Omnicell, Inc. (OMCL) Earnings Call Transcript
May 11, 2023
Earnings Call Speaker Segments
Kathleen, I think you had some statements to make?
Yes, I did. Good morning, everyone. Welcome to the Omnicell presentation. We'd like to welcome those of you also joining us on the webcast today.
Maybe walk through the opportunity that you've seen within Advanced Services.
Yes, we're transforming the pharmacy care delivery model. And our primary strategy to do that is with these Advanced Services. Every single advanced service comes with an ROI. That is the first premise of putting forth a new service. And that ROI-driven model is -- gets a lot of attraction from customers because they have problems they have not been able to solve without partnerships. It's not just a technology or solution, they need a partner to work with them day to day and a strategist to do this. So we have most of our new introductions of our new products, are all in the forms of services. And it's driving the trends forward today, it's a growing part of our business, 15% to 20%. Our goal is to eventually get it to 80% to 90% of our business because we feel that's the model that best fits with the transformation of the industry as well as can deliver the outcomes that nobody else can deliver.
That's great. And I want to talk about EnlivenHealth a little bit. You mentioned a retail pharmacy win in the past quarter. I guess just to level set, if I'm a patient of a retail pharmacy. And I've been using that pharmacy for years, maybe I get 3 or 4 prescriptions there a month. How does my experience change at that pharmacy now that, that pharmacy is using Enliven. And then same question from the pharmacist's perspective and then the pharmacy, overall. How should we think about the changes to the pharmacy experience?
Well, retail or outpatient pharmacy is a significant topic for all providers now. It's no longer just retail and providers. But in a retail experience, we've been able to prove that if you can get engagement with the patient, you'll get better compliance, better follow-through on meds. The first step in taking your meds is getting your meds. And so we do that with the Med Sync service. For instance, Walgreens is of our customers of that service. We line up a patient's meds that they're going to take in a particular month, and maybe have to go 5 or 6 times to pick those up at a pharmacy because they all have different start dates. What we do is, we go into their database, examine the best approach for the best patients with the best setup on which meds that would work best for. And we go to the customer and say, let's approach these customers for a single day, once per month to get all of their meds, so they no longer have -- having to do different days, to pick up the meds or even have them delivered. So it's one day per month. You're on 5 meds, you get all 5 meds. We do the co-pay adjudication because when you do that, you have some half meds that are filled and some that are quarter, so that you can sync up. What happens then is patients that are better compliant in taking their meds from the retailer, it helps because their revenue increases because now they're providing the meds and maybe most importantly, that patient is now super sticky to that location and that entity. It's no longer, I need to pick up a med, maybe I'll go to a different provider. I'm going to stick to the one where I know that I'm going to get all of my meds on that first Tuesday of every month. The second way that is just really some of the latest technology in natural language voice communication. Generally, when patients call a retail pharmacy to check on meds and refill, they go through a classic IVR system. And about more than 90% of those calls are then just transferred to a pharmacy or tech. Putting a significant workload on that particular pharmacy. If you use natural language communications, with informed understanding and predictability of why that customer is calling, you can cut 20% to 25% of those calls down and have them resolved by the technology, not have them flip over to the pharmacy tech or the pharmacist, saving enormous time for pharmacists. So that's just 2 of the modules that we offer, up and down both, some of the largest retailers, mid-size and even some of the independents can have access to these technologies that can improve both their revenues and their cost picture.
Yes. I want to talk about the go-to-market strategy there because you mentioned Walgreens and there's obviously, I think, close to 70,000 pharmacies in the U.S., and one of the largest, if not the largest pharmacy is utilizing these technologies. And I would say that pharmacies, in general, we just think about the tech stacks that they're using from a retail consumer communication standpoint, they haven't really evolved much. So as you think about the opportunity kind of within the midsize, the independents. Can you talk about where you see the biggest opportunity, what the interest level has been across maybe the largest, the midsized and then the independents?
We're able with the largest to pick off individual modules and customize them and then integrate them into their platforms. In fact, that's the biggest reason we can sell the next module to these large institutions is because we're already integrated into their systems. So we not only have the current products that they're using, but we're also introducing new products, and we believe we're the vendor of choice because we have those integrations. But when you get to the second tier of pharmacies, this is where we can provide more comprehensive systems. They can have a single platform with a menu of options. They can do the communications platform, they could do the Med Sync platform. We have financial analysis. We have the ability to refer -- pharmacists refer patients to better medical programs that help pay better for their pharmacy benefits. And so we have these other products that really work off this platform. And what's really unique is we have the broadest platform in the marketplace. So it's easy to go from one module to the second module. These -- particularly, middle tier, do not want to use 3 different platforms to accomplish the goals, they want to use one.
I want to switch gears a little bit. On the last call, you talked about a strategic alliance with Long Island University and CIMM. And when I heard, you talk about that, it reminded me a lot of what Epic the EHR vendor has done over the past 30 years. Partnering with academic medical centers and students. And so by the time someone has graduated from med school, they're already very familiar with the product. Can you talk a little bit more about that relationship? How it came about? And are there opportunities for other types of relationships that could do the same thing?
Yes. There's several goals we're trying to achieve with this Long Island University partnership where we've deployed our entire technology platform, particularly on robots, in a lab setting. So they're not for use in the hospital, but this is where pharmacists and pharmacy technicians are trained. And what's really important to get the best education is to be up with the most current technology, as you become a pharmacy tech or a pharmacist. And we realize that as we go out and interact with our customers, the best kinds of pharmacy techs and pharmacists to have in those institutions are ones who understand how technology is really going to change the workflow and how it's used to actually supplement the job on the pharmacist. And one of the amazing things about this location is a small point, but a big one to me. Obviously, in the United States, the big pharmacies are in basements, underneath hospitals that's where most pharmacies are. And they're inside of pharmacists, so most people do not have access to these. And Long Island University, it's actually a big -- it's on the main floor with a bunch of glass in front of it. So everybody can easily approach and understand what these technologies are doing for the pharmacy and how they work. But this is, as you say, really fundamental because we know that a pharmacy tech, who probably have pharmacist, who has had strong experience with this technology. When they step out into the marketplace, they have more value because of this discipline they've added to the pharmacy discipline. And it's very exciting. It's not just to teach, we're also doing research for them. We are trying to discover the best ways to deploy the technology in order to get the most out of it. And even having our own customers who are not at Long Island, different customers and our own employees go there to learn about how to use the equipment and become ready users and certified. Certified is the right word.
I want to talk about the Central Pharmacy product. You mentioned a few wins in the past quarter. And obviously, the macro environment is still pretty tough, but University of Iowa added the XR2 robot, a Southern California-based NFP signed up for CPDS I'm curious, can you talk about the conversations you're having with these health systems and provide a little context on what problem are you solving for these systems?
Well, there are several problems we're solving. But the obvious one is labor shortage. And so by putting in robots, that can pick and put away without mistake is fundamentally transformative to the workflow of the pharmacy, obviously. But probably more important is, because you singulate down to the last single dose and expiration date, you're able to eliminate waste. As a reminder, pharmacy has -- is perishable. It's not good forever. And so when you give the next dose of the 500,000 doses you have sitting in your pharmacy when you get to the next dose, you want to give the one that's closest to expiring away before it expires. And so you don't lose it on yourself. When you digitize it on a robot, that's all taken care of for you. You don't have to think about it. It delivers the right dose for you to get to the patient at the right time as well as there's no mistakes. And so this is an obvious step. Everybody thinks that robotics is a good thing to put into pharmacy. But how it's used and how it's best deployed is difficult because there are a lot of demands on pharmacies, the speed, the amount of drugs you need to take in, take out. And so we tie that to a service and so we have experts in Pittsburgh, who are working with all of these customers to make sure these systems run and deliver the outcome we've promised. So when we walk in, we don't sell a product. We actually go on-site, deliver 2 certified technicians that are Omnicell employees help drive the efficiency as well as stay connected with the overall experts in our company to make sure these are all delivering outcomes. We start our discussion with delivering the ROI and better outcomes by deploying the technology. And then we measure that consistently and generally have a quarterly update report with the senior management of the hospital on how we're delivering on those. So those are very attractive because you're delivering a promise and how are you delivering on that promise and you take the fear away. One of the issues with health care, pharmacists, is they're conservative. We want health care to be conservative. But how can I be sure this robot is going to work well? How can I be sure it's going to deliver? We say, look, we're in this game with you. We're going to run this to make sure and show you every day that we can deliver on what we promise. And that is very attractive to our customers because they're no longer buying products that are partnering with us to deliver results.
I want to talk a little bit about guidance. The 1Q revenue and earnings was well above expectations. And you mentioned a couple of things there. The point-of-care leases and then some onetime items. As we think about where we sit today, and clearly, it would seem that some of that was a pull forward from 2Q. But as we think about the guidance for the rest of the year, I'm trying to understand a little bit more about what's embedded within that. Is -- would the macro environment need to improve at all in the second half of the year, given that you're seeing -- you're expecting sequential improvement from 1H, 2H. Do we need to see a macro improvement in order to achieve that guidance?
No, I think we feel like the way we understand the macro environment today, we're satisfied with that. We've seen in January, where most health care systems had negative margins by March, they have gotten to net zero. We believe that there is incremental small increments every month and better utilization of inpatient beds, particularly for elective surgery, and less utilization for beds 3% or below from COVID-related usage. So it's returning back to somewhat of a pre-COVID look. I think that probably the biggest -- I think the other big thing that's dramatically changed for the health care systems is temporary labor usage dropped 65% in February-over-February, temp nurses basically. And so we're seeing regular nurses return to the work in permanent positions, although slightly higher rates, a lot less use of temporary labor -- contract labor from the nursing discipline. And that's giving a lot more comfort and predictability with the CFOs of these institutions. It's giving them confidence on that, and they understand what the future looks like. And so therefore, we certainly feel that our guidance and the numbers that we put forth, we're very comfortable with.
Great. And then as it relates to the XT replacement cycle, I think you're in the low 60% range when it comes to the replacement opportunity there. And I guess there's debates going on, on where that is within the S-curve. But I'm curious, during your last replacement cycle, can you talk about kind of where growth started to slow? Is it around this area? Was it higher? And then what are you adjusting, I guess, in the go-to-market strategy to drive those replacements over the rest of the year?
Yes. We have a -- we've been in for our ADCs and capital replacement cycle. We are 60% or more through that. And that's in the bookings, not -- they all haven't been revenued obviously. And you never probably get to 100%, maybe 85% or something like that. And we've seen a little bit of a pause there because a lot of people were pulling those purchases in, through COVID, when they had extra funds. And so as we go over time, those last bit of XT will obviously be replaced and the orders will be put in for that. So we have confidence in understanding what that looks like as well as we also always have new products in the works to come out that can enhance those products and those markets for us as well. The -- for us, the biggest markets available and greenest markets, untapped markets for us are our XT robots in the basement, our IVCS in the basement and our Specialty Pharmacy Services. These are new services that we've launched that we've never had before. And now that we have these, there's a lot of opportunity to, not only put these in place, but really get our customers to the next level of pharmacy deployment as they chase, what we call Autonomous Pharmacy. And so I think the ADCs are, yes, you got to have those to work those. Yes, there's more technology that can be delivered on those. But you have to have the broader platform to get the overall impact of automation and technology. And so people are on those roadmaps, and we feel really good about that.
You mentioned the Specialty Pharmacy business or I think it was formerly branded as ReCept. Can you talk about the opportunity there and what you're seeing in the macro environment? I think you mentioned on the call that health systems are increasingly looking to have their own internal Specialty Pharmacy. Talk about the value that Omnicell provides there and the opportunity? And then also, how are you compensated through that part of the business because specialty drugs are obviously the fastest growing. So it's certainly a very interesting and attractive market.
Yes. Well, just on that note, of course, about over $580 billion spent here in the U.S., almost $0.5 trillion on drugs, $400 million almost on Specialty Pharmacy, which I'm sure you know. So it's hard to get strategic in pharmacy if you're not involved in Specialty Pharmacy, it's almost a given. And so that's why we're excited about the purchase of ReCept. And with -- the opportunity there is to dispense Specialty Pharmacy drugs from a provider directly to a patient. You need 2 things. You need specialty -- 3 things, Specialty Pharmacy license, but you also have to have a payer network who is going to reimburse you for that as well as manufacture approval to dispense that drug from that site. So we're able to help these institutions get both of those, which really allows them further to engage with patients. Now we go in and set up an internal Specialty Pharmacy inside their pharmacy itself. Now this is more complicated than I say, I believe, the application for a Specialty Pharmacy is about 400 pages. So they're glad for you to come in and provide the experts and expertise to do this. And then as we get with the clinicians and begin to get the flow of specialty drugs flowing through that pharmacy, we get a percentage take of every drug that passes through. And so that's a really healthy business for us. It's a win for the institution and a win for us. And it's in excess of our 50% margin, as we scale that business. That will be a very strong and profitable business as we continue to get that. Now we're getting a lot of RFPs coming in, asking us to bid. There's a lot of midsize and smaller institutions who not have Specialty Pharmacies. They want us to provide it, particularly if they're already a customer of ours, they'd rather go with us because we have a deep and broad relationship, and it just makes a lot of sense for us to work with them on Specialty Pharmacy. So that is a very busy group for us as we begin to scale.
When you think about -- I guess, on Specialty Pharmacy in there, but Specialty Pharmacy, Central Pharmacy, the compounding robots. When you're having conversations with these health systems, is the conversation we can help you reduce the burden on your full-time employees so they can do other things? Or is it we can reduce the amount of full-time employees that you require in these specific -- in the pharmacy. I'm curious kind of what the balance between those 2 things is.
Well, it's a little bit -- it's -- labor is the component, but what they're really getting from us is just not only the technology, but the hard to find specific labor to run that technology. So they can find people, but they can't find people that are qualified or know how to run it as well as we can run it. And so they're happy to give us that person, to give us that contract in order for us to provide those people. So it's just not a matter of the -- you just take IVCS where if you're doing it manually, the most highest paid, most qualified pharmacy technician, in a site, is the one doing the mixing of these compounded drugs manually. So you just don't need a pharmacy tech. You need a very specifically trained, your highest-trusted pharmacy tech to do this. If you can't find those people, it doesn't matter that you have people. You need us to move that work over to a robot and then we'll provide the specialist to run the robot. So it's filling a very deep need. And then that's just the labor component of it, but obviously, not outsourcing or buying IV compounding from outsourcing is a big money saver. So there's a big ROI on the IVCS, it's just not the people.
Got it. And then the competitive landscape, industry pricing. I'm curious we've been in this challenged macro for, I guess, about almost a year at this point. Has there been any changes to either the pricing environment, more discounting or any changes to the competitive landscape over the past 6 months to a year that is worth calling out?
Well, I think there's 2 big distinct differences, those within our customer base, and those who are out competing to swap out a competitor. When you're trying to swap out a competitor, there is price competition, although we're generally higher even though we're out there. And most of the pricing in the initial sale is the cost of change. The fact that they now have to train people, pull people out and the like. It's not as much as what's the price for your widget versus your competitors' widget. And with our own customers, obviously, because of the inflation we have been raising prices, quite significantly, for the last 18 months. And as we reported on our last call, we've had a lot of inflationary pressures from chips and steel and freight and we're crossing that second quarter. Where now our pricing is coming through our backlog and into our P&L, is higher than those inflationary costs have been in previous quarters and years. So we're really happy to see those price actions begin to take effect because they're delayed, you might contract with the customer today for a higher price. They may put the order in, but that order may not get delivered and installed for 9 to 12 months so you don't really see that pricing action hit the P&L for 9 to 12 months. But now we're into that better pricing.
Switching gears a little bit to capital allocation. Can you talk a little bit about where the recent increase in R&D dollars is going to? And then also, you've done a few deals over the past couple of years to build out Enliven in the Advanced Services. What is your interest and appetite for M&A over the next year or so?
Well, I think M&A is part of the long-term strategy. We did take in 3 acquisitions and -- over the last 1.5 years and at the end of '22 and '21. And we're still integrating those. And the cost there is the front end to the customer looks well, but we've got to integrate the back end to get the cost out. These are cloud-based solution sets and every cloud-based solution set is run on a different cloud-based platform, and so you want to consolidate all those to one, and get some cost savings there. So there's some easy wins there as we get those platforms on the back end, especially, consolidated. So we've got to follow through on those. But I think we continue to look for solutions because we have such a strong relationship with our customer base. And when they want to buy from us, we have a platform that continues to get more and more sophisticated as it's both cloud-based and backed up by experts that allow us to keep adding modules on to differentiate us and keep us highly motivated as a good and true partner of our customer base.
Pivoting back to the guidance, again. I think the implied 2Q margin guidance would indicate a step down in margins. And I think there was timing that was called out. But is there anything else that we should think about impacting whether it's seasonality or something else that 2Q margin...
Most of all, Q1 and the difference between Q1 and Q2 is simply due to mostly one very large lease buyout. Generally, when you get a buyout, like you're leasing an asset, you continue to re-lease the asset. In this case, the organization chose to just buy the whole thing out, which generated 100% margin for us at one time. Now we were kind of thinking that lease buyout was going to happen second quarter. So we didn't necessarily pull it in. It just -- it was more of a customer timing thing where they wanted to go ahead and do it earlier than we thought they wanted to do it. And that -- when we have lease buyouts from time to time, but this is probably one larger significant one and one we weren't really expecting to see in Q1. So if it landed in Q2, we'd see sort of this normalization that would make a little more sense. But when we compare first half to second half, certainly second half has this nice increase over the first half.
Got it. And then rather than ask on a potential timing of a new cabinet product. I'm curious, is there any type of solution or a technology that is not currently offered within the current XT product that you think would make sense to add in the future product?
Well, I think there's always future products. As we look at markets, we particularly know that more and more activity are going outside of inpatient and more to outpatient, and we do have products that work in outpatient. But there's a lot of activity there and also activity that -- hospital in homes, right, being able to take the patient all the way to the home. So as that trend continues, we need to have plug-and-play opportunities for our providers to provide medication management no matter where the patients are, whether they're in the hospital, in rehab or all the way at home.
And then last question. The Advanced Services beat expectations by a lot, last quarter. And I think as Scott mentioned, patient engagement, I think, around Enliven is a key driver there. Can you talk about expectations in that part of the business for the rest of the year. Is momentum really building within the Enliven platform where there's good line of sight into some potential new opportunities over the course of the year?
Yes, we have quite a few as-a-service contracts in backlog. And as those are installed, revenue comes online. And Q1 we got -- we were able to get a couple more going ahead of time and those added to the Enliven revenue ramp. And so we feel strong about that. I don't think that's a little bit of a timing issue as well, easily could come in Q2. But there are small timing steps as you install each of these as-a-service businesses, their revenue goes on top of the run rate and just slowly adds up. And so we really feel good with the guidance we gave for the year, we feel strong that we're in line with that.
That's great. I think we're out of time. So Randy, Kathleen, Naveen, thank you for joining us.
Allen, thank you. Cheers.
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