Investors can expect to see the name ScripsAmerica, Inc. (OTCQB: SCRC) quite a bit over the next few weeks as the a national low-cost supplier and distributor of generic Rx, branded Rx, OTC, nutraceuticals, and oral delivery OTC pharmaceuticals sets out to complete, or at least begin the implementation of, an aggressive four-point plan for growth. Of course any plan to achieve new objectives is going to require money and SCRC has estimated they will need to raise approximately $9 million to $12 million to reach their goals of sales growth and profitability.
How does SCRC intended to raise that kind of money? Looking at the company’s most recent financials it is clear it won’t be coming from revenues. Instead, the company says “funding is expected to come from the sale of equity securities, preferred and/or common stock securities.”
SCRC can’t rely on revenues for good reason; their earnings report demonstrated that they are nowhere near a position of strength. In fact, SCRC reported net sales of approximately $996,800 for the three month period ended March 31, 2012 compared to $1,641,200 for the same period one year earlier. Gross profit for the reported period totaled $168,800, 17% of net sales, compared to $465,800, 28% of net sales, for the same period in 2011.
The cause of the dramatic drop off in net sales was due to the completion of a supply agreement with the United States Veterans Administration (VA) at the end of 2011. In their earnings report SCRC indicated they expected a new supply contract with the VA would be executed by the end of the second quarter 2012 and “sales will return to our expected level.” To date there has been no report of a new supply agreement with the VA.
An obvious concern investors would have with SCRC is vulnerability. Clearly the company relied heavily on the VA supply agreement and without it their net sales suffered tremendously. That’s not to say SCRC doesn’t have some impressive names in the health care industry to whom they deliver their pharmaceutical products, counting McKesson Corporation, Cardinal Health and Curtis Pharmaceuticals as clients, but the company’s earnings report clearly indicates that up to this point the demand for their products isn’t at a level that delivers strong financial results.
Of those three names listed above McKesson accounted for 85% of SCRC’s net product sales for the three months ended March 31, 2012. So again, SCRC is in a position where they are reliant on one purchaser for the bulk of their sales, making them a high risk.
Interestingly, SCRC stated in that earnings report “Management believes that, based on the anticipated level of sales, estimated to be approximately $6.5 to $8.0 million for 2012, and no significant increase in operational expense as compared to the 2011 fiscal year spending of approximately $1.6 million, the Company can fund its current operational expenses for fiscal year 2012. Our gross profit margin is expected to continue to be in the range of approximately 25% and our outlays of cash for general and administrative costs are expected to be in the range of 5% to 7% of net sales.”
Those “anticipated” levels appear rather optimistic given the figures that were produced for their reported quarter. For starters SCRC had sales of under $1 million in the first quarter, meaning they will need to step up sales significantly if they are to hit their “anticipated” level; the gross profit margin of 17% reported for the quarter is nowhere near the 25% they think they will continue to be; and as for general and administrative costs the 5% to 7% of net sales they expect is a far cry from the 20% of net sales they reported for the quarter.
Perhaps SCRC is anticipating some significant developments that aren’t known to the investment community. The only news that the company can really point to is what they released on Monday which simply announced the completion of the research and development phase for its RapiMed pain reliever for children.
According to the release the company’s manufacturer will begin production of the RapiMed formulations and anticipates the product line will be available for distribution during the first quarter of 2013. As every investor is aware, anticipation doesn’t always deliver the desired outcome.
In an update to shareholders on August 6, 2012 company CEO Bob Schneiderman stated “”The US constitutes the largest market in the world for generic pharmaceuticals because of its aging population and ScripsAmerica is ideally suited to compete in the current environment by providing a low cost system of broad-based marketing, sales, and distribution capabilities for generics, branded pharmaceuticals, over the counter medicines, vitamins, and nutraceuticals.” How a children’s pain reliever fits into that aging population is anyone’s guess.
Additionally, SCRC even noted in their quarterly report: “Competitive pressures among U.S. generics providers are continuing to increase as a result of the number of new market entrants growing faster than the generics market as a whole, leading to cost competition on the manufacturing side and squeezed profit margins. On the sales side, generics prices are eroding due to low-cost suppliers from India and China capturing market share, as well as the success of health insurers and health maintenance organizations in negotiating lower reimbursement rates. Finally, large direct purchase customers such as chain drugstores demand product variety and reliability of supply that allows them to lower their inventory levels.”
We haven’t even discussed the four-point plan for growth yet and it’s already clear that SCRC has some hurdles. Those objectives are laid out in simple form as (taken from their recent quarterly report): (a) expansion of its distribution network (b) development of new products (i.e. rapidly dissolving drug formulation pain relief products scheduled to ship in the third quarter of 2012) (c) an acquisition of a pharmaceutical packager /supplier and (d) acquisition of a pharmaceutical manufacturer.
This is where the $9 million to $12 million in financing comes in and their need to sell securities to capture those funds. Just a quick look at those objectives and the figure they put on achieving them appears rather conservative. Right now SCRC just appears to be too optimistic about their outlook and their future plans. Concentrating on developing an expansion of their distribution network would be a good start but spreading themselves too thin and taking on these other objectives could seriously jeopardize their future.