MedAdvisor Limited (AHE) Earnings Call Transcript & Summary

And fourth quarter FY '25. My name is George Kopsiaftis, and I'll be your moderator for today. Joining us today is Rick Ratliff, the CEO and Managing Director. Good morning, Rick or good afternoon for you.

Good morning, George.

And also joining us is the incoming CFO and Company Secretary, Sean Slattery. Good morning, Sean.

Good morning, George.

So the format for today is for Rick to walk you through the results released this morning, which should take about 20 minutes. This will be followed by a 10- to 15-minute question-and-answer session, and we aim to finish around 11:15 today. [Operator Instructions] I'd now like to hand the floor over to Rick, who'll get us started. Thanks, Rick.

All right. Thanks, George, and good morning, everyone. I want to thank you for joining us today for our fourth quarter FY '25 update. And before I get started, I want to reiterate, welcome to Sean Slattery, our incoming CFO, and welcome him to the MedAdvisor team. So with that said, if we can turn to -- we're on Slide 3, that will work. So this morning, I'm going to provide a quick business summary, and then I'm going to walk through the ANZ and U.S. business results details. Unfortunately, we have downgraded our FY '25 guidance, and so I'm going to walk through some of the details associated with that as well. I'll provide a quick update on our strategic options review process, in what to expect from here and then spend some time providing a little color on the U.S. landscape at present and our strategy for best navigating as we move forward. And then we'll finish with a discussion on our FY '26 priorities and the outlook for the year. So if we can move to the next slide. As the subtitle indicates, we've continued to experience headwinds through the fourth quarter, largely associated with the U.S. business. With that said, we've been working diligently in the background positioning the business to take advantage of some of the tailwinds that I'll spend some time talking about later in my comments. So let's review first, key highlights from the quarter and starting with the U.S. business. Although we saw marked improvement in vaccine-related revenue over the prior corresponding period, continued short-term headwinds due to delays in program launches across categories resulted in notable decline in our U.S. results, and we'll go into more detail on that in a few minutes. Looking ahead, as we look at FY '26, we do have a solid pipeline, which gives us some confidence in the outlook of the year ahead. And again, we'll talk more about that in a few minutes. In Australia, the business continued to perform strongly in the fourth quarter and the big news there being the sale of the ANZ business. So if we look at the group level very quickly, following the ANZ sale, the receipt of the initial $27 million in proceeds were utilized to discharge all of the outstanding debt. And as of the 7th of July, we were just over $16 million in cash on hand in the bank. The strategic options review as is now turned to focus on the U.S. business, in addition to the substantial improvement in programs that we have underway, there is a possible divestment of this business as the Board is considering various options. Further update on this will come along in the quarter, and we'll talk a little bit more about this in a few minutes as well. As announced in April, Linda Jenkinson, our former Chair, decided to step down from the Board. She's been replaced by Kate Hill, who is the interim chair. And more recently, we announced the departure of our Chief Financial Officer, Ancila Desai, as many of you know, Ancila has been instrumental over the past 3 years in working with myself and the rest of the team from MedAdvisor through a significant amount of change and transformation, and we're very grateful for all of the leadership and the support that she's provided during that period of time. As mentioned a minute ago, Sean Slattery has taken over the CFO and Company Secretary role as of July 21. And then again, we're going to talk about the FY '26 -- I'm sorry, the FY '25 guidance here in a moment. So if we'll move to Slide 25 very quickly, the Australian business has now been divested, as I mentioned. So this slide's really provided for completeness is we -- the ANZ business did contribute to the fourth quarter results. But it's suffice it to say that the business experienced a strong quarter, benefiting from initiatives over the past few years. I do want to acknowledge that I'm very pleased the business has moved to a good home and Wayne Marinoff, our former General Manager of the ANZ business is going to continue to lead the business going forward as the CEO. So if we'll turn to the next slide, we'll go to the U.S. business. Revenue for the quarter was AUD 10.1 million, which represents a 34% decline compared to the prior corresponding period. This result reflects a softer operating environment and the impact of approximately $4.8 million in deferred health program revenue. So this is contracted revenue that was to run in the quarter and late in the quarter was determined that it would move into the first quarter of FY '26. On a more positive note, vaccine revenue actually rose 52% year-over-year with growth driven by pneumococcal, vaccine programs primarily in a couple of other categories. In this category, there were several vaccine programs actually that were also subject to late quarter delays that affected the full revenue potential in the quarter. Both general and specialty medication revenue declined compared to last year. These declines were largely due to broader industry challenges that led to program deferrals in the quarter, and we'll see the results of that as we look into FY '26. There was a case with one specialty program, budget pressure from that brand, move that program out as well. And then there were a number of programs that we have been working on through the year that we're expecting to not only see run in the second half but restart for some programs. Thrive programs contributed to about 40% of quarterly revenue, slightly below the prior year. This is really the result of some adjustments in our program mix, partially due to some planning in relation to the transition to our new platform. Gross profit and gross margin were both lower year-on-year reflecting the overall revenue decline, but also reflecting allocation of platform costs that started at the beginning of the financial year and have carried on through the first quarter and an unfavorable mix on the product side during the quarter. So lastly, I'll highlight the pipeline. I mentioned a moment ago, it is currently valued at around $125 million unweighted, which gives us a high level of confidence as we look into FY '26, and we'll comment towards the end of the presentation. So turning to the guidance, despite a solid pipeline actually going into the fourth quarter, market conditions continue to be challenging, and there were some continued budget pressures. But more so, there were delays in health program activations that were affecting the overall revenue. And this is -- I've mentioned this a couple of times. Following the recent finalization of our accounts, but still prior to audit adjustments, we are revising the guidance for FY '24 down revenue for FY -- I'm sorry, FY '25 -- revenue for FY '25 is now expected to be around AUD 88 million primarily reflecting the shift in programs that I mentioned earlier. Due to the later-than-anticipated program starts in the fourth quarter and some updated government guidance on vaccines, as I've mentioned a minute ago, approximately $4.8 million of revenue that was originally expected to drop in the fourth quarter has now been deferred in the first half of FY '26. Despite the tailwinds -- or I'm sorry, the headwinds, our overall gross margin is expected to remain stable at around 60.8% for FY '25, consistent with FY '24 levels. Finally, the EBITDA guidance is now expected to decline to a loss of around $6.5 million to $7.3 million. So if we move to Slide 8 on the strategic options. We've already covered much of this content, so I won't dwell on this slide, except to say that the ANZ business or the ANZ sale has put the company in a stronger capital position, and the Board's focus has now moved as I mentioned earlier, to reviewing the path forward for the U.S. business. One option being considered by the Board is the possible divestment of this business and discussions are underway with a number of interested parties. As part of this review, the Board is considering capital management options, including a possible capital return and we plan to provide further updates during this quarter and wrap up the review by end of the year. So now if we spend a few minutes on the U.S. business, if we'll go to the next slide, spend a few minutes talking through these different categories. As I mentioned previously, we're seeing trends in the United States. They're significantly reshaping the pharmacy and pharmaceutical landscape. Starting with the pharmacy industry in the upper left-hand corner, there is a shift towards what we call direct-to-consumer models, which is reshaping patient engagement type programs and is lengthening sales cycles in some situations. Investment -- investment from the pharmaceutical manufacturers is focused on specialty medications and disease management and fragmented channels across spend in the pharmaceutical organization is driving a more significant demand and more focus on clear return on investment. And while we are seeing vaccine programs or vaccine funding, remaining important with these organizations because the public policy team is we are seeing some level of market uncertainty, but there definitely will be spend in these categories. In the pharmacy sector, major U.S. pharmacy chains like CVS and Walgreens are under significant financial pressure, closing stores and shifting to new digital-first strategies, which play to our advantage, but they are experiencing significant pressures on their margins. And we've seen some of this most recently with the privatization of Walgreens through a private equity transaction in Rite Aid's recent bankruptcy. There is also the challenge of digital disruptors in the market such as Amazon, who are raising consumer expectations. But at the same time, we're seeing vaccine administration be a key driver for pharmacy store traffic and profitability across different categories of vaccinations such as flu, RSV, COVID, shingles and in particular, pneumococcal vaccines. The competitive environment has become more fragmented with the rise of the number of niche digital vendors, which is challenging our ability as we're working with the DTC brand groups in maximizing brand budget allocation to the MedAdvisor programs. We're also seeing agencies are -- who are representing the brands are becoming much more cautious. The planning cycles are getting somewhat longer. And as I mentioned a minute ago, the focus on return on investment is increasing significantly. And in addition to all of this, we have reduced our sales team significantly, and so our infill presence is much lower than it has been in the past, which is affecting our brand and the agency engagement, and I'll talk about that more in a minute. So finally, on the government side, regulatory pressure around drug pricing and direct-to-consumer oversight is increasing brand caution, brand pharmaceutical brand caution and market uncertainty, changes to vaccine coverage and funding combined with the recent vaccine advisory committee upheaval from RFK Jr. have impacted confidence and trust across the industry. So this uncertainty is impacting not only pharmacy readiness, but timing of brand investments. So in summary, it's a very dynamic and somewhat disruptive environment, but with the right strategy, we believe that there's still a significant opportunity even in the face of these challenges. So if we'll turn to the next slide, so in the face of this market disruption, we're actively resetting our commercial strategy to unlock growth going into FY '26. Our business development team is being rebuilt to strengthen brand engagement, expand our account penetration and establish new agency relationships. So there is a renewed focus on agencies and the expected increase in our business development capacity going into FY '26 particularly in the first half, we believe will help support faster pipeline conversion as well as position us well for a very strong second half. So we're also tightening our sales qualification criteria to prioritize high conversion brand funded opportunities. So in relation, we're expanding engagement with some of our top pharmaceutical sponsors we've been working with for a number of years, including Pfizer, GSK, Merck, Novo Nordisk, Dexcom and others. So the intent here is really to strengthen our position and gain a higher share of wallet as we build out our sales team as well as our account management group. So operationally, we've restructured our account management team under our customer success leadership to improve execution and retention. Dedicated team is now in place and focused on program delivery. So there's an operational aspect to our account management function. And there's also a coordinated effort with our business development team on client-facing related activities around relationship development, program renewals and upsell of other services and opportunities. So we're taking -- we're also taking our insights from the fourth quarter to better anticipate client delays and bolster program readiness. We did experience a number of delays that were not expected, moving revenue from fourth quarter into the first half of FY '26, and the efficiency of getting these programs through their process and launched is a challenge in managing that, not only with the pharmaceutical manufacturers, but ensure we're as efficient as possible within our own operations. So we're also looking very closely at aligning our channel delivery and program design so that we're matching our retail customers' and pharmaceutical partners' expectations, getting the right alignment helps us to ensure programs getting into the -- into production faster and it also streamlines the sales cycle. In addition to that, we're continuing to focus on our in-pharmacy print solutions, it continues to be the foundation. We have a much stronger moat around that particular offering, and it provides the most reach for our market, and then we can provide surround sound type capabilities with our digital function as we expand our pharmacy network capabilities. And then lastly, we're very excited to launch our next-generation engagement platform, that's going to empower pharma and pharmacy partners to more easily build tailored, data-driven patient engagement programs faster and at lower cost. So if we move to Slide 11. We can now look at our FY '26 priorities and the outlook. So key priority, as I've already mentioned a couple of times, is for us to complete the U.S. commercial team restructure alongside of scaling our customer success operations. These changes are critical to improving execution and ensuring that we can better serve our clients across the U.S. market. In Q2, FY '26, we're set to launch the next generation of our patient engagement platform that we've talked about quite a bit up to this point. This is a significant major milestone for us, and is going to be a key driver for expansion of our digital capabilities with our pharma and pharmacy partners. We're also strengthening and expanding our U.S. pharmacy network relationships to reduce execution risk and build greater resilience into our program delivery model. This will support more consistent performance and better program outcomes across the board, it's extremely important to the future growth of the business. Transformation 360 will remain a core focus throughout the year as we continue to streamline operations, redesign business processes and manage organizational change much more effectively. And then another important milestone, again, will be the completion of our strategic options review process, which we will provide more updates on that here in the near future. So turning to the outlook on the right side. From a market perspective, we're entering FY '26 with a strong pipeline, as I've mentioned a couple of times. Based on this, we're confident in delivering 15% revenue growth in FY -- over FY '25 in FY '26. While we expect vaccine-related revenue to be below prior year levels, we do anticipate the restart of a number of delayed general medication programs into the first -- in the first half of the year. And in addition, we have good visibility to expansion of our specialty medication revenue, and we expect that to grow meaningfully through the year. So importantly, we've been focused on reducing our cost base, particularly through the second half of FY '25, and we'll continue to focus on that, as I've mentioned, in launching our new platform, but in relation to all of this and the cost reductions that we've done in February and April time frame of this year, we do expect that FY '26 operating expense to be -- in the United States to be down around 10% from FY '25 and it will be down around close to 30% from FY '24. So with that, I think that concludes my statements for the presentation at least. I appreciate everyone's time, and I will hand it back to George to see if there might be any questions.

Yes, there are a few questions. [Operator Instructions] And Rick, first question says, are you going to spend -- our cash, but I guess, the proceeds of the sale in the United States?

No. The proceeds from the -- the net proceeds from the sale after discharging the debt have been set aside. And the intent at this point is not to use those proceeds in the United States. This would include the expectation of the holdback that is yet to come. That's the additional AUD 8 million that we would expect to come in before the end of the calendar year -- calendar year 2025.

Next question, if you divest the U.S. business, what is left? And does the company become an ASX shell?

If there's a -- that's a good question. If there's a divestiture of the U.S. business, there are several different options that are being reviewed with our advisers in Australia, and Sean is involved in that as we speak to determine what that structure might look like, but there's no specific answer to that question at this point in time. And it's not a given that, by the way, that there will be a divestiture. That is an option that's being reviewed.

Next question. I calculate the U.S. revenues to be around AUD 63 million for FY '25 and gross margin at around AUD 33 million based on a margin of 53%. What is the cost base of the U.S. business now? And is that margin expected to improve in FY '26?

So the revenue sounds correct. I'd have to -- Sean, I'd have to come to you help on this, if you have the data. If you don't, we may have to come back.

No, I'll have to come back to the person asking a question. I'll take this question on notice just because I don't have it readily available.

All right. That's fine. We'll come back to you on that one. With all the changes impacting the U.S. business, are you still expecting revenues to be skewed to the first half '26 or is that -- or has that changed?

Because there is still some emphasis on vaccine-related programs and an expectation that vaccines will continue to be a part of the business, maybe not at the same scale. There will be some skewing towards the first half, but probably not to the same scale as what we've seen in the past.

All right. Great. Next question, do you think that your management team has lost their focus on how pharmacy retail wants to interact with pharma based on your pricing model and objectives?

Could you repeat that question?

Yes, sure. Do you think that your management team has lost their focus on how pharmacy retail wants to interact with pharma based on your pricing model and objectives?

So there's probably several different elements to that question. First of all, the management team is continually assessing the environment and the nature of how a pharmacy, that's part of the question, would like to engage with pharma is definitely something we're continuing to evaluate. Now keep in mind that whether you're a pharmacy in the U.S. or you're a pharmacy in Australia, the pharmacies are always in interacting with pharma in various ways, sometimes through a wholesaler because they're working on distribution. Sometimes with the media side of a manufacturer because they do in-store advertising as an example. This is more physical advertising in the store. So this could be -- this is not digital, this is not technology. So we are continually working with the retail pharmacies to determine the best way to be their partner to help engage their customers with pharma sponsors kind of communication and drive awareness and adherence of different kinds of program -- different kind of products. So that's the key. Now the pricing issue is different. So the question might be in relation to vaccines as an example, which is an area that we're taking a look at, vaccines have been about 30% to 40% of our revenue, and I would expect it to continue to be in the 30% range even going forward. However, the way that we run those programs and the pharmacies on behalf of pharma that model could change over time. Now that's for a variety of reasons. That's not just because of the pharmacy. That's also because of the government and regulatory issues. So we have to balance what the pharmacies are looking for with pharma and the pricing models and structure for these programs that are compliant with regulations. So the answer to the question is not easy, assuming I'm understanding it correctly. But it is something that is core to our business, and we have to continue to evaluate.

Next question. Given the uncertainty in the U.S. business, does it make sense at this stage to consider a capital return, especially if the U.S. business has not been cash flow positive for many quarters, and the $16 million in cash provides the business with some flexibility?

That's a part of the analysis that's being done relative to the capital management strategy. And I would say at this point, given the -- where the businesses come from our strategic options evaluation process in combination with the process is to look at opportunities in the U.S. and Australia, while we're also running the business, we've got to continue to look at all of those components and that particular point is a valid point and kind of plays to the question on the appropriate utilization of available funds. And does that make sense for the business but is it also in alignment with shareholder expectations. So we've got to work through that, particularly in the next 30 to 60 days.

Next question is you say 15% revenue growth, how much is that in dollars? I think the question is probably around when you refer to 15% on -- up on FY '25, is that the reported FY '25 number or the U.S. portion of the revenue?

The 15% growth would be off of the U.S. revenue base. So that number comes to 1.15 as you got a 0.15, which you just want the net.

Next question. Can you clarify the senior exec KPIs for FY '26? Is there a reference to the sale of the U.S. business?

There the -- we're in -- because of the process we're going through, we're in the early stages of finalizing the KPIs in FY '26, the KPIs are focused on revenue growth, margin protection, product expansion, deployment of our new platform, et cetera, those are the kind of the categories. The transaction -- if there is a transaction to be had in the United States, that's somewhat of a separate conversation, a separate set of objectives.

I'm not sure you'll be able to answer this one, but what's the expected EBITDA in FY '26?

I would say at this point, we've got -- we're working through -- you've got an idea of what our focus is on -- on revenue, and there's a good indication of where we're at relative to OpEx. So I'll probably just leave it at that. I think we've provided -- I think we provided the metrics to be able to make some determinations there.

Next question. Is the business cash breakeven?

It varies by time, over time. At this point, given the level of revenue as we brought down the cost basis, we're very close, but it's dependent upon the revenue growth.

Okay. Back to this growth, it says looking at the guidance is revenue growth including the $4.8 million deferral, and then it goes on to ask, is it 15% based on the group number or the U.S. number which you answered earlier. So I guess, back to the first part of the question, does the revenue guidance include the $4.8 million deferral?

Yes, that's deferred we recognized across FY '26.

You're talking about the FY '25 guidance. What are you talking about? Sorry '26 guidance.

It says, looking at the guidance is revenue growth, now talk about the 15% revenue growth, including the $4.8 million deferral?

Yes. It's in -- it's yes...

Yes, that will form part of FY '26 revenue.

Yes. Correct.

Next question. How much of the $8 million holdback are you expecting to realize?

At this point, we're working towards realizing the entire amount, unless told otherwise.

Given the stated outlook in the presentation for FY '26, you should be able to state the outlook -- sorry, you should be able to state the outlook. Okay. I think, you're saying, given your outlook statement, you should be able to provide revenue, profit and EBITDA guidance. It's not really a question, it's more of a statement.

We've given the guidance that we're planning to give at this point.

That looks like all the questions at this point in time. So what I might do is, I might just hand it back to you, Rick, for any closing remarks you might want to make.

Okay. Yes. No, thanks, George. And I appreciate everyone taking the time to spend with us this morning. We have been on quite a journey over the -- over FY '25, and we've experienced a number of challenges. With that said, we are very focused on transforming the overall business and going into FY '26, we remain very confident that the best opportunity to engage patients in managing their medication continues to be through the pharmacist interaction with that patient. So we believe we're in the right space. We believe we're making the right investments relative to our new platform. We're bringing down the cost basis. We're restructuring our commercial team. We're building for success and for turning this business around in FY '26. So I appreciate everybody's time today. I appreciate everybody's patience with all of the change that's been going on through this business. It's been a significant challenge. There's no question. We do believe in the base fundamentals of the business and the direction and we're in the right place, we have got to execute at this point. And we've got to convert our pipeline and bring value to our customers, and that will turn into value to our shareholders. So I appreciate again the time. And George, I will turn it back to you and to wrap things up. Thanks, Sean, for joining us.

Yes. Thanks, Rick. And thanks, Sean. I'll also add my thanks to everyone for joining us today. That wraps up the proceedings, and I'll invite you all to now disconnect. Have a nice day.