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No. of Recommendations: 14
Thanks for the initial overview, I've been looking into this company for a while and did a short write-up on it so thought I would share and help clear up some questions about how they generate revenue. I think this is a solid company with a great year ahead of them. I am long.

OptimizeRx is a health tech company that enables pharma companies to reach providers directly at the point of care. To do so, they integrate over 370 EHRs, reaching 60% of physicians in the US. 80% of the top 50 pharma brands are clients and they grew revenue 76% last year to $43.3M.

Business:

The most important marketing channel for pharma are providers, accounting for 49% of marketing budgets. Traditionally, pharma companies made use of in-person sales reps. However, only 46% of physicians are willing to meet with pharma reps, a number that continues to decline post-COVID. With more new drugs entering the market each year, pharma companies are increasingly looking to digital channels like OptimizeRx.

Essentially, OPRX enables pharma marketing efforts by doing 3 things at the point of care (within the EHR systems):

-Providing clinical information (education on new drugs)
-Financial messaging (offering coupons at the right time)
-Patient engagement (medication adherence)

They acquired CareSpeak to improve medication adherence and RMDY Health to expand into digital therapeutics. They also launched TelaRep last year to allow providers to reach pharma reps directly through the EHR, making them more comfortable with prescribing new treatments.

Over half of revenue is from enterprise contracts (providing more revenue and higher retention) and the rest is pay per click. They closed 33 enterprise contracts so far this year. Gross margins are mid-50s with costs mainly made of the revenue share they're paying to EHRs. Average initial deal size for enterprise contracts is $1M, however, there is significant room to expand as pharma manufacturers have separate marketing teams for each branded drug and within that, each indication (use case) can have different marketing campaigns.

2020 was a transformational year and their solutions have never been more relevant. Pharma is seeing an incredible 520% ROI because digitizing the sales process leads to improved accessibility, affordability, and engagement. This is not just a COVID phenomenon either.

Moat:

This model scales well and there is a clear flywheel: more EHR partners = more providers -> more pharma partners/marketing spend -> more EHR partners.

It's similar to Roku, where more users drives more ad spend which then drives more content which leads to more users.

OptimizeRx’s relationship with EHRs is very similar to GDRX’s relationship with PBMs too, who can't aggregate each other and see the relationship as incremental margin. 90% of providers use EHRs daily and for an average of 5.9 hours. OptimizeRx is a win-win-win because pharma can see a higher ROI on marketing spend, providers can get coupons from pharma and spend less time talking with sales reps or researching new treatments, EHR vendors can earn additional revenue for very little work, and patients can better afford their drugs.

Competition:

They only have one major competitor, ConnectiveRx, and although ConnectiveRx is the bigger company, they are getting disrupted by OptimizeRx with a newer, easier-to-use platform. GoodRx is a potential future competitor but is currently focused on DTC rather than B2B.

TAM:

Pharma spends $20B annually marketing to providers, $4B of which is digital. Given OPRX offers high and measurable ROI, has established relationships with pharma, and the secular tailwinds towards digital, I believe it is well-positioned to capture significant share.

Management:

Will Febbo joined OPRX in 2016 after working at an investment bank. Before that, he co-founded MedPanel and he came to know OPRX through the buyer of that company. Since joining, he has accelerated their trajectory and established OPRX as the clear leader.

Risks:

EHR vendors are incentivized to partner with competitors but since OPRX is the best there is no incentive for the pharma clients to go anywhere else. Enterprise contracts are deepening these relationships. And EHR vendors have no incentive to partner with each other.

Also, while EHRs are very fragmented with over 500 vendors in the US, Epic and Cerner control over half the market. Because of this, OptimizeRx may be pressured on margins in the future. However, EHRs have no good alternative to OPRX and it’s free margin.

Conclusion:

It currently trades at an EV of $746M with $83M cash after a recent raise and no debt, so 12.7x 2021 consensus of $58.6M (35% growth). Gross margin is 55% and adjusted EBITDA margins are 12%, which it expects to improve through 2021 via a larger mix of higher-margin offerings.

Overall, I see OptimizeRx as the category leader in a niche but attractive market that should continue to benefit from strong tailwinds as pharma spend moves digital. They offer a win-win-win for providers, pharma, patients, and EHR vendors.

-Richard
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