Omnicell Stock: Investing in Automated Pharmacy Tech

Those of a certain age may remember actor Matt Dillon’s greatest performance of his career as a drug addict who, with his drug-addled gang, busted into pharmacies to get a fix and make some cash. “Drugstore Cowboy” came out in 1989, but what the medical industry euphemistically calls “medication loss due to drug diversion” is still a problem for modern-day pharmacies, along with all of the challenges of managing medication in today’s highly regulated and inefficient medical system. But it requires more than just an app. A company that’s been around almost as long as that Gus Van Sant movie is building a platform to power the automated pharmacy. You had us at “drug diversion.” Let’s take a look at what Omnicell stock (OMCL) has to offer.

About Omnicell Stock

The origin story of Omnicell reportedly goes back to 1992 when a guy named Randall Lipps (no, really) saw nurses fumbling around to locate medical supplies while his daughter was in the hospital. Like any good father, he saw a business opportunity. He enlisted some grad students at Stanford University to develop an automated inventory management system for nurses, which could track transaction data, inventory, expenses, and even patient billing. This was 1993, and the company never looked back. A few years later, it developed automated medication dispensing systems for pharmacies, raised all of $20 million in 2000, and then went public in 2001. Today, Omnicell is nearly a $4 billion company by market cap, and surpassed $1 billion in revenue for the first time last year.

Its platform combines automation, robotics, software, and data analytics to create what it calls the automated pharmacy of the future.

The Omnicell Automated Pharmacy Platform

Let’s take a deeper look at the company’s vision of the automated pharmacy of the future. According to a slide in the latest Omnicell investor deck, “leading health systems” published a white paper that proposed a framework for tracking the technological evolution of pharmacies. It looks a bit like Maslow’s hierarchy of needs the five stages of development for self-driving cars. 

Admittedly, the resolution is crappy, but you get the idea. Most of the industry is allegedly at Level 2, with things like barcode tracking and presumably various software programs to manage inventory such as hemlock and leeches. The Dark Ages, really. Only Omnicell, of course, has the capabilities to get its customers to the Jetsons-like Level 5, a fully connected system in which each dose is a node on the network, providing real-time control of workflow based on predictive intelligence. Robots do all of the compounding and dispensing of medications, allowing healthcare staff to focus on value-based care.

The company is still building those automated medication dispensing systems. The latest version is the XT Automated Dispensing Cabinet, which has all sorts of bells and whistles like biometric security. It integrates with electronic health records and provides more data than anyone will probably ever use outside of the NSA. But Omnicell is rolling out an even bigger and badder model, a robotic system called the Omnicell XR2, for centralized pharmacy management. The company has also updated its automated compounding technology after a decade with the new IVX Station, which Omnicell claims can help pharmacies churn out drugs 70% faster.

On the software side, it has a cloud-based predictive analytics solution called Omnicell One, which it claims can help optimize medication inventory, reduce waste, and monitor for any drug diversion activity. Another software suite, EnlivenHealth, is focused on patient engagement and medication management.

Recent Omnicell Acquisitions

While Omnicell has grown organically over the last three decades, acquisitions have helped fuel some of its recent growth and technological capabilities. Between 2012 and 2017, Omnicell acquired four companies, which seems like a manageable load to integrate. More recently, however, it has gobbled up three companies and a business unit from another pharmacy services company in less than two years. It seems like many businesses went on buying sprees during the pandemic, something we noted recently in articles on cold chain logistics stocks and Stratasys and its costly acquisitions. So far, Omnicell hasn’t written down any losses, but some of these acquisitions closed less than a year ago. Let’s take a quick look at what the company has added since October 2020.

• In December 2021, Omnicell bought MarkeTouch Media for $82 million to add mobile and web-based tech and patient engagement solutions to the EnlivenHealth software suite. The company also hopes to leverage these assets to expand into other business segments like specialty pharmacy and pharmacy benefits management.
• In the same month, Omnicell also acquired ReCept, which is focused on specialty pharmacy management services. Specialty pharmacies handle specialty drugs, which refers to all of the super expensive, incredibly complex therapies, such as biologicals, that those same cold chain logistics companies are serving. It cost Omnicell $100 million to push deeper into what sounds like a lucrative market (more on the automated pharmacy market shortly).
• About a year ago, Omnicell completed the acquisition of FDS Amplicare for $117 million to further beef up its EnlivenHealth software-as-a–service (SaaS) offering.
• Finally, Omnicell spent $225 million to take over the 340B Link business of Pharmaceutical Strategies Group about two years ago. The federal 340B Drug Pricing Program allows qualifying hospitals and clinics that treat low-income and uninsured patients to buy outpatient prescription drugs at a discount of 25% to 50%, according to the Commonwealth Fund. The acquisition adds a suite of software-enabled services and solutions to comply with the complex rules that govern the program, as well as find the best deals on outpatient subscriptions.

So, that’s more than $500 million in acquisitions in the last 24 months, and three of those in just the last year. It begs the question: Just how big is the automated pharmaceutical market to justify that kind of expenditure?

Automated Pharmacy Market Opportunity

We’ve been covering the cannabis market for years because our readers love the theme. One market forecast says the U.S. market will reach nearly $53 billion by 2026. Sounds great until you consider annual prescription drug expenditures are 10X that at an estimated $535 billion, according to the IQVIA National Sales Perspective database. In the recent cold chain logistics article, we noted that more than $70 billion has been poured into regenerative medicine and other advanced therapies. Some of those more expensive, complex therapeutics will end up at the specialty pharmacies that Omnicell serves. More than 40 million Americans take five or more maintenance medications routinely, based on statistics published by the National Center for Health Statistics. That all works out to something close to 200 billion daily doses. People may love their weed, but they need their meds.

On the flip side, the U.S. Bureau of Labor Statistics said the healthcare industry lost more than half a million workers from February 2020 to September 2021 alone. In addition, in a nationwide survey conducted by the National Community Pharmacists Association, nearly 90% of the survey’s 278 independent pharmacy owners/managers said they couldn’t find enough qualified staff. Automated pharmacies could potentially help fill some of those holes. All those stats add up to a pretty big total addressable market (TAM) for Omnicell:

In fact, the market is so hot that the company apparently revised its TAM estimate to more than $90 billion at its big investor day event just a few days ago. It also claims to have a presence in about 80% of all U.S. retail pharmacies, as well as long-term sole source agreements with half of the top 300 U.S. health systems.

Should You Buy Omnicell Stock?

The company lays out a pretty compelling case for Omnicell stock. Revenues grew by 27% last year, though it’s worth noting that 2021 year-end revenues included all of the acquisitions we covered earlier. In other words, a good chunk of that increase came from inorganic growth. For example, 77% of the $63.3 million in revenue growth from the “Services and other revenues” stream came from 340B Link and FDS Amplicare.   

Projections for 2025 call for annual revenue of up to $2 billion based on a probably more sustainable 14%-15% compound annual growth rate, though that’s definitely a shot-in-the-dark estimate. In fact, Omnicell stumbled in Q2-2022 by missing its earnings estimates, though any tech company like Omnicell that is operating in the black is worth keeping an eye on these days. In addition, Omnicell is highly reliant on product sales and other non-recurring revenues, which makes it hard to predict where the next dollar is coming from. There’re plans to change that though as the firm sees SaaS revenues expanding from 10% of total revenues today to 20-25% by 2025.

One red flag is that Omnicell does about 90% of its business in the United States, but considering that the rest of the world peddles pills much differently, that’s not entirely surprising. Probably any significant international expansion would have to come through M&A given the complexities of legal drug business around the world. There are also domestic customer concentration concerns. One of the quirks of the healthcare systems is that companies like Omnicell have to contract with what’s called group purchasing organizations (GPOs), each of which functions as a purchasing agent on behalf of member hospitals and other healthcare providers. Sales to members of the ten largest GPOs and U.S. government accounted for about 67% of total consolidated revenues.

Conclusion

At the end of “Drugstore Cowboy,” Dillon’s character Bob is shot. While riding in the ambulance, Bob muses over the irony that the authorities are rushing him to the hospital – “the fattest pharmacy in town.” The prescription drug market is one of the fattest in town, and Omnicell appears well positioned to eat a big piece of the pie. Omnicell stock is valued quite low – a simple valuation ratio of only 3 – and boasted a pretty decent gross margin of 49% at the end of last year. Still, we’re going to wait and see how the company manages its new portfolio of products and companies. The long-term goal appears to be a shift to SaaS and other recurring revenues, which should also boost gross margins, giving the company more room to maneuver and build its business with smart M&A moves.

Now back to other diversions …

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