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

Good afternoon, everyone. I'm Jamie Perse. We're going to get started with our next session. We have BrightSpring and Jen Phipps, CFO. Thank you for joining us.

Thank you for having me.

I wanted to start, you just joined as CFO. You've been with the company a long time, but just as you get to know the investor community, I just wanted to give you a chance to talk about your background and what you bring to the CFO seat that's new and help the strategy of the company going forward.

Sure. Thank you. I've been with the company for over 8.5 years, have been a part of everything that we've done over that time period in increasing sets of responsibilities, helped to lead a lot of processes like the IPO and a number of the transactions that we've done. So we've done 68 transactions over my tenure with BrightSpring. 66 of those acquisitions are performing ahead of where we are. My team and some of the leadership that I've been able to provide, I think, has been very helpful to that. And so I just am excited with getting to continue in furthering my tenure with BrightSpring in this role.

Okay, great. We'll get into some of the company stuff in a second. I wanted to take a moment just to address some of the uncertainty and confusion yesterday. Can you give us any context for -- just the confusion, again, that occurred intra market yesterday.

It's a really good question. We believe that our platform is very strong. We believe that there was really nothing from a market news perspective that we are aware of that would impact us. We did announce a secondary transaction yesterday evening after market. And so I think just those would be some of our thoughts as to why there might have been some market dynamics going on with our stock yesterday.

Okay. And I'm sure you're pretty limited in what you can say here, but is there a framework to think about how KKR might continue to work down their ownership over time? And then post the secondary? Can you just remind us what percent of ownership they have at this point?

Yes. So KKR has been a longtime supporter and owner of our business, and they've been very, very supportive of BrightSpring and our management team. They continue to be great partners to us. And -- but really largely are serving just board capacity and doing those things. They will own -- I think KKR as a portfolio company or KKR as a private equity company has a balanced approach in how they do sell downs of their investments. And we have no reason to believe that they wouldn't be extremely balanced and in how they would approach an exit of Bright spring. But they continue to be very supportive of our company, the growth track record and ultimately what we are going to deliver as a company. And they will own -- they owned 53% prior, and so they'll just be under -- if the greenshoe is fully executed, there'll be a little bit over 44%.

Okay. Great. Let's turn now to the business. Coming out of the IPO, you guys laid out this roughly 8% top line, 8% EBITDA growth trajectory. It's been much better than that, pharmacy has been a big part of that. Can you just kind of talk through what has surprised you most coming out of the IPO in terms of the outperformance? What wasn't in your guys' model that you kind of articulated publicly that has transpired to drive that performance?

Yes. So we believe that we have an attractive position serving home and community health care markets, and we're a part of the solution. And we serve large and growing populations in markets that have high value and ROI. As we were coming into the IPO, we had a long track record of growth that was a little bit higher than that. But as we scale, we just wanted to be very balanced in what we believe that we could achieve. And so as we approach guidance, as we've approached even just at the start of the IPO, we wanted to have high confidence in our ability to achieve what we said we were going to do. And at that time, we had very high confidence in our ability to beat and exceed those percentages. There have been some things that were more favorable than we anticipated. The LDDs that we've been able to win preferential access because of our quality in our specialty oncology business. We have done that at a greater acceleration. Those drugs have ramped in the marketplace faster than historically they have. Those have been some of the items for outperformance. We've continued to do M&A, largely tuck-in, but we've been able to see growth and improvements in those acquisitions that have been greater than we expected. And then, frankly, we've just been extremely focused on technology, utilizing our scale to make sure that we are deploying best practices across all of our businesses. We were always focused on that, but we have been incrementally more focused on that, and that's just -- I'm reviewing, Jon Rousseau, our CEO, is reviewing every single week, a list, 100 long regarding every single project that we have in all of our different businesses, focusing on making sure we're utilizing the best technologies that we have the best processes that our contracts and the way we're procuring and utilizing whatever we're doing, it is at the most efficient and effective way. So we're just continuing to be All in on those areas as well.

Okay. I'll come back to a couple of those points in a minute. But just you mentioned the track record longer term. From 2018 to [ 2020 ], I think you grew revenue 18% and EBITDA 13%, really kind of consistent performance across many years. Jon often talks about just durability and sustainability when he's talking about the growth profile and performance of the business. How should we think about the track record you guys have built? And again, those words like sustainability. Is that to say that type of profile is potentially achievable going forward? Or how would you just level set us on how to think about the performance continuing?

Yes. Our strategy for the last 8 years and continuing has been we want to lead on volume, and we're doing that based on our quality and our outcomes that we're achieving. We believe that having the highest quality services allow us to achieve volume growth that are outsized to the market. So that's an area. We're focused on driving efficiencies and leveraging our scale and technology investments across our platform. We are focused in on doing accretive tuck-in M&A, which enhances our growth profile. These have been winning strategies for us. They have underpinned our long-term growth rate. And when you exclude community living, the EBITDA growth rates are actually 15% at 13% when you include that, and that's been for nearly a decade. So we just continue to execute on our strategy that we've continued to execute on over the last several years, and we believe that's a winning strategy for us.

Okay. And one question I often get asked, I mean, you guys painted this picture of you've got very complementary services across a number of end markets. How should we think about just the synergy that creates, how much cross-selling opportunity there, how much cross-selling [indiscernible] achieving today and just I guess, even bigger picture, the rationale for these businesses being together.

Yes. So as we think about the populations that we're serving, largely seniors with the divestiture of the community living business. We are focused in on serving the many needs of the highest populations of the -- or the highest concentration of those seniors. And they need provider services, they need pharmacy solutions, and they have doctor -- they need home-based primary care that's able to step in front of and unlock some of those opportunities across with the doc holding the pen. And so we believe that, that provides better outcomes for our patients, which leads to higher ROI and cost savings to the systems, and we're focused in. But I would say from a core strategy going back to what we're focused in on, quality leads to volume growth, we are focused on that individually within each of our different business lines that we have. And then as we cross over and have patients that are in -- that have multiple different needs, which we do, how can we serve as many of those needs as possible. So in our hospice pharmacy. All of our hospice patients receive their meds from our hospice -- our hospice patients receive all of their pharmacy needs from our hospice pharmacy. So that's one example of where we're doing that. We have home health patients. We have a new medication management program called Continue CareRx. We implemented that probably about a year ago. We had a paper published in JAMDA, which is a peer-reviewed medical journal, showing that individuals that receive our Continue CareRx program, so medication and medication adherence processes and services and receive home health, have a 72% greater reduction in hospitalization as compared to just average home health patients. That is really significant. Now there's lots of reasons why not all home health patients are on our Continue CareRx program. There are things we're working through with payers related to making sure you get the appropriate rates for those programs. But those are the types of programs that we think are differential and will be really important as we move forward and really try to drive costs out of the system.

Yes. And that's one kind of tangible example today. How do you think about just unlocking more of these types of synergies across the business and serving an individual patient with multiple service lines? How much more opportunity do you see in the medium term?

Yes. No, I think we see a lot of opportunity. Our home-based primary care business and those are largely nurse practitioners that are going into the homes where patients are, whether it's a senior nursing facility or into their actual home. We believe the expansion of that business help unlock even more opportunities for us across the business. So these, I think, like docs at home or nurse practitioners that are going in, they're able to step in front of issues that patients might have that reduce hospitalizations. But primary care doctors hold the pen and typically have a lot of influence in what our [indiscernible] would have. And so we continue to build out services. So we've talked a little bit about another example of an area that we're expanding in our rehab business, we have started expanding into Part B rehab for seniors. And that's -- we're in the early innings of what that looks like. But we have patients that have primary care services that could be receiving our home health services that are getting rehab services if they're not on the home health benefit that are in the senior nursing facilities where we're providing the drug. So it's really about access, and we think better coordinated care that, again, is the reason you do this. And we're also doing this in order to be able to begin unlocking differential payment plans from a value-based care strategy perspective. So again, we're in the early innings of that. But as we are producing outcomes, that are driving cost reductions in the system, we believe that we should be able to share in those savings. And so in 2024, we started a partnership or started in a partnership with one of the largest ACO providers and we're docs to some of the high-speed patients in their plan. And we're just starting down this path, but we believe that there are a lot of opportunities. So that's a Medicare plan. We did buy a little I-SNP, and it's in just a couple of states, but that's an MA capability that we have from a value-based care standpoint. And as we think about how do we leverage our access to patients across our different service lines, again, how do we drive those items. And then how do we work with our payers that we have to help manage their patients as well. So those are all items that we think are beneficial.

You brought up the primary care opportunity. So maybe we can go there next. There's a lot of primary care models out there, and many companies have talked about this market, many with very mixed results. So how should we think about your ventures in primary care and how you build that thoughtfully, how you make it durable? And what's differentiated about this compared to other companies that are trying to build primary care capabilities?

I think what's differentiated for us is that we have a lot of the other service lines that our doctors are then able to help connect. So we see this as being really important in helping connect our different service lines together. And again, these docs oftentimes hold the pen related to referrals and are helping -- now patients always have choice, but we believe our services are strong and help give our patients just a view and are able to step in front of any issues they would have. I think, again, our ability to take the services that we do provide all connected together and help layer that into an ACO or an I-SNP strategy and help get differentiated payment to help pay for these services, I think those are very valuable and something that we're able to do or seeking to do a little bit differentially to maybe how others have done it.

You also mentioned alternative payment models and here too, especially. There's been very mixed results in the market, and it's been harder, I think, for many to take risk effectively versus anything people thought a few years ago. How should we think about how you approach layering on risk? I think it's pretty small today, like 5,000 patients upside-only contracts. But where does that go from here, both in terms of the types of risk as well as the opportunity? How much savings you think you're leaving on the table at the...

Our models are largely upside models, and we're really not taking risk outside of the one very small I-SNP plan, and we're doing that very carefully. We've been the doctors in that practice and associated with our I-SNP for lots of years. And so we have a history and understand those patients really well. So again, we're trying to tread very carefully as we would in anything, and we're doing this in as risk-free way as we think that we can and really just trying to capture some of the upside associated with the value that we're driving in the chain.

Okay. And shifting gears a little bit. You mentioned all of the M&A the company has done over the years and you being a big part of that process and continue to focus on it. Yes, how should we think about where you guys are at in terms of approaching M&A today? You've got a lot of different service lines, very broad from a geographic perspective as well. Where are you finding opportunities today or most focused on adding density or scale within your model?

So as we discussed, we have a really strong track record of M&A and how we're able to integrate that well and improve on the quality and the financial performance of the acquisitions that we do. We have a very strong pipeline that's very long. The majority of our -- all of the deals that we do are proprietary based on long-standing relationships that we have throughout all of our different businesses. So we have relationships and theoretical deals that we might be working on for 5 years. Relationships that we're building, understanding the best, highest quality providers in markets, building relationships with them and staying close to them over whatever time period that would be. And Jon Rousseau, our CEO, is very involved in that process as well. And in all of our different business line leaders in identifying who are the best people in the business and just making sure we're staying close to them. So that pipeline has never been longer. We've been very balanced in the M&A that we've done, largely focused on tuck-ins over the last couple of years as we focused on deleveraging, which is a critical priority for us. But we've been able to do still a number of M&A transactions that we think have been very accretive and beneficial to us.

And obviously, it's an uncertain environment for a variety of reasons. What's your perspective on just where buyers and sellers are in terms of getting across the finish line? Where multiples are? Any context you can share on what you're seeing in the landscape?

Most of our transactions are very small, very small tuck-in acquisitions. And so from time to time, different things happening from a regulatory standpoint can impact what is available in the market. But I would say most of our deals are probably not necessarily impacted by that so much. And again, we just stay very close. We have line of sight to a number of different targets. We know who the best players are. We have a very targeted approach from a corporate development standpoint, understanding what markets we think makes sense, where do we want to be in home health that we're not, where do we want to be in hospice that were not. From a rehab perspective, what are the next couple of companies that we think are just really great players, again, focused on small smaller tuck-in deals has traditionally been what we've done. Every once in a while, an interesting more medium-sized acquisition has come along and has been very interesting to us. And certainly, we would consider those. But there's not really anything that is significant that we're focused in on and certainly nothing from a platform perspective that we feel like we need at this time.

Okay. And on the other side of the spectrum, you announced the divestiture of the community living business. I guess, just give us your perspective on the rationale for that transaction and how it positions the remaining business going forward?

Yes. So we love that community living business. We believe that we are a high-quality operator that has performed really well in this space. But as we think about where we want to be focused as an organization, we've been focusing over the last several years, primarily from a senior standpoint and focusing on developing really in clinical areas from a health services perspective. And as we just were thinking about where do we want to be, we just felt like that particular asset made sense with a different buyer, and we were approached and ultimately, the transaction made sense. But again, we love that business. We think that the work that, that business is doing is high-quality work and is extremely important. There's actually not a better ROI in our company than the ROI that those services provide to states and to those patients.

Okay. Maybe turning to the businesses specifically, I'll start with pharmacy, but I want to go to a provider. I think you were CFO of the home health and hospice business. There's spend some time there as well. On pharmacy, you mentioned that LDDs and how important that's been to the growth profile, those ramping quicker than expected. You've talked about, I think, 18 or so over the next 18 months. How should we think about this type of cadence of LDDs and contribution going forward, the sustainability of the LDD portion of the story?

Yes. So there are over 400 oncology therapies that are in Phase III at the FDA. We continue to see just a growth in that -- in those pipelines. And we've also seen that in the oncology space, there has -- and rare orphan, there has been just a narrowing of network to a limited distribution standpoint. These are often high-touch drugs that are life-changing, life-altering drugs that require really just high touch and real focus in delivering and making sure that patients are getting what they need and they're staying on the medication from an adherence standpoint. And so manufacturers have increasingly been limiting the networks. And again, we see that largely in specialty oncology related to oral and injectables. And we continue to have really great NPS scores, Promoter Scores, Net Promoter Scores, both from a patient and a provider standpoint, very high-quality services. We got drugs to patients faster than almost anyone in the specialty pharmacy industry. And we believe that this is the reason we're winning preferential treatment in as limited drug distribution networks as those are coming to market.

And across your specialty business, is there a way to decompose growth between existing drugs and those just maturing in their typical life cycle versus new to portfolio drugs and just the breakdown of contribution?

So as you think about limited LDDs, you typically see -- it's a ramp from a curve perspective. And so you just have to layer all 127 LDDs and they're in different places [indiscernible] curve. Typically, it is not very early in the life cycle that they're ramping. So it takes some time for doctors to understand what that new drug is doing, the sales forces for the manufacturers. Our sales forces are going out and educating. So we typically see classes of drugs that might have been LDD wins in 2023. They're still ramping in 2025. Some of our 2022 drugs are ramping in 2025. So we have seen an acceleration where information is getting out there much quicker that we think doctors are getting educated faster. I think our sales force has been helpful in that as well and making sure people understand what these new drugs are available and doing. And we're seeing those -- that continued growth. But again, as we don't see that pipeline slowing down. But certainly, I think we have good visibility into the next 12 to 18 months as you stated.

Okay. And obviously, there's a lot of focus on most favored nation drug pricing in general. How are you guys thinking about potential impacts on your business and the mechanics of how that impacts reimbursement for you?

Yes. So we think of most favored nations really more potentially deeper, maybe not deeper, it's more like IRA, I guess, as we think about what is happening. And a number of those drugs that would be on any top list are already on the IRA list. And as we have sized and frame that for people that are following us, we really think about those impacts as being more limited and confined to the home and community pharmacy space. And less unmitigated, there would be an impact to the pharmacy -- the long-term care pharmacy space. But we believe that individuals on the hill, in Congress at CMS, we do not believe that the pharmacies were the target of the IRA impacts or MFN impacts. We're the last mile to the home. We have very thin margins, and we are helping reduce costs and help patients stay on the drug. So we're confident that -- or I guess, we feel that it's very important that ultimately from a pharmacy perspective, that there will be some mitigation that will occur. Will that occur via a dispensing fee, an enhanced dispensing fee that could take place. We believe that's one area that are conversations that we've had with people on the hill and the CMS. It could be that manufacturers reduce cost or some combination of all of those things.

And I guess in the home and community pharmacy, which you said is maybe where this would be most impactful. Is there a framework you're able to share in just in terms of how to think about potential impact there?

So what we've said is that we believe that our balance and our scale, our balanced portfolio, which is very complementary and diversified and the scale that we provide, I think, is going to allow us to navigate this certainly much better than, obviously, if we were just a long-term care pharmacy. And as we framed it, we still believe that we will be able to achieve our long-term historical growth rates and that otherwise, this is probably a couple of percentage points of West completely unmitigated, at least related to IRA in 2026, a couple of percentage points of EBITDA growth for us that we would otherwise have. But again, we do feel confident that people understand this issue and that from a pharmacy perspective, the pharmacies are the last miles of the home and are very important from a value chain standpoint.

Okay. Let's go to the provider business for a few minutes. There's, I think, 4 core businesses that remain after the Community Living Divestiture. Overall growth was 12% in the first quarter, which is certainly above end market growth? Can you help us think about which businesses are driving that growth? What's driving kind of obvious market share gains and just give us a little more context for what's driving that?

Yes. So as we think about our provider business, we've broken that out post community living to 3 subsegments: our Home Health Care segment, which is made up of our Home Health Hospice and primary care business, our Rehab business and our Personal Care business. As we think about our Home Health care segment, we see good market growth that -- and we expect that to continue. We believe that we will be able to grow outsized or we're focused on initiatives that will allow us to grow outside to the market, which is beneficial and a number of initiatives that we've hopefully would expand margin there. As we think about our rehab business, we also think about that as a double-digit growth business as well. And that's a really great business. We're focused in on growth in certain areas like VA and some other payer relationships. But that is definitely not -- most of the growth is coming from our other business lines as we think about that business. So again, that's a very steady business. We like that business a lot. We think it's very complementary to the other services that we're providing, but that business is a little bit lower of a growth rate.

Okay. And your guidance for this year implies like 10% to 14% growth, which is consistent with the first quarter. Are there unique tailwinds in '25 that we should think about fading as we get into '26 and just longer term broadly? Or how should we think about that guidance as a baseline to think about more durable growth?

Yes. We are definitely focused in on continuing that growth and making sure that the growth we have underpinned by the quality services that we offer would be outsized to the market. And we think the quality services we're offering have allowed us to do that historically. We look to do that into the future. There are things that we're expanding into, like Part B rehab that I mentioned that we think can provide tailwinds from a growth perspective. And as we scale, we will help continue to allow the growth rate to be outsized to the market. again, as our home-based primary care and that business line continues to expand. And we start to see shared savings. We believe that, that will also provide growth that will allow us to achieve our longer-term growth rate in that segment.

Okay. Maybe we can turn to margins. Overall corporate margins have gone from roughly low 6s into the 4s. I think a lot of that has been driven by mix. So I guess, first question, can you talk about the underlying margins, not at the reported segment because we kind of know those, but even deeper, I mean, are there margin pressures within some of the businesses? Or how much of this is mix versus again, underlying margins?

Yes. We are focused. So it is -- we have had outsized growth compared to the rest of our company, which we think has been very good growth, really great growth comparatively. We have seen outsized growth in our specialty pharmacy business, and that business has the lowest margins within our portfolio and I think within the industry. And so as we've had really outsized growth and that outsized to our other business lines growth, that has absolutely impacted our margin. We're focused and really think about margin at each different individual business line level. We're thinking about it in terms of where do we think it should be, and then how do we make sure that we're expanding that in the best ways. What are the things -- what are our competitors' margins look like. And we really have goals set at each different business line level and our focus on making sure that we're expanding those in each of those different areas. Certainly, on the pharmacy side, we've been focused in on making sure we have -- you have payer impact each year that we work to offset via cost or efficiency or processes. And those are very important to us every single year to make sure that we would offset any impacts that you might have from a rate perspective. You typically have a more favorable rate impact on the provider side as we've seen historical -- or we've seen historically rate increases across the provider segment largely.

And as you do that analysis comparing your margins to peers and individual business lines and just generally evaluating where there's margin opportunity, where are you most focused in terms of improving segment or business line level margins in the next 12 to 18 months?

Yes. The areas that we're most focused in on that we see opportunities for improvement are in our long-term care pharmacy as well as in our home infusion pharmacy, those are probably the 2 areas that we're most focused in on as we have other rate pressures and other things that we're doing. So home infusion is a little bit more nuanced. We have taken the last 1.5 years to make pretty significant investment into an op model that we believe will help -- that we'll be able to then leverage and help us move forward from a growth perspective. So that's an area where we believe there's definitely a lot of opportunity for us to expand and grow. And we spent the last 1.5 years really thinking about the operating model as we focus on both the acute and chronic side and really made some investments in that area. So we're really excited about what we -- how we think we're going to be able to move forward, I guess, relative to those investments in the coming years. And we've stated that we would be disappointed if we didn't have significant growth in that particular business. So we see a lot of opportunities there, both in terms of margin expansion and growth. And then from the long-term care pharmacy headed into IRA. We are very focused in on making sure that we -- obviously, we're working on what offsets we can have from a congressional standpoint, from a payer standpoint, from a cost standpoint. But then separately, what are the things we need to be doing to make sure that we would have a list of 10 or 15 or 20 projects to help us offset what those costs would be -- those impacts might be if they were completely unmitigated.

And then how are you thinking about G&A, just the cost needed to support the business? Obviously, there are variable costs in there just as you grow the business. What investments do you need to make and then what efficiency and offset opportunities do you see?

I think we've been very balanced over the last several years, investing in growth, investing in technologies that we -- that have set us up well for growth into the future. So as I think about home health and hospice, over the last -- it was probably 3 years ago, we invested in one system across -- that's an area we're very acquisitive in. We had a handful of different systems, different operating systems. We spent the time, the energy getting onto one platform. Every acquisition in our home health and hospice space now come into that platform and that acquisition that allows us to better leverage our processes, better leverage our infrastructure, make sure we have the right reporting. So that's just one example, but those are things that we've done. So from a cost perspective, I think there's a lot of leverage that we'll have from a growth perspective. But you're right, they're absolutely will be incremental investments that we'll want to continue to make, both from a quality and as we grow, that's an area we just have continued to invest in quality resources, making sure we have those right processes, those right systems.

Okay. And I think we're out of time, but one to close just very quickly. Guidance of $570 million to $585 million for the year, how are you guys thinking about the range and just business performance relative to that at this point in the year?

Yes. So we -- from a guidance perspective, our philosophy is to be -- to have high confidence in our ability to really like deliver the range that we are doing that and make sure that we have line of sight to sort of every single thing that's going to allow us to be within that range. So we are performing really well. We continue to be performing really well and feel like we are doing everything we can to set ourselves up for really good performance for 2025.

Great. I think we can conclude there. Thank you so much for joining.

Thank you.