Thursday, March 21, 2013

Assured Pharmacy (APHY) and Chronic Pain Drugs

Assured Pharmacy (APHY) isn't an ordinary pharmacy network; they specialize in chronic pain medications.     Trends in pain management indicate that chronic pain sufferers need more than access to drugs.  A pharmacist's relationship with medical groups that prescribe regular therapy seems to affect a pharmacist's value proposition.

Assured has been in business long enough to have a financial history worth examining.  APHY has been losing money for several years according to their financial statements.  High-margin drugs ought to give them pricing power but their cost of revenue is so close to their gross revenue each quarter that it makes me wonder why they can't leverage those drugs' prices into a gross profit that can at least cover their SGA expenses.  Their retained earnings deficit increased from -$23M in 2007 to -$39M in 2011.  I would be concerned about this long-term inability to add value if I were an investor; fortunately I'm not an investor.

Chronic pain drugs are mostly low-volume, high-cost products.  The pharmacy retail sector for these drugs seems to be fragmented, with many specialty pharmacies as stand-alone operations in a single area.  APHY's concept is a network more akin to pharmacies for common over-the-counter drugs.  Success with this business model demands economies of scale in purchasing large orders of drugs.  That's why large discount pharmacies succeed; their products are cheap and available in bulk.  The market for chronic pain drugs has a very different structure.  Franchising may work but Assured Pharmacy will need dedicated referral relationships with medical offices around the U.S. to fulfill the potential of their business model.

Full disclosure:  No position in APHY at this time.