Option Care Health, Inc. (OPCH) Earnings Call Transcript
May 9, 2023
Earnings Call Speaker Segments
[Audio Gap] Option Care, the largest home infusion provider in the U.S. And today with us is John Rademacher, President and CEO; and also Mike Shapiro, CFO. So gentlemen, I guess, only a few days ago, you made a beef announcement, a merger with Amedisys. So maybe first, you can just very high-level key main points that we should keep in mind when it comes to this merger before we jump into more detail questions.
Great. Well, thank you, Joanna. Thrilled to be here. Excited to talk not only about the progress that we've made as Option Care Health but more importantly, the vision that we have as we see the businesses coming forward. Before we start, I certainly want to make certain that everyone understands we may be making some forward-looking statements based on our assumptions and expectations moving forward. There's risks inherent with that. We ask and encourage you to go to our investor website to take a look at those risks and understand that in the safe harbor aspects of that. First and foremost, I just want to hit on how excited we are of the progress that we've made as an organization. Last in last week's news was really a strong quarter that the organization delivered. And our team continues to be focused around delivering high-quality care at an appropriate cost in the setting in which patients want to receive that and really great progress on all of the key initiatives that we have and such an incredible foundation that we're building from. So a lot of really strong momentum. The team continues to be focused around capturing market share from that perspective, good execution within our procurement area and focus around the cost of goods as we move that. And also really strong cash velocity as we looked at the way that our revenue cycle management team continues to execute and the concept of having and establishing a perfect claim from the moment we receive the referral. So really strong momentum in the first quarter, continued solid foundation that we're building from. And I think that builds even more confidence in the announcement that we made and why we're excited about the opportunities that sit ahead of us as we think about combining with Amedisys and creating a very unique platform to serve patients in the home or in an alternate infusion suite.
So with this background, you mentioned the strong results in the home infusion business. So I guess the key question is why diversify away, why not the pure home infusion company?
Look, we've worked really hard to establish an incredibly solid foundation to build from. And we've been talking for a while around the need to look broader around care as it's being delivered into the home. And as we went through a lot of work coming out of the integration work that we did with the BioScrip merger and started to push ourselves forward. We looked at 5 key trends. And as an organization and also in conversations with my Board of Directors looked at 5 things that really are going to be trends that are going to influence and impact the way that Care is delivered moving forward. First and foremost, scarcity of labor and clinical labor is with us and organizations that are well organized to capitalize on that, we think we'll be well positioned to continue to grow and succeed in the marketplace. The second area is that payers are really starting to change their view around focusing around total cost of care. -- whether you want to call that value-based reimbursement or other models, we know that the reimbursement model will be changing over time and thinking about what we need to do to provide broader services with that. We believe the home is going to be an important center of care and that the ability to have additional services and additional capabilities to wrap around the patient is going to be a mission-critical success factor. We know that aging demographics continue to push more individuals to being Medicare eligible. And we know that a vast majority of them are choosing Medicare Advantage as being the platform and the program that they will utilize. And the fifth thing is we know that many of the patients that are on service today that have chronic conditions are polychronic. They have a multitude of needs that they are working through, not just the infusion, not just the infusion drug, but they have broad needs, not only for infusion services but other things that wrap around them. And so the ability that we have as an organization and where we think the power of this combination is to really address all 5 of those areas and being better positioned around a marketplace that's changing around a need that is developing and providing additional services while we're in the home in the preferred position that we have.
Right. And then I guess thinking about the core of the Amedisys business, the home health, right, and the rate cuts that are coming or there is one already happening this year and then the more next year and into 2025. So what was the impetus to act on this now ahead of knowing where these rates will shake out on the Medicare side for home health?
We did a lot of research heading into this. One of the things we've heard is -- and you'll see it in the proxy as it comes forward. We've been talking with Amedisys since last summer, last fall and thinking about what this combination will be. This isn't new news. And in many instances, folks have been anticipating some of the changes that are in there. As we ran through our analysis, both what we did internally and using experts that help to inform us around the process. We think that we have built into the model an appropriate assessment of those types of changes. And we also believe that as we're looking forward that the marketplace is pretty much factored that in into the price points and when we looked at the exchange ratio with the Amedisys transactions. So look, there's certainly a range that's in there. We are conservative by nature in the way that we approach it. And we think that we've been appropriate in anticipating what June and then ultimately November announcement will be as we're thinking about that moving ahead.
And I guess you mentioned you've been looking at this asset for some time and kind of sitting where it fits. So just curious how this came about? Were you looking at different types of verticals in home care? Why did you decide to go with home health hospice platform? And also, there's other options as in like there's other platforms, so why Amedisys versus some other platforms.
We've been doing a lot of work with the strength of the business and with the focus around thinking around how we were going to evolve. We've been talking about opening the aperture for a while. We've been talking about what are the additional services that we can do when we're in the home and how can we think differently around a model that would be more effective in streamlining the way the care plans are delivered and utilizing critical resources in a more efficient way. And so we've talked about and we announced a relationship with Amedisys going back to operation warp speed and helping to deal with the public health emergency and think about how do we get the monoclonal antibodies into the marketplace. And so that partnership or that relationship started at that basis. We continued in conversations, especially with hospital at home and things that were happening in the Contessa space. And so the orbits continue to circle and we saw a really important opportunity to work more closely and then to create something better as we looked at the capability sets of both organizations. And so we're really confident that as we're looking forward, all of the capabilities that exist there today just put us in a better position to meet the needs and the changing needs as we look forward. And there's a lot of capability set. We identified and we called out on the call on Wednesday, that the ability to cover a broad spectrum of the care continuum, everything from what we can do with preventative care and focus around those chronics -- and medication, and chronic management through a post-acute event, the hospital at home and SNF-at-home capabilities, all the way to palliative, whether it's curative or comfort to end of life. And having that brought of a spectrum and the ability to cover that much of the care continuum, we think it helps to better position us as a partner of choice for payers. It positions us better to take a look at how to leverage and utilize the clinical capabilities of the broader organization. And I believe it creates a better outcome for patients that move across that continuum across their lifespan.
And one thing I'd add, Joanna, specific to your question around why Amedisys within this space. I think as John and I have shared, we spent an exceptional amount of our time looking at a number of assets, a number of opportunities for us to deploy shareholder capital as we really dug into the home health space, and we really explored their track record, both around their history of providing high-quality results unparalleled patient satisfaction in this space in their quality and compliance track record. We found that to be truly differentiated in this space, and we thought that, that was a very complementary cultural aspect as we looked at building upon the platform that we've established.
In prior questions, you mentioned payer relationships, and I guess shifting to different models. But I guess before we go there, the other, I guess, headwind for home health, right, is the Medicare Advantage and how this is a negative mix shift as that payer grows and the membership grows much faster than fee-for-service. So with this merger is one of the rationale here is that you're going to try to address it or as a combined entity, try to influence the MA contract with the -- on the home health side? Or is there may be some benefits you see also on the infusion side on the flip side from having those 2 assets together?
Yes. As we look at it and the conversations that we've had and until we could announce, they were limited in the format. But what we hear from the payer community is like this focus around the total cost of care and trying to drive better clinical outcomes at a lower cost and aligning around that. We have in the conversations and you've seen in some of the announcements that Amedisys has made is they're starting to make some progress in getting better rates with certain payers that are more of a case rate and episodic as opposed to the fee per visit type of structure. And we think that there will be traction there. I go back to the first trend that I identified, and that is access to clinical resources is going to be -- there's a scarcity value there. And I think the better you can align around the aligned needs of the payers, which is they want to get their members into these types of settings and provide high-quality care and appropriate cost. The more we can make certain that we have a position at the table to have those conversations and to make certain that we're paid fair value for the value that we deliver. And that's going to be part of it. And I think having both the infusion as well as the home health capabilities and being able to look at how to rationalize the use of the clinical resources. And we know there's waste in the system. There's ways for us to become more efficient and effective in the way that we're addressing the needs of patients in the home. That's a benefit for the patient. That's a benefit for the payer. That's a benefit for us from a capacity standpoint and being able to leverage and utilize the model in new and more efficient ways. So I think across all of that, there's an opportunity to really think differently in delivering care in the home in a much more comprehensive and a much more robust manner.
And I guess what gives you confidence that the response from the plants from the commercial plans will be positive because obviously, the track record for the home hub has not been really that great because even for Amedisys, you mentioned they get -- they made some traction on these new contracts, but it obviously has been a very elongated process. So what gives you confidence that now things will be different?
We've talked about this in other settings as well. No one's knocking on our door saying they want to give us more money in the infusion space either. I mean, we fight for every aspect of reimbursement to make certain that we're fairly paid from that standpoint. And we believe that there's a compelling value proposition here to drive better outcomes for their members for their patients. We know that in every conversation that we have at the health plans, and I'd say this is true for home health as well as they're focused on making certain that they have appropriate prices, right? So scale is going to be important to make certain that we can drive operating efficiencies and we can price our products appropriately. The second thing they always look for is access. They need to make certain that you can have a wonderfully low-priced product, but if you don't have any access and you don't have the clinicians to be able to take those patients on to service, they're going to linger in the higher cost settings. And so you have to make certain that access is part of that. The third thing is quality. And as Mike said, we believe with the Amedisys team, their focus around quality, their star ratings, independent accreditation bodies break them high in their quality, and that's something that payers really want. We saw the impacts of some of the payers in Medicare Advantage who didn't get the star ratings and who suffered some impacts because of that. So high ratings is going to be very important. And the last thing is around patient satisfaction, member satisfaction, right? They've got to win their members on an annual basis in many of those instances. And so our continued focus around those 4 dimensions and building programs that are in alignment with that, we think is right squarely aligned with the needs of the payers as they move forward. And those conversations can happen. I can tell you, since the announcement on Wednesday and the news getting into the marketplace. Certainly, we've had conversations because we now can have more open conversations with some of our key health systems and some of our key payer relationships. And I can tell you, they're all excited. They want to learn more. They want to hear more around what the capabilities will be. But there was positive response from those key customers that we have in helping to think differently around how to have a smooth transition of care out of the hospital into the home and how to develop new programs that are aligned with payers' needs. And we're encouraged by that initial feedback and know that there's going to be a lot of work post close to continue those conversations moving forward.
And I guess talking about payers. And previously, you mentioned a value-based care, right? And the shift, we're obviously hearing from pretty much every single payer talking-- or payer and provider talking about this. So on that front, what gives you confidence that you can do it right and you can coordinate all these different services you're going to have under one roof. Because obviously, we know that United Optum is pretty much working on that, but they have a dedicated payer to work with, with the United Health plan. So I guess what gives you confidence that you can do it as well as then one might be better.
I think the independence that we have allow us to have open conversations and strategic conversations with many of the payers in the marketplace. And not all payers are is in doubt as United is with its capability set. And the ability for us to have those conversations and to start thinking differently and meeting the needs and building programs that are aligned with the specific plans. We think there's an advantage in that independence allows us to do things and innovate with them through the process. So that aspect-- look, we have a very productive relationship with United today, even in the infusion space, and they have captive capabilities that they have there. We have a very productive relationship with Aetna, and they have capability set as well. And so our ability to have that independence to continue to innovate, to continue to meet the needs, hear their voice, and respond quickly through that process. And the agility that we've been able to demonstrate even in our existing model, we think will be an advantage for us to have those conversations and help to steer the way the market is going to go. We've had, I think, with many in the room, we've had conversations it's hard to really define value based in a clear way, but we know it's evolving. We know total cost of care is something that is front and center. It needs to be dealt with. And having the ability to think more broadly, not just on the infusion event, but on the total patient care and being a bigger part of that care plan, we think allows us to have a stronger voice in that process in a better position in order to be part of the change that's coming.
And just wrapping it up because obviously, we understand the long-term strategic value and where you're headed with this combination. But kind of trying to put numerically some of the benefits or how the model will change after the merger is completed. How should we think about the growth algorithm for this entity, combined entity longer term?
Yes, it's a great question. Look, first and foremost, the leadership team on the Option Care Health side has a track record of knowing how to integrate complex organizations in a manner where we can unlock shareholder value while preserving unparalleled patient care. In the last 3.5 years since tackling the BioScrip integration, we've unlocked more than 130% in total shareholder return at a time where we brought together 2 different organizations with admittedly some challenges inheriting the BioScrip platform. So looking forward, we get really excited, not only with the capabilities on the Option Care Health side, but rolling up our sleeves with the leadership on the Amedisys side to really build a new platform. From an outlook, as we think about -- we've talked about unlocking $75 million in synergies, $50 million of cost side synergies and $25 million from incremental revenue and programs with payers and referral sources. And that would be by year 3. That's not the end zone. That's not the finish line. That's an interim expectation. As we draw the line out, we see a compelling financial proposition. We see this combined organization generating top line of high single digits. We see low double-digit adjusted EBITDA earnings going forward, which would imply that out of the gate, we'll be in the neighborhood of 10% EBITDA margins, and we would expect to modestly accrete. So double-digit earnings growth, compounding and expanding the EBITDA margins over time. You do line out, we're 3 years -- 3.5 years post BioScrip. If we were to draw the line out, assuming we close the transaction later this year in 2027, that implies we'll be generating north of $9 billion in revenue. Our profitability from an adjusted EBITDA perspective, we estimate will be between $900 million and $1 billion with a double-digit EBITDA margin. And out of the gate from a cap structure perspective, on a pro forma combined basis, we're 2x leverage. So I think one of the other key headlines is the cash generation capabilities. And I think by 2025, a couple of years getting into the integration, we would expect to be exceeding $0.5 billion of cash flow from operations. And given the capital efficiency of this platform, we think the ability to down the road, deploy further capital in a shareholder-friendly manner is incredibly compelling. So we're really excited about building on the track record of integration and delivering growth. And we think that, that doesn't change with this combination by any means.
Good to hear that. And on the synergies, so can you give us a little bit more detail, the $75 million, the $50 million is the cost. So can you kind of flesh it out a little bit what this entails and maybe on the timing of when we should start seeing some benefits of that savings?
Yes. We start getting after that day 1. And even with the BioScrip transaction 3.5 years ago. We never stopped driving whether we call it acquisition-related synergy or whether we call it doing our jobs and driving cost efficiency in the business. Naturally, bringing 2 public companies together, you would expect things like public company costs, board expenses, public filing, audit, et cetera. But we look more broadly across this enterprise. Just the indirect spend pool alone, excluding the cost of the clinicians and providing care, there's $1.3 billion in SG&A. And so I think most folks know our track record at being relentless around focusing efficiencies while also making sure that we're investing to grow. And I think most folks know where they would place their bets on the over under on delivering the $50 million of cost synergies. We have a very high degree of confidence in that. I think what's more exciting or equally as exciting is the momentum that we see from the commercial strategies going forward, which we think complements that. And from a cost side, we think we'll start unlocking that in the first year and build on that momentum from thereafter.
And I guess the other piece is the $25 million EBITDA from the revenue synergies. So can you give us a sense of the magnitude of these revenue synergies and what it actually entails? Is it the commercial contracting benefits? Is there cross-selling kind of more details? And is it more on the infusion side or home health side? Or is it equally spread out when it comes to this revenue synergies you would expect?
I'll start and Mike certainly can add to it. So out the blocks, we'd look at probably 4 key areas in which we do it, certainly making the commercial team more effective to capture demand in the marketplace to make certain that we are well positioned there. We've talked before about reach and frequency and taking a look at where our position on that. And there are situations today where both organizations may have resources embedded within a facility. We may need to there. We may need one, and we can redeploy to other opportunities in that marketplace. And so we'll be thoughtful around that commercial execution and looking for those opportunities for cross-sell, upsell through that process. I'd say both in the opportunities that sit with the infusion side to potentially pull more patients on to infusion services that require that. We'll focus there, but also in helping those discharge planners look for a one-stop shop to be able to discharge a patient that may need home infusion services and home health services and helping to coordinate that in a better way. I'd say the second area is in the hospital at home and the focus around the Contessa platform and what exists there. A big portion of that cost and the spend there is on infusion products, which is why we've got a partnership with them and had really fostered that. So we'll look to capitalize there and drive some efficiencies and effectiveness as they're thinking about that program and how to effectively utilize it. And that builds into Snit Home as well as the hospital at home program. The third area is, and I talked about some of the things that are necessary to wrap around the patients in the chronics to provide a better care coordination to be able to provide additional services while we're in the home and think differently around not just the infusion event, but the space in between those infusion events to drive better clinical outcomes. And the last area is, look, this creates an incredibly strong platform in order for new products to enter the marketplace, so new therapeutic categories. We've talked and folks are very familiar with what's going on with some of the Alzheimer's therapies and what may come there. We've been very conservative around our approach that we need to have a clear understanding of the path to payment and how that would be reimbursed through the process. But you would have a platform that would allow you to really capitalize on the footprint, the community-based service model and be a partner of choice if there is a clear path to payment and that would move forward. So this platform just gives us a tremendous opportunity to participate different in the marketplace if those events were to start to happen. That's not the only reason, but it's just -- it's an additive benefit of a stronger platform and more capability sets that are required to have a comprehensive solution.
We have a few minutes left. So just coming back all the way to your introductory comments about your -- the home infusion business. Obviously, we didn't have to spend that much time on the call on Wednesday talking about the quarter. And you mentioned it was strong. It came in better. So maybe just 2 questions there because in terms of the topics in the -- during the conference is around utilization and labor. So in terms of the volume, it sounds like things were tracking there well. So maybe can you flush it chronic versus acute and also specifically on the acute curve business, we heard all the hospitals seeing very favorable trends when it comes to volumes in Q1 and also into Q2. So kind of can you talk about the trend in your business?
We'd love to talk about the first quarter, Joanna. Look, we're really proud. And as John mentioned, the momentum coming out of the first quarter, we feel really good. It was balanced execution across the board. We see continued strength in our acute portfolio as we become and continue to be that dependable partner of choice to health systems, transitioning patients out of the hospital with some of the competitive dynamics from earlier in 2022. We continue to capitalize on those opportunities. And we saw robust growth in the acute portfolio, which we've been very candid. We see longer term growing in the low single digits. We delivered mid-single-digit performance, and that's some of our higher gross margin profile therapies. At the same time, we continue to be a good collaboration partner on the chronic side. And so we're really excited about the balanced top line results that we've delivered. And as we skew more towards chronic, again, that's more of a predictable and stable revenue base, which also helps to flatten out our years more than if -- for those of you that have been following home infusion, rewind a few years, you typically saw a little bit more of a depressed start to the year driven by the acute side. Equally as exciting. Look, our procurement team is the best in the industry. We continue to fight for every basis point on the therapy margin side, and we have reached new highs in our penetration of our ambulatory infusion centers, which we continue to aggressively expand. We exited the first quarter with over 26% of our nursing events occurring in one of our centers. That was in the high teens a couple of years ago before we really started that concerted effort. Not only does that help us from a clinical labor capacity perspective, but it helps us drive margin improvement because we're driving better utilization of that costly clinical labor component. And down below, our focus on spending leverage. Back to my earlier comments, continues to be relentless. We continue to deploy automation and technology in our revenue cycle side, which has led to the highest cash velocity we've reported internally as well as driving better labor efficiency within our indirect labor investments. So just really excited about the momentum. We were north of 9% EBITDA margin in the first quarter. And equally as important, we generated approximately $90 million in cash flow from operations and actually increased our cash balances despite deploying $75 million for a share repurchase from Walgreens. So just really excited at the strength of the first quarter and the momentum we're carrying that into the back half of the year. The only other thing I would add to that is we also announced Naven Health. And that was a combination of Infinity Infusion Nursing and Specialty Pharmacy Nursing Network to create Naven Health that's focused around making certain that we have access to the clinical resources that are necessary. So really great progress from that standpoint, net new. So the number of new nurses that we have available increased over the quarter. We expect as this moves forward. We'll continue to see that progress. And remember, that focus originally was on infusion nursing on that. We created Naven Health because it will also give us the opportunity to expand as we're looking at a broader need for home health and hospice into that process to be able to utilize that engine to help support the growth of the business as we move forward. So excited about the potential that, that brings us as well.
I think that's all the time we have. But I'm glad you mentioned Naven because it was a mile still, which is exciting. But thank you, gentlemen.
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