Guardian Pharmacy Services, Inc. ($GRDN)

Good morning. My name is Allen Lutz, health care tech and distribution analyst here at Bank of America. We are incredibly excited to have Guardian Pharmacy Services here. We have President and CEO, Fred Burke. Fred, thank you so much for joining us.

Thank you. We're very excited to be here, too.

Great. So Guardian just reported earnings last week. I would love to get a sense, do you have any prepared remarks or initial comments that you'd like to make?

I think we covered it pretty well in our call. We had a really good quarter that was better than the consensus, which was roughly our own internal plan as well and flowed through some of the outsized performance into increasing our annual guidance. So everything seems to be rolling well. We dealt with the IRA, which was a complete sea change for our industry, probably the biggest change that we've experienced in a decade. Decade. And it was -- I'm very, very proud of the team. Our data analytics capabilities and skill sets really shone through as we were able to work and understand and see that the predictions we have made, the forecast came were on track. So we were -- had a busy first quarter, off to a good start.

That's great. And I think Guardian has been a public company for less than 2 years, so relatively new still to the public markets. I think a lot of investors are still new to the Guardian story. Can you provide maybe a quick intro to Guardian, what the company does and what differentiates you in the industry?

Allen, we're an institutional pharmacy that's focused on a particular segment of long-term care, assisted living facilities. And assisted living is where all, if not most of the growth has occurred in long-term care, but they need a different type of service. So from the outset 20 years ago, when we founded the company, it was done so on the basis of providing that very specialized service needed by assisted living. And it has served us very well as we have now grown to be the nationwide leader in assisted living. I'll hasten to add with a whopping 13% market share, which, to us, means there's 87% left to go. But that's from a standing start and our pharmacy map does not yet cover the entire geography of the United States. So the special service is working well. We feel like we have a great opportunity to continue and grow the business.

Yes, I'd love to, kind of, follow up to that. The ALF market is growing about mid-single digits, but the industry, unlike the retail pharmacy industry, unlike the PBM industry or the drug distribution industry, the long-term care pharmacy market is incredibly fragmented. Can you talk a little bit about the competitive landscape in the ALF market? Talk about the health of competitors and the outlook for M&A.

We consider our main competitor, the single-unit independent pharmacy owner who, by and large, does a really good job of serving assisted living. They too have engineered their pharmacy for the special needs. But they also have lacked the benefits of scale, such that the profitability is nowhere near what Guardian is. And that then doesn't allow them the resources they may need to provide some of the extra services. And there, unfortunately, and we are very upset or distressed about this -- the effect of the IRA on our industry colleagues. They are already operating on thin margins, and we're worried that it will be untoward for them. But we expect it to hopefully bring some of the excellent operators that we respect and admire to want to join the Guardian family.

So as you think about the competitive landscape, a lot of the independent pharmacies are doing a good job satisfying customers. But in many cases, their profitability even before the IRA was breakeven or very, very low. Can you talk about what the Inflation Reduction Act did in your business? How you were able to offset the dynamics from IRA? And then we can go into maybe how that could have impacted your peers.

Sure. For the first 10 drugs in '26, essentially the law took away our sell-side margin, the spread that we made on the sell-side. We still maintain the dispense fee in our buy-side margin. But we, Guardian, set about the task 2 years ago of educating our payer partners of what the effect would be and very happy to report that we were able to mitigate that entire headwind. The negotiating entities on behalf of the independents, the PSAO networks also set about that task. And we don't know exactly how much of the headwind was mitigated, but some, but I'm afraid not all.

And as we think about your business versus an independent pharmacy that competes in the market, maybe a single operator, can you talk about where does Guardian -- where does their size and scale allow them to drive the EBITDA margins that you have today that are much higher than the peer average. Where are those competitive advantages? I would love to go through those.

Generally falls in 4 buckets. First, on the buy side, the purchasing. We have substantial purchasing advantages leveraging our scale. It's on the reimbursement side, as we have decided 5 years ago as a company to invest in all that's necessary to negotiate and contract directly with our PBM partners. And we have set about the task of demonstrating the value add that we bring. And as a result, enjoy reimbursement from that. The third bucket would be national accounts and regional accounts. With our geographic coverage, we've been able to establish relationships with the larger assisted living groups which allows us to bring that relationship to an acquired entity. And then finally, this is a very complex business under the covers. Takes a lot of systems and processes, procedures, controls to manage the business such that you can exact the kind of profitability that you deserve. So, we bring that to the party as well. And that generally takes 2, 3, 4 years to implement, but is very impactful. So those 4 buckets combined to take a new member of the Guardian family from breakeven or making 1, 2 or 3 percentage points of EBITDA margin up to our corporate average.

And as you think about the fragmented nature of the competitive landscape or just the competitive landscape in general, primarily support the ALF market. They support other populations. Why do you think that there hasn't been more of a consolidation? What are some of the reasons that it's hard to grow, it's hard to earn constant profitability in your space as you think about the competitive landscape?

You're speaking now of the competitive pharmacies, the independent pharmacies?

Just in general. It could be large competitors, could be independents, but -- why have others not had success scaling in this market?

I think there has been some success in scaling on the SNF side, the skilled nursing, pharmacies that serves the skilled nursing facility. But there hasn't been on assisted living because it's such a specialized service model, and it does require scale to achieve the profitability. So you've got that virtuous cycle, if you will, that you need the scale to get the profitability. But without the scale, you don't have the profitability to aggregate players.

And so if we kind of take everything you've talked about today, I would love to get a sense of what you think the long-term growth algorithm of the business is. The ALF market is growing 5%. You talked about some of the challenges in the competitive landscape. I would love to think about how at 13% market share, how do you think about whether it's top line, EBITDA, EPS, how do you think about the long-term growth algo of this business?

Well, absent the anomaly of the IRA, which we can circle back to, which is a one-time revenue hit, we've guided to high single-digit organic growth, supplemented and augmented by the M&A program, so low double digit with leverage at the EBITDA line. The one-time hit for '26 means that our revenue is going to be relatively flattish is what we've guided to for this 1 year. In the past, I'm looking in the rearview mirror, we've been able to exceed that. I think cumulatively, over the life of our company, it's been mid -- mid-double-digit teens growth cumulatively for CAGR on the revenue line. But we're more conservative in our guidance. We feel very comfortable that we can continue what we've been doing to achieve this growth.

And as you think about the targets for M&A, can you talk about when you acquire a pharmacy, what type of margin profile does that pharmacy have? And then how long does it take to get to the consolidated margin profile of the rest of your business?

As you mentioned earlier, most of our targets are operating at breakeven or near breakeven low single-digit EBITDA margins. And we generally say it takes 3 or 4 years to bring a pharmacy up to the Guardian corporate average, because we can implement some things quicker than others. We can implement our reimbursement soon, and that starts us on the journey. Our purchasing may take longer. And certainly, we want to make sure that the services are adequate and up to par before we launch our national account programs. And then those systems and processes, generally this pouring concrete over a 2-, 3-, 4-year period of time. So we'll get an initial jump from the purchasing and reimbursement and then over time, feed in the national accounts and the systems such that it takes 3 to 4 years.

Can you talk about the balance sheet a little bit in cash flow? Do you have any debt? And talk about the cash flow profile of the business as we think about how you're funding these transactions?

No debt, $64 million of cash on March 31. And we generally say that we have a 60% cash conversion ratio. And that was interrupted slightly in the Q1 as we did take a slight working capital hit associated with the IRA, but we'll expect to see that resume as we move through the year. And obviously, the kinds of deals that we're talking about, we can fund out of our combination of cash. And of course, we do have additionally credit facility of $75 million, which we're not tapping at the moment.

Great. That's great color and perspective. Can you level set how many pharmacies do you own today? And in a typical year, how many do you acquire? How many do you acquire?

I believe it's 62 in total with 54 being full service. And in the past, we've generally added 3 -- 2, 3, 4 new pins on the map. And we do that not only by acquisitions but also with what we refer to as contiguous greenfield startups. And the way that works is one of our pharmacies may establish service of some key accounts in an adjacent metro area. And once there's enough critical mass, then they can expand there with bricks and mortar. And then that allows them to properly serve that entire market area. We've been very successful with that. It's a great way to grow. And so we'll do that as well. And we should be adding 2, 3, 4 new market service areas per annum.

Great. And then last question. As we think about the remainder of 2026, what are you most excited about this year as you think about the trajectory of the business and the opportunities in front of you?

Well, it's been really, really gratifying to be a public company. We're very much employee-owned. We have over 200 employee owners of Guardian. And that's been a very rewarding for them. And I think it's been highly motivating as well. And we just have so much opportunity. We feel like we're running in the open field, and I'm really excited as we move forward to capitalize on that opportunity.

That's great. It looks like we are out of time here. Fred, thank you so much for the time. Really appreciate it. And thank you to everyone in the audience for joining us.

Thank you, Allen. Thanks, everyone. Appreciate it.