No concerns on margin side: Trxade (MEDS) CEO Suren Ajjarapu

A lot is being spoken and written about Amazon (NASDAQ: AMZN), Shopify (NYSE: SHOP) and JD.com (NASDAQ: JD) and their prospects in an increasingly digitized world. The COVID-19 pandemic has fast-forwarded a phenomenon that would otherwise have taken maybe a couple of years longer.

Anyhow, what is yet to be addressed is the promise offered by many small and mid-cap firms that are gradually creating a niche for themselves among the tech-savvy customers. Trxade Group (NASDAQ: MEDS) is a good example.

The company’s second-quarter earnings performance, which sent the stock up 35% earlier this week, is a testament to its growth potential. In the words of CEO Suren Ajjarapu, Trxade is a digital GPO that aggregates suppliers and digitalizes supply chain in the pharmaceutical space, much like how Amazon works.

Trxade is on a mission to bring together independent pharmacies under the umbrella of its technology, in turn empowering them to take on major healthcare chains such as Walgreens Boots Alliance (NASDAQ: WBA)  or CVS Health (NYSE: CVS).    

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COVID-19 impact and margins

Trxade is one of those firms that have benefited from the global pandemic, even though it largely remains under the radar. High demand for personal protective equipment (PPE) including N-95 masks and sanitizers leveraged sales in the Integra Pharma division in the second quarter. This, in turn, led to a 244% spike in Q2 revenues, well above what the market had expected.

In an otherwise stellar quarter, what concerned some investors was a 50% drop in gross margin. During the earnings conference call, the management attributed this drop in gross margin to the increased sales of low-margin PPE product. Talking to AlphaStreet, Suren said there was no need for any concern on this.

He pointed out that on the tech side, gross margin remained strong at 70-75% range during the quarter, and the low margins on the PPE side brought down the overall margin to around 30%. He added that gross margins could improve once the weight is shifted away from PPE products as the pandemic subsides.  

50% market penetration

Trxade already has over 11,700 pharmacies as part of its network, representing more than half of the their total number across the US. The company also continues to add pharmacies at a steady pace of 300 to 350 per quarter.

In the first and second quarters of this year, Trxade added 305 and 325 new independent pharmacies respectively to its network.  

Suren said while the company keeps adding new pharmacies, the prime focus will be on boosting per store purchase.

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Same-day delivery app

One of the promising products from Trxade’s stable that stresses on the firm’s potential is DelivMeds, a mobile application through which patients can order drugs online and get them delivered on the same day.

Even though the product is still not matured, Suren said the company is in the process of bringing it under its entire network and is fine-tuning the AI, so that it can reroute the scripts to pharmacies within a 3-mile radius of the patient.   

On the cash side, the company looks steady with a stable balance sheet and low debt. This, along with a wide market penetration makes Trxade a value stock with long-term potential. The stock has a 12-month price target of $12, which is at a 58% upside from the current stock price, despite the post-earnings rally earlier this week.

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