I like to write about underhedged stocks on SA, and today I’m taking a look at MedAvail Holdings (NASDAQ:MDVL). It’s a company focused on pharmacy automation kiosks, and its business growth looks compelling. However, operating expenses are high and the company is expected to run out of cash soon. I think further stock dilution seems inevitable in the near future. Overall, I don’t think the company is worth much in its current state and I’m bearish. Let’s review.
Presentation of the activity and finances
MedAvail is a pharmaceutical technology and services company whose core product is a MedCenter. It is a pharmacist-controlled, customer-interactive prescription dispensing system that looks a bit like an ATM on the outside.
It’s an interesting concept but there are several competitors with a similar business, including Omnicell (NASDAQ: OMCL) Dispension Industries, Pharmaself24. What MedAvail offers does not appear to be unique.
The company also operates full-service retail pharmacies under the SpotRx brand that use its automated pharmacy technology. MedAvail has bet on a hub and spoke model and is currently present in the states of Arizona, California, Michigan and Florida. He plans to set foot in Texas and Illinois in the near future. MedAvail has partnered with several major brands, including IMA Medical Group, CareMore Health, Cigna (NYSE: CI) and Cano Health.
Distribution Units typically increase to $1 million in annual revenue by their second year. As of December 2021, MedAvail had a total of 13 distribution units that had been operating for over 18 months, and it plans to implement approximately 25-30 distribution units in 2022. For the graphs below, note that the cumulative deployments nets exclude disused clinics, pilot and demonstration sites.
In the first quarter of 2022, retail pharmacy and hardware revenue grew 126.3% year-on-year on the back of a $5.4 million increase from prescription revenue volume growth at existing sites as well as new locations in Florida and Michigan. Unfortunately, there don’t seem to be any significant economies of scale as the total cost of goods sold and services jumped 132.3% to $8.61 million. Additionally, operating expenses increased by 33.1%, resulting in MedAvail’s operating loss widening to $12.8 million in Q1 2022.
Looking to the future, targeted milestones listed in MedAvail’s latest corporate presentation include increasing the network of distribution MedCenters to more than 100 in existing markets. I don’t think that should be difficult to achieve given that there were already 88 distribution units in service in March 2022, compared to 68 units in December 2021. The company also aims to reduce its quarterly cash burn by 20% by improving its gross turnover. margin and greater use of central pharmacies. It also highlighted a procurement strategy for the procurement of pharmaceuticals at optimal cost to stimulate the use and appropriate combination of drugs. However, I don’t see a path to profitability anytime soon given that gross margin hasn’t improved much in recent quarters and operating loss has increased by more than 37% in just one year. In my view, this is a major issue as it resulted in an increase in net cash used in operating activities to $13.3 million in the first quarter of 2022 from $9.8 million a year earlier. As a result, MedAvail ended March with cash and cash equivalents of just $5.27 million. The company then raised $40 million through the issuance of 37.6 million shares at $1.0625 each in April 2022. Still, I believe another large private placement is expected to take place towards the end of 2022 due to increased cash used in operating activities. I think further equity dilution seems inevitable at the moment.
Turning our attention to the balance sheet, we can see that MedAvail has an asset-light business model and that cash, receivables and inventory accounted for nearly half of the $27.7 million in total assets at the end of the first quarter of 2022. I find this regarding this the accumulated deficit has exceeded $200 million.
Overall, I expect MedAvail to continue to grow revenue at a rapid pace and believe the annual run rate could exceed $50 million by the end of 2022. However, the gross margin is barely positive and when you add operating expenses, the picture isn’t pretty. And with the net cash used in the operations growing rapidly, I think another major capital raise is likely in a few months. I’m bearish but I don’t think now is a good time to short MedAvail. According to data from Fintel, there are 250,000 shares available for borrowing at the time of writing, but the short-term borrowing charge rate is 79.39%. And if you want to rely on put options instead, the lowest strike price available right now is $2.50.
When it comes to the risks of the bear case, I think there are two main ones. First of all, I could be wrong about the lack of value of MedAvail activities. The company has an interesting product and I think it may become a takeover target for a large drugstore chain looking to diversify its business. Secondly, sometimes the stock price of microcap companies can rise for spurious and unknown reasons, and it is possible that this will happen here in the future.
Takeaway for investors
MedAvail started as a prescription drug dispensing kiosk startup in 2012 and I think it has accomplished a lot in the past decade. The company continues to grow rapidly, but the problem is that operating margins don’t look good, leading to heavy cash burn. I don’t expect the situation to improve anytime soon and it looks like another big capital raise towards the end of the year is likely.
I’m bearish on MedAvail but I don’t think it’s a good time to short its shares because the short borrowing fee rate is close to 80%. In my opinion, risk averse investors should avoid this company for now.