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

Good morning. Thank you for joining us. My name is Joanna Gajuk. I work at Bank of America Equity Research. I cover some of the small cap and medium cap health care services provider. So now it's my pleasure to host this session with Option Care. They are the largest home infusion provider in the U.S. And today with us, we have Mike Shapiro, the CFO, but also, we forgot to put your name, but Nicole Maggio, who's the Corporate Controller at Option Care. Did I get it right?

You did.

Okay. Perfect. So I guess Mike said that he wants to introduce, I guess, some concepts that we want to make sure we hit and then we're going to go right into Q&A.

Sure, Joanna. And thank you very much. We're thrilled to be here, really excited to share some thoughts on Option Care Health. Recently released our first quarter results, really solid start to the year, especially considering some of the operational challenges we endured with some of the disruptions on the technology side. For everybody in the room and listening in, we're the largest provider of home and alternate site infusion therapy in the United States. We have a physical presence in 46 states and are licensed and have patients across all 50 states. In the first quarter, we saw very solid traction for our model as we continue to strive to drive greater senses of patients in the alternate site where we have the privilege of treating patients that are dealing with both acute and chronic conditions. In the first quarter, we delivered 13% top line growth, which really just underscores the strength of the platform. And I think as many folks at the conference have been reflecting on, the first quarter was quite challenging with the disruption with the Change Healthcare IT environment, which was very well integrated with our overall operations. And so starting in late February, really through the entire first quarter, we had quite a bit of disruption around our ability to triage, new patient referrals, process and support existing patients as well as seek reimbursement for claims. And so the team really performed at just an exceptional level. The level of patient care was not disrupted at any time. We actually maintained all of our responsiveness, and equally as important, our patient satisfaction scores in the first quarter were the highest ever recorded at 93%. So on the heels of the first quarter, again, we reaffirmed that we actually brought up the lower end of our guidance range, and we think 2024 is going to be yet another very productive year for the Option Care Health team.

And I guess to that end, with some of the disruption you mentioned, the Change Healthcare outage and also some supply cost pressure, but you still were able to lift the lower end of the guidance. So to me, it sounds like the core is actually doing better. So I guess can you talk about that, like what's the driver for the better sort of core?

Sure. So when you unpack our revenue base, we have literally dozens and dozens of different therapeutic categories, each of which have their own attributes, growth profiles, competitive dynamics. We have roughly around 26%, 27% of our revenue are what we refer to as acute therapies. These are therapies like intravenous antibiotics, parenteral nutrition, where we're helping to transition patients out of an acute care setting into the home to complete their recovery. These are, as I like to use the analogy, these are the diving catches. We get calls from hospital case management teams. They expect us to get back to them within 30 minutes to tell them, are we in network with the payer? Do we have the drug? Can we marry it up with a nurse and be it at the patient's home, literally, in some cases, within hours. Our responsiveness in the first quarter for that portfolio of therapies despite not having full access to some of the technology and tools we lean on to process those therapies timely was quite remarkable. And frankly, continuing to be that collaborative partner of choice with hospitals and health systems, I think we earned some additional stripes and some credibility in the first quarter. Our chronic therapies, which are approaching 3/4 of our revenue, these aren't those diving catches where we need to respond within 30 minutes. These are for folks that are more often diagnosed with a chronic condition. Conditions that, in many instances, they'll be managing throughout their life like Crohn's, colitis, rheumatoid arthritis, CIPD (sic) [ CIDP ]. And so those are therapies where, again, we utilize a lot of the tools in the change technology suite to process and onboard those patients. And I'd say the team jumped through several flaming hoops within the quarter to make sure that we were onboarding and supporting those patients at the same time. And so really across the board, the teams in the field perform miracles in maintaining existing patient support as well as onboarding and supporting new patients. And I think one of the really exciting things around the first quarter is, in addition to what was a very solid performing core portfolio of therapies, we actually saw some really nice top line traction in some of the newer rare, orphan and limited distribution therapies that we've launched over the last year. These are typically very, very expensive therapies for very small patient populations. And these therapies really play well into our platform with a national consistent leading platform of clinicians driving best-in-class quality, effectively universal payer access as we're the only ones that are in network with every major payer across the U.S. And so we've built a reputation as being a commercialization partner of choice with pharma as they introduce new therapies, especially with some of the more limited population therapies where you might have 1,000 or 3,000 patients nationwide. Our model allows us to quickly and comprehensively develop clinical protocols, disseminate that so that if there's a member in Portland, Maine and another patient in Portland, Oregon for an orphan drug, they receive the exact same clinical experience. And that's really resonated with biopharma as they introduce some of these new therapies. And in the quarter, we saw considerable traction from some of those newer therapies that we've launched.

On the flip side, you mentioned that the new therapies on the flip side, they come at a lower gross margin, right? So maybe can you talk about that? Because I guess it sounds like they could be low single digits, maybe mid-single digits gross margins initially, right? But for the reasons we can talk about -- to us. But I was just asking us about the trajectory, right? So I guess they come at lower margins, but the idea is that eventually, the margins -- the gross margins improve and also the other element on those orphan therapies, as you call them, become at a high dollar, right? So in the end, it kind of all adds up, and is additive. So maybe can you talk about that trajectory, how should we think about these new therapies being additive over time?

Yes, absolutely. So they are a little bit of a different economic proposition. So again, back to our portfolio of revenue. The acute therapies, which are really growing in the low single digits, these are some of the more mature therapies like IV antibiotics and parenteral and enteral nutrition. They typically carry a gross margin rate of north of 50%, which on a rate basis is very, very attractive. But the patient revenue per patient start or per patient event is relatively limited. Typically, we'll get a referral from a hospital. We treat them in the home as they recover from whatever sent them to the hospital for 2 to 6 weeks, and hopefully, we never see them again. On the chronic side of the house, those therapies typically are in the 10% to 25% gross profit rate. But the difference is it's a lower margin rate because of the branded therapy in our revenue, we don't have really control over ASPs or AWPs, the reference price of the therapy. But the dollars per patient start is considerably higher, and it's for a much longer period. Some of our patients, we have the privilege of treating for years or decades. So even though those therapies carry a lower rate, it's really a function more around the branded nature of the therapeutic. The dollar is typically at a gross margin contribution are greater, even though a lower rate. So it's a little bit of a paradigm shift. As we think about some of these emerging chronic therapies that are in the rare and orphan category, if you're a biopharm and you're introducing a new novel therapy for an underserved population, typically, there's less price pressure. And so the margin rates what we're clearing over that reference price is very, very minimal upfront. In addition, we typically have to build out a patient support model. So as you said correctly, Joanna, these typically, while they're very, very expensive therapies for limited patient cohorts, they typically carry mid-single-digit gross profit rates. It might be 5%, but it might be 5% on $300,000 for a patient we might be serving for years. So as we evaluate these novel new candidates, to be clear, we don't launch every therapeutic. We're a for-profit enterprise, and we make sure that we're clearing a reasonable gross profit on those patients. But over time, as you build that patient cohort, as you build your "street cred" with manufacturer, that allows us to develop a deeper relationship with them. We might be able to negotiate better procurement levels. We may be able to monetize patient experiential data back to the manufacturer after we build a substantial patient cohort. Those are ways that, over time, we can enhance that margin. But to be clear, that's a multiyear journey with biopharm on these novel therapies. They're never going to be the portfolio-leading gross profit margin profiles. But the cash on cash contribution, given the infrastructure that we've established through our investment technologies and pharmacy infrastructure, allows these to still remain a very attractive proposition for us.

And when thinking about these orphan therapies, that could be very small in totality in terms of just the market -- the patient population. But I guess they keep adding, right? So maybe can you talk about your kind of outlook longer term in terms of just all these therapies and maybe other things? And how we should think about your views in terms of the top line growth for the company longer term? Has anything changed based on the biosimilars or subcutaneous? So a lot of different dynamics in the industry. So has anything changed on that front?

Look, one of the attractive aspects of this industry is it is very, very dynamic. The portfolio of therapies that we have the privilege of providing to patients is constantly changing. We have the best-in-class business development and trade relations teams who are constantly monitoring the drug pipeline. So therapies are enhanced with subcutaneous administration methodologies or oral substitutes. There's biosimilar events where branded therapies have biosimilar entrants into the marketplace. There's new therapies that are introduced. We've seen several since we've both been with the enterprise since back in 2015. So you look at the portfolio of therapies that we provide to patients across the country today. It's very different than it was 5 years ago. Now there's what I would call some of the blue-chip therapies like IV antibiotics and nutritional support, immunoglobulins, infliximabs, enzymes, steroids where those are very stable and predictable. There's a number of other therapies that enter into the portfolio that exit. We've highlighted a few. Radicava is a therapy that we used to provide for ALS. The great news for the ALS population is that an oral indication was approved. So they didn't need to receive the therapy intravenously anymore. And so we knew that was going to develop. And that's a case where there were some therapies that have exited our portfolio while we've introduced new therapies for muscular dystrophy and multiple sclerosis and CIDP. And so there's this constant anticipation and evolution of the therapy portfolio. Nothing develops on the therapeutic level that catches us by surprise. We know the forward calendar of items that might have a subcutaneous administration that's introduced or that there's a biosimilar that evolves. Those are all market developments that we take into consideration as we project the -- taken into the calculus of projecting this as a high single-digit growth enterprise. There's a lot of tailwinds in this industry, and there's definitely some headwinds. And as we think about our position in this industry, we think a high single-digit growth enterprise over the medium term is the way folks should be thinking about this. The good news is up to this point, we have consistently exceeded that. But going forward, that's kind of how we think about the enterprise.

And the only thing I'd add is really our current portfolio of therapies does include biosimilars and subcutaneous administration. So, it's nothing that we haven't worked through before and it doesn't already currently exist in our portfolio.

Absolutely.

And then just coming back to your comment about the high single digits and how, I guess, Q1 played out because clearly, the revenues came in much better. And I guess when I look back historically, Q1 tends to be down from Q4, but instead, it was actually up. So it sounds to me like there's some market share gains and maybe those new therapies. So sort of, is that sustainable, the performance in Q1 when it comes to revenues given that seasonality was kind of outperformed? And what does it imply for, I guess, the rest of the year when it comes to revenues?

Yes. You bring up a number of good points. There is a little bit of seasonality in this industry in that Q1 is typically a little bit below Q4. There's a Herculean lift to reauthorize chronic patients, to verify benefits, to implement plan design changes that does carry some inefficiency. John highlighted that on the call in that we were just coming out of that annual heavy lift when the change health incident evolved and tossed us an additional curveball. The great news is the commercial team continues to execute very, very well. We did see that seasonal downshift in some of the more kind of legacy therapies. But to your point, offsetting that, we had a very productive quarter with some of these newer, again, very costly emerging therapies that we've added to the bag, so to speak, over the last year. So a lot of those newer therapies that carry a very large revenue per patient start more than offset what has historically been that seasonal downshift. All I'll say is, look, we've -- for the year, we did bring up the lower end of our revenue guidance range. So I think folks can infer that our confidence in that range is increasing as we exited the first quarter. And the only thing I'll say is throughout the year, there typically is a first half to second half lift. I think with some of the challenges that we highlighted on our call, not the least of which is the change health impact, that does imply, and we're comfortable with the expectation that there's a little bit of a bigger first half to second half lift than you would have historically seen in this enterprise.

So I guess we talked about revenue, but the other component here in terms of the margins, we're getting a lot of questions about that, gross margins. And we kind of covered one of the headwinds here around the new therapies coming at lower gross margins, but you also highlighted Change, and you also mentioned some higher supply costs. So is there any way for us to kind of stack up these 3, I guess, major headwinds that you called out in Q1 in terms of the magnitude of things and also how do you expect this to play out for the rest of the year?

Yes. So as we highlighted on the call, because obviously, we fully anticipated that there would be some questions around how do we triangulate the top line growth to the gross profit dollar growth. We highlighted a couple of idiosyncrasies around the quarter that definitely impacted it to a greater extent than usual. The reality is we're making progress on recovering from the Change Health impact every single day. We think that by midyear, we will most likely have that in the rearview mirror. And similarly, on some of the nutritional and some of the acute therapy inputs where we've had some supply chain disruptions from API and key input manufacturers, those therapies, to a great extent, are compounded in clean rooms under hoods where we're acquiring different commodities, compounding them into patient-specific doses, and there's been a lot of API and other key input disruptions that, again, our procurement teams are working through. So we haven't put specific numbers on those items. Again, we weren't looking for a cry sheet on the gross profit. But we did want to underscore for folks that there were a couple more headwinds that have emerged in the quarter than, frankly, we were anticipating. The good news is the supply chain disruptions as well as the Change Health impacts and inefficiencies, while both of those impacts continue to this day, we think we have a line of sight to mitigate those for the most part by midyear, which again gives us more confidence in the back half lift. One of the other things we highlighted, Joanna, and this goes back to last year when we called out some pretty unique procurement benefits that benefited 2023 to the tune of $33 million to $35 million, which was great until we have to explain the year-over-year growth in 2024. That's going to obviously persist and that's, frankly, part of the reason why we're not calling out specific dollar amounts from the supply chain and the change health disruption because, frankly, neither of those are leading us to deviate from our communicated guidance ranges. Conversely, we actually lowered the high end of our -- brought up the lower end of our adjusted EBITDA guidance range by $5 million in the quarter. So increasing confidence in our expected results for the year.

Also maybe we could talk about some of the things we mentioned before, biosimilars and subcutaneous. Like you said, this is -- these are not new concepts, by no means, for the company. But I guess there's, I guess, maybe more attention being paid because Stelara is viewed as a key therapy for some providers at least. So maybe help us think about that concept first in terms of either helping us [indiscernible] but also giving us examples from the past of how prior therapies switching to biosimilars, how that impacted your business.