BrightSpring Health Services, Inc. (BTSG) Earnings Call Transcript & Summary

Ladies and gentlemen, the program is about to begin. At this time, it is my pleasure to turn the program over to your host, Joanna Gajuk. Please go ahead.

Hello everyone. Thanks so much for joining us. My name is Joanna Gajuk. I'm the equity research analyst at Bank of America. And it's my pleasure now to host this next session with BrightSpring. It's a diversified home care provider. And today with us is Jon Rousseau, President and CEO, and we will go right into Q&A. But before we do, I just want to make a note to the audience that if you want to ask a question, you can use the Ask Question window that you see in the webcast panel. So please use that to send questions my way.

So Jon, thanks so much for joining us. And maybe we should start with the pharmacy segment because, obviously, there's been a lot of nice outperformance there or much more, I guess, significant outperformance in there specifically the specialty pharmacy, but with that growth of 40%, I guess, tracking for this year after growing 30% the year before that. So can you kind of give us a state of the union in terms of the sources of outperformance? Any specific therapies that came in better? I guess, the new contracts, the LDDs, but also maybe something about competition during the change system outage and such? So kind of give us a sense of what's driving that outperformance there?

Sure. Thanks, Joanna. Yes, our specialty oncology business has continued to have very good momentum through this year, really the last 6, 7 years. And I think broadly, if the organization though worth noting, we've had very good breadth and contribution of our growth across really all of our service lines this year, which has been good to see as we continue to address markets of high need and high growth with really valuable solutions. In oncology, it's a multifactorial growth model that is working well today. We have been able to develop with the team, a very strong position in oncology, growing in rare and orphan indications as well today, over the last decade plus. And so you see oncology, which continues to have strong innovation in its pipeline with new therapies coming to market, and with our service levels. Actually, the Net Promoter Score for Q3 just came out. Our patient and physician Net Promoter scores were the highest ever. 94 Net Promoter Score with patients, which is pretty remarkable in terms of the service levels that they are characterizing. But based on that service level and quality, we really have constructive relationships with our manufacturing partners who we work very hard for and we are able to pull through and help execute for them as new products come to market. We will launch probably about 15 new therapies into the market this year, either in an exclusive pharmacy arrangement or an ultra-narrow where we would be one of two pharmacies in the network. So first and foremost, oncology, thankfully, for patients and their family, continues to have a lot of tremendous innovation in terms of new therapies and the benefit of those coming to market. We're very thankful to be working with our manufacturing partners to be a pharmacy of choice for them and continue to service and support their patients as best possible to drive quality outcomes for individuals every day. So you're seeing more and more drugs come to market, thankfully, helping patients. We are winning those in a disproportionate way. You have other brands that have come to market in prior years that are continuing to ramp and penetrate the market as well, reaching more patients. And then you also have brands going generic over time, which is a good thing for all stakeholders in the industry, really. We had one drug that will go generic here in Q4. It was actually the very end of Q3. And then we continue to deepen with manufacturers on fee-for-service type business around data analytics, hub services as well. So there are 5 or 6 growth drivers in this business within the dynamic and double-digit growth oncology market, where as an independent pharmacy, we have really built a nice reputation and partnership with manufacturers over the last decade. And that's what's continuing to drive the growth at above market growth rate levels. As new therapies are coming on the market, the ability to win those preferentially is driving market share overall. And then as certain drugs continue to convert to generic, when drugs go generic, they typically broaden in terms of their volume and utilization. And that's something we really focus on making those drugs more accessible for more people. And as more drugs go generic and with our focus on generics, that drives market share as well. And as we look out 5 to 7 years, as you look at the pipeline in oncology, as you look at new brands coming to market and as you look at the expected conversion of existing brands going generic, we continue to see this model playing out for a long time.

And I guess you mentioned the oncology. The industry is growing 15%, but I guess you're growing even faster than that. So who are you taking share from?

Yes. I think, Joanna, it's really just a function of as new brands are coming to market, it's really being a partner of choice for those manufacturers in that process. So yes, over time, given our investment in clinical liaisons and sales force, we believe we continue to take a little bit of share in existing products. But as new products come to market, if you were selectively chosen as a partner for those, that is where you will ultimately, by the math, being market share in the overall market, if you're taking a disproportionate, or even 100% share of the specialty pharmacy channel, for new drugs coming to market. And then as drugs go generic, they typically get more utilization. And we have a strong focus on value-add generics. The clinical requirements to support these drugs are all very similar. But as drugs go generic, our focus on those will result in -- and ultimately, a market share increase as well. So it's really driven mostly by events in the market, whether it's a new brand or a brand to generic conversion and our focus and execution on those events.

Okay. That makes sense. And I guess since we're talking about oncology and [ possible ] there some -- there's been some interest in owning oncology clinics, but I would want to ask you whether are you interested in going that route as well?

Yes. We are building out with some providers really in primary care and home-based primary care, really with a focus in seniors and assisted living and skilled nursing and some home settings, and we think that is highly synergistic in the future. Oncology is not an area that we thought about for prescribers just given sort of valuations in that market, probably not something that's on our strategy list right now.

Okay. That makes sense. And the other piece of that specialty, right, is the home infusion, it's much smaller maybe 10% of the company. But can you talk a little bit about growth there in terms of what it's been, but also how do you think about the growth outlook going forward?

Yes, infusion tends to be a little bit of a split market with chronic specialty therapies growing at higher rates than acute therapies like antibiotics and [ enteral ] and other. And back up a second, just to be clear, in oncology that is oral and injectable therapies for us. And then so on the infusion side, that's obviously all infusible therapies, excluding oncology, which is really something that's done by the oncologists and the prescribers of the buy and build model. So on infusible products, other than oncology, we focus on both chronic specialty therapies and acute therapies. A lot of people gravitate more towards the chronic. We believe in being a full source provider in infusion. We ultimately believe that creates more ultimate size and scale and more relevance with the payers. But infusion is something that we've continued to really dedicate significant resources, too, about 10% of the company overall from an EBITDA perspective. But we do believe there is significantly more potential. I think our portfolio products that we're serving and supporting an infusion is nicely diversified. That's always been a key element for us is not to be too heavy in any certain area. We like that. We spent the better part of the last year really focusing on some operational initiatives, some leadership and people augmentations to really try to focus on service levels as best we could. I think we were always a very good pharmacy in that regard, but we're really focused on turnaround times and service levels in particular. Even to the point where we curtailed the business and the volume growth this year intentionally, really looking for '25, '26 and '27 to be years where our infusion business really starts to tick up in EBITDA growth again. I also think in that business, there's a little bit of margin and efficiency opportunity from some of the operational efforts that we employed this year. So I think for us in infusion, where we sit today, it's a little bit more of an idiosyncratic story versus a market story, where as we get through some operational augmentations, I think, and make some increased sales investments on the back of that in the future. I think that will put us in a pretty good place. But our growth to really generalize is probably 80-20 [ going to be ] driven by the things that we are doing specifically in our business, whether it's a sales or whether it's an efficiency opportunity, versus what's going on growth rate-wise, external to us. But nevertheless, longer term infusion, like everything we do, has a tremendous value in ROI for the system and for payers, just given that we provide these products and services at lower cost environments. They produce great outcomes. And so we like the industry longer term, no doubt. And we continue to try to make sure we have the building blocks in place so that we can get more and more focused on market share in '25 and beyond.

Right. And I guess, in that business, a lot of interest about STELARA, which you guys made a comment on your call that it's immaterial to your company in the aggregate. But maybe -- can you kind of give us your thoughts about this dynamic, which there's some uncertainty how that particular one is going to play out. But in general, biosimilars in that business because you alluded to like the generics, very positive when that occurs. So is it something similar in the infusion business when you have biosimilar launches? And I guess would that STELARA dynamic change your view of the biosimilar switches going forward?

Yes. So for us, as I mentioned before, we've intentionally tried to have a really healthily diversified book of products that we support in service and infusion. So STELARA, there's a dynamic there where the manufacturer is changing some of the pricing that you can buy it at in the industry. We'll still see where a lot of that settles out. But for us, STELARA represents less than 1% of what we do as a company. And we don't see that being a swing factor of more than a couple of million dollars here or there. As we look at next year, and there's many other potential areas of growth within the infusion business that we continue to feel really good about as we execute against our operational and growth strategy that I talked through before. As it relates to biosimilars more broadly, in our oncology business, that -- since that's an oral and injectable business, there really isn't a biosimilar threat there per se. We are serving innovative brands that are coming to market, brand new or tried and true generics that have converted from brands that have been around for a really long time, and they're just fundamental mainstays in the market. So we don't see biosimilar threat in our oncology business. Then for infusion, STELARA, after REMICADE a few years ago, is the one that was on the radar screen. We don't see risks from biosimilars and in the near future within infusion. And if you look at the infusion pipeline, it is very, very large. And so ultimately, we would expect that dynamics in the pipeline of new therapies that would be very beneficial for populations, things like Alzheimer's growth, market share gains idiosyncratically then potentially any opportunities, for example, with Medicare, fixing some of the reimbursement challenges there, which is far overdue. These sort of opportunities all we think, create much more of a positive dynamic, ultimately, net-net.

So as you think about that business growth, how would you characterize it?

Yes, that's certainly a business that we expect to grow in double digit as we get through -- as we get through a lot of our operational updates and investments in '23 and '24. That's a business that we will certainly budget to be double-digit growth next year and hopefully, we can do even better than that.

So staying on the topic of pharmacy and policies. So you mentioned Medicare fix in infusion but I guess bigger picture, some other topics or relevant topics for that segment is the IRA. There's some changes right under IRA to Part D essentially lower the cost for the patients. So some payers indicated they already saw high utilization for specialty -- of specialty drugs already this year because there are more changes happening to that patient cost in 2025, really, right? So how would you think about that impacting your business? Have you seen this already this year and kind of the magnitude of things that you were expecting to next year?

Yes. That dynamic has been a play all year as the doughnut hole has been addressed here with IRA over the past couple of years. Anything that fundamentally would make the patient's financial responsibility lessened would allow for more individuals to beyond therapy and for utilization to increase. That's a tremendous thing in terms of people that can be positively impacted in their life by these therapies. And so whatever is -- reduce the out-of-pocket ultimately is a positive for patients, and that incrementally does create some positive volume impact. We will see that occur again on January 1 just around the quarter, where the out-of-pocket is going to come down a little more. So we would expect a little bit more of an increase in patient volumes as we get into next year as well as a result of that. I mean if I were to sort of characterize it though, any impact in our volume from that is more on the edges, again, to really just generalize. That might account for 5% to 10% of our incremental growth but it's really the continued stream of innovative new oncology drugs, getting into rare orphan, launching these drugs and exclusive or limited networks, and then continuing to drive market share focus with our sales force on the back of our service levels. That is what is driving the far, far preponderance of our growth and performance of the company versus any sort of onetime reimbursement updates.

And thinking about IRA, but also in the context of the administration change, right. I know we don't have much details in terms of where things are going to be heading to. But I think -- I guess to ask your thoughts in terms of just high-level expectations for any changes under the new administration and what those could be? How those could impact the company? I guess the pharmacy, but also maybe provider side.

Yes. Yes. No, you're exactly right, Joanna. So we'll see who's in the seat and what those specific policies are that, that will allow us to have more definitive views on that at time. I think we're extremely fortunate that what we do is universally well regarded. The pharmacies in that whole value chain are the folks that are getting meds to people every day, helping to make sure there's adherence, helping to reduce unnecessary hospitalizations from lack of proper adherence and medication management. Same on the provider side, providing patient family preferred services, where people reside in the home and community, results in ultimately better ER and hospitalization outcomes, and it reduces costs dramatically as well. So we get tremendous bipartisan support when our government relations team is really working to educate and advocate on the Hill and at the state level every day. They are talking to everybody. And we really do get broad, broad support for these high-quality and high ROI therapy. So we've never really had any concerns or preferences as it relates to what happens in D.C. just given the broad-based support that we have for our therapies and services. I would say big picture, too, regardless of what's going on in the industry, our strategy has always been to just drive long-term durability and outperformance and just continued market share gains, regardless of the environment, which we've demonstrated for the past 8 years that I've been here now by continuing to build scale, by focusing on quality, by investing in sales and marketing, by doing accretive acquisitions. Those have been the things that have continued to drive our volume growth. And regardless of what's going on, exogenous to us, we'll always continue to be our focus. That said, we focus on markets with the value proposition that reduces costs and improves outcomes that we love working in that area.

But I guess talking about the elections and the changes, the company has relatively high Medicaid exposure, right? And Republicans and corporates have talked about custom Medicaid spending. So obviously, there are specific ideas, but we don't know exactly which way it's going to go, but I guess a couple of things being discussed reducing federal margin percent or the work requirements or maybe cutting some supplemental payment programs, block grants. A lot of different things being thrown out there. But I guess, if one of those things were pursued, how would you think about the potential impact to your business, thinking about specifically the Medicaid areas that being kind of discussed?

Yes. Most of those factors would be -- would not pertain to our populations and our service models. There are no work requirements. We've not had participated in any of these supplemental payments. So the folks by and large, were taking care of in Medicaid or individuals with behavioral conditions and/or seniors in their home. This is who Medicaid was attended for. Widows, orphans and people with disabilities or seniors who need it. And so we are serving front-of-the-line populations where 20% of our revenue comes from Medicaid. And as far as we're aware, nothing would change, and we're -- in regard to that. These are stage funded programs for -- which are extremely essential services for people really born with these conditions. It's not Medicaid population, some and otherwise 35-year-old healthy individual. So we don't see any risk from any Medicaid changes. It's usually all just a function of state budget processes year-over-year where we do have our Medicaid businesses. We've had over 30 years in a row of continued rate support and just a long track record of support with those services.

And since you mentioned the -- specifically your Medicaid business and provider side, right, the IDD business that's targeting very specific patient population is the way its designed. So we usually don't talk about that business much, right? We started with the pharmacy because that's where the excitement is. But maybe you can kind of remind us about the main drivers for that business and also how to think about the reimbursement from the state? Because clearly, this is Medicare reimbursed. Because obviously, rates been pretty good, but I guess there's always questions how long this could last. So maybe you can spend a couple of minutes talking about that business specifically and the main drivers and also specifically the reimbursement outlook in that business?

Yes, incredibly stable business. Again, these are individuals that are able to live in a home, in the community instead of an institution. And so it's really the highest ROI service we have. Typically, say, states over $200,000 a year per individual. And it's just an incredible business from a vision perspective and from a from an outcomes perspective. Again, it's a business where rates and revenue has been very stable, has increased every year for 30 years. And we pour a lot of quality and compliance into that business every day but just a very steady business. And I think if you step back and look at our enterprise in totality, we are a mix of some higher growth businesses then some very steady cash flow businesses. And ultimately, that gives us a very nice and unique level of payer diversification as well, which we really like. And so across our pharmacy and our provider services, we really sit back on a very regular basis and are very thoughtful and intentional about where we're trying to dedicate resources and where we want to grow the most on pharmacy. We think, especially oncology, we think infusion, we think home and community pharmacy focused on the senior living setting, home health, hospice, skilled nursing facilities, behavioral settings. Those are our three pharmacy businesses. There are dynamics in each one of those markets that we think are attractive from a long-term perspective and where we think, given our scale and our focus on quality and service programs, allows us to compete very effectively with leading service levels. On the provider side, home health, hospice, rehab and then this more personal care, behavioral care area. Home health hospice and rehab would be the double-digit growth areas that we're very focused on growing into the future. I would say community living and personal care. These are sort of just very steady 2% to 4% businesses that really help with cash flow generation and help us reinvest into other growth areas of the company. So it all fits together very well for us and has had a stabilizing impact on the organization over the years. As it relates to any future reimbursement outlook, ID was carved out of any of that discussion starting about a year ago in terms of "Hey, what happens 6 years from now, if ever implemented on 80% of the reimbursement having to go back to direct labor," IDD was always carved out of that discussion. It still is and we'll see where that even lands 5 to 6 years from now.

Right. And I guess staying on that business because there's been an increase in litigation and media articles about quality issues and behavioral health providers. So it's not really what BrightSpring does, but I guess there was one also BrightSpring a while ago. Maybe can you comment on any changes in operating environment for that business at all because of that attention that's being put on behavioral, I guess, with the picture of behavioral industry?

Yes. I would say no, just very consistent performance in that business. We're not a psych hospital or anything like that. This is taking care of individuals and largely 3, 4, 5 bedroom homes out in the community instead of an institution with -- this is about 15% of our company today. It was really the legacy of the organization. When I arrived 8 years ago, it was about 70% of the company, and we just continued to grow so much in the clinical areas, home health hospice and the pharmacy areas that even as this business has grown, it's become a small part of what we do overall. But a tremendous mission there. Again, it is a huge ROI for states, the ability for these individuals to more or less than put out to be able to live in a neighborhood, in a home, live a great life is an incredible thing. It is a more acute population, a lot of the time that you're helping to live out there in a community. And so you've really got to focus on quality and compliance. But we make more investments in that business and in those areas that really, I think, almost anybody in the industry and have leading quality measures to show for it. So again, this is a business that's been around for 50 years at the company. It's been one that's been very stable where we continue to make investments in it. But we derive our growth in the organization and where our growth focus is really the other 85% of our company today.

Right, exactly. And I guess to that point, since you mentioned the company is quite diversified. I counted like 10 different business lines. I mean you can even go more narrow, and you can come up with even bigger numbers. So there's a lot of different things going on inside this organization. So obviously, that's a question of examples of what are actual benefits of owning all these verticals under one roof?

Yes. Fundamentally, we have three pharmacy businesses specialty, oncology, and infusion and then help community pharmacy serving a variety of settings where we go to people, 24/7. We could be anywhere in the U.S. within 3 hours. And so -- but our pharmacy is really characterized as a closed door pharmacy where we go to the patient with very specialized programs. These are more acute populations. All of this is extremely different from retail. And so it is a specialty pharmacy focus to unique higher need populations characterized by a very customized set of services, which drives health outcome significantly. That is what we are doing in pharmacy with large -- and there's a lot of markets where you need to go to people where they have specialized needs, and we really leverage our scale in our clinical and quality expertise in doing that. On the provider side, you've got home health hospice, you've got rehab and you've really got the personal care services, those 3. And we are now moving out a primary care overlay to that, which we're excited about, but which is a longer-term build, which can ultimately drive more integrated care, and it's moving us more into value-based care as well. Look, we think that the reason we've been successful is that we have complementary service lines that we were able to offer. It gives us more scale. We are able to leverage best practices in the enterprise in each one of those businesses, whether it's HR, GR, IT, sales, quality. We are able to deploy expertise into every one of those businesses, theoretically to try to run them better than individual company providers in a couple of states. And so it's our scale, it's our best practice deployment, and it's also our ability to do accretive acquisitions to drive synergies, operational improvement. These are all things that we are able to bring to the party, so to speak, when we have one integrated platform that's being managed separately, but at the same time, we have dedicated owners, leaders, strategies and resources for each one of those businesses. So we think our one enterprise approach is what makes us successful. It gives us more stability, I think, more diversification but we also try to drive more growth in terms of how we think about where we want to spend our time and money and optimizing within all of those markets. And so again, what's driven our growth historically has been we participate in good markets that are growing where we're driving market share gains, and that's driving really strong and outsized volume growth number -- and that's been on the back of quality. Number two, we've continued to drive a lot of efficiencies over time, leveraging the scale of the platform. And then number three, we've been able to do accretive M&A. I think going forward, number four, hopefully, we will continue to demonstrate and build out this primary care capability, which will be a care management adder. But that's something that we need to execute on as we move forward in the future. But certainly a dynamic organization, and we think that that's a good thing.

So you mentioned M&A, but I guess if you strip M&A, you mentioned a lot of these business lines growing double digits. So just to confirm, I guess, I assume the pharmacy business, that's largely organic. But in the provider segment, there's been more acquisitions that you've been doing. So when you say double digits growth in some of these segments, like how much is organic and how much, I guess, the acquisitions when you talk about the expectations for the growth rates being double digits?

Yes. When you look at our '23 to '24 revenue across the company, you can assume that's largely all 98%, 99% organic growth especially oncology has been 100% organic. Really, the M&A we've done on the pharmacy side has been more on the home and community pharmacy where we've done some tuck-ins. It's sub-4x multiples. That's been it on the pharmacy side in the last 2 years. And then on the provider side, we've really focused our M&A on home health hospice and rehab. We don't really do any M&A in community living or personal care. And even those deals in the last 2 years have been very measured. Other than the deal we did in a hospice in Florida here most recently, which given the uniqueness of the situation, we needed to be a little bit creative on. Other than that, even the provider deals have been at 6x, 5x or lower multiples. We've been really opportunistic. As we were heads down before the M&A and before the IPO and in our first year after the IPO, really focused on getting leverage to 3x in the next 2 years. And so -- but opportunities about that we've done 60, 59 deals in the last 6 years, all but 1 or 2 of them have more EBITDA than we acquired them. And so we really do have an incredible M&A platform here. There is more value creation possibility potential that we have. But we're always -- probably for the next year or so, I would assume it's safe to say we're really going to balance our view of leverage and with incremental growth and focus on deals that we think are going to be very accretive from a multiple standpoint.

All right. So we should think more about like packing acquisitions rather than anything material?

That's been what we've done for the last 2 years. And I would say, safe to assume, at least, for the next year, that's probably where we'll continue to operate. As we're able to manage our leverage down over time. I think that will create more opportunities to do slugs of EBITDA here and there for, call it, $15 million or $20 million or $25 million. But we've largely kind of focused on smaller deals where you can just get better multiples. And I think we'll probably do that for the next 12 months and go from there.

Right. Because you also stated your target leverage of 3x, right? So should we assume essentially that the free cash flow should be going towards debt paydown versus acquisitions? That's the way to think about next 12 months?

Yes. So we'll balance use of free cash flow across debt paydown and accretive M&A. I mean if you think about 10 or 12 of EBITDA from M&A, call it, we'll do this year, maybe pro forma on an annualized basis now. But that's just kind of the rule of thumb we've had. We don't exactly hit that number every year, but sort of [ 10% ] to [ 15% ] as a baseline of tuck-in M&A. That's how we've always talked about it. When you think about multiples on that amount of pro forma EBITDA being in the 4% to 6% range that you have ample ability to do that M&A extremely comfortably while still having a lot of free cash flow to pay down debt. So if that's the target for M&A, we have ample ability to execute against that and pay down debt. You're really not even eating up half your free cash flow. Now if we decided to get more aggressive on M&A for all the right reasons, that would be something we'd have to take on a case-by-case situation. But our baseline has been to comfortably be able to do some tuck-in accretive M&A while still generating free cash flow for debt paydown. And in an opportunistic situation, we've also used equity where we thought that, that would be helpful and also keep moving down the path on leverage.

Right. Exactly. And I guess we are out of time. So I appreciate Jon for spending this time with us. And to the audience, we still have one more session for today so please stay tuned. And thanks so much for joining at the conference.

Okay. Thanks, Joanna. Nice being with you. Have a good day.