Mednow: pan-Canadian growth
Mednow is establishing itself as a national, online Canadian pharmacy based on its leading pharmacy app, telemedicine support, strategically placed fulfilment centres across Canada, and specialist services. The H1FY22 results and further Q3FY22 acquisitions show rapid implementation of this strategic vision. Mednow's integrated operation gives patients a fast and efficient alternative to the old-fashioned pharmacy lineup. The Canadian pharmacy market is estimated by Mednow at around C$48bln.
Mednow has seen rapid growth since its March 2021 IPO, primarily driven by the acquisition of regional pharmacy and healthcare businesses. The H1FY 2022 results to 31 January 2022 showed revenues at C$2.4mln from higher-value biologic treatments and doctor home visits plus the core app technology and pharmacy fulfilment centres in Vancouver, Ontario, and Nova Scotia. Fulfilment centres in Winnipeg, Montreal and Calgary could be opened from summer 2022.
Mednow continued this program of strategic investment in Q3FY22 with the acquisition of a specialist liver care pharmacy and consolidation of the Mednow East (Ontario) fulfilment centre. Mednow For Business (MFB) enables employers to manage their employee's pharmacy benefits. MFB provides an enterprise pharmacy solution and already has potential access to over 500,000 customers.
Mednow has a strong vision for the long-term, integrated future of the business and aims to double its customer base year-on-year to reach 110,000-120,000 users in the calendar year 2023 located across Canada. The C$0.5mln investment in Doko Medical Inc. indicates possible longer-term US expansion.
Changing the pharmacy landscape
Mednow’s Q2 FY22 results show that revenues increased 230% quarter-on-quarter, mainly through acquisitions, with a Q2 gross profit of C$354k at an 18.7% margin. The H1FY22 EBITDA loss was C$7.4mln, compared with an EBITDA loss of C$1.4mln in H1FY21. This reflects the increased corporate and marketing investments needed in scale-up operations.
The underlying business of retail and corporate pharmacy app-linked fulfilment remains the core driver of organic growth. Mednow's recent acquisitions (Medvisit, Infusicare, London & Liver) give scale and synergies and may expand into other Canadian provinces. Customer numbers could grow: In Mednow's estimate from 19,000 now to over 40,000 by December 2022 and to over 110,000 by December 2023.
Management has estimated that in calendar year 2022, revenues might be between C$42.5mln and C$47.5mln with a 20% gross margin and an overall loss. Over calendar 2023, management has further estimated that sales might grow organically to between CA $105mln and C$110mln with a gross margin of 25%. This could give Mednow an EBITDA profit.
With a firm foundation of speciality pharmacy services, digital infrastructure, and brick and mortar pharmacies, Mednow is in an encouraging position for strong organic growth.
Conclusion
Mednow has a clear pan-Canadian vision of an integrated pharmacy operation (figure 1) based around the core online app platform and with additional services and speciality pharmacy operations added on.
Nation-wide infrastructure
Figure 1 - Mednow vision
Source: Mednow
Mednow continues to open more fulfilment centres across Canada (figure 2). These are licensed pharmacies based in major cities to allow Mednow to provide on-demand and same-day delivery across Canada. Mednow plans to open centres in Winnipeg and Montreal by the end of summer 2022. A further centre in Calgary is planned for some point in late 2022. This network will enable Mednow to offer pan-Canadian prescription fulfilment in key centres. 2022.
Figure 2 - National Network of Fulfilment Centres
Source: Mednow Investor Presentation: https://investors.mednow.ca/
Since the IPO, Mednow has also acquired a number of businesses in addition to the fulfilment centres in figure 2. These are:
- Medvist in summer 2021 that provides doctor home visits in the Ontario area;
- Infusicare Canada in late 2021 a specialist Ontario pharmacy linked to a leading autoimmune disease clinic; and
- London Pharmacy and Livercare, two businesses acquired together in March 2022, offer specialist pharmacy services.
In a key development for the future, Mednow has established Mednow for Business. This works with corporate health plans to give their users access to the Mednow app and pharmacy services. This also enables payors to easily manage the pharmacy benefits
Mednow has made two small strategic investments:
- Life Support Mental Heath — a mental health app and support service
- Doko Medical — a US telemedicine app business
Finally, Mednow entered an agreement to sell TruDiagnostcis genetic testing kits, focussed on healthy ageing, in Canada. Sales could start in 2022.
Core technology Platform
The proprietary digital platform with telemedicine functionality (figure 3) links doctor home consultations, pharmacy online consultation, and enables fast and direct delivery of prescriptions.
Figure 3 - Mednow App Services
Source: Mednow Investor Presentation: https://investors.mednow.ca/
Business to consumer
Mednow's retail, business to consumer (b2c) business, figure 4, uses the proprietary Mednow app to offer a range of services including online pharmacist consultations, prescription ordering and refills, prescription reminders, and access to a suite of speciality healthcare services.
Consistently positive user reviews (a Google rating of 5) and near-instant access to pharmacists enable Mednow to acquire customers through a chain reaction of referrals from loyal customers. B2c currently represents around C$2mln per year of annualised revenue, but management hope to increase this to an annualised C$7-8mln by the end of 2022.
Figure 4 - B2C retail Pharmcy model
Source: Mednow Investor Presentation: https://investors.mednow.ca/
Mednow's customer acquisition engine is being improved all the time as Mednow continues to roll out new and improved services to capture even more market segments. Most recently, Mednow has launched Total Health, a personalised supplements service aiming to capture some of a market worth almost US$152bln. This includes age-related genetic tests. Part of Mednow's mission is to demystify the supplements market for consumers and to offer personal guidance, consultation, and delivery of preventative and pharmacological supplement programmes.
Mednow for Business (MFB)
Mednow's business to business (b2b) offering (figure 5) gives faster customer acquisition at scale through mass onboarding of patients. Individuals in corporate or association health plans connect to Mednow's network of pharmacies through MFB.
MFB has agreements with partners such as PACE Consulting Benefits and Pensions Ltd., PACE Consulting MGA Services Inc., and Sterling Capital Brokers. These and other agreements represent access to roughly 500,000 potential customers. Other employer clients such as Tucows (TSX:TC), Consensus Cloud Solutions, and Arista Networks represent roughly 3,500 corporate users on the Mednow pharmacy platform.
Mednow aims to develop b2b to achieve approximately C$10mln per year in revenue and continues to develop a steady stream of corporate clients and partners for the coming months.
Figure 5 - B2B pharmacy model
Source: Mednow Investor Presentation: https://investors.mednow.ca/
Detail on acquisitions
This section reviews the acquired businesses now being integrated into Mednow's pan-Canadian operations. The aim is to show the range of Mednows current operations. Table 1 shows acquisitions to date. The Liver Care and London acquisition finally completed in late March.
The pharmacy acquisitions of Mednow East and West were previously app licensing agreements delivering about C$62k/ quarter in total. These payments have now ceased.
The pharmacies were lent funds by Mednow to cover the start-up phases of the businesses and to develop their fulfilment operations. These loans, C$2.4mln, were converted to equity on acquisition with the small cash payments possibly covering stock.
Doctor's services
Medvisit is a doctor house call service that has been operating in the Greater Toronto area for over 30 years. Medvisit conducts roughly 30,000 home visits a year. These visits are conducted by a network of over 100 doctors able to treat acute and episodic illness and injury.
Medvist generated about C$3mln of revenues pre-acquisition with a gross margin of approximately 25%. It has a database of approximately 400,000 patients. Sales in H1FY22 were C$845k implying about C$1.7mln for FY22. These may be depressed due to the COVID pandemic. An earn-out could lead to a payment of C$680k over the C$1.32mln cash paid.
Specialty pharmacy
Infusicare is a speciality pharmacy offering biologic drugs. These drugs contain genetically engineered proteins that target specific parts of the immune system that fuel inflammation. Presently, biologic drugs are one of the fastest-growing pharmaceutical product segments in Canada. Infusicare currently services the Arva Clinic in London, Ontario, Exhibit 1.
With annualised revenue of around C$9mln, Infusicare contributed about C$1mln on our estimates to Mednow's Q2 results having been acquired in December 2021. Infusicare should now contribute at least C$2.2mln/quarter consolidated into pharmacy operations. Unless Infusicare can expand into other Canadian regions, we have modest growth expectations. The reported gross annualised margin was C$0.4mln.
Exhibit 1 - Arva Clinic
Source: Arva Clinic
Liver Care Canadaprovides virtual and in-person visits to patients with over 10 hepatologists and gastroenterology specialists, and a team of 12 speciality nurses, 3 of which are nurse practitioners. It has treated over 5,000 Hepatitis C patients with curative treatments. Liver Care helps patients with early detection to give direct access to treatments. It uses supportive therapies such as weight loss and nutrition counselling. Annualised revenues were C$21.3mln with a gross profit of C$2.1mln. Hepatitis C drugs are very highly-priced so a few thousand treated patients will generate a high Pharmacy turnover.
The acquisition under amended terms closed on 23 February so about C$4mln sales will be included in Q3FY22 revenues with about C$9.5mln in FY22. Mednow paid C$1mln initially with payments of C$375k in February 2023 and February 2024.
Exhibit 2 - Liver Care Canada
Source: Liver Care Canada
Investments in long-term vision
Mednow has made investments in two related businesses. These are Life Support, a mental health service and Doko Medical, a telemedicine offering. A licensing agreement has been signed to sell Trudiagnostic age-based genetic testing kits in Canada with potential for related services and pharmacy use.
Life Support Mental Health
On July 9, 2021, Mednow bought a small equity interest in Life Support Mental Health Inc., a privately held Canadian company that develops online mental health solutions for patients (exhibit 3). Mednow paid C$0.75mln for 12.3% of the equity and is represented on Life Support's Board.
We are uncertain on the development of this app. Mental Health is a major concern, especially after the pandemic lockdowns, but there are a number of online offerings, and it may be hard to gain market traction.
Exhibit 3 - Life Support Mental Health app
Source: https://www.lifesupport247.com/myb/
Doko Medical
In November 2021, Mednow bought a 2.8% equity interest in Doko Medical Inc., a U.S.-based virtual healthcare provider, for C$500k. This will enable Mednow to learn about innovative telemedicine (Exhibit 4).
It may also provide a route for Mednow to access the much larger, but also fiercely competitive, US market. Doko appears to specialise in treating erectile dysfunction.
Exhibit 4 - Doko Medical app
Source: https://www.doko.md/
Total Health
On November 12, 2021, Mednow entered into a two-year license and distribution agreement for Canada with TruDiagnostic, a US company. TruDiagnostic has developed epigenetic testing kits (“testing kits”), Exhibit 5. Epigenetics analyses nonpermanent modifications (DNA methylation) to a person's genes that occur in response to environmental stress and disease. These affect the immune response and the effects of diet. The kits also test “effective age” by monitoring telomere length — the caps at the end of chromosomes; older cells have shorter telomeres.
Mednow paid US$150k to acquire the two-year rights. The minimum order value is 400 kits a year. The US price for the full kit and service is US$499. Mednow aims to package these tests with nutritional supplements based on clinical evidence.
Exhibit 5 - Trudiagnostic kit
Source: TruDiagnostic
Integration of Mednow aquired companies and services.
This nexus of acquisitions and investments shows the synergy between Mednow's patient services, its streamlined technology, and its core business of fulfilment pharmacies. The wider offering of specialty patient care, doctor services and pharmacy services can not only help attract a greater customer base, but it can also help establish crucial industry relationships. Such relationships will be important for expanding and maintaining Mednow's network of fulfilment pharmacies according to an increased volume and variety of demand. Mednow's technology offering underpins this, and will facilitate the integration of all parts of their operation for maximum ease and accessibility for patients and clients.
H1 FY 2022 commentary
Mednow’s current financial year ends on 31 July 2022. As a high-growth company which has made substantial acquisitions over the last 12 months, Mednow's historic financials are less interesting for investors than its future projections and its ability to integrate the business and achieve organic growth. However, the historic financials for the six months ending 31 January 2022 are still relevant as the basis for future growth.
Sales
Sales in H1FY22 totalled C$2.46mln giving a gross profit of C$615k. Graph 1 shows the sales development and impact for acquisitions and projects historic revenues forward for the remainder of the financial year adjusted for acquisition date.
Of that revenue, about C$849k was earned by Medvisit in the Toronto area. This revenue, C$1.7mln on an annualised basis, is lower than the C$3mln of revenues disclosed on acquisition in 2021, see above discussion.
The other major item is pharmacy sales; we assume mostly retail although there are some corporate accounts. This is probably broken down at about C$1mln from the Infusicare Canada acquisition completed on 13 December 2021. Infusicare’s annualised sales were reported as C$9.3mln upon acquisition, so we have adjusted for the mid-Q2 FY22 completion date. Currently, Infusicare works through a specialist Ontario clinic and covers about 2,500 patients.
The remaining pharmacy sales reported come from the wholly-owned Mednow West and Nova Scotia pharmacies and total about C$350k. Mednow West was acquired late in Q1FY21 so may have contributed over C$300k in revenues.
App revenues in the period totalled just under C$200k, mostly paid by Mednow East. The subsequent acquisition (1 April) means that there is no further app revenue.
Graph 1 - Historic and estimated FY21-FY22 sales
Source: Mednow reports, ProActive extrapolations
Forward look on annulaised revenues
After the Q2 end, Mednow completed the acquisition of London and Liver bringing a further CA21.3mln of revenue. Mednow East will also bring further consolidated revenues, currently undisclosed. On a consolidated basis, we expect FY22 sales (to 31 July 2022) of about C$22mln.
Mednow has indicated that by the end of 2022, it intends to have annualized pharmacy revenues of about C$42mln plus C$3mln of Medvist revenues. To do this, Mednow is developing MFB: a strong corporate business to business enterprise solution generating at least C$10mln of annualised revenue. The app-based retail sales are planned to increase to an annualised C$7mln.
If these plans succeed, it will give a broadly-based, diverse business.
Chart 1 - Future anualised revenue
Source: ProActive based on Mednow disclosures
Growing the customer base
To achieve high growth, Mednow needs to add retail and business customers to its existing base of 19,000 (January 2022). Mednow's disclosed targets are 40k-45k users by December 2022 and 110k-120k by December 2023. Our interpretation of the possible breakdown in December 2022 is in Chart 2.
The majority of current users are from the Medvisit business but there are probably mostly low volume users. There are 2,500 patients needing biological pharmaceuticals supplied by Infusicare Canada. London and Liver has a high revenue base from its 2,000 speciality patients.
Finally, and set for rapid growth, are the current retail customers. These will be augmented by new corporate customers signed up through MFB enterprise plans.
Chart 2 - Anticipated Mednow customers by CY2023
Source: ProActive based on Mednow estimates
Profit and loss
Mednow has annualised general and administrative costs of over C$14mln. Marketing and sales expenses totalled a further C$2mln; these have increased significantly due to core branding and online marketing initiatives executed to increase the exposure of the Mednow corporate brand and to acquire patients and users of Mednow’s web app and mobile app. It is of course crucial for a growth company like Mednow to invest heavily in marketing, and we would expect this trend to continue.
In H1FY22, Mednow also reported total non-cash share-based compensation plus depreciation and advertising of just under C$3mln. The reported loss for the half-year was C$10.5mln with an EBITDA loss of C$7.4mln.
Balance-sheet
Mednow remains in a strong position with 31 January 2022 cash of C$16.4mln. Current assets including accounts receivable and recovery of sales and income tax was C$20.5mln. Current liabilities totalled C$4.8mln. Apart from long-term lease liabilities (C$2.2mln), there is no debt.
Cash flow
The net cash outflow due to operations over H1FY22 was C$6.9mln. There was a small C$200k outflow due to financing. However, the main cash flow was on investment activities, particularly the acquisitions of Infusicare Canada, Medvisit, and Mednow West (Mednow Pharmacy Inc). Overall these totalled C$5.2mln. The total cash outflow for the period was therefore A$12.4mln. This reduced cash from C$28.8 mln on 31 July 2021 to C$16.4mln as noted above.
Strong revenue development promises positive future EBITDA
ProActive does not make detailed financial forecasts on Mednow. Although Mednow has indicated the historic annualised gross profits of larger acquisitions, we do not know their overall cost impact for FY22.
We observe that given an annualised EBITDA loss of $15mln, based on H1FY22, annual sales of over C$75mln at a gross margin of 20% (the guided FY22 figure) would be required before cash break-even. The Q2FY22 gross margin was 18.7% following the Q2 Infusicare consolidation. Mednow has noted that it will not be EBITDA profitable in calendar 2022.
However, in a high growth situation, it is important to look beyond the historic figures as these are a poor guide to future performance. We are aware that management integrating the businesses to exploit the inherent synergies. Mednow has disclosed and is implementing ambitious growth plans that are intended to enable a positive EBITDA over calendar 2023.
In 2020, the total Canadian retail pharmacy market was estimated at C$32.5bln (IQVIA). This is spread over just under 10,000 traditional pharmacy stores with big retailers also offering in-store pharmacies. This is a market that although highly regulated, appears ready for digital innovation.
Mednow’s long-term profitability and goals reach far beyond the operations that have been acquired over the last financial year. Its combination of digital infrastructure and a developing pan-Canadian network of bricks-and-mortar fulfilment centres will enable Mednow to display rapid organic growth.
Mednow does face digital competition. For example, Pocketpills, using an app developed in India, has grown fast, and claims 300,000 users. Pocketpills has just raised C$30mln in a Series B round. Amazon Pharmacy could offer a significant challenge if it decides to make a major investment in the Canadian market.