PharmX Technologies Ltd ($PHX.AX)

A hidden monopoly business that was historically under-invested in.

• Illiquid microcap with ugly (past) history trading at 1.1x EV/REV, 3.4x EV/EBITDA despite being a monopoly with little threat of competition.

• I believe the core business can grow high single/double digits and there is unknown upside from a high margin marketplace & data business.

• Has $13.6m cash, the risk to the stock is that $8.1m of this was won in a judgement that has been appealed and is pending.

COMPANY

PharmX (PHX) was previously called Corum. It was listed on the ASX for over 20 years. Previously the main business was pharmacy point of sale (POS) software, simply look at historical financials to see how bad/competitive that business was. They sold the POS business in October 2023.

BUT they also had a 30% stake in PharmX which was created in 2006 in partnership with the dominant POS vendors. PharmX is a EDI gateway integrated into pharmacy POS software. It connects pharmacies and suppliers, for electronic ordering and invoicing, so the pharmacists don’t have to call/email every supplier or login to all different supplier websites.

PHX became 100% owners of the PharmX EDI gateway business in September 2020 and has subsequently reversed the chronic under investment in the gateway under previous ownership.

They charge the suppliers (currently 71, examples are Sigma, Symbion, API, Arrotex, Revlon, Blackmores etc) a connection fee per month for each connection a supplier has with a pharmacy. The POS vendors also get a rebate for connections through their software of ~25% (my estimate). From the judgement document (more on this later) the fixed fee started at $12 per pharmacy per month when PharmX commenced operations in 2007. This fee has increased over time due to CPI clauses/renegotiations. There is also different fee amounts depending on if the connection is active or not.

So with ~5,500 pharmacies in Australia & a 99% market share the revenue formula is (active connection fee per month * 12 months * average active connections per pharmacy * number of pharmacies + non-active connection fee per month * 12 months * average non-active connections per pharmacy * number of pharmacies) * (1- avg % rebate). I guestimate the average blended fee per active/non-active connection is $16 per month.

This business will grow as connections (especially active ones) grow. The total number of pharmacies is mature and fees will grow at CPI+. Since PHX became 100% owners the average connections per pharmacy have grown from 3.9 to 7.9. I think this can continue to grow because of the following reasons: the highest connections a pharmacy has is 21, they are now viewed as independent (following sale of their POS software) so other POS software companies are more willing to work with them to increase connections, 60 day dispensing creates need for increased efficiency gains, can incentivise POS vendors with rebates, increased singular focus as long lawsuit over plus sale of POS software business.

Competition

Why doesn't someone else build one? They have (MedView eXchange) but gained no traction. 2 main reasons why:

• Cost - PharmX supports $18bn of transaction value (90% of the retail side of pharmacy industry) and they make ~$6m of revenue from suppliers, not even worth thinking about changing for cost reasons for suppliers.

• Functionality - Been around for 18+ years, most important functionality is reliability & security I think. Integrations are custom built for each supplier & POS software. Little incentive for you (as a supplier) to risk going to a new unproven EDI. I'd say you risk your career for no reason if it goes wrong.

PharmXchange

More recently they have launched PharmXchange which is a B2B marketplace that currently has 2000 pharmacies on it and 80 suppliers. It’s accessed via the same POS software as PharmX. PHX will charge 5-10% commissions on order value.

A typical pharmacy may buy from mom & pop suppliers or slightly bigger ones who can't join the PharmX EDI gateway because don’t have technical resources to do so

So PharmXchange is self-administrative/onboarding platform which allows the smaller suppliers to connect to PharmX platform in standardised way

Larger suppliers have also said the exchange is attractive for them as a sales and marketing tool given Australia is expensive to market to, so they like the cost saving and instantaneous sales and marketing on the platform

I have not put anything in my numbers for PharmXchange or the data business, nor any interest on their cash balance.

Underlying PharmX EDI Gateway Profitability

In the court documents (more on this below) it is mentioned more than once how extremely profitable the PharmX EDI gateway is. Corum historically didn’t give out any figures for PharmX because they didn’t want to split out for competition reasons. Historically Corum revenue was flat but PharmX was growing strongly with POS software business going backwards.

I put the below together from the court documents. Won't go into too much detail but to say this business did $2.9m profit in FY20 yet the PHX might do only $0.7m NPAT in FY24.

Above are my estimates except for the "PharmX profits” line which is straight from the court documents. I believe these are distributable "profits" hence they are either NPAT or profit before tax. Either way they are substantial relative to current NPAT/PBT.

I know they have been reinvesting following the underinvestment historically: they have moved onto the cloud, have invested in new functionality, started the PharmXchange & data businesses. Some of these aren't (famous last words) ongoing expenses so I wonder if PHX can move back towards FY20 profits. I'm not factoring this in but it provides good upside potential based on a $7m EV. FY24 revenue should be around $6.5m for the core PharmX EDI gateway and so at a 50% margin that’s $3m profit…my investment case isn't reliant on this. It seems wrong but I don't see how.

The Cash

$13.6m cash. $8.1m of this was won as judgement in their court case vs Fred IT. Of this $1.5m was interest, $1.5m costs and $5.1 judgement. Of the $5.1 judgment $1.1m was an overpayment amount. And $4m was wrongful distribution amount.

Better read on case (& thesis!) here https://substack.com/home/post/p-144477766 but basically one of the original partners in PharmX gateway (Fred IT) got bought (50%) by Telstra in 2013 and this meant they were required to tell the other partners (PHX have all the rights of these parties) to give them the opportunity to buyout Fred IT's PharmX stake. Fred IT didn't tell and the other parties only found out and bought PharmX in FY19, this gave rise to the judgment amounts below:

1. $1.1m overpayment amount - The PharmX Stapled Securities Agreement (SSA) required the price for Fred's stapled securities to be calculated based on the distributions made in the two financial years (2012 and 2013) preceding the change of control event on 30 September 2013. Under this scenario, the agreed price that Corum, Mountaintop and Simple Retail should have paid Fred for acquiring Fred's interest would have been $637,444 instead of the $1,831,397 they actually paid.  Hence, Corum claimed an overpayment of $1,193,953 ($1,831,397 - $637,444) from Fred. The judge discounted that claim by 5%, so as to reflect the slim possibility that Mountaintop and Simple Retail would not have sought to exercise their pre-emptive rights hence PHX were awarded $1.1m

2. $4m wrongful distribution - The dividends paid to Fred from PharmX which otherwise would have been received by Corum total $6,323,503. Had Fred entered into a third party access agreement with PharmX providing for the payment of a rebate of 40% because of their strong POS market share, PharmX’s distributable profits would have been reduced by $2,113,561. The $2,113,561 will be deducted from the wrongful distributions paid to Fred that Corum seeks to recover of $6,323,504, which gives a total of $4,209,943. This figure was discounted by 5%, reflecting the slight possibility that Mountaintop and Simple Retail would not have sought to exercise their rights at all, which results in a figure of $3,999,446

Fred IT have appealed, which has been heard and is pending judgement. The basis of their appeal is that the court case was brought 9 years after the event (change of control of Fred IT) and hence as the statute of limitations in Australia is 7 years there should be no judgement and all the cash ($8.1m) should be given back to Fred IT (even though there is no argument that there wasn't a change of control). But PHX's argument (that they have previously won) is that the statute doesn't start if the other suing party (PHX) couldn't have known the law was being broken (Fred IT not notifying other PharmX owners of the change in control of Fred IT). I believe PHX are also arguing if fraud taken place then it pauses the statute the whole time the fraud is taking place (I believe the fraud in this case refers to the Fred IT management knowing there was a change of control and not telling Corum/PHX & the other parties)

As a non-law, but BIASED, individual the Fred IT argument seems ridiculous to me. It's basically that yes we weren't entitled to those 7 years of distributions we received and yes we weren’t entitled to be bought out at 18/19FY higher levels of profitability BUT because you didn't find out (and somehow should've known) until 7 years after the event then you lose.

Valuation

The 2 scenarios are 1. Assuming they keep all the judgement cash ($7.3m EV) & 2. if they have to give it all back ($15.4m EV)

The above includes no upside from PharmXchange or a movement back to FY20 profitability. I believe the revenue is highly recurring.

I'm viewing the appeal as unlikely to overturn the judgement so 6.4x EV/NPAT for FY25e with upside options + having a monopoly with little threat of competition seems very appealing to me.

I'd happily buy this whole company for $21m, get back $14m in cash, then juice the revenues and squeeze the costs (Succession-Matsson Interviews Tom) back to FY20 levels and $3m profits (if actually correct) and get a 2 year payback. Also I think the core business could grow high single/double digits plus any upside of PharmXchange.

Should PHX have to give the cash back I assume that’s not a good day for the stock but who knows in illiquid micro/nanocaps. Could be down 50%, could not move, or maybe it's up 50% because people think the cash is still at risk. I'd be hoovering up as much as possible if down 50% or flat. The business is not at all reliant on the judgement cash to operate.

RISK

The big risk (besides the appeal being successful) is the company wastes all the cash the PharmX EDI business spits out. They have done the right thinking in shrinking the company and focussing on the great business hidden within, but to then go an waste all the cash would be extremely disappointing as a shareholder. Based on the $7m EV all I want is profitability to grow and head back to FY20 levels, and then, maybe, grow into other areas.

This is only a 1 pager, have obviously missed details and my grammar is bad but that’s not the purpose of a 1 pager. DYOR. This isn’t investment advice, I don’t know your circumstances. I obviously like the idea hence I hold a position in PHX at the moment, this could change. This is just to help me be clarify what I think. It’s based on my opinion of things that could happen in the future using publicly available information. Do your own research, I’ve probably made mistakes so do not rely on me