Guardian Pharmacy Services, Inc. (GRDN) Earnings Call Transcript & Summary

Good afternoon, and we're here for our last presentation of the day, but saving the best for last, right? So we have a Guardian Pharmacy Services as our next presenter. I've got Fred Burke, the company's CEO. Fred, maybe let's start with an introduction into what is Guardian and then a little bit of the state of the union.

Super. Thank you, Brian. We're really pleased to be here. Thank you all for coming and for your interest. Look forward to answering questions, et cetera. But just by way of background, a 30,000 feet, Guardian is an institutional pharmacy serving long-term care but a very specific segment of long-term care, which is assisted living. And as you probably know, that's where most of the growth has been and will be in long-term care facilities. These facilities have a very acute resident population. It's counterintuitive and most people think of assisted living as your mom is going to play mix doubles this morning, lunch by the pool, and it's starkly different. We've got 85 years of age, 14 prescriptions on average, impairment in activities of daily living by 3 or more over 2/3. So highly acute population. These facilities require a different type of pharmacy service. So we've engineered our pharmacies from the ground up to serve assisted living. And we've been very successful. We are the market leader, even though we don't cover the entire geography of the United States, we nevertheless, are the national leader with a whopping 13% market share. And the way we look at that is there's 87% left to go. We feel like we're running in the open field with competitive advantage with very, very strong growth, and that puts us in a really nice position to grow. The thing I'd call out about Guardian is that it's a great place to be in health care, serving frail and elderly residents that need to us and doing really a lot of things that all are geared to accomplish 2 goals. One is to get the resident on the proper drug regimen. That's both therapeutically, clinically and per their PBM formulary. And then to provide the tech-enabled platform to the facility to ensure that they adhere to that drug regimen. It's a great place to be when in health care, you can say we improve outcomes, and we've been in the cost curve, which both of those things do.

That's a great intro. So maybe, Fred, just as I think about the industry, right? So like you said, you have a 13% share. I think the audience is familiar with names like Omnicare, PharMerica, which is now owned by BrightSpring, not everyone -- I mean, Omnicare has struggled, right? So are you seeing any market share opportunities emerging right now as some of your competitors struggle with whatever operational issues you're having?

Well, our competitive landscape really bifurcates into 2 different segments. One is that -- are the legacy players that you mentioned. And in that scenario, their pharmacy platform has been engineered to serve skills, nursing homes. And essentially, think of it as the pharmacy is operating health care professional to health care professional. There's a medical director in a nursing home, a doctor who's managing the drug regimen. There are RNs that's managing the wings and the caregivers are mostly nurses or nursing credentials. So the pharmacy's job is to receive the order and get it back at the right time and the nurses can take it from there. Alternatively, in assisted living, there are very few, if any, health care professionals. There's certainly no medical director. So it falls on our pharmacy to be the coordinator of care with the community physicians for the residents. And the caregivers also are technically medical technicians that are certified by the state after a training class that our pharmacy provides. So it's very important to provide a different type of service. And we are very successful and are competing against those 2 legacy players. The other competitor are the independents. And here, these pharmacies have been able to be engineered to services and do a great job. Their problem is lack of scale and profitability.

Yes. That makes a lot of sense. Fred, maybe as I take a step back, I mean, you're a fairly recent IPO. I mean, recent enough.

We had a birthday last Friday, 1 year. Thank you.

There you go. Happy birthday. That's awesome. So I think not a lot of investors fully appreciate the growth algorithm or the growth story that you have. So as you think about the Guardian story, what's the right growth rate or growth trajectory that investors need to be thinking about?

Okay. We are guiding in a medium to long-term sense. We think that we can grow low double digit as we have done. Historically, it's been about mid-double digit. And the way we compose that is, first, we enjoy a secular tailwind because assisted living is growing residents in the low double-digit range. I mean, low single-digit rate, sorry. And additive to that is market share gains with us selling new facilities to receive service from Guardian. So we're guiding to high single-digit organic growth. And then supplementing that is our M&A program, which takes us to low double digit. As I mentioned, we historically have grown revenue since inception, 15%, but we think in a long-term sense that we very, very conservatively can guide to the low double digits.

That's awesome. So you mentioned something that is interesting to me. I mean we had Brookdale present here this morning. I know they're one of your bigger clients.

I sure wish I could have been here to hear them. You had me at a one-on-one.

We kept you busy today, which is a good thing. But as we think about the dynamics of the senior housing industry, I mean, should investors just be looking at the growth rate in assisted living occupancy as a proxy for what drives the fundamentals of your business today?

Absolutely. We've seen this industry develop and change greatly over the 20 years that we've been at work. And essentially, what we see is what originally was a real estate play, transform into a health care platform. And we see a fragmented industry consolidating. The consolidators are attracted to our more sophisticated level of service. And that growth, I think, will continue. We see demographic cohorts coming that should spark another building boom as occupancy gets up near 90%. I believe cap rates come down. I think we'll see more capacity to satisfy these demographic cohorts coming.

So maybe taking a different tack here. As we think about sort of volume growth we feel good about, as we think about pricing, right? I mean, obviously, the price inflation branded and a little bit on generics are kind of flattish. How are you thinking about the price component of your business, revenue algorithm?

Well, there's a lot of leverage in our business that is derived from our scale because there's a fixed cost that we can lever. But the reimbursement algorithm has massive leverage. And one of the things that we're embarked on, so 5, 6 years ago was to move away from our PSAO network negotiating on our behalf, to going direct, which we've accomplished. And that's allowed us to educate our payers on the value add that we bring, which they appreciate. It's been very interesting. And so one of our quest, and we're not guiding to it, but we're -- you can better believe that one of the things that we're working very hard to do is improve our reimbursement.

So Fred, maybe the other question I would ask, the IRA is viewed as a headwind for your business I think there's a bill that was proposed a couple of weeks or 3 weeks ago. If you can walk us through just how you're thinking about the IRA, what you're doing to prepare for it? And what are you hearing from D.C.?

Sure. Well, let's start with -- we mentioned our birthday a year ago. We wanted to be sure and advise investors that this was a potential headwind for us. And the reason it is, is the one sector in pharmacy that derives some product margin on brand is long-term care. We do so in 3 different ways, on the buy side dispense fee, and then there was a small ingredient cost spread that goes away in that we now are mandated by the bill to sell at MFP. We think we were an unintended consequence bill but nevertheless, it's a potential headwind. Just to give an order of magnitude, it will be about $100 million plus of revenue in '26 but most of the analysts have modeled in about a $5 million EBITDA headwind, which is about 5%. We said from the get-go our mission was to mitigate that. And we said about the task of doing so in 2 ways, one was on the policy and the legislative front in D.C., which I'll come back to. But secondly, in our opinion, it's a commercial negotiation. We have the ability, given the way our contracts are written that we can negotiate with every one of our payers on this particular issue, even if the contract doesn't renew, and we are, and have adopted an increasingly optimistic tone as time has passed. In the last quarterly call, you may have heard that we are very confident that we're going to be able to mitigate this with our commercial negotiations. The Washington effort derives through our trade group that we founded or we're one of the founders and have supported greatly. We want to be a good citizen for our industry. And as I mentioned, we were not comfortable with these PSAO networks representing us. Well, similarly, our industry colleagues, the smaller independents are very fearful that their PSAO network will not be able to negotiate and mitigate effort. So they're looking to a legislative solution. We've been supportive of that, but we also view the polity drumbeat from Washington to be helpful for us as we work with our PBM payors and negotiations.

That's awesome. Fred, maybe just a quick question. Today, there was an announcement from some of the drug companies about kind of like an agreement of source or an offer to the government on drug pricing. Curious if you have any thoughts on that.

I have heard -- you've had me pretty busy today. But I did get just a snippet related to your speaking about the direct to consumer. That's going to be very interesting because in Medicare, they're already benefiting about IRA. And is this would this claim be adjudicated through IRA through their Part D plan? I'm not sure. So it seems to me that this initiative is more geared toward commercial plans and people who are paying large out-of-pockets through their commercial plans.

So it shouldn't have an impact on your business?

No.

That makes sense. Shifting gears. I mean, in your discussion of the growth algorithm, acquisitions kind of factor into that, right? So just curious what's the filter when you're looking for deals? And how do you kind of like look at them strategically?

Well, we're not constrained by financial capital. We have the firepower to do what we need to do. We're constrained by human capital. And we're looking for an operator who wants to carry out. We're not in the business of acquiring 100% of a pharmacy and saying goodbye to the operator. We're looking for great operators and we are really proud of our team. As part of the absolute secret sauce of Guardian is the outstanding entrepreneurs that run these pharmacies out in the field. They're fabulous clinicians. We provide them a lot of support from our Atlanta corporate support group with respect to business issues. And that combination is extremely powerful. So what we're looking for is an operator who's collaborative, who wants to carry on generally, they're constrained by their lack of profitability to grow, but they have the service platform to do so if they can avail themselves of all the things we bring, our purchasing program, our reimbursement contracts, the technology that we have, the margin management data stack. So that's who we look for. We want them to grow. It takes now 2, 3, 4 years to get them up on our full platform, integrated fully and up to our corporate profitability average. But that's kind of the what we're looking for.

So if I'm looking at your entry into Oregon and Washington as kind of like key studies. Anything you can share with us in terms of those market entries? And how are you going to expand in those markets that you've entered recently?

Excellent example. It is a case study. We have been "instructed" by our national accounts that they want us to be in the Pacific Northwest. And so obviously, the first step would be an acquisition screen, an M&A screen. There's not an alternative, we'd have to think about a greenfield start-up. But fortunate for us, in both of those markets, were outstanding operators. I'll take the Seattle team, as an example. They've been in business 20 years, built that business from scratch outstanding service, wonderful platform. But unfortunately, they didn't have access to the national account. And like I mentioned, even though this is a very well-run pharmacy without scale, they just couldn't generate the profitability they need to grow. So we're really excited about this one. We were able to go ahead and allow them to take on some of the national accounts sooner than we otherwise would because there's such excellent operators. And we'll see that pharmacy grow. We'll see them improve their profitability as they implement our purchasing scale platform, our reimbursement contracts, some of the margin management tools. And I would hope, not saying they will, but I would hope that maybe in 2, 3, 4 years, they might even consider a contiguous lentil start-up of their own in that they serve Eastern Washington. And gee, wouldn't some bricks and mortar be nice out there. So that's our model. That's how we think about it.

That's awesome. Maybe I'll ask the audience if there's anyone who wants to ask questions here. Otherwise, I'll keep going.

You're doing a good job thus far.

I mean we talk a lot. So I think of your business as one that generates a decent amount of cash flows. So how are you thinking about just the free cash power of the business and capital deployment strategies from where you sit today?

It's a good question, which I don't have an answer to, but I can discuss. Let's go back in time. Our business was built with $50 million of contributed capital, all of which was returned prior to the public offering. That is indicative of the stewards of capital that we are. Now as we turn into this adapter, a new chapter of PUBCO, it remained to be seen, was this really going to where investors really going to see this cash conversion ratio play out. And I think you have this far. We have about a roughly 60% conversion ratio after paying taxes and CapEx. That can more than fund our M&A program. So what will we do with the cash? It certainly gives us the flexibility to take advantage of whatever opportunity notes. And we love that. That, coupled with our credit facility, which is unused at the moment with no debt, but we have it ready and willing and available. So we'll take it a step at the time. We have been public now for a year. We're seeing what we projected manifest itself, and we'll need to figure out whether this can be used for purchasing a bigger and more important assets or it might need to be returned to shareholders. All of that is open and up in the air.

So maybe just to that point, right? I mean we talked about the new market entry strategy that you did, for example, in Washington and Oregon. But are there adjacencies to the business that could be interesting or would be good strategic fits as you think about M&A strategy?

Yes. We have several experiments underway for adjacent market segments. I'll call out 2. One is the PACE program. It turns out that our local bricks-and-mortar service model is very attractive and advantageous to these PACE programs. So I think we're serving 6 or 8 of those now as we speak. We also built out the data analytics platform to provide the CMS reporting, et cetera. So that is not nearly as large a TAM as our assisted living market, but it's very, very attractive at the pharmacy level because the service models are similar, and that certainly leverages our platform. Another is hospice pharmacy, which is right at the moment, a broken model. And so we have some experiments underway to see if we can help with that at, and it's sorely needed. So that is a larger TAM, approximately 50% of the size of assisted living.

That's amazing. In that space, I think the key players are what? Optum is in that business, Cardinal Health?

What you have is hospice PBMs that then need local pharmacy service. And they're willingness to provide adequate reimbursement has been -- has caused them or their lack of willingness has caused them, I'm afraid, to be in a spot of bother now with the lack of 24/7 coverage, driven by a lot of 24/7 retail has gone away in most areas. And so we're trying to think about different strategies to properly address this marketplace.

Makes a lot of sense. Last question for me, Fred. What do you think is underappreciated by investors at this point about the Guardian story?

Well, one thing certainly is the virtuous circle of scale we have been able to achieve scale. That's improved our profitability, which allows us to invest in people and technology and better improve our services, which in turn drives more market share, which in turn drives more scale, and it's a virtuous cycle. We've already talked about another, which is the cash conversion ratio and the financial profile. And I would call out, again, we mentioned it very briefly. The thing that's very difficult for investors to understand is to not view us through the lens of the legacy long-term care pharmacies. Because we're focused on a different segment and literally from our very first pharmacy, we're engineered to serve this different segment, which requires a different type of service. And we could spend all afternoon going into the details of that but it's quite significant and therefore, you need to think of us differently from those legacy players.

That's amazing. Well, thank you so much for being here, and I really appreciate you sharing all those thoughts.

Thank you. Really appreciate it.

All right, Fred. Nice to see you as always.

Thanks.