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

All right. Hello, and thank you for coming this afternoon. My name is Harry Pearson. I'm an associate with the health care investment banking team here at JPMorgan. It's my pleasure to introduce the Guardian Pharma Services team. We have Fred Burke, President and CEO; David Morris, Chief Financial Officer; and Ashley Stockton, Senior Director of Investor Relations. We're going to have a presentation then with a little moderated Q&A. If you guys want to take it away.

Sure. Thank you. Good afternoon. I'm Ashley Stockton, Senior Director of Investor Relations for Guardian Pharmacy Services. Before I start, I just need to make a quick disclaimer here. Please note that today's discussion will include forward-looking statements, including those related to our expected results from 2025 and our outlook for future financial performance and industry and market conditions. These forward-looking statements are subject to important risks and uncertainties, and we encourage you to review the cautionary note on forward-looking statements included in today's slide deck, which has been furnished on a Form 8-K filed with the SEC and is available on our Investor Relations website as is the slides that we'll be using today. So thank you for joining. I have with me today, Fred Burke, President and CEO; as well as David Morris, CFO, both co-founders, along with Kendall Forbes. The team founded the company in 2004 and bring decades of experience building and scaling health care services businesses, including a prior nuclear pharmacy platform that was sold to Cardinal Health. To give you a brief overview, Guardian is a long-term care pharmacy services company, primarily focused on serving the assisted living facility market, which we'll refer to as ALF throughout this presentation. We are the leader in this market, which is the fastest-growing segment of the long-term care industry and is supported by strong demographic tailwinds. However, assisted living has a unique challenge. Unlike other care settings, ALFs typically do not have a medical director or nursing staff responsible for overseeing medication administration and management, even though resident acuity has continued to rise and drug regimens have become increasingly complex. Guardian's pharmacies are purpose-built to address this gap, which again doesn't really exist in other settings like [ SNF ] where there are dedicated health care professionals. We combine technology, clinical oversight and strong local service to do more than simply dispense medications. We help manage the entire medication coordination function from start to finish, improving visibility and accuracy, supporting adherence and helping facilities to streamline operations. The result is better clinical outcomes for residents and meaningfully lower costs across the health care system from the residents to the facilities and the payers. It really is a win-win for all. Our business model is built on five core pillars. First, a multipronged growth strategy. We benefit from strong secular growth in assisted living, but we also drive incremental share gains through organic growth and a disciplined M&A strategy. Second, our national scale, aided by our data analytics, helps to drive better profitability, allowing us to optimize purchasing and reimbursement. Scale also enables us to serve national partners. These are structural advantages that will continue to support underlying margin expansion over time. Third, a higher level of profitability gives us the ability to reinvest in services and technology, affording us competitive advantages. We invest in our leaders and teams at the local level, who are continually building deep relationships in the community. We also invest in technology to support them to help deliver accuracy, reliability and consistency across states and facilities. Fourth, we enjoy strong and durable financial performance with a history of consistent growth and profitability and durable margins. We also have a healthy balance sheet with virtually zero debt and are able to fund our acquisitions with existing cash. And finally, as I mentioned before, we have a highly experienced co-founder-led management team with meaningful ownership, ensuring strong alignment with shareholders. Together, these five elements form a proven model that we believe is positioned to continue compounding value over time. With that, I'll turn it over to Fred to talk more about the assisted living market and how Guardian is positioned within it.

Thank you, Ashley. The assisted living market is highly attractive. It's large, roughly $7 billion in drug spend with 1 million residents to serve with a strong secular tailwind. The competitive situation is highly fragmented, with many independent pharmacies being our key competitor. The important thing is to remember that these residents are private pay, they've chosen to live there, they have rising acuity, and medication management is the top reason for even entering assisted living. We're talking about 12 to 14 prescriptions per day with frequent drug changes. As a private pay, our payer is largely Medicare Part D. We built our pharmacies for the unique needs of assisted living. And it's more than just dispensing drugs. It's truly a medication care coordination partner for the residents in A to include comprehensive drug regimen review, most likely the first time that's ever occurred for a patient when they transition care from the community into assisted living, which involves getting the resident on the proper formulary to mean both therapeutically and in accordance with their payers formulary, the organizational elements and systems needed to secure refill authorizations, compliance packaging, a tech-enabled platform to ensure efficient and effective administration of the drugs, which leads to 100% adherence; and then training from our account management staff of nurses who help the assisted living facilities with their compliance. It's led to us being the market leader in ALF. We serve roughly 140,000 ALF residents of the 1 million. That's a 13% market share nationally, I'll say, even though we don't cover the entire country from a geographical footprint standpoint, the way we view 13% market share is there's 87% left to go. We have 54 locations around the country with a lot of space left for us to plant flags. But very importantly, if you look to the chart on the right, you'll see our market share by state and where we can take this relative to the average. We have many pharmacies still coming up to scale with a lot of room for organic growth. Our competitive landscape involves high barriers to entry and competitors where we have significant advantages. We have institutional pharmacies. These are typically skilled nursing facility focused that we're able to successfully compete with and independent pharmacies who deliver excellent, strong local service but do not have the financial wherewithal to bring the value-add services that Guardian is able to do. I'll turn to David, who can talk about our growth levers.

Thanks, Fred. Over the past 20 years, we've built the business driven primarily by very strong organic growth, and we intend to continue that as we move through the next several years. How do we do that? It's threefold. First, we bring on new assisted living facilities in existing markets. Once we bring on a new facility, we work with the facility and the residents to increase the adoption rate of people who are using the preferred pharmacy in the assisted living community. And then thirdly, we grow organically by launching with existing teams into contiguous markets, where we have a strong market in a city. And then we will be serving customers in an adjacent market and eventually open a pharmacy there. And we've done that in 9 such markets over the past 4 years. In addition to our strong organic growth, we accompany that with our M&A strategy, and it's a little different than most. There are around 100 independent pharmacy long-term care operators, who we are targeting. And we first look to a leader who is established in a market, who's grown their business effectively and who seeks the assistance that the Guardian platform has and wants to continue to grow the business in a collaborative manner as we move forward. Secondly, we're looking for geography that's rich with national account out demand. And these two factors drive our M&A strategy from a size, the typical pharmacy that we target is $10 million to $30 million in revenue, serving around 3,000 residents. A little bit about our M&A integration. Once we close the deal, we work with that team to not only grow the business but bring it up to scale from an operations standpoint. And we do that by focusing really on four areas. Number one is the reimbursement from a payer standpoint. Number two are our margin management tools, which help with adjudication and revenue recognition in this very complex business. Number three is our purchasing platform, and then four is implementing our national accounts. And over, on average, 4-year period by implementing these four areas plus many more, we work to grow the business at the top line and achieve the operating scale and margin at the bottom line. Just a picture of sort of how our cohorts are folded in. You'll see in '24 and '25, our M&A acquisitions that have come onboard plus our contiguous greenfield start-ups are roughly it's 11 locations. And we view this as an investment. We're investing in these businesses who have not achieved the profitability of our overall business and scale. And over a period of 4 years, we work to grow that business and bring it up to scale.

I'll touch a little bit on some of our competitive advantages with service and technology. One area that's been especially critical to Guardian's success is our continued investment in data analytics. Internally, we built Guardian Compass. This is our proprietary analytics platform that allows us to monitor and improve pharmacy-level KPIs, everything from purchasing optimization and reimbursement performance to operational efficiencies. We then extended those capabilities externally through GuardianShield, our client-facing analytics platform, and we can then use our analytics there to show our facility partners and payers with clear data-driven proof points how we are improving outcomes, lowering costs and reducing operational burden. Fred had mentioned we do a drug regimen review. You can see here that in 2024, there were 100 and -- over 112,000 interventions that our pharmacists had through those drug review processes, and we can show this to our partners. We also saved our residents over $41 million last year by getting them on the proper formulary. So these are just two examples of some of the data-driven work that we can show to our partners. Finally, we continue to invest in automation and robotics. We are now on our third-generation state-of-the-art robotics as well as we provide our facility partners eMAR systems to help them accurately track medication administration and enhance safety, efficiency and compliance.

Flipping back to our financial performance, you can see that we've had a consistent record of not only growing our top line, 2012, 2025 CAGR is around 16%. We've had strong leverage at the adjusted EBITDA line as well. And this is driven by activity. It's resident count growth along with prescription growth. So we're growing the core business organically, folding in the M&A, increasing resident count along with the prescription volume growing, as you see on the right. We've been able to achieve a very consistent margin profile over the years, not only at the gross margin line, but also at the adjusted EBITDA line. I mentioned the investment that we're making in the 11 pharmacies that locations we've grown and expanded into the last 2 years. Just to note that if we were not making that investment, it would increase our adjusted EBITDA margin by roughly 80 basis points. We're working and we'll achieve leverage as we move forward, and we'll continue to make such investment to continue the growth profile as we move through the coming years. Ashley mentioned our strong EBITDA as well as our cash flow. On average, our cash conversion is approximately 60%. This is after our CapEx investment and income tax payments. And you can see from what we disclosed this year, our cash balance is growing nicely net of our M&A activity that we've done in 2025. Moving to our outlook. We talked a little bit about the Inflation Reduction Act. Fred is going to touch on that, and then I'll come back to our guidance.

When we first began the process of our public offering, we went over and above to make sure that we educated people on this potential headwind that was coming our way. It's caused by the fact that the legislation in the IRA requires us to sell these branded drugs at the MFP or manufacturer's fair price, which served to eliminate one piece of margin that we earn on these branded drugs. One of the three margin sources was eliminated by this legislation. We also hastened to add that our intention was to overcome that headwind. And the reason we felt comfortable we could do that is that we deal with this all the time in our business. For example, in '24, we had the insulin issues. In '25, we dealt with inhalers. And then this impact on the IRA with the branded drugs for '26 and '27 is a bit larger than what we normally have to deal with. And so we said that over and above our business initiatives, efficiency improvements, purchasing, plan optimization, et cetera, that we would need to coordinate with the payers on the reimbursement side to fully offset this negative, which we have been doing.

And with the guidance that we issued end of day yesterday, we reaffirmed our 2025 guidance and issued new guidance for 2026 with revenue in the range of $1.4 billion to $1.42 billion and adjusted EBITDA of $115 million to $118 million. And you'll note, and I'm going to talk a little bit about the impact on revenue, it will push our adjusted EBITDA margins in '26 above the 8% mark because of the reduction in revenue. If you look to the right first on adjusted EBITDA, we are continuing our historical low double-digit growth, $105 million is our midpoint for '25 going to $116.5 million for '26. So adjusted EBITDA growth has not been impacted. We've overcome it, as Fred mentioned, for 2026. Conversely, on the revenue side, it did have an impact. Our revenue forecast for 2026 is relatively flat compared to 2025. And just so you can calibrate the impact, we have taken our 2025 revenue, adjusted it for the pro forma IRA impact if it had been there in '25. And you can see the growth trajectory is still in our high single-digit growth rate. So I just wanted to make sure that was clear as everybody is looking to our 2026 performance and growth.

Great. Thank you all so much. I wanted to open up a couple of questions. I think first would just be you're relatively new as a public company. How has going public changed the company at all? What have you learned?

It's been a really interesting process, and I think positive on balance. The first thing is that our employee shareholders now understand the value of what they've built, and that is very motivational. It's allowed us to achieve, I'll call it, a good housekeeping stamp of approval with our various partners in the industry, such as the generic manufacturers that we purchase from our wholesale distributors, the PBMs that we partner with for reimbursement. So that's been a very positive thing. It's been helpful in our M&A program because before, we were representing that we could improve these businesses. But now it's very clear to the target that in point of fact, it can be done. So they have more belief. So as we move forward, it's allowed us to sort of reinstitute a major element of our secret sauce of what we think got us here, and that is employee ownership. So we are able to implement a new LTIP program for employees that is very, very powerful and very motivating. So on balance, I think it's been good. And we've enjoyed our interaction with investors. It's helped us push our thinking about our business.

It's taken us to a higher level.

It really has, for sure.

That's great. You had a chart in there that I think was really helpful to going through the steady cash build that you all have aggregated while continuing to do strategic M&A. How are you thinking about capital deployment, both in terms of the size of the acquisitions and how you're measuring returns on invested capital? Are there opportunities in assisted living that you think might be meaningfully larger or different than what you've historically done? How has that thinking evolved?

Stepping back, even before the IPO, we haven't really been constricted by capital. The business has had strong cash flow. We've always had a very low debt profile. But post IPO, I think one thing that we talk to investors about and is important to understand is there's not a large assisted living platform where we could deploy a big chunk of capital. We talked about the 100 independents, sort of the steady as we go smaller businesses. Those are what we're attracted to. So there's not a huge opportunity for a large deployment of capital. But we're looking. There are some strategic things out there that could manifest itself where we could deploy $50 million or $100 million, but that's not the case. And what we said when we went public, we wanted to sort of get our legs under us. We're 18 months into this, and the business is generating cash, and we're going to be looking at this and talking to our Board and investors about the best way to deploy capital. It won't be a share buyback because we're trying to increase our liquidity.

It's a high-class problem.

Yes. Good problems to have. I think it was also Slide 31 was very helpful. I think when you had released the 8-K talking about excluding the impact of the mandatory drug pricing reductions from the IRA and the WACC adjustments, the company would have projected 2026 revenue growing at the high single digits. Can you just share a little bit about what's driving that organic growth? How investors should be thinking about it? I think you showed both growth in members at the site level and then also number of prescriptions. It would be helpful to hear a little bit more about that.

Well, I think our assisted living space is growing. We've got a small tailwind with the silver tsunami. We've seen occupancy at our customers go from post-COVID in the 70s approaching back to 85%. So there's a small tailwind with our customers and our growth. And then we're taking market share in existing markets. There's a small piece, maybe 100 basis points, that has been related to acuity, more prescriptions. We're not forecasting that and our forward-looking organic growth, but that's another factor. We don't know if it will continue, but has driven some of the growth in 2025.

And then adoption and contiguous greenfield start-ups really play a tremendous role in growth. Take the contiguous greenfield start-ups, as David mentioned, a pharmacy would begin serving assisted living facilities out at the periphery of that distance whereby we can deliver great service, let's call it, 2 or 3 hours, establish a critical mass there and realize there's a larger market that if we build out brick-and-mortar, we'll be able to now expand into that market.

That's really helpful. One other question I had is just would you talk about the upside opportunities that you see in the business going forward over the next few years? What's getting you excited?

Well, I'll start. I mean, what's exciting to me is that we're the market leader. We have competitive advantage, and we have a whopping 13% share. That means there's 87% left to go. So the idea of doubling or tripling the business by keeping on, keeping on excites me a lot.

We've got some market dislocation with the Omnicare situation, and who knows where that would go. And I think the upside we have -- Fred talked about the LTIP plan, but we've got a very engaged and motivated team growing the existing business, and that's key to us to continue our success.

Then finally, I think it's going to be very important for us to continue to build out the geographic footprint. There's a lot of open space you saw in that map. So we've got to keep going with that. And that will be through M&A and through greenfield start-ups.

That's great. And maybe one last question for me is, given that the market is still getting to know you all, what do you think is underappreciated about Guardian that you're hoping to keep educating investors about?

I'll start, and I know they'll add and help. This data analytics capability that Ashley brought -- mentioned is really, really important. Our pharmacists work very hard doing extremely powerful work clinically. But it's sort of been behind the curtain. They just do this. It's in their DNA to build -- and I'm just giving you an example, to build a data analytics platform that tracks their therapeutic interventions is very powerful. It allows us to demonstrate the value add to all of our and importantly, to the [ payers ]. So that's an example of things that are very, very sort of under the covers with Guardian that are nevertheless extremely important.

And we're working every day to educate. I mean, just to bring to life to investors our service offering, what we do for assisted living communities and the residents, I mean people are just beginning to understand that and how we're able to do it with the tools and the platform we bring, we're able to allow these clinical operators to focus on what really matters, taking care of the residents and removing all of the operational tedious things to make the business profitable. We've got teams of people to help with that so they can focus on the residents. I think that's starting to come to life.

Wonderful. Well, I think that's all the questions I have. I wanted to thank you all for coming today and presenting here and sharing your story with us. We look forward to seeing you back at JPM in 45th, and thank you again.

Great. Thank you, guys.

Thank you very much.