CRRX will benefit from Ontario’s decision, Leede says

A change in policy from the Ontario government is a positive for CareRx (CareRx Stock Quote, Chart, News, Analysts, Financials TSX:CRRX), says Leede Jones Gable analyst Doug Loe.

On April 1, CRRX issued a press release applauding the decision of the Ontario government to pause scheduled changes to long-term care pharmacy funding, keeping funding per-bed serviced at $1500.

“Pharmacy service providers like CareRx are highly integrated in long-term care homes and collaborate with physicians and nurses to help improve medication and labour management,” CEO Puneet Khanna said. “This pause in the fee reduction will ensure that long-term care pharmacies can continue to deliver the same exceptional partnership and essential service offering to long-term care homes and help alleviate the many burdens home staff are facing. We want to thank minister Jones, minister Cho, their respective staff and the Ontario government for recognizing the value of long-term care pharmacy service providers. We look forward to continuing to work collaboratively with the Ontario government to help demonstrate how long-term care pharmacies can continue to be partners in helping achieve the goal of ensuring four hours of direct resident care per day.”

Loe says that plan is delayed and hopefully, for the sake of CareRx, discarded completely.

“As originally articulated in the ON Government’s Drug Benefit Act, a proposal to reduce professional fees from $1,500 per bed served annually was poised to decline to $1,400 one year later, then to $1,300 and ultimately stabilize at $1,200 annual revenue per bed served in year three post-implementation. As we have summarized in many CRRX reports since then, the original fee reduction schedule if implemented over the originally contemplated timeframe would have been fully implemented by now, if not for epidemiological factors that negatively impacted eldercare services in the province. Had the schedule been enacted as proposed, the degree of which could have driven the LTC Rx industry specifically into negative EBITDA territory.”

In a research update to clients April 1, Loe maintained his “Buy” rating and one-year price target of $4.25 on CRRX, implying a return of 107 per cent at the time of publication.

Loe thinks CRRX will post Adjusted EBITDA of $29.5-million on revenue of $369.4-million in fiscal 2024. He expects those numbers will improve to Adjusted EBITDA of $30.6-million on revenue of $377.3-million in fiscal 2025.

“In conclusion, we are maintaining our Buy rating and one-year PT of $4.25 on CRRX, with our valuation still based on 10x EBITDA using our F2025 EBITDA forecast ($30.6M, unchanged) as the reference data in that calculation,” Loe added. “In retrospect, our forecast was clearly aggressive if the ON government had indeed implemented professional fee reductions as proposed. But as stated above, we were optimistic that the government would more actively explore budget-cutting initiatives that did not excessively impact a LTC Rx industry (and CareRx specifically) that already was generating modest EBITDA margin, and equally modest (though positive) cash flow. We expressed this view explicitly in our last CRRX report. As before, our EV calculation incorporates FQ423 balance sheet data (cash of $7.7M, total debt, excluding liability component of legacy convertible debentures, of $60.9M) and basic S/O of 59.8M. At current price levels, our PT corresponds to a one-year return of 107%.”