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

Hi. Good afternoon, everyone. I'm Erin Wright, the health care services analyst at Morgan Stanley, and we're happy to have with us BrightSpring Health Services with us -- today. To get started, for more important disclosures, please see the Morgan Stanley website at morganstanley.com/researchdisclosures. And if you do have any questions, please reach out to your Morgan Stanley sales representative. And with that, I'm happy to have BrightSpring's CEO and CFO with us today, Jon Rousseau as well as Jennifer Phipps. Thank you so much for joining us.

Sure.

Great. So just to get started, I want to talk a little bit about the current mix of the business now. In the labeling, you recently divested the Community Living business or -- in the process, but can you discuss a little bit about now what the mix looks like of the business, the inherent synergies across both pharmacy and care delivery, and what the strategy is, bigger picture?

Sure, sure. Yes. Thank you, Erin. Good afternoon. So our Community Living transaction, we announced the divestiture there in January. We are still expecting that to close by the end of the year. Our company in totality, really a pharmacy and provider platform serving home and community markets. So we think of ourselves as a leading home and community health care provider in the United States, serving individuals and lower cost in high-quality settings with a tremendous ROI to what we do, which continues to facilitate strong demand with our platform. We're really serving either specialty populations or seniors. So the same kind of population is really in the same setting across our service lines. So a really complementary set of services to what we do. And with that platform, the scale that we are able to realize and the benefits of that scale have been meaningful to us over time. So we love the fact that we're serving markets with really valuable services that are really provided tremendous health to individuals with a platform that given its scale and the synergies between our service lines, we think, has driven a lot of advantages. So today, our business is very focused, I would say, on the other side of that divestiture more clinically, both in terms of who we're serving, individuals with clinical needs and then our workforce being more specifically clinically oriented. So we believe we have a unique platform and a great platform to continue to serve more and more patients in the Home & Community. We think we have ultimately more opportunities to drive more integrated care across our service lines. And we like what we have. And for us, as we look out over the next 5 to 10 years, how do we continue to deepen geographically as much as we can to bring these services to more and more individuals who need them, which is ultimately really good for all stakeholders in health care.

Okay. And then can you talk about kind of the organic growth prospects and key drivers across each of the 2 segments. M&A is a component of sort of the strategy to you. But from an organic perspective, can you talk about some of those key drivers?

Yes, yes. Three of our main drivers over the past, now going on, 9 years have been, number one, volume. Our volume growth has typically been well above the markets that we're in. I think it's been underpinned by our quality and our operational capabilities. Number two, driving organic growth has been a continual focus on cost efficiency and lean. That is a focus more now than ever in the organization. And then number three, Erin, as you mentioned, accretive acquisitions. Those have been really 3 hallmarks of the organization. As I go back to number one, from a volume growth perspective, you can look at our specialty pharmacy business, in particular, and our home health and hospice and rehab businesses on the provider side is being the leaders in growth, but every one of our businesses has had very solid volume and revenue growth, the 3 service lines on the pharmacy side and the 3 on the provider side. I mean as we look out to the future, we believe both the pharmacy and the provider side of our company should have organic and volume growth rates above 10%. Whether you look at a 3-, 5- or a 9-year CAGR in the organization. Our growth rate has been about 15% from a revenue and EBITDA perspective. More recently here, that CAGR has been higher than that. But that really always is our base plan, and what we strive for in the organization is through volume growth underpinned by great quality and through efficiency and accretive acquisitions, we can continue to drive that mid-teens EBITDA growth rate. In years where things are going even better than that, that's terrific, and we will try to beat that when we can. But there is a lot of demand for our services, these high ROI services, and we try to combine that with a real focus on efficiency in the organization. And we believe that we can continue to grow at our historical growth rates by maintaining our focus on these critical success factors.

Okay. And M&A, yes, is part of the strategy, but it's not a new strategy for you. You do have a track record here, and I think that, that's an important dynamic to speak to, but also can you talk about where the pipeline sits today and some of those recent transactions that you've completed, the hospice deal, for instance, the nature of some of those transactions and some proof points around how profitability has evolved since closing. Sorry, that's a lot in there, but you know.

No. Jen, do you want to talk about the M&A side?

Sure. So we have an almost 100% track record, 66 of 68 deals, we're really proud of that. Where the EBITDA is ahead of where it was when we acquired that. We have really built a machine in terms of acquisitions that we've been able to do from a corporate development team that is focused on generating proprietary deals. We have a pipeline that's very long and robust in all of the different business lines that we're thinking about utilizing our local operators and the relationships that we've built over years and years to develop that proprietary pipeline. And we just -- we have an IMO. We've developed just a process in terms of how we're integrating things in, bringing those into our processes, keeping them like really thinking about how we make sure that we keep whole, the feel of what that acquisition was, but make sure we're bringing them into our processes, our contracts, other synergies that we're able to bring to bear. And so we've been able to do that really well. One recent acquisition that we had, we did Haven Hospice, which was in Florida. That was an acquisition of a not-for-profit for hospice, where that not-for-profit was actually losing money, and we are now run rating ahead of the business case that we put together when we did that acquisition and really just very focused on that in every deal that we're doing.

Yes. I think what's been really gratifying too is we're typically able to drive improved quality in operations in some of the acquired businesses. So for the last couple of years, though, it's really been more or less tuck-in mode with the exception of a few transactions. And I think as we look forward with the close of community living, if that indeed does close in Q4 this year, we'll be below 3x leverage even without community living closing, we'd be [ 3.3 to 3.4. ] And I think our balance sheet is just really in a strong position. We'll probably have a little bit more agility as we think about M&A in the future, but always with an eye towards where our balance sheet is and always with an eye towards very accretive situations.

And then the latest on the Amedisys transaction, and why you're excited about some of these assets?

Yes, we were helpful -- we were glad to be a helpful partner there to help facilitate that transaction due to confidentiality with all the parties, we're pretty limited in what we can say. But that was a situation where the geography that was available other than 1 state was completely complementary to us. And home health is still not a huge part of what we do. It's probably our sixth-or-so biggest service line of the 6. And -- but we've been really judicious about building into that space. We like home health, the ROI and the outcomes for home health are incredibly profound. It's extremely important. We've been watching to see how the reimbursement landscape settles out there. That will become stable at some point here in the near future. But that was a situation where we just thought it was a very unique opportunity that we hadn't seen too often, and we were glad to be a part of that equation to help facilitate that transaction. We're optimistic that, that will close here in Q4.

Yes. Okay. And we'll get into some of the regulatory questions to you, but also on the expansion kind of questions, but de novo expansion. De novos are a key part of also kind of your strategy, what's the latest in terms of your outlook on that? I think the prior targets were like 20 de novo expansions a year. Is that still the case?

Yes, pretty consistent. Jen, maybe you want to share some of these numbers, but as we just think about continuing to try to penetrate our markets more deeply and expand geographically, this is a primary vehicle whereby we do that.

Yes. So we've been able to -- this year, we've been focused on Part B rehab and expansion from a de novo standpoint there. As we look forward to -- and as well as some home health and hospice as well as we look forward to 2026, we believe home infusion is another area that we look to expand on again, opening potentially some clinics or suites as we're thinking about where those de novo strategies will be in addition to home health hospice rehab as well.

Okay. And then from a regulatory standpoint, there's still a lot of unknown from a drug pricing perspective, what is MFN or tariffs, or how we should think about sort of IRA and Part D and dynamics across that segment, too. Can you talk a little bit about how you see this playing out from your perspective from a drug pricing, and where you're exposed, I guess?

Yes. From a regulatory perspective, I would just say, first and foremost, we're really fortunate to provide services that have such a meaningful value. Everything we do has a very long-standing intangible ROI that I think is well appreciated. I also think our quality and the scale and our relevance in our market serves us extremely well. We have an outstanding team that works at the state level and in Washington, D.C. with all the policymakers. And I can tell you in all my meetings, the value for what we do is clearly appreciated by all. As we look at some of the various topics out there from a Medicaid perspective first, the individuals that we provide services for in Medicaid is who Medicaid was intended for, seniors, duals, individuals with disabilities that is not the target whatsoever of some of the Medicaid bills that are out there. On the home health side, we'll see what happens with the final proposed rule here in the coming weeks or so. As I mentioned before, while we think home health is certainly a growth opportunity for our company, and we're in a unique position to grow it. We've been very thoughtful about building that out to date. We've been much bigger on the hospice and rehab side of provider. And obviously, we've been growing more aggressively on the pharmacy side. So we just don't have a ton of home health exposure to date. So that potential impact is not meaningful for the organization. We also have multiple positive offsets there from hospice rate and new MA rates we've been negotiating on the home health side, too. As you think about pharmacy, there's nothing. IRA is what -- is essentially MFN in the here and now. We'll see if anything occurs on MFN in the future, there's really been nothing specific proposed to date. But I think everybody clearly understands the value of pharmacy within the value chain. None of the policy discussions have ever focused on the pharmacies. Ultimately, the pharmacies and the value chain are driving generic utilization and medication management, which keeps people out of hospitals and lowers costs. I like to think of it as sort of the grease or the oil in the engine of the supply chain. And I think everybody is extremely supportive of the value that the industry provides. So as it relates to IRA and the here and now, really just 1 of our pharmacy businesses has relevancy there for that we're working with multiple parties on the outside to make sure there are no unintended consequences on the LTC pharmacy industry from that. We also have many different levers internally whether they're growth or whether they're operational and OpEx related to be able to manage through that extremely effectively. But ultimately, as they scaled in really high-quality provider with very high ROI services, you can look back over 10 and 20 years. There's always going to be things that work in your favor, and there's always going to be things that you have to work through. And with our focus on quality in volume growth, our focus on efficiency and our focus on accretive acquisitions, we think that's going to continue to serve us really well along with numerous service lines within our company that are growing at really attractive rates.

Okay. And then your pharmacy, I want to switch gears to the Pharmacy Solutions segment a little bit more, so it continues to grow at a rapid clip. How sustainable is the 30% plus growth that we've been seeing across that segment as we head into 2026.

Yes, as you look at the balance of our company, that historical CAGR of 15% or so. Really kind of consistently, I would say, in a generalized way, applies across the enterprise this year when you look at a lot of our businesses. Then you do have our specialty pharmacy business, serving oncology patients in rare and orphan patients. That's been growing at rates higher than that, and it's pulling the company growth rate up. Certainly, you do get into the law of large numbers at some point, a $600 million EBITDA base that we should have this year plus continuing to grow that at those sort of rates, Erin, just mathematically does become a little bit of a challenge. I don't think there's really any precedence at all in health services for growing companies of these size, even north of 15%. I mean I think our growth rates have have put us in the top 5% to 10% of the S&P comparatively. So we'll see, but we've really tried to assemble a platform and focus on a group of businesses that we think have really great characteristics with strong business models. And specific to that industry, we really try to drive service level excellence for all of our stakeholders, manufacturers and payers that's resulted in continuing to service a lot of new brands in the oncology and rare and orphan market coming out. The FDA pipeline, the innovation pipeline at the FDA is as robust as ever. We're going to win probably about 18 drugs this year, new brand launches and limited pharmacy distribution networks. And then you've inevitably got older brands that convert to generics. Generics are good for everybody. Reimbursement really comes down, and we're focused on driving generic utilization as much as possible. That business also has a nicely growing fee-for-service business, for example, clinical patient hubs that we operate for manufacturing partners of ours, data services agreements, et cetera. So multiple growth drivers even within that business. And as we look out to the future, we feel optimistic that the current underpinnings and trends of the business will continue for the next couple of years. And that will continue to provide, I think, for a lot of opportunities more broadly across the company. One of the things we're really doing now is when you're able to be successful and capitalize on a lot of the investments and the execution that you've put into the organization we're really big believers that you have to continue to try and keep investing and keep getting better for your patients, for your stakeholders to drive quality, to drive more efficiency. It's health care, and we're really focused on those 2 things in particular. But over the past couple of years and ever more so this year, we are just continuing to try to invest as much as we can in areas of the company, so that 2, 3, 5 years from now, these areas will be as impactful as possible. And so it's been a year, fortunately, marked by not only growth, but also probably less evident below the surface. Still netting out in that growth number is just more investments in people and IT and resources than we've ever made before.

Okay. Within Infusion to digging a little bit into some of the subsegments within the pharmacy solutions. I guess, what is your view on the growth opportunities across acute and chronic therapies and also just like bigger picture, what are those areas within the pharmacy segment that you're most excited about, like in terms of breaking out specialty and infusion, where you have on the specialty side more oncology exposure, but also the Home & Community Pharmacy too?

Yes. We really like all 3 of our pharmacy businesses. As a reminder, we're a closed door pharmacy, right? So really the polar opposite of retail. We go to the customer, we go to the patient and really always typically a senior or a specialty population where we are going to them to solve their medication management need. A lot of people don't realize 1 of the top 2 reasons for unnecessary hospitalizations and ER visits is issues with the meds. And so that's fundamentally what we do is a close to our home community pharmacy going out to people every day, a couple of hundred thousand of those medication deliveries every single day, 40 million scripts a year. We like all those businesses. In Infusion, starting with your question, really proud of and enhanced management team we have in that business. We spent a lot of time over the last 2 years, really trying to standardize a lot of our operations in our pharmacies across about 35 different markets. But we're very focused on continuing to stay true to the heritage of that Infusion business, which has been on the acute side, acute drug therapies, antibiotics, nutritional, et cetera, that's a tough business. That's a tough business operationally. Typically, those referrals when they come in, have to go back out the door within 2 hours. You've got to be local. You have to be right there. And it's just a very operationally involved in complex business, but that's something that we lean into. And the acute market is a very, very large market in the United States. It's 1 that we think is attractive. Others have pulled away from that market because of some of the operational challenges. And we think that creates opportunity if we can have an operational capability set that's able to effectively deliver there. At the same time, there are a lot of chronic therapies out there, a lot of patients with very significant chronic needs that can be solved by infusible therapies, and so we're focused on growing the chronic side of the business and doing that through both the home and more suites and clinics in the future. So you tend to see a lot of infusion companies, maybe just do chronic and just do mail order or just do clinics. We think ultimately serving acute and chronic therapies in the home and through suites and clinics gives us the biggest addressable market opportunity, allows us to make the most impact and gives us the most relevance with payers. And so excited to see our Infusion business, I think, relatively and comparatively internally stepping up its growth rate compared to what's been going on across the rest of the company. We touched on our specialty oncology and rare and orphan business, which is an oral and injectable business, which we're really proud of the business model in the operational metrics that have been put in place there over the past decade plus. And then our Home & Community pharmacy. I would say that's a business where we also have enhanced leadership. It's a team of people that have come over from some of the biggest pharmacies in the United States, the Krogers, the Walmarts, the Humanas, and people are very familiar with driving mass automation through organizations. And we want to be as efficient as we can in that business while delivering 99.999% service and quality levels to our customers. There's also attractive end markets. The history of that business was more serving skilled nursing facilities, but assisted living, behavioral end markets, hospice, PACE, these are all interesting end markets with a lot more demand where we think there's market share opportunities. And so Home and Community is going to be a mix of OpEx and operational opportunity with really focusing on certain targeted end markets. But each 1 of these pharmacy businesses that are closed or by their nature, I think all have opportunities to continue to provide innovative solutions and address more patients and doing so in a more efficient and high-quality way.

You mentioned the near-term pipeline of about 18 launches on the limited distribution drug side. So can you talk a little bit about that process like in terms of that your relationships with the pharma companies on that front? What can you bring to the table for them, and what gives you confidence in your ability to continue to win those LDDs?

Yes. I think we've won like 4 LDDs. These are branded drugs coming out on limited pharmacy networks in like the last 45 days. So we should hit about 18 brand wins on the oncology and rare and orphan side this year, which is really on target with our plan. And I think over a period of going back 15 years, our Net Promoter Score in this business is -- ranges from 93 to 100. We've got about 97%, 98% patient adherence levels. And there's about 35 things that you have to do to start up and effectively manage and take care of a patient when they're on these sort of specialty regimens, and it goes far beyond just mailing a drug. And we try to do those things exceedingly well, and that's generated a lot of strong partnerships with manufacturers that we're honored to be their partner when they bring more and more of these innovative drugs to market, which really have life-changing effects on patients living with these diseases.

Drug distributor earlier today was talking a lot about kind of the biosimilar pipeline and generic conversion kind of momentum over the next 12 months and beyond. I guess, can you just take a step back and talk about the implications across your business because I think sometimes that's misinterpreted in terms of how that flows through because there's obviously -- can be some compelling profit opportunity.

Yes. So from a biosimilar perspective, that 1 would be really not relevant for us. Everything we do on the oncology and rare and orphan side is oral and injectable, so really not a biosimilar dynamic at play there. On the Infusion side, we have very few, if any, drugs that would have a biosimilar risk or opportunity. For us, the opportunity is, as a pharmacy, we try to really drive generic utilization when we can. Again, generic drugs are great for patients. They're great for the health care system. We have a sales force that's very focused on driving those conversions as fast as we can when they occur. And just given how there's more manufacturers on the generic side and what the cost -- the acquisition cost of the drug is, those generic conversions are favorable events for our company.

Okay. And then can -- I'll do 1 more on the pharmacy side. I guess, hospital partnerships and just how you're thinking about sort of the future in terms of those partnerships providing infusion capabilities and potentially even more services there on.

Yes. We're really on -- I would say, the specialty oncology side is complementary to the hospitals. I mean, about 50% especially drugs go through the hospital channel and about 50% through the specialty pharmacy channel. So we're really kind of complementary and adjacent to the hospitals. When they have LDD challenges and access challenges, that's where we can partner in particular. As it relates to Infusion, I mean, I do think there's ultimately more preferred partner opportunities and joint venture opportunities in the future. I think there's a lot of payer opportunities on the Infusion side, where payers see opportunities to see individuals, be infused in home settings more quickly versus in an institutional setting. So that is an area of focus for us. I think overall, in Infusion, we're focused on sales and marketing, if you will, excellence and really driving as much value as we can for referral sources. But going deeper strategically with hospital systems is something that we just probably sort of haven't gotten to at the level that we would like to in the future. And I would say that, that is an opportunity. And we're in a unique position to provide benefit not only for them in addressing their needs, but also for payers.

Switch to the Provider Services segment. So of the subsegments within that, you have home health, rehab care, personal care. What are the growth profiles of these businesses? What are some of the biggest opportunities to accelerate growth?

Yes. So from a home health care perspective, just a quick reminder that includes our home health, our hospice and our primary care business. The majority of that particular subsegment is actually hospice. And as we think about the growth drivers within this particular segment, you have market dynamics from a volume perspective that I think are really favorable, both in terms of home health and hospice opportunities. We see great rate support or consistent rate support that we've seen from a hospice perspective. From the home health, I think Jon mentioned earlier that the rate there, we believe is from an outlook standpoint in the future is going to stabilize, but really that's a very small part of our business today. But again, focus on the volume, focus on how can we drive technologies and efficiencies through our processes while increasing our quality there. From a personal care perspective, that is just really a steady growth business. It's gotten -- we have data back 30 years with rate support going back 30 years of positive improvement there, that really a steady growth business. I think not something that's going to move the needle for us. But again, we're focused in certain markets like VA and other areas that we think are really attractive there. And then from a rehab perspective, we have a lot of opportunities there as well. So we're really focused on driving outsized volume, increasing our quality. We really expanded into Part B rehab late last year and really have been driving that this year. We think that's very synergistic, especially with our home health and our home health care subsegment as well as our neuro rehab, which is probably the highest ROI, just outcomes that are really fantastic driving cost to the system. We were able to continue to drive volume growth there as well.

Yes. Rehab business historically has been more focused on a neuro population, workers' comp and commercial, and we're expanding that more into the seniors population now, synergistic with home health and the primary care and the pharmacy we do in those ALF settings and in the home. But I mean you look at rehab, home health hospice, I mean, those are businesses that have been growing well into the double digits, and we expect that to continue. Again, a focus on quality operational execution drives the volume growth and the market share gains and additional de novos and geographic expansion. So definitely double-digit growth expectations continuing for those 3 businesses, which would be, I think, quite a bit ahead of market. And Personal Care, it's a very steady business, as Jen said, kind of a cash flow business for us, but private pay and some other payer sources outside of Medicaid is where we've been expanding in the past. That's about half of our payer source in that business. And that could provide some more opportunities in the future. And Personal Care, really underappreciated in terms of its impact on keeping people out of the ER in the hospital. A lot of those nonclinical services of personal care are just the thing that people need, whether it's the nutrition, whether it's the transportation, the companionship, the med management in the home, that's really quite effective.

And I think going back to the IPO, I think some of the things that you talked about, too, from a labor perspective, like you've really highlighted retention rates across the business. How are those and how do those stack up in staffing levels, use of contractors, wage investments and wage dynamics. Can you talk a little bit about the labor environment, please?

Yes. I think our HR focus outside of just the core business units and driving those growth strategies from an enterprise level, HR and IT are a big area of focus in the organization. We want to find the right people. We want to onboard them effectively. We want to train them well. We want them to work out of good EMRs, have efficient systems. It's been a really big focus in the organization. We absolutely believe that you can differentiate from an HR and IT capacity. So we have a ton of focus on recruiting in the organization. A whole host of programs that we've implemented around onboarding to try to streamline that and make it as efficient as possible and then just providing really great and efficient training in the organization, that's been really helpful. I think we benefit from the mission that we have with the organization. A lot of people want to feel that, and what they do, and it keeps people where they are. And we just try to be the employer of choice in our markets to the best of our ability. Our retention rates have improved every single year for 9 years that we've been here. And that's been really pleasing to see. So from an HR standpoint, on the provider side, we have been able to manage the labor extremely well. We've continue to make investments in our people. We now have 401(k) everywhere. We gave out an all-employee stock grant a year ago. Pays continue to go up. Benefits has continued to go up. So a lot of the reason why we drive efficiencies and volume growth in the company is to be able to continue to invest back in our employees. On the Pharmacy side, that's a pretty labor-light business comparatively, I think our revenue per FTE is about $1 million. I mean you could have a $100 million pharmacy with 50 employees. So that's a business where I think we benefit from the model. And from a labor perspective, that works well for us. But HR has been a focus. We've been able to manage it really effectively. And it's certainly key to continuing to grow more in the future. But we're also focused on how can we keep growing in the future without as many people. How do you potentially maintain who you have but not need quite as many resources as you grow into the future. We have a new CTO in the company. We're building out an internal AI team. I got a whole list of projects. We work with a lot of outside vendors on this stuff right now. But if we can do a lot of that internally, we want to be able to do that too, pharmacy intake and a lot of use cases in home health are high on the list for how we're going to try to deploy a lot of those technologies to become more efficient in terms of what we need resource wise in the future.

And it sounds like you're confident as we kind of even head into 2026. But just bigger picture, just to end with this is, some -- what are some of those big themes and key drivers and maybe even leave us with some key headwinds, tailwinds as we think about 2026 on a bigger picture.

Yes. Thanks, Erin. I think there's going to be a lot of consistency. I think what has been driving the organization over the past couple of years is going. In our current view today, we anticipate continuing into next year. A lot of momentum on the specialty pharmacy side with brand drug wins and some generic conversions, growing out our fee-for-service business. It's doing more of the same, but just continuing to execute against that. I think our Infusion business, as I said before, being more of a growth driver in the organization as compared to what it's done historically relatively compared to the other businesses. And I think really dialing up the focus from an automation and efficiency standpoint, and our Home & Community Pharmacy business will be very important. And on home health, hospice and rehab, it's just continuing to try to penetrate these markets and drive volume growth as much as we can. So real consistency in the growth drivers that really led us this year are going to be similar ones that play next year.

Okay. Great. Thank you so much for the time. I really appreciate it.

Yes. Thanks, Erin. Thank you.