASE SEE IMPORTANT DISCLOSURES ON PAGE(S) 4-6 OF THIS REPORT 250 Montgomery Street, 16th Floor, San Francisco, CA 94104 (415) 248-5600 Main (415) 248-5690 Fax (800) 909-7897 Trading www.merrimanco.com - twitter - OTCQX: MERR Member FINRA/SIPC
Valuation To value OPRX, we consider the company's large growth opportunity and the company's early leadership in an under-penetrated niche market. We think OPRX's growth opportunity is closely tied to the secular growth in e-prescriptions (which is expected to nearly double by 2016), driven by the continued adoption of EHR systems. Our $3.00 price target is now based on 20x (a discount to our previous multiple of 23x to reflect the extended valuation horizon) our newly-introduced 2016 EPS estimate of $0.15 (assuming an estimated share count of 27 million in 2016). Over the past year, OPRX has traded in a range of $0.91 - $2.12 and the stock currently trades over 40% off its 52-week high. With more than 100% upside to our price target, we reiterate our BUY rating. Risks that could impede the realization of our price target The company is small with limited resources. Loss of key management personnel could detract from the company's operational capability. Encroachment on OPRX's technology and value proposition by EHR/EMR software channel partners or pharmaceutical customers could pressure margins and impede sales growth. OPRX faces potential litigation risk surrounding its proprietary technology. Customer concentration is high, with two customers accounting for 58% of sales in 2013 and three customers that accounted for 44% of revenue in 1Q:14. Unfavorable consolidation in the EHR/EMR space (i.e. OPRX channel partners acquired by vendors who do not utilize OPRX' technology) could cause potential disruption for OPRX's distribution capacity. October 3, 2014 2
Optimizerx Corp., (OPRX) Income Statement ($000s except per share data) 2011 2012 Mar Jun Sep Dec 2013 MarA JunA Sep Dec 2014 2015 2016 Net revenue 1,112 1,989 669 1,104 1,373 1,811 4,957 1,317 1,454 1,700 2,125 6,597 11,200 18,400 Revenue share expense NM 115 160 451 1,156 1,767 499 540 765 956 2,760 5,040 8,280 Gross profit NM 1,874 509 653 1,373 654 3,190 819 914 935 1,169 3,836 6,160 10,120 Advertising 544 57 3 4 23 17 47 30 46 40 40 156 170 200 Professional fees 343 263 53 79 152 269 553 93 87 90 90 360 500 1,250 Consulting 185 19 20 20 26 34 100 16 17 20 30 83 100 200 Salaries, wages and benefits 865 1,184 375 320 345 279 1,320 349 374 375 400 1,498 1,850 2,250 Rent 38 62 15 15 15 15 61 15 15 15 15 60 60 60 Depreciation and amortization 145 187 48 48 48 49 194 59 116 115 115 405 425 425 Stock-based compensation 0 286 0 10 282 119 411 422 233 285 60 1,000 1,000 1,000 General and administrative 446 269 219 56 95 (82) 288 89 79 80 90 338 400 600 Other 0 0 0 197 377 (574) 0 400 0 0 0 400 0 0 Total operating expense 2,565 2,329 734 750 1,362 128 2,974 1,472 967 1,020 840 4,299 4,505 5,985 Operating Income (1,454) (455) (224) (97) 11 527 216 (653) (53) (85) 329 (463) 1,655 4,135 Total other income (expense) (667) 0 0 0 0 0 0 0 0 30 40 70 150 0 Pretax income (loss) (2,121) (455) (224) (97) 11 526 215 (653) (53) (55) 369 (392) 1,805 4,135 Income tax benefit (expense) 0 0 0 0 0 0 0 0 0 0 0 0 (387) 0 Net income (loss) (2,121) (455) (224) (97) 11 526 215 (653) (53) (55) 369 (392) 1,418 4,135 Diluted EPS ($0.15) ($0.03) ($0.02) ($0.00) $0.00 NM** $0.01 ($0.04) ($0.00) ($0.00) $0.01 ($0.02) $0.05 $0.15 Diluted share count 13,922 14,211 14,232 33,608 34,086 NM** 14,713 16,684 23,242 24,000 25,000 22,231 26,000 27,000 Growth (year over year) Sales growth NM 79.0% 103.2% 114.2% 203.0% 162.0% 149.2% 96.8% 31.7% 23.8% 17.4% 33.1% 69.8% 64.3% Operating expense growth NM -9% 16% 27% 144% -77% 28% 101% 29% -25% NM 45% 5% 33% % of sales Gross margin NM 94% 76% 59% 100% 36% 64% 62% 63% 55% 55% 58% 55% 55% Operating expense 230.8% 117.1% 109.7% 67.9% 99.2% 7.1% 60.0% 111.7% 66.5% 60.0% 39.5% 65.2% 40.2% 32.5% Operating Income -130.8% -22.9% -33.5% -8.8% 0.8% 29.1% 4.3% -49.6% -3.6% -5.0% 15.5% -7.0% 14.8% 22.5% *Source: Company reports and Merriman Capital estimates ** Not sharecount available for 4Q:13 October 3, 2014 3
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