PharmX Technologies Limited (PHX) Earnings Call Transcript & Summary

Good afternoon, everyone. If you could just give us a thumbs up or let us know that you can hear us, then we can get going. Good. all right. Over to you Nick.

Good afternoon, everybody. Welcome to the investor briefing on our announcement earlier on today regarding the strategic alliance between Sigma Healthcare and Pharmx, which I think we consider to be one of the most strategically important milestones in the history of the company. You'll be aware that we're releasing our interim results on Wednesday. So today, the plan is for me to give you an overview of the strategic rationale for the deal. And then Tom will briefly outline the transactional arrangements, and then we'll leave plenty of time for questions. So for those of you that don't know me, my name is Nick England. I'm the Chairman of Pharmx. And Tom Culver, our CEO, is joining me on the call today. So to give a bit of background and context, Sigma, post its merger with Chemist Warehouse is an ASX 20 company with revenues of $7 billion a year. They are by far Pharmx' biggest customer by some distance. And we've had a long established good relationships with both the wholesale and retail arms of the business. Pharmx is a significantly smaller business, but we are a supplier of critical infrastructure for the pharmacy industry. And as such, both parties have recognized the potential risk that each presents to each other. So for probably the last year or so, we've been working on a solution, which de-risks the relationship for both parties. And the idea has been to develop a true alliance that strengthens both parties, strengthens the relationship and enables both parties to share each other's growth stories. From a Pharmx' perspective, we're absolutely delighted that a company the size of Sigma has chosen us as their core technology partner, which we think is a really endorsement of both our strategy and our technology. And Sigma's belief is that it will drive some massive internal supply chain efficiencies for them. From a Pharmx' perspective, it brings alignment with a high-growth partner. It enables us to secure a multiyear agreement with our largest EDI partner. And then most crucially, it gives us the ability to exploit a range of identified opportunities, which we think will drive future revenue growth. Key amongst those is the ability to expand our offering globally. You'll be aware that Sigma operates in different jurisdictions and has ambitions to expand that growth even further. We also believe that it will help us rapidly expand our Marketplace offering through both range and reach. We also believe that it will enable us to expand our EDI footprint vertically throughout the supply chain in conjunction with Sigma. And finally, we think it will turbocharge our data analytics business. Now we know it's easy to identify these opportunities. The agreement has a process whereby we will formalize the statements of work and the key will be executing on those. That's the risk we have in this agreement. But we're hugely excited about the potential that this offers us going forward. The announcement -- this announcement is the first step in the process, but we absolutely believe it's a bit of a game-changer for the company. So Tom, if I can just let you just talk a bit more about the transactional arrangement.

Yes, of course. Thank you, Nick. Yes, so this is a multiyear strategic partnership with Sigma, Chemist Warehouse. Both 2 entities are existing customers of ours today, an extension of those agreements and an expansion opportunity of those services. So the extension of the agreement is extending our relationships for a further 5 years, securing ensuring up our business and our relationships. Pharmx will be appointed the preferred EDI partner of growth partner for Sigma Wholesale and Chemist Warehouse retail across Australia and New Zealand. Under 2 parts of the agreement, what we call Part A and Part B, we will be providing services to Sigma and Chemist Warehouse across Australia and New Zealand and potentially other international markets, starting with the main focus around the expansion of EDI solutions as well as data and analytics. The 5-year renewal, the Part A agreement and then access into Part B agreement essentially comes with Sigma acquiring a 10% stake in our business. We will pay an establishment fee back to Sigma for the value of the 10%. This is basically done on a promissory note satisfied by shares. And Sigma will also appoint a Board representative to Pharmx with any shares at any point within the deal being held within a 3-year escrow. Standard termination rights apply, nothing unusual. And we see this, to Nick's point, being an incredibly exciting opportunity for us and for Sigma, but for us really to start to shift the revenue profile and the opportunity of this business as we think about growth over the coming years. I think the element that I would add to Nick's point is that from our perspective, this is very much a partnership that allows us to expand on the existing strategy that we have. So our strategy being a single platform that focuses on the combination of EDI analytics and marketplace or procurement capabilities and expanding those more deeply across our partners. I've often talked with investors on investor calls about our approach for more, about creating more value for our partners in return for more value to our business. And we certainly believe this partnership is a significant step forward in that strategy and provides significant opportunities over the coming years. So on that point, we think we may open up to questions either for myself or Nick. From anyone, please feel free to either drop a note or raise your hand and introduce yourself and go ahead and ask a question.

Yes, we've got a couple of hands coming up. So Brad [indiscernible], do you want to jump in?

Sure. Thank you for the detail. And I appreciate the commentary on the single platform kind of the strategy. Because I guess one of the things that was confusing from the press release was the focus on EDI because it seems like a lot of the discussion has been that, okay, there's not a differentiation between EDI and Marketplace going forward, they're going to be one offering, but then a subset of that offering was highlighted in this release. So maybe you can help better understand what was meant by that.

Yes, certainly. So I mean internally, we -- and as a business, we talk about single platform, single platform being the capability that we have developed, which enhances all the, I guess, the underlying features that sit underneath that. So that might be EDI. It might be Analytics or Marketplace or a combination thereof. And ultimately, it's this approach to single platform, which has allowed us to secure the deal. I think it's evidence that the execution of the strategy has been good and it has been strong, and it is delivering to our partners' expectations. We break down in the announcement the stepping between, for example, EDI and Analytics to align to the rollout approach of the alliance. So on day 1, there is no expectation that Sigma becomes a full single platform partner. However, over time, we intend to roll out additional services across their business units locally, internationally and through the vertical, which over time will ultimately mean that they take up our full single platform services. It's not as straightforward working with, I guess, a big business like Sigma and Chemist Warehouse whilst they are going through their own transformation project to simply take up our single platform in one go. So it will be a staged rollout. And that's why you're seeing that differentiation in the announcement.

Alex -- Alan, do you want to jump in?

Can you hear me okay?

Yes, we can hear you.

Hear me all right?

Yes. Great.

Well, look, yes, well done on the announcement. I'm sure a lot of work has gone into it. So just a couple of ones. Maybe you could break down what preferred EDI partner means for the uninitiated. And then maybe just why you think Sigma Chemist Warehouse have chosen yourselves? And then I think if there's time just to walk through the difference between the prior arrangements with Sigma, Chemist Warehouse and what that means now, again, just in really plain English.

Yes, sure. Thanks, Alan. I mean preferred provider ultimately means that we are now, I guess, the primary or the premier position as an EDI solutions provider across their 2 businesses. Why that is important is that as we think about these 2 businesses coming together as they're going through a transformation, they currently have 4 different EDI providers throughout various parts of the vertical. And that is just in Australia and New Zealand alone. If we think about additional markets such as Ireland, the Middle East, China, for example, then there are other solution providers, too. Any business merging is looking for efficiencies. One area of efficiencies is to reduce the number of partners operating with. As a preferred premium provider that we, expect to be in the driving seat as that consolidation happens. As we underpin that as well with both the vertical expansion strategy, so our ability to operate where we do today, also up the vertical and bring in our Analytics capability as well, we're very, very confident that these are going to drive some pretty significant outcomes for us across the regions. As we think about why we have been chosen, again, I think it comes back to being -- it's a validation of the strategy that we have put in place over the last 12 months. We have worked for a long, long time with Sigma and for Chemist Warehouse. We play very important roles in their businesses today. But I think this is validation that the enhancements of our solutions, the enhancements of our thinking as a business and the growth in our capabilities very much aligned to the growth objectives of a business like Chemist Warehouse, in particular. You may have noted read an article from Vikesh, the CEO of Sigma a couple of weekends ago, where he talked about the cultural shift within their business. So Sigma is very much the executive in charge, but the cultural shift is now a Chemist Warehouse culture. And that means high growth. That means quick work, and that means relying on partners like us that can help deliver towards their strategy. So these are all parts of the reason why that wording has been chosen around that partnership.

Okay. We've got two more questions. Brent [ Lister ]?

Nick, again, well done on the announcement. A couple of quick ones. I can see someone put in the Q&A as well. The strategic partnership to the extent that it influences impacts your ability to be independent from other chemists. And then secondarily, on the second tranche of equity available to Sigma, will that be considered like a primary capital raise into the business? How is that transaction expected to be executed?

Yes. Okay. Sure. So on the first piece around independence, thanks for this. This is a very important point. We don't see this alliance as impacting our ability to work with the rest of the market to offer the critical infrastructure that we offer today and operating as essentially an independent provider that sits in the middle of the industry. Our contracts, our commercial relationships, our working relationships with any of the other wholesalers, the suppliers or the pharmacies does not change, particularly as we see it, and we don't see that any other party would have a reason for it to change. We continue to be the best and the biggest in the industry of what we do. What we actually see out of this partnership is a greater ability for us to drive and deliver innovation into the industry. What we develop and work on with Sigma and Chemist Warehouse will become available to market. It's our IP. And it puts us in a stronger financial position to continue to provide a robust high availability system to the entire market. So we don't necessarily see that this is going to have a negative impact on anyone else, and we intend -- fully intend to continue to operate for the whole of market and as the independent provider.

If I just jump in, I'll just give an example actually of what was the former major shareholding from both Sigma and Symbion and offered a white label solution to Chemist Warehouse. To show that actually, [indiscernible] having a stakeholder in that business should not preclude all participants from being treated equally within the business. And that's our intent really absolutely.

To the second part of that question around the second tranche of the deal. So as we think about the essentially Part B services where Sigma are able to effectively earn in up to 19.9% of our business. So the extra 9.9% on top of the 10%. This is essentially based on revenue generation. So what we have agreed in the construct of the contract is that we need to -- Sigma needs to be able to work with us to provide services that generate new revenues, of which they will get a rebate on those new revenues, and those new revenues can then be used to acquire additional shares in our business. We will, of course, need to come to shareholders, most likely come to shareholders as that ownership expands and it goes beyond our existing threshold. This isn't about us buying more or offering more to get Sigma to take a larger position of our business. This is dependent on Sigma providing upside revenue to our business. In return, they may have a greater ownership.

Two more people with hands up. [ Artem ].

Congratulations on the announcement. I can only imagine how much work has gone into that. So congratulations. As we think about Marketplace as the main driver of future value creation for Pharmx, driving frequency of usage and habit formation by pharmacists is very, very important. And I'm guessing that your deal and your arrangement with Sigma has one of the goals to achieve such habit formation and frequency of use. Could you elaborate how you think about this element with respect to your Marketplace platform and pharmacists?

Absolutely. So just -- I'll answer this one just in broad terms. I don't want to get too much into the weeds. But as we think about the 2 sides of the Sigma business today, there is Sigma, which is a wholesaler and then we have Chemist Warehouse, which are essentially pharmacies or purchasers who can use the Marketplace. So we think about what the Marketplace opportunity is in this relationship across those 2 businesses. Bringing Sigma onto the Marketplace allows us to serve Chemist Warehouse stores in the Marketplace as well as non-Chemist Warehouse stores who use Sigma as their wholesaler. Our ambition is to also then bring on Chemist Warehouse into the Marketplace. This will be done under a separate scope of work, which Nick mentioned to be agreed by the parties because it will require us to develop very specific head office and curation capabilities. What I mean by that is Chemist Warehouse stores can only buy within the compliance and the catalog controls set by Chemist Warehouse. They do not trade or transact like the rest of the pharmacies in the market where they have greater control over their procurement. And so there is an element of development that we need to do in order to make this the right solution for Chemist Warehouse, but we certainly bring this partnership into that main driver of Marketplace being a core revenue driver for our business. So across the market with Sigma, directly with Chemist Warehouse. It also brings in opportunities as well as we think about the procurement requirements of a group like Chemist Warehouse, driving greater efficiency through things like automated reordering, better catalog controls, all things which get driven through a data and analytics solution that we can provide creates a very real opportunity for us down the line. I do want to be very clear, though, Marketplace is absolutely part of the Sigma early stages of the alliance. The Chemist Warehouse piece and getting their stores trading through the Marketplace will come under a future scope of work.

Can we somewhat simplistically think about Sigma as an anchor? If you were in a retail real estate business, can we somewhat simplistically make an analogy between your deal arrangement with Sigma as an anchor tenant that will drive traffic and will make Marketplace more attractive for both pharmacists, other -- whether they are inside ecosystem of Chemist Warehouse or not as well as other suppliers, mostly probably direct suppliers, brands and manufacturers who will see the Marketplace a lot more attractive now when there is that anchor tenant who is driving traffic in your case, usage?

Yes, absolutely. And going back to Nick's kind of introductory piece, it's one of the reasons why we see this as such a critical and defining moment for our business because absolutely, Sigma on their own and Sigma, Chemist Warehouse combined are absolutely that anchor tenant. They have that capability to drive transaction and volume through our business because increasingly, they are a primary wholesaler and a secondary wholesaler for the market. They have an expansion plan. And of course, with the power of Chemist Warehouse and Sigma, they're a key driver of new traffic, new suppliers coming into this region. So yes, absolutely, we see them as fundamental as a key partner for us. And they are the reasons why we have spent so long trying to bring this deal together into fruition. There's multiple wholesalers out there. We felt that Sigma and Chemist Warehouse with their current growth profile was the most important for us to pursue.

Tom. [indiscernible]

Look, just interested in this sort of almost $9 million establishment fee, how you sort of -- how that number came about? It seems like quite a lot, and there doesn't seem really any guarantees from Sigma, Chemist Warehouse side of what that would mean for revenue. So just sort of interested in the potential financial risk of this transaction. I appreciate there's not really a lot of cash out of the business. But in terms of what that might mean, given there seems to be no real guarantees or commitments on the other side, it's all upfront from your end.

Yes, good point, [ Dean ] . I think -- we're paying an establishment fee for the guarantee of the ER business going forward. The Board believes that even though there's no guarantee that the upside for Pharmx of paying that fee will far exceed that we're paying out over the next few years. That's probably about as much as an answer as I can give you.

But I mean, ballpark, you might be thinking more than $1 million a year in revenue?

Until we've done the statement of work, we wouldn't want to quantify any more. It's just that the Board's belief that it's significant for us.

Right. Well, thank you very much, everybody. There's some more questions. I think it's one more. Brad, we got you again. Last one.

Just quickly to confirm on that second tranche. So based on revenue thresholds they hit, Sigma will earn credits that will then basically be exchanged for shares. They don't -- there will not be incremental cash injected into the business for that extra 9.9%.

That's going to [ next year ].

Got it. And there's -- I understand that the statement of work haven't been quantified yet, but obviously, the Board had to look at something to make -- you are -- these are sizable financial commitments from the company in terms of both the establishment fee and the extra 9.9% potential ownership. Is there any more color you can give us just on kind of how the Board got comfortable that this was the right path forward?

Yes. I mean there's certainly been work going on in the background between our 2 businesses. There are some items that will need to be delivered, for example, by the end of June. And so for us to be able to deliver those in partnership, work has already started on those in the background. We will be able to announce what these projects are as the scopes of works are finalized and agreed into market, and that will start happening. So I think ultimately, from my perspective and my role reporting into the Board was it was about presenting what these opportunities are, the stage of these opportunities, the certainty around the commitment that we have on those opportunities, which really build into the fundamental foundations of what this alliance is. So there will be more to come on it, but there are -- there is more going on between our businesses already.

It looks like a very interesting transaction and hopefully is the inflection point for the future of Pharmx.

Well said. Thanks, Brent.

Okay, guys. Well, thank you very much for attending, and we look forward to seeing you again on Wednesday.

Thanks all. Bye-bye.