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Written by 15:00 Analys

MEDS: Strong momentum in pharmacy market’s transition to online

With a proprietary tech platform, 80-130% retention rates and a Net Promotor Score (NPS) of 72/100, MEDS is on track to capture the SEK 50bn market opportunity in the Swedish pharmacy market’s shift to online, which at 19% penetration still lies ahead. Since launch in 2018, sales have grown at a CAGR of 171% and the company is passed all costly entry barriers. With an estimated 4+ LTV:CAC ratio, a 2x revenue to OPEX growth ratio and an estimated capital injection of SEK 200m by mid 2023, we forecast positive EBITDA in 2025E. Following a contraction of peer multiples over the last year, our base case supports a fair value range of SEK 100 – 120 per share in 12-24 months, while we see an upside to SEK 220 per share (SEK 3.5bn market cap) should management reach its long-term goals.

Andreas Eriksson & Johan Widmark | 2022-08-23 15:00

This commissioned research report is for informational purposes only and is to be considered marketing communication. This research report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and Emergers is not subject to any prohibition on dealing ahead of the dissemination of investment research. This research does not constitute investment advice and is not a solicitation to buy shares. For more information, please refer to disclaimer.  
 
Online pharmacies – not like other online retailers
Despite a generally high level of digitalisation in Sweden, only 19% of sales on the SEK 50 billion Swedish pharmacy market happens online. But, Sweden’s poor availability of physical pharmacies (third fewest per capita in Europe), a generational shift to buy more pharmacy products online and a favourable regulation with e-prescriptions and digital IDs, are all factors that should drive a further penetration of online sales. In addition, pharmacy products are as well very suited for online sales. With logistics easily manageable considering the often smaller sized and similar sized products, long shelf life, no “touch and feel”-element as opposed to clothing, and a low return frequency makes it a perfect candidate for a profitable online business.
Strong growth and key metrics
Since launch in 2018 when sales amounted to SEK 24m, MEDS has gained a lot of traction, closing 2021 with sales of SEK 470m, representing a CAGR of 171% and over 3.5 million orders shipped. In 2021, MEDS gained 408 000 new customer totalling around 630 000 active customers during the year, meaning an ARPC of SEK 730, while average order value has increased 37% since 2018. Other noteworthy metrics are the 80-130% retention rate, meaning existing customers come back and buy for more. Unsurprisingly this also shows in the 72/100 NPS (Net Promoter Score), which compares to retail average at 44/100.
Plenty of room on the upside – despite market contraction
We expect a continuous rapid online penetration of the pharmacy market, as online pharmacy sales grew by 51% CAGR between 2015-2020, and it should only be a matter of time before online pharmacies reach the levels of online book sales at 60% penetration. This presents a fantastic opportunity for online pharmacies in general, and for MEDS in particular. With continued strong momentum throughout the year, we forecast sales of SEK 690m in 2022, on track with the company’s own financial target to reach sales of SEK 2.5bn by 2026 while showing a positive EBITDA in two to three years. After raising SEK 247m since January 2021, the financing situation is solid but in order to reach targets we expect the company to raise another SEK 200m in H2’23. Peer group has experienced a significant contraction in valuation multiples, in reflection of the market’s shift to reward near term profits and punish cash flow far ahead in the future. With a combination of DCF (WACC 13%) and target multiples of 1.5x SALES 2024-25E and 25x EBITDA 2025E, our base case support a fair value range of SEK 100 – 120 per share in 12-24 months.
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