The healthcare sector provides a diverse group of investment candidates for investors of many types. From the dividend-paying $66.72 billion heavyweight Bristol Myers Squibb Co. (NYSE:BMY) with a closing share price of $40.50 on Monday, April 15th to the fledgling $1.87 million market capitalization MultiCell Technologies Inc. (PINK:MCET) with Q1 revenue of $12,329 while operating at a Q1 loss of $385,845, investors of various risk tolerances and investing styles can secure gains in either, but with obvious differences in risk, upside potential, and investment timeframes being obvious. There is even a niche group of investors who invest in small pharmaceutical companies undertaking clinical trials in an attempt to reap the rewards of regulatory approvals with potential gains of many hundreds of percentages, while risking the downside of a devastating failed clinical trial or regulatory rejection from the FDA in the form of the dreaded complete response letter, often resulting in greater than 70% losses upon announcement. While solid gains in the long term or short term are possible with any range of pharmaceutical companies developing new therapies for various indications, the risks associated with the negative events can be too much for many investors to tolerate.
There is another option for solid gains with much less risk, a type of “investment hybrid” of the safer revenue generating large pharmaceutical and the larger upside, but higher risk of a development level pharmaceutical. I would like to introduce a small capitalization pharmacy company with possibilities of large gains without the risks associated with development phase pharmaceuticals. Assured Pharmacy Inc. (PINK:APHY) is a specialty pharmacy based out of Frisco, Texas. Rather than dealing with the volatility and risks involved with developing therapies in expensive clinicals with uncertain outcomes, this company instead markets approved drugs in the U.S. However, the company is not an upstart version of Walgreen Company (NYSE:WAG) or CVS Caremark Corporation (NYSE:CVS), but is rather focused on a niche clientele customer base needing Schedule II and III drugs due to chronic conditions. Assured’s business model is also different in that it doesn’t have the aisles of over the counter (OTC) drugs, food, magazines, candy, toiletries, and other goods that attract a larger continuous flow of people in and out of the store, but rather it focuses solely on the patients and their required drugs in a more confidential and less intimidating atmosphere. While a CVS and Walgreen’s still carries these drugs, patients needing the more regulated drugs can tend to feel “singled out” due to the extra paperwork and slower processing of their drug fills and refills, obvious to the rest of the customers who are there to receive drugs for acute conditions or to buy other non-pharmaceutical products. Additionally, since Assured Pharmacy’s pharmacists only deal with a reduced diversity of products, they have a more in-depth understanding of the narcotics, opioids, and other highly regulated drugs that they specialize in. This understanding is important especially when it comes to having a better knowledge of potential side effects as well as any interactions with other drugs.
Assured’s expertise in dealing with physicians and patients needing the more regulated drugs is evident as soon as the prescription is written. The local Assured Pharmacy, which has already painstakingly screened the physician to ensure that he/she is legitimate and meets all of its criteria before the company will even do business with him/her, physically receives the prescription directly from the attending doctor by having a representative drive to the clinic or hospital. After carefully screening the prescription for accuracy and legitimacy, Assured will then either mail the drug to the patient’s residence or dispense the drug at the pharmacy to the patient. However, this dispensation of the drug only occurs after the state’s electronic database is consulted to assure the patient is eligible for the drug and does not have a history of abuse including shopping around for multiple physicians in order to obtain illegal (excessive) refills of the drug. The prescription drug monitoring program (PDMP) is a statewide database of regulated drugs and the patients receiving them. Information included in these PDMPs is used to support/deny access to medical use of controlled substances to better facilitate the identification of prescription drug-addicted individuals and enable intervention and treatment. Although data seems to indicate that the PDMP system is cutting down on abuse, it also has an unintended consequence. According to a Congressional Research Service (CSR) report composed for congress on January 3rd of this year, “Prescribers may hesitate to prescribe medications monitored by the PDMP—even for appropriate medical use—if they are concerned about potentially coming under scrutiny from law enforcement or licensing authorities. Studies of paper-based prescription monitoring programs that preceded the electronic PDMPs found that many prescribers did not order the required prescription forms, rendering them unable to prescribe specified controlled substances at all. Their concerns may lead prescribers to replace medications that are monitored by the PDMP with medications that are not monitored by the PDMP, even if the unmonitored medications are inferior in terms of effectiveness or side effects. Studies showed that after benzodiazepines were added to New York’s paper-based program in 1989, a decrease in benzodiazepine prescriptions was accompanied by an increase in prescriptions for other sedatives.” With many pharmacies determining that it is not in their best interests to dispense these highly regulated drugs due to the legal headaches or ethics, the door of opportunity for Assured may continue to open as the regulations get more complicated and burdensome.
So, why all the increased restrictions on prescription drugs, and why would our old pharmacy business model be subject to even more strict guidelines? Would it be possible for Assured’s approach to begin garnering more interest not only from shareholders and larger pharmaceuticals, but also the regulatory agencies? Let’s consider some statistics on the CDC’s website that are a direct result of our current pharmacy business models and guidelines:
- From 1999 to 2008, there was a 300% increase in the number of deaths due to prescription pain killers alone, 14,800 such cases.
- In 2009, the abuse of prescription pain killers accounted for 475,000; double that of five years previously.
- In 2010, approximately 2 million people reported using prescription painkillers for recreational purposes for the first time within the last year. This yields an average of 5,500 per day.
The website goes on to explain that a majority of painkillers are prescribed by dentists, primary care and internal medicine doctors, not specialists. The overall cost to Americans for this prescription drug abuse is over $70 billion per year according to a recent CNN report. Nonetheless, the need for legitimate dispensing of these drugs for chronic conditions, whether in the form of Schedule II, III or IV drugs, is real with millions of Americans suffering from chronic pain and other chronic conditions.
While regulatory agencies and the general public can appreciate Assured Pharmacy’s business model, how has the concept affected the company’s bottom line? With chronic pain therapies garnering over $20 billion annually, the total therapeutic market for chronic conditions is huge. Assured Pharmacy is just beginning to tap into the market with its own unique approach. 2012 sales for year ending December 31st 2012 were $14.1 million with a gross profit of $3.1 million, both down from 2011 sales of $16.4 with a gross profit of $3.2 million. As of December 31st, Assured Pharmacy had cash in the amount of $21,298. However, an unregistered private placement filed on February 13th gave the company an additional $500,000 to fund its operations. In 2012 Assured raised $550,082 through financing activities, as opposed to the $1.2 million it required in 2011, so additional financing in 2012 could be forthcoming but not likely to exceed $1 million, depending on expansion plans. With the regulatory environment getting more burdensome to navigate for pharmacies in general, it remains to be seen as to how this might benefit Assured’s sales as some pharmacies decide to discontinue Schedule II and III drug sales. Regardless, I believe a statement in the company’s 2012 10K is worth noting: “Management believes that our current corporate infrastructure can efficiently support our existing pharmacies and develop three additional new pharmacies per year up to total of twelve operating pharmacies. As a result, we believe that the implementation of our plan to open up to eight additional pharmacies will not require material additional corporate infrastructure”. Last year’s revenue numbers were based on sales generated from its four pharmacies located in Riverside, California; Kirkland, Washington; Gresham, Oregon; and Leawood, Kansas. If the above statement in the 10K holds true, 8 additional pharmacies, once operational and requiring no additional corporate infrastructure, can create solid revenue moving forward, garnering investor and possible M&A attention.
Investment consideration in Assured Pharmacy (APHY) should be done only after additional research on the regulatory environment, company share structure, SEC filings, and into the pharmacy industry as a whole with a solid investment plan in place before opening a position of any type. Assured’s current basic market capitalization of $5.18 million or $32.2 million fully diluted market capitalization can make it a volatile and potentially manipulated high-risk investment. Nonetheless, without the risks associated with clinical failures and regulatory rejection as experienced in the high-risk development-phase pharmaceuticals, the rewards could be great if the company grows its pharmacy numbers in the manner mentioned above and if the prescription drug regulatory environment continues to become more restrictive and in need of a better business model. Assured Pharmacy’s business model may very well be “just what the doctor ordered.”
ChemistFrog is a degreed chemist who currently resides in Georgia. He writes predominantly on small capitalization pharmaceutical companies that are undervalued, oversold or trading under the radar. His unique writing style comes from a varied background of his work experiences as a chemist working in food safety, water quality, pesticides, food additives, paints, plastics and pharmaceutical precursors. Initially writing solely for the purpose of performing research for his own investments, ChemistFrog has advanced to writing in many venues including his own website at http://chemistfrog.com, Seeking Alpha, Market Playground and others. ChemistFrog offers a free newsletter that interested readers may subscribe to at his website. Before making any final investment decisions on any company’s presented in ChemistFrog’s writings, we advise you to perform additional research to confirm all facts.