Adheris Health Limited (AHE) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to MedAdvisor Limited First Half FY '25 Results Briefing. I'm Sarah Sweeney, Senior Vice President of Global Marketing and I'll be your moderator today. Joining me are Rick Ratliff, our Chief Executive Officer and Managing Director. Hello, Rick?

Hi, Sarah.

Also with us today is Ancila Desai, MedAdvisor's Chief Financial Officer. Hello, Ancila.

Good, Sarah.

We recognize that today is a particularly busy day as it marks the final day of the ASX reporting period. So we intend to keep this briefing to 30 minutes, and we'll aim to finish by 11:00 a.m. We appreciate your taking the time to join us. Rick and Ancila will walk you through the first half FY '25 results, which were released to the market this morning. This will take about 15 minutes, followed by Q&A of around 10 to 15 minutes. [Operator Instructions] We're mindful of everyone's schedule and aim to keep the session brief. If you have further questions following the briefing, Rick and Ancila are available for one-on-one meetings. Please contact George from the IR department to arrange. [Operator Instructions] With that, I'll hand it over to you, Rick, to get us started. Thank you.

Okay. Thanks, Sarah, and good morning to everyone. I want to thank everyone for joining us today for our first half FY '25 update. And so if we'll go to the agenda slide, Slide 3, [ Gerika ]. First, I just want to say that many of you will have seen our second quarter results that we released in late January. Today's result carries on from those themes discussed in those results. And importantly, I do want to focus today on how we're reshaping MedAdvisor for long-term value creation. So with that said, what we're going to do today is I'm going to provide a quick overview of our first half results, Ancila and I will walk through the financial and operational update. And then I want to provide some perspective on key industry market drivers and how that is really accelerating our focus on reshaping our business in both the United States and Australia. And then we'll wrap up and take a quick look at our second half '25 priorities. So if we'll go on to Slide 4, take a look at Slide 5, take a look at our first half overview. So first of all, we are pleased to report that we delivered a profitable NPAT that was in line with previous guidance in our quarterly reporting. We did finish the half with $57.1 million in revenue at the group level. Those who have been following along will know that our revenue has declined compared to the prior half in FY '24. As we have indicated over the last couple of months, this was impacted primarily due to significant budget adjustments and vaccine-related health programs from 2 pharma clients in the United States. Nevertheless, our THRiV-powered patient engagement programs continue to gain traction in the U.S. and represented nearly 35% of the quarterly revenue compared to 7% the same time last year. In Australia, we've been very pleased with the migration of our pharmacy clients to our cloud-based MedAdvisor for pharmacy platform with 90% of our customers having transitioned so far. Our ANZ business continues to grow with launch of new services in revenue streams, including telehealth and e-commerce. And at the group level, we've been redesigning the business. This significant and important program that we have named Transformation 360 was launched in October of 2024, and we'll talk more about that later. As you know, we've initiated a review of strategic options to evaluate and address valuation disconnects. The review is actually moving along extremely well. At this time, we expect to complete the review by June 30. And then finally, as we look into the current half, we are prioritizing the work we're doing to reshape our U.S. and Australia businesses supported by Transformation 360 to address shifts in the markets. And again, we'll spend more time on that later in the presentation. So now I'd like to pass it over to our CFO, Ancila, to discuss our financial and operating performance at the group level. Ancila?

Thank you, Rick, and hello, everyone. It's a pleasure to be with you today. I will talk you through our group financial highlights, starting now from Slide 7. As Rick outlined, revenue for the half was impacted by lower-than-expected vaccination rates, leading to delays in pharma spend. Consequently, gross profit, EBITDA and NPAT were all impacted by this decline in revenue. Notably, we did manage to remain profitable across all metrics over the period. We are very proud to have delivered a third consecutive half year profit result. Also pleasingly, gross margin did improve in the half. This was in fact driven by higher margins that we can now access through THRiV programs. We implemented a number of cost savings initiatives through the period as part of our Transformation 360 program, which are expected to deliver annualized savings of approximately $5 million from FY '26. Moving to Slide 8. This slide would be familiar to most of you as it outlines the adjusted EBITDA bridge. As you could see, the majority of the EBITDA impact was revenue and gross margin related, which also includes some reallocation of costs such as $500,000 for cloud-related expenses, which were previously reported as OpEx and some additional marketing expenses of $400,000, which are now recorded as a discount to sales. We incurred some restructuring expenses in people and culture as a result of our planned Transformation 360 initiatives. And in relation to cloud-related benefits, half of that benefit does relate to efficiency gains, but the other half of $500,000 relates to the reallocation to cost. And as you can see, Transformation 360 OpEx-related expenses for the half were $300,000. Now let's move to Slide 9. Sorry, Slide 9, please. One back. Perfect. Thank you. The group's cash position stood at $12.4 million, which was down from our position of $15.6 million at the end of June. As we discussed, our receipts were lower due to decline in revenue, and this was offset by timing of supplier payments. An additional $1 million was attributed to a pay run in the U.S. The U.S. team is paid on a fortnightly basis. We invested $500,000 in Charac at the start of the half. There were other payments related to income tax, interest payments, lease and PP&E. It's important to note that we increased our debt position through the period with an additional drawdown of USD 3.5 million in 2Q, taking our gross debt to USD 11.3 million as at December '24. I would like to now turn back to Rick.

Okay. Thanks, Ancila. If we'll go to Slide 10, take a look at the U.S. very quickly. As we've been discussing, the decrease in revenue and gross profit in the United States is primarily due to the lower-than-expected vaccination rates and implications on budgets in late second quarter. What new information here, as you'll see in the middle chart, the bar chart, the traditional in-pharmacy programs were down due to impact of the delayed vaccine programs and a substantial shift actually to THRiV-powered programs. So on that point, gross margin did increase, as Ancila mentioned and I mentioned earlier, due to a higher mix of digital and THRiV-powered programs in the half. On the right-hand side of the slide, we're giving you a little more information and insight into the revenue by category and what we call method, and we're going to dive into this a little bit more detail if we'll go on to Slide 11. So on Slide 11, the key point here is there are 3 key categories of pharma-sponsored programs that deliver revenue in the United States. First of all, general medications revenue, then vaccine revenue and then specialty medications revenue. While vaccine programs are the primary driver of the revenue decline in the half, there are various market shifts that are contributing to the decline as well as you look across this chart. I think, [ Gerika ], if you click one more time, you might see the data under general medication category. There we go. Okay. So if you look at the general medications, general medications represented about 37% of our first half revenues. The revenue is down about 19%. This is primarily due to spending delays related to a patent issue with a brand in the heart category. antivirals also contributed to the revenue decline due to lower-than-expected COVID cases, which we'll dig into in a minute early in the flu season. However, there were a few wins in the half with asthmatic medications growing at 99% and thyroid medications growing over 184% year-over-year. In the vaccine category, this represented over 50% of our first half revenue. which is a typical trend with our business. Revenue in this category was down 33% due in large part to the decline in RSV and COVID programs, as we've been saying, which definitely aligns with industry trends and revenue impact on our pharmaceutical manufacturer clients. Non-RSV vaccine revenues were down modestly, and we actually had a significant increase in our nonseasonal vaccines such as shingles in the half. Specialty medications are a relatively small contributor to our overall revenue, representing about 8% today, but this is a category where we see longer-term significant upside opportunity. In this category, the revenue was down primarily due to funding shift to new launch brands in the categories. There were some wins in this category as well with chronic kidney disease, up 82% and anti-inflammatories up 19% year-over-year. So as we'll discuss later, I think what's important here is we remain extremely optimistic on the fundamentals of the U.S. business. And we are executing strategies that we'll talk more about later to address these market shifts and position our business for long-term success. So if we go to the next slide, I just want to spend a few more minutes on vaccines. This is very similar to something we reviewed in the second quarterly results, but I just want to reinforce some of the key points here. While this is a very busy slide, the key is it's intended to help visualize some of the trends in vaccinations from 2020 to late 2024. The lines on the chart show the weekly vaccines delivered by brands that are highlighted at the top of the chart over time. So you can see that through 2020, 2021, vaccine spikes were primarily driven by COVID, which would definitely be expected. But as we look across 2022 to 2024, the COVID vaccines still remain important, but we do see an increase in types of vaccines available. For example, new vaccines were up by 25% from 2022 to 2023, primarily as a result of new RSV vaccines from Pfizer and GSK. This is an important point relative to the miss in the second quarter. At the same time, the trend around the volume of vaccines being delivered is declining in some categories. We know of a few reasons for this. The light green lines are related to flu shots, which are somewhat stable over time. And we're expecting COVID vaccinations as they are declining, we expect them actually to flatten out and have a very similar characteristic to flu. As we mentioned in the December guidance, and I just mentioned a moment ago, we have seen over a 70% decrease in RSV vaccines from 2023 when they were launched, which is our FY '24 to FY '25 in these results. This chart also shows definitive seasonal spikes in vaccinations, you can see in looking across on to the 2024 time frame. This coincides with our seasonality of our business and our flu season. Through these spike periods, especially over the last year, 12 to 18 months, consumers are often inundated with information around vaccines, particularly as there are new vaccines coming on to the market. And this can be confusing. It can add to what term vaccine hesitancy, which is one of the important factors that's been affecting the decrease in vaccination rates. So now that we shed some light on the challenges, let's talk about where we see some of the potential solutions and opportunities. So we're starting to work with pharmacies and vaccine manufacturers to look at how we can spread vaccine programs more evenly throughout the year. We want to streamline the information flow to patients, making it easier for them to digest the information and more easily and more likely to get vaccinated actually. So some of the strategies we're discussing with the pharmacies and pharma manufacturers, the brands in this category is delivering educational messaging supporting a healthy vaccine journey across the course of the year. and not just a particular season. We're looking at programs to promote shingles, which we are doing as we speak with other nonseasonal vaccines during off-peak times during the year and then promote the seasonal vaccines like flu during the peak times, as you would expect. So we expect that this should, in turn, lead to increased vaccine program volume and improved uptake of vaccines over time. So if we'll turn from vaccines now just for a second to Slide 13. I just want to make a quick comment here. This is a great case study of the value of pharmacy communications programs that support objectives for specialty medications such as asthma biologics, which are characterized here. But in the interest of time, I won't go through the details just to say that this is a great example of where we believe significant opportunity as we move forward. So if we'll go on to Slide 14 and take a look at ANZ for a moment. We are very pleased with the progress in our Australia business. Key callouts here are revenue was up modestly to $11.4 million. Gross profit was down slightly as was gross margin. However, we're still at a healthy 81.6% on gross margin. The reduction in gross profit and gross margin, as Ancila mentioned earlier, primarily due to some restructuring on marketing expenses and the shift of some cloud platform-related costs to cost of goods sold. Key point is to note that we've made very good progress, I should say, of our cloud-based platform, MedAdvisor for Pharmacy, with 90% of the pharmacies migrated, and we expect this to be completed by the end of March. And we're rolling out a number of new services that will deliver incremental revenue streams over time. So if we move to Slide 15, take a quick look at the pharmacist intervention program. that we launched in the half. Following the launch of a weight loss medication in 2024, pharmacists commenced educating patients on administration and side effects while facilitating referrals to a patient support program. The program delivered some great results with 1,700 pharmacies participating in the program and delivering more than 31,000 services to patients via pharmacist. So if we go to the next slide, we did launch the Transformation 360 program in October of 2024. These programs are on time and on budget. You can note several of the key metrics. We have driven down the overall cost through our restructuring. We delivered some cost savings this year as well as incremental $5 million in savings in FY '26. And then we're about 35% completed with the platform development. And quickly on that, if you go to the next slide, while this is a busy slide at a very high level, I just want to say that our next-generation platform that is being built through Transformation 360 is going to significantly enhance the capabilities that we're currently delivering through THRiV. And our new psychographic data segmentation engine utilizes a number of different data sources and artificial intelligence to identify the right patients for the right message in the right channel at the right time. So there's a significant amount of new technology and capability so we can lower the cost to deliver more advanced, more personalized functionality through a number of different partners. So I'll leave it at that in the interest of time. So if we'll go to the next slide and turn to industry drivers. There are a number of evolving market trends that are reshaping the pharmacy and pharma landscape across both the U.S. and ANZ. So I'll hit these very quickly. Looking first at the U.S., our direct-to-consumer models are reshaping patient engagement through pharma. Pharmacy chains are facing a number of significant cost pressures through a number of restructurings and financial challenges. And of course, we've got to acknowledge the U.S. governmental influence and the new administration and the potential impact as we look into the next 4 years. In Australia and New Zealand, government policies and the aging population are driving growth in the Australian pharmaceutical sector. Pharmacies are gaining ability as we've been discussing to provide expanded services, including diagnosing conditions and prescribing medications, and this is being powered actually through a recent announcement of a women's health initiative from the Pharmacy Guild of Australia and the government. We'll touch a little bit more on that in a moment. So if we go to the next slide, I think it's important to note that we have been monitoring these trends and others over time. as well as those that were driving the headwinds in the first half in executing a strategy to address these headwinds and future opportunities. So we're leveraging the Transformation 360 as a catalyst to reshape our U.S. business. And as mentioned in previous presentations, the Transformation 360 program actually does go beyond just transforming our platform as we were discussing a minute ago, to also focusing on transforming our business processes and go-to-market strategy to keep pace with market trends. So at the heart of this initiative are our core pillars of the customer focus, operational excellence and collaboration. These are extremely important as we look forward in how we plan to reshape the business in the United States. Currently, we're refining our go-to-market strategy to align with the shifting market buying patterns from pharma and customer priorities and industry challenges. We're doubling down on operational excellence, and we're improving internal coordination across teams to ensure seamless access and proactive customer support. By improving internal coordination, we believe that and focusing on the customer, staying laser-focused, we're going to see significant value creation in the U.S. business, and you can see the impact at the bottom of the slide. So we go to the next slide so that I can keep things moving. And now if we turn to ANZ and how we're leveraging the same framework to drive market alignment, expand pharmacist-led services, enhance digital engagement and integrate AI to improve medication management. Our customer focus and double down on operational excellence and again, the focus on collaboration and teamwork across the business is reshaping the way that we can drive not only the current solid performance, but enhance and expand on the market drivers in the Australia and New Zealand market. One of those key drivers, if you go to the next slide, is the women's health initiative that I alluded to earlier. This initiative was recently announced that there's going to be a funding opportunity for women's health programs through pharmacy engagement. And we're very proud to have been a partner and support of delivery of women's health and other clinical services over the past few years. And so based on the pilot results to date and our expectations for growth in Australia and talking to the key stakeholders, we do expect there to be significant opportunity, as you can see on this slide, over the next several years. So if we'll go towards the end, we're going a little long. I apologize. In the second half of FY '25, we'll focus on driving strategic changes across the business, enabled by Transformation 360 and aligned with ongoing market shifts. Our primary focus is going to be on redesigning the U.S. business, continued expansion on ANZ and ongoing cost optimization and executing on our strategic options evaluations. So in the U.S., we are reshaping the sales team and customer success organization to optimize the sales cycle and drive faster pipeline conversion. We've already seen some early signs of positive momentum in the half. We have a solid pipeline, representing over 160% of the revenue needed to achieve our revised internal projections. In ANZ, we'll continue to focus on expansion of services to drive revenue, and we're focused on continued expansion of clinical services as we've been discussing. And we have announced that we will be standardizing our SaaS fee structure in the March time frame. We've announced the restructuring in January associated with Transformation 360, and we'll continue to monitor for additional operating expense savings opportunities. We anticipate the completion of the MedAdvisor rollout, as I mentioned, and we'll launch THRiV next-generation patient program or platform at the end of FY '25. And then finally, we are making progress on our strategic options, as I mentioned, on the front end and expect to complete that review by June 30 of this year. So I do apologize, we've gone long, but I appreciate you spending the time with us this morning. And if we've got a few minutes for questions, I'll hand it back to Sarah to tee those up.

Yes. Thank you, Rick. Thank you, Ancila. We do have a couple of questions. I will start off with Elyse from Canaccord. I think you had your hand up early in the presentation delivery.

Great. Can you hear me okay?

Yes.

Looking at the pipeline, obviously, that looks like a pretty robust and varied pipeline. Are you able to quantify where that sits in terms of dollar amounts? And then kind of looking at the revenue per opportunity, how has kind of the revenue kind of per contract or per product evolved with kind of maybe some tightness on the pharma marketing wallet? Are you needing to explore some lower touch or lower cost options for those customers?

We've not provided any guidance in relation to the first half outlook from a revenue perspective. We are analyzing the speed of pipeline conversion. Like I said, we do have a robust pipeline in line with our revised projections internally. And we are seeing through the conversions in the half or first couple of months of the half that the contract values is actually very similar to the past. It varies significantly. We've signed a significant contract with a new mental health brand just recently. We've signed a large contract for shingles vaccines that will be delivered over the half just recently. And then there are a number of other new brands, they have similar characteristics to what you're alluding to, Elyse, where when we bring in a new brand, typically, they're going to come in at a lower contract value. However, if we can land those, there are a couple of situations where we can actually burn the revenue quickly. And then because we already have the program in place, assuming that good results, we can actually extend those to run across the rest of the half. So I'll leave it at that,

And then it looks like you're doing a good job with the cost-out program. Is the current employee base and resource base still sufficient to manage the existing pipeline opportunities and to kind of service those customers?

So the cost takeout that we've done up to this point has been in line with our planning in relation to Transformation 360. So this initial cost-out in the January time frame was planned. So some of that is somewhat of a rebadging, if you will. So there are some roles that have been eliminated. There are some roles that have been moved to offshore. So there's a little bit of a balance. So the answer to the question is, at this point, while we're continuing to look at costs and opportunities to optimize our costs, at this point, we believe that we have the right staffing to deliver on the business in both the U.S. and Australia.

Okay. We have a couple of questions in the Q&A. The first is the strategic review has been extended to June. Can you comment on why the delay? On the previous update, you mentioned you expect an outcome by the end of March.

Right. So we are making very good progress on the strategic review. We are evaluating, as we said, options in both the U.S. and Australia and looking at various approaches to help maximize value to shareholders. As we've been doing that, we've found significant interest in a variety of different options. And so in order to get through those options and determine the appropriate direction, it's going to take a little bit longer than planned. At the same time, the analysis is going extremely well and the interest in how we might evolve the actual business is very good.

And I think we have time for one for Sarah Mann from MA Moelis.

Just a quick one for me, and sorry to be short term, but just around the pipeline. So can you give us any color around, I guess, what percent of the pipeline has been contracted relative to, say, the same time last year? And then specifically within that, you alluded to some of the largest programs in the first half potentially being deferred to the second half. Can you give us an update on, I guess, conversion of those programs in the second half and whether they've been downsized at all?

Okay. So there are a couple of things there. Relative to programs being deferred into the second half, there are a few of those programs that have continued into the first half. There are some that have not been executed yet. However, we are in conversation with those customers on timing to deploy those programs. We're still optimistic that, that will happen in the half. It might not happen as early in the half as was expected. So as you know, Sarah, some of this is timing. So the conversion of pipeline to contracting is key. And like I said, we are seeing some solid movement in pipeline conversion, particularly here in January and February, and it appears that will continue into March. And we're holding to ensure that, that trend continues, and we don't see any changes before we start to provide any other detail at this point.

Sure. Okay. Understood. And then clearly, you've alluded to the macro uncertainty just with everything that's happening in the U.S. at the moment. And thanks for providing kind of the breakdowns across the different categories that you're operating in. Can you give us a feel for which of those revenue streams you kind of see as most stable in the current macro environment versus the ones that are most at risk now that RFK Jr. has kind of been appointed as Secretary.

Well, you did add the complexity there at the end. Given what we know at this point, and this is partially why we broke it down because this is the way we look at the data, is that general medications, which are medications across the categories I showed, these are for COPD, diabetes, heart, migraine, et cetera. We don't see any impact on those areas relative to the promotion of the medication. You still need the medication to address that particular condition. The challenge will be, and this is not just RFK, this is in general, with things like the Inflation Reduction Act, there's a significant price pressure on pharma and we've not seen any impact from that price pressure on what we do. What we do is much more targeted and cost effective than the kind of spending you might do on TV. And if RFK does go down the path of affecting the spend on TV in the United States, that's a multibillion-dollar expenditure by pharma on an annual basis. And we would expect to see some of that not necessarily go back just to cost reduction of medications, but to lower cost, highly targeted approaches to getting medications in the market. So we don't see general medications as an issue. We don't currently see vaccines as an issue. However, it is somewhat of a wait and see. We do expect and we're still seeing interest in driving vaccine awareness, particularly in pharmacies because 90% of adult vaccines are administered in the pharmacy. So we expect to see a little bit of pullback. But in some cases, in the pneumonia category, we expect to see the spending increase. So there's a little bit of give and take in some of these categories. The vaccine business is still about a $23 billion, $25 billion business in the U.S., growing at about 7% to 8%. So we do expect to continue to monitor it, but vaccine is a public health initiative in the United States. So we'll continue to monitor it. But that is one that as obviously, we've seen is going to fluctuate. On the other side, with specialty, specialty medications is probably the highest growth opportunity because this is where probably 60% of the spend is on medications in the United States and most other countries, and it will continue to increase, particularly as these drugs get more and more personalized and targeted at certain types of disease. And that's where the spend on R&D and getting into the market. The challenge for us is tying in, and that's what I was showing with the biologic example in the case study is tying the fact that an individual on a specialty medication that might be filled in another venue, such as a specialty pharmacy or some other way of picking up the medication, those same individuals are on many other medications that are filled in the pharmacy. And this is where we're making the tie. So as we can continue to build the structure, which we're using new data sources to help show the return on investment, we expect that there to be significant growth there. So I think hopefully, that gives you a little bit of color on each one of the categories, but we are very focused across all 3, and we hope to see significant growth in the specialty category.

In the interest of everyone's time, I think we're going to wrap it up. It's about 7 or 8 minutes after the hour. I do want to reiterate what I said at the beginning of the presentation, if you have any questions at all or would like to dive deeper into specific topic areas, Rick, our CEO and Managing Director; as well as Ancila, our Global CFO and Company Secretary, are available for one-on-one meetings. And we do encourage you to take advantage of the opportunity, simply reach out to George from the IR department to schedule those meetings. Rick, I'll hand it back to you for any closing comments as we close our day, close our presentation.

Sure. Thanks, Sarah. So again, I just want to thank everyone for taking the time today. I also want to thank everyone for their support of MedAdvisor. And I want to emphasize that while we're not happy at all with the first half result, we do believe in the fundamentals of the U.S. business. And we believe that there's a solid foundation there. And we've been working on programs. We're going to continue to work on programs and reshaping the business for long-term value to our shareholders. So again, I want to thank everyone for spending the time with us and for your ongoing support. So Sarah, I think that's it. Thank you.

Thank you, everybody. Have a great day.