Option Care Health, Inc. (OPCH) Earnings Call Transcript

Good morning, everyone. My name is Lisa Gill. I'm the health care services analyst with JPMorgan. It is with great pleasure this morning. We have Option Care join us. CEO, John Rademacher, will start with comments. And then he will join myself and CFO, Mike Shapiro, for a Q&A session. John?

Great. Thanks buddy. Before I get started, a couple of housekeeping items. First and foremost, in today's presentations and comments, we may make some forward-looking statements. These statements are subject to uncertainty and risks for ability to go out and take a look at our Investor Relations website or SEC filings to understand those uncertainties and risks. With that, I'd like to start with a little bit of background for those of you that are not familiar with the Option Care Health story. As an organization, we are the nation's largest provider of home infusion and alternate site infusion services. The organization is licensed in all 50 states. As you can see by the coverage map, we have full coverage. About 96% of the U.S. population is covered by our infrastructure. We are in all 10 of the top 10 payer networks, and we love the independence that we have because our ability to work closely with those payers as they're thinking about their programs and the needs of their members, it allows us to innovate and work closely with them. We have over 4,500 clinicians across the country. And this is pharmacists, pharmacy technicians, dieticians and nurses. And a lot of our work is really aligned in making certain that we're leveraging those clinicians to the highest level of their licensure and focusing around higher level of acuity of care in the home or in our infusion suites. With the infusion suites, we have now over 165 locations in which we operate infusion suites. We have about 550 chairs that are available to patients, and we're starting to utilize that in a much more robust way as we're building out our infrastructure accordingly. We have dedicated commercial teams that focus both on patients that are being discharged from the hospital or those coming out of the acute care setting, looking for that transition into the home, as well as a dedicated team that is calling on physician practices and specialists in order to identify patients that have chronic conditions. Our footprint, our scale, our infrastructure and the technologies that we've invested in allow us to be seamless in that transition of care and also to be able to leverage the infrastructure and leverage our team to the fullest. Since we became public in 2019 in Q3 as part of a merger with BioScrip, we have continued to be able to deliver on acceleration of growth. And when you look at -- since that merger, both on the top line and our ability to deliver that growth from revenue, but also creating leveraged EBITDA growth is something that we're really proud of. As an organization, we aligned that part -- at that point of the merger to really look for ways to optimize that platform to realize synergies, both from cost as well as revenue and to put ourselves in a position to be the partner of choice with the referral sources as well as payers in the marketplace. And as you can see, not only were we able to continue to accelerate that top line growth, but the ability for us to leverage the infrastructure, tap into the technologies that we had invested in and start to drive productivity and efficiencies across the board, allowed us to expand EBITDA margin from 5.6% to 8.4% in the third quarter. We also, through that period of time, have really focused around revenue cycle management and making certain that as we're focusing around our efforts that we're converting every claim to cash, and that when we start with the process of a referral, that, that perfect referral begins at that point of entry into our system. And so we're always thinking about what it takes to convert that claim to cash to make certain that we're doing everything we need to, to have the appropriate documentation and authorizations and working in partnership with the payers through that process to really increase the ability to capture that cash and drive cash flow. Mike and I talk a lot with our team around EBITDA doesn't pay light bills, cash does. And so the focus for the organization to make certain that we are able to drive that cash flow is something that really has allowed us to strengthen our balance sheet to be able to utilize that cash to not only reset the strength of that balance sheet, but also have flexibility as we're looking forward based on the move from a leverage profile that was 6.2x at the time of the merger to the end of the third quarter at 2.5x. So really proud of that and the direction that we're going. We're not in a position to really disclose anything about the fourth quarter or provide any guidance for 2023. But again, just reiterating some of the strength of the performance on the third quarter, we continue to see mid-teen growth in revenue, continue to expansion in our EBITDA margin, as an organization continue to focus around the execution and be able to work aggressively at thinking about how do we look for offsets for some of the inflationary pressures that are affecting everyone in the marketplace. As I said, cash flow generation continues to be very strong and our ability to continue to reduce the leverage profile and have cash on hand to give us flexibility as we're thinking about opportunities to continue to invest in the business and look for opportunities for expansion in organic ways has never been stronger. With that, again, as part of that expansion, we announced that we acquired a provider of home infusion services, Rochester Home Infusion based in Rochester, Minnesota. Again, a very unique platform that they had an opportunity for us to continue to expand our reach in that marketplace. And as most of you know, Rochester, Minnesota being the home of Mayo Clinic just allowed a deeper relationship with a really important academic medical center as well as an opinion leader organization for us to continue to deepen our reach and leverage to our infrastructure fully. Continue our path forward of looking for integration opportunities and driving a collective strength in our nursing network. The 2 acquisitions that we did with both Infinity Infusion Nursing as well as SPIN nursing services allows us to have access to critical resources in the nursing area, and that integration is moving on plan and, in many instances, ahead of plan based on the great work of the team for that integration. And we continue to invest in the infrastructure to open up additional infusion suites. That is part of a comprehensive strategy that we have to make certain that we're meeting our patients where they're at, as we continue to expand into the areas of -- with chronic therapies becoming a bigger portion of our portfolio. Knowing that many of those patients are outdoing activities of daily living, going out and working, the ability for them to have a convenient and high-quality place for them to receive that care outside of the home is something that we've been building towards and, again, continue to make really strong progress against. We've talked before about some of the capital deployment and the flexibility now that our balance sheet allows us to do. We've deployed approximately $150 million through our M&A efforts in those expansions. We also had acquired a book of business from BioCure going back into 2021. We acquired Wasatch Infusion, which is an operator over infusion centers in Utah, to really start to bolster our capabilities and bring in some expertise within our organization to think about those operations and how to drive that forward. And really pleased with the progress that we're making and the ability to take those best practices from all of these organizations and apply it to our business as we move forward. One thing that is pretty notable on that is in these types of transactions that we do, the ability for us to retain that top talent in many of these instances, founders, that were part of those organizations, they're still part of the Option Care Health team. And we are -- have the ability then to leverage their knowledge and know-how throughout our enterprises, we're thinking about those best practices and how to apply them fully. As a CapEx and part of our annual process, again, we deployed about $25 million in CapEx throughout the year. And that is to continue to invest into our people, our process, our technology, our facilities to make certain that we're operating at the highest standards of care that we're investing in the quality and into the infrastructure to allow us to capitalize on the privileged position that we have. We feel that we are in a really favorable position in a large and growing marketplace. So when you take a look at the total infusion market, we look at the world through really 2 lenses in our commercialization efforts. One is the opportunity for us to take share, to make certain that as we're deploying our commercial resources, we're leveraging the capacity and capabilities that we have, is that we're always out trying to look at reach and frequency of our commercial team, and the opportunity to be that partner of choice to be able to win more of the demand that's in the marketplace by the capabilities that we bring by the capacity of our organization and by the skill set of our clinicians. The second thing that we look at is make share, and that is working upstream with biopharma and looking for opportunities for new infused products or for products that had been infused in other sites of care, to move them into the home or move them into one of our infusion suites. And so a lot of that energy and activity around both from a business development process, working with biopharma around those new and innovative products as well as working through our trade relations and other partnerships, to take a look to see if there are additional products that we can bring into our portfolio and be able to execute well to meet the needs of the patient, the members, the payers through that process. We also like the diversity of our portfolio. When you take a look across both the acute and chronic portfolio of therapies, a lot of diversity within that. Our ability to serve not only patients being discharged from the hospital that may need antibiotics or nutrition support or have needs for congestive heart failure. We also have a broad spectrum of chronic conditions that we are able to provide infusion services for that really meets the needs of neurologists and gastroenterologists and dermatologists. We focus really around that fulsome portfolio, and we like the diversity of what we have within the bag of our team as they're able to go out and call on these call points. One other item, I'm sorry, that we also like is the mix of our business. We are somewhat unique in the sense of because of some of the challenges with CMS in the way that they look at reimbursing home infusion, we do not have a significant amount of direct Medicare fee-for-service. As you look at the portfolio and look at the mix of our payer, about 88% of it comes from commercial payers. Now part of that is Medicare Advantage. About 1/3 of the 88% is Medicare Advantage members from a revenue perspective, but we don't have a huge exposure to CMS. We've been working through a process to try to get better coverage and better access for beneficiaries from Medicare fee-for-service. But at this point in time, the vast majority of our revenue is from the commercial market. When you look at the competencies and the way that we're looking at our business and how we can play a significant role not only in infusion services, but thinking broadly around in the post-acute setting and how we can think about the outpatient market, our team is really focused around looking for those near adjacencies to continue to grow and continue to execute. Certainly, our focus is around the home. Our focus is around the depth of the relationship that we can create with those patients, the clinical competencies that we have in the practice of pharmacy, in the practice of nursing and what our dietitians do. And our ability to truly capture data, insights, information and be a deeper member of the care team is something that we're continuing to evolve and continue to grow. Our breadth of not only services that we have today, the strength of our network, the depth of the -- our payer relationships that we have and those clinical competencies allow us to have deeper relationships upstream with biopharma with manufacturers as they're thinking about opportunities to bring products into the marketplace, as part of the investments that we're making into our nursing network. We are participating in decentralized clinical trials in support of some of those new products. And again, gives us a really virtuous cycle of being able to help support biopharma in their needs and being able to support their drug development and their pathway towards approval. But also it gives us the opportunity to learn a lot around how we need to interact with them through that process and put us in a really strong position as they're thinking about channel partners and bringing those products into the marketplace. We've had proven capabilities to execute well on M&A to be able to drive a focus around how do we think not only about that organic growth, but are there opportunities for inorganic, and have developed a really strong team to think about integration management as well as the project management associated with making certain that we get full value out of any of those investments that we're making from an M&A standpoint and taking those best practices from those organizations and applying them broadly across our enterprise in a really efficient and effective manner. And then revenue cycle management, as I talked to about earlier, just in our focus around making certain that we're looking at creating that perfect claim from the moment we receive the referral is something that has proved to be extremely beneficial as we're looking at the opportunities to better partner with payers to make certain that we have clean claims through that process. And that as an organization, we understand the needs that exist to make certain that prior authorizations are done appropriately, that we have all of the documentation that's necessary. And again, as some of the blocking and tackling, but it's the execution aspect of this business that allows us the privileged position that we're in. We're doing a lot, as most organizations, to make certain that we're focusing around ESG and other aspects, and we really have 4 pillars in which we focus our efforts around. Certainly, reducing the impact on the environment is something that we look at, whether we're looking at pack-outs and the way that we're looking to drive better outcomes from that standpoint. Caring for our patient community and making certain that we're there to support in those markets that we serve and meeting the needs of patients through that process. Empowering our team members and focusing and making certain that we're doing things from development and training and creating career road maps and paving to allow all of our team members to look at us as an employer of choice, but more importantly, have an extremely high bar for the value that we bring to them as they bring to us. And then finally, looking at a responsible and resilient enterprise, again, focusing around that sustainability and the resilience of everything that we do. As we're looking forward and really looking at the road map for how we create value over time, we truly believe in the organic growth of the business. We've said publicly that we believe this is a high single digits of revenue growth that came through the scale and the leverage opportunity that we have. The mid-teens EBITDA growth engine, and we believe that over the midterm, that's something that the organic growth will allow us to do. But we also have the opportunity to leverage our infrastructure in a greater way. Think about new ways for us to capitalize on that and to make certain that we're driving productivity and efficiency in everything that we do. As I mentioned earlier, we're investing in making certain that for new therapies and services that we're well positioned to be a partner of choice, not only with biopharma as they're entering new products in the marketplace, but also working with other participants, whether it's payers or others that are looking for additional or new models in which to operate as things like value-based care and other aspects enter into the marketplace. The improved capital structure that we've seen over the last 3 years really allows us a greater amount of flexibility to be focused around where there are opportunities in M&A and outside of that. We will take a very disciplined approach on that. It's not our money, it's our shareholders' money. And so everything that Mike and I do as we're focusing around that is making certain that it's both strategic and economic, and we have the opportunity to really capitalize on the strength of our organization and look for ways to be -- to create value and a meaningful relevance with all of the key stakeholders that we operate with. So with that...

Great. Thank you for all the comments very much, John. So as we think about one of the last things you talked about and that's value-based care, it's something I think a lot of us are focused on. It's been around for 20 years, but it feels like we're finally starting to get some amount of acceleration that was maybe the right word as we think about value-based care, whether it's entity seeking risk. I think of your company as, one, benefiting from site of care from a value-based care perspective. But two, when we think about new payment models, are you seeing any changes in the market when we think about reimbursement or the role that Option Care can play from a value-based care perspective?

Yes. I think a couple of things with that, Lisa. First and foremost, the level of conversations that we're having with the payers is starting to change. And we're looking at the ways -- for us to be a risk-bearing entity at this point in time is probably a bridge too far, given the fact that the size of our population is pretty narrow in the total spend that they have in the post-acute space. But we play a very important role, especially in capitated programs and helping to reduce the total cost of care. And so looking for different ways in which we can have shared value as we're bringing products and services that historically may have been underwater if we were trying to do them ourselves, we're getting a different level of receptivity to think differently around what is a reimbursement model for our business that would allow us to provide that value as they're looking at the total cost of care, not just the unit cost of the service that we're providing. And so I think we're starting to feel that. Again, it's going to take time, and I think it's going to be a reorientation through that process. But we're, again, in pretty active conversations to think differently around the role that we can play as they're looking at the broad patient population, but especially those that they're managing from a capitated standpoint, knowing the value that we can bring into that equation.

If I think back 2 years ago when we first started to reengage, and I think about some of the conversations with yourself and with investors around the shift in site of care, could it be permanent? Will the hospitals come back and try to regain this market share? You've done a really good job the last 2 years, not only maintaining that market share, but continuing to grow your market share. What's the current competitive marketplace like? And are they trying to regain some of that?

Look, it's extremely competitive, not only with other home infusion providers, but also physicians that want to hold patients in their suites as well as hospitals. I mean one of the advantages that I think we have with some of the moves that we made, especially with our nursing network, is capacity. And as much as some of the hospitals would like to try to hold revenue, they don't have the staff in order to do that. So our ability to still be a partner of choice to be able to working through that process, I think it just gives us an advantage, and we can move quickly through that process as we're looking at how to utilize our capacity and really tap into that nursing network broadly. We get paid to be paranoid. We really focus around competition, not only from those that we know, but looking at other disruptors. But we're really focusing on our capacity, our capabilities and having that access to the clinical resources that some in the -- some others are struggling in order to be able to fulfill those needs.

Again. We've also talked, and you talked a little bit today, about the mix between chronic and acute therapies. You've been clear that they're growing at a different rate with higher gross margins from the acute volume growing in the low single digits and chronic care revenue growing in the low teens. How do the drivers differ for each of the therapies would be my first question. And then secondly, what are some of the incremental opportunities to maybe either improve volume or improve margin in each area?

Yes. So again, just setting the stage, most of the acute therapies that we are able to dispense are generic or near to generic at this point in time, and so you certainly have a lower cost. Now the gross margin on those tends to be significantly higher, shorter duration from the therapy set on that, and so we have higher turn of that patient population but have an opportunity to really do some interesting things. And we think that given the investments we've made into our infrastructure, and again, as we're running our pharmacies, we're executing around operating clean rooms, doing patient-specific unit dose, a high choreograph between that compounding, dispensing, distributing and marrying it up with a nurse. And that is hard work. But honestly, it's something that we've perfected through the process. And we think there's still opportunities for us to on that and grow. On the chronic standpoint, with all of the biologics that are entering into the market, with the position that we held, with the expansion of our infrastructure from the AIS, we think we're well positioned to be part of the channel solution for that as we move ahead. That's going to be lower margin business just because it's branded pharmaceuticals, and a lot of those is their innovative new products entering in the marketplace. We're not going to get a discount.

Or bigger dollars.

Bigger dollars. And we're not going to be able to get a discount or rebate off of that through that process. And so that ability for us to make certain -- and Mike and I look at all of those opportunities to really focus around what are the dollars associated with that. And we get the question all the time, could this be a 12% margin business? It could, but you wouldn't like the growth profile. We think that when we're looking at the dollars and our ability to grow EBITDA dollars and the cash associated with that, there still is huge opportunity. Even though we may feel some top line margin compression from a percentage standpoint, the dollars are real and something that we execute towards.

And as we think about that chronic pipeline, obviously, we have a very large, big Alzheimer's drug that, hopefully, will be coming to the market very soon. How do you think about the pipeline of drugs that are coming to the market, ones that will be beneficial for Option Care? And then secondly, how do you think about the biosimilar market and the opportunity there for margin?

Yes. So I think the exciting news for -- on the Alzheimer's front. I think as a country, as humanity, the ability to start to unlock some of the process to think about what are some solutions there. We're just thrilled that those announcements are happening and that progress is being made. We had talked about this a little bit with Aduhelm when it went through the approval process that given the fact that the vast majority of the patient population is going to be Medicare and if that's Medicare fee-for-service, there isn't a reimbursement mechanism right now that would allow us to do it in an effective way. We'd be upside down if we follow the current reimbursement from CMS. So we're going to be muted in any expectations around what the new product would do. But we do believe that we're in an extremely strong position that if we can fix the reimbursement and if we can work with payers around, even the MA patients on that, that we have a really strong position in our infusion suites and for patients in the home if this were to get the approval and get a national coverage determination and those types of things. So we're trying to position ourselves well. We're in conversations kind of broadly on that. But at this point in time, it's a little too early to tell around the impacts that, that may have. On the general pipeline, we have a dedicated team in business development that is working upstream with biopharma around any infused drug for the most part. And the ability for us to participate in that, whether it's in a limited distribution because of the size of the patient cohort or if it has a broader patient basis to participate within that. And so we're pretty excited about that pipeline. We've said before, every year, we are just probably 1 or 2 product launches. These are singles and doubles. They're not home runs unless we do get something like Alzheimer's, but that's part of the continuous cycle that we're looking at the funnel management and driving that forward. Because everyone thinks that everything operates the same way in that if we have a 14% chronic growth, that every product moves in that direction. We have products in the portfolio that are declining. Radicava, which was an infused drug for ALS, got an oral indication last year, and they're starting to transition those patients over. That's fantastic for those patients. They needed that type of solution. But we have situations where part of the portfolio is declining as others are advancing, and we need that virtuous cycle of having new products coming in and us to start to cultivate that early in the process as we know that, that maturity curve is going to hit. And in some of these, we will feel some decline over time.

And then the other question was around biosimilars. You talked about the generics are good for you. How do we think about some of the biosimilar potential opportunities?