Omnicell, Inc. (OMCL) Earnings Call Transcript & Summary

All right. I guess we will get started. Hello, everyone. I'm Jailendra Singh, health care technology and distribution analyst at Credit Suisse. Thanks, everyone, for joining us. Next up, we have Omnicell. From the company, we have Peter Kuipers, Executive VP and CFO; and Kathleen Nemeth, VP of IR. Omnicell is a leading provider of solutions targeting patient safety and operational efficiency in health care facilities. Peter joined Omnicell in 2015 as Executive VP and CFO. Peter and Kathleen will begin with a quick 20, 25 minutes presentation, and we will then open the line for Q&A. With that, Peter, over to you.

Thank you, Jailendra. It's great to be here and talk to everyone, give an update on the business and the strategy. We do have a presentation, I think, that we can show. Let's go ahead and do that.

Let me then share the slide. You're on mute. You're on mute, Kathleen.

Yes. I thought I have the screen share, sorry.

Yes. That's fine.

There you go. Thank you.

There you go.

There we go with the slide show? Yes.

Okay.

Good. We have the normal disclaimers that we'll flip through, of course. So again, great to be here. Thank you for inviting us. Excited here today to give you an update on a 5 new topics you want to focus on. We go kind of to the agenda here. So a couple of areas, if we go to the next page. So really, thank you for the introduction, Jailendra. We really wanted to talk about and go a little deeper on the large market opportunities that we see for our solutions for medication management automation. We believe now that we have the market-leading platform that can drive meaningful outcomes for stakeholders. We've also innovated and we're driving innovation both in products and also services. And lastly, I want to focus on and talk about our successful go-to-market strategy, where we now have 143 out of the top 300 U.S. health systems under long-term exclusive partnerships to invest and drive outcomes in medication management, fee automation. So let's talk about the mission and vision of the company first. So we are a mission-driven company. And that's why we believe we've been successful with our stakeholders, including employees, customers and also investors. So what we want to be, we want to be the caregiver, the most trusted partner for medication management automation. We do want to accelerate pharmacy and pharmacy operations and strategy to perfection via technology. If you look at the evolution of the company on the next page, we have driven substantial value for our stakeholders, including employees, customers and investors. We've evolved to now be the market-leading platform in medication management automation, and we're evolving and building and realizing the vision of the autonomous pharmacy, together with our customers and the industry. So let's take a step back and talk about what is pharmacy, what are the issues that pharmacy is facing every single day. As you can see here, 20% to 30% of prescriptions are never filled. There are 1 million emergency room visit as a result of medications not taken properly or not timely. 125,000 hospital -- hospitalizations as a result from medication errors and medications not taken properly and hundreds of billions of dollars resulting costs from non-adherence. We click one step deeper and really look at what is now the complexity that's driving all these issues. So here you see from left to right, issues in pharmacy and that means solutions ordered, if you will. We're right in the middle, so think about if you operate, if you're the leader of a pharmacy in a large health system, and the top 300 U.S. health systems, by and large, have 10, 20, 30, 40, 50, even 100 different locations, many floors. You have hospital buildings, you have outpatient surgery centers, outpatient clinics. Within all those locations, you need to be able to manage between 3,000 and 4,500 different SKUs of meds. You need to have those available for the right patient at the time and for the right medical professionals. So that's the core of the problem to solve. If you go on the left. If you look at the left side of the page here, you can see at the bottom that 1 out of every 200 medications dispensed has a detected error, which is not acceptable. You can also see, from a financial perspective, that actually medication or pharmacy is the fastest-growing cost line in the P&L of a hospital. Medication waste because of expiration is also a significant cost driver within that line. And also from a staffing perspective, AAHP, American Association of Hospital Pharmacists, time study showed that 75% of the time spent by a pharmacist is actually on administrative tasks and not focusing on patients. And also, of course, the compliance component is very, very important. There's many issues there. We've come to market with some leading solutions that we can talk about later in the presentation. And then there's also the issue of burnout, the turnover. Turnover rates in pharmacy staff and pharmacists are 20%, 30% or even higher. So many, many issues to solve there, and we can do that through technology, digitization and automation. If we can go, and that then results to our priorities. We want to be the leader in medication management automation and drive the vision of the autonomous pharmacy. And we are leading in many areas with our platform. Point-of-care has many growth drivers that I'll focus on in a little bit further on in the presentation. Central pharmacy automation, that's a newer market. Again, we've got some really strong market position there, both from an installed base perspective and upgrade opportunities and also greenfield. And we are transforming the company to a more tech-enabled services. Of course, COVID, we believe, has made our offerings and our platform even more strategic because you do want to automate. That's what we see in our customers, it's automate and digitize. And how do we differentiate? We believe we're the only tech provider in medication management automation with a comprehensive portfolio. And again, over half of the top 300 U.S. health systems are current Omnicell customer, and with 143 of those, we do have long-term sole source agreements. So let's take a look at our platform as of today. So pharmacy automation started in point-of-care. So the automation layer you see here in the solution set, that is an automation layer of connected devices. Point-of-care is close to a patient, also called point-of-use, when medications are dispensed to a patient, either in a patient ward, in an operating room or in an emergency room. And our systems are connected and interoperable with electronic health record systems like a Cerner or an Epic. But that's only one point in the medication dispensing process. Of course, you need to start at the beginning in a health system and where it starts at the central pharmacy, where now we can offer robotics, robotic systems like the XR2 that enable the digitization, tracking and dispensing to perfection. We also have IV prep and IV robot -- robotic systems that can do the same thing for fluids. And then over time, we've built a software layer to bring to bear the power and optimize the outcomes via that connected device layer, if you will. Omnicell One, that we'll talk about in a minute, is an optimization engine, which can help you drive actionable insights and suggested actions to optimize medications across your large health systems with many, many locations. We've recently also added 340B. We acquired a company called 340B Link, which is the -- we think, has the strongest stack, if you will, and has been winning in the marketplace. 340B is very strategic for our customer base, and we also expect some cross-selling opportunities. And then last year, in December, we've also announced the development of more professional services, so beyond break-fix standard maintenance services, more and more we're developing professional services and advisory services. And then on the retail side, the nonacute side, we have relaunched the EnlivenHealth retail pharmacy platform that can drive via different modules, med adherence and value-add for both retailers and payers. And for -- also for that segment, we have robotics and packaging also for that group of customers, and it's all powered by a data platform. With that, let's talk about the market opportunity and the relative size. So point-of-care is the more mature market. However, we think there's significant growth there to be had. We are a market leader. The biggest drivers in our growth actually from our bookings and revenue perspective is actually expansion by our current customers, where they deploy more of these systems on more floors and in more locations. And we're early on in an upgrade cycle. Today, we're at 30% booked on the installed base from December 16, so much more to go there. It is high visibility revenue for us because we are really close to our biggest customers, and we know their cohorts, their aging and their implementation strategy. And then we've been taken, and we believe we will continue to take market share as well in point-of-care. Central pharmacy, again, that's the next big automation opportunity in the market, a very logical place to start. We do believe we have a leading line of robotics there for both solids with the XR2 and then also with IV. And then increasingly, our customers are asking, and we're implementing, the robotics in the central pharmacy also as a service. 340B, very interesting and sizable TAM as well, really strategic for a lot of our health systems. And it really expands the autonomous pharmacy portfolio to also outpatients' medication management with visibility for the health system. And then lastly, on the retail, institutional and payer side, we have [ Allina ] platform plus med robotics and packaging that drive value for the stakeholders. What does the autonomous pharmacy look like? If we go here on the following page, the vision of the autonomous pharmacy is a fully autonomous medication management delivery system with essentially no or very limited manual steps with 100% visibility, 0% error rate of Six Sigma levels of error rates and high levels of efficiency and Six Sigma levels of compliance. Now we're not the only ones that are working on the autonomous pharmacy. So we go to the next page. There is a group of leading and prominent pharmacists in the U.S. that have published a white paper earlier this year on the framework of the autonomous pharmacy, and this is a page from that white paper. You can see here it's close or similar to the autonomous driving framework, if you will. So there are different levels of automation and pharmacy going from Level 1 to Level 5 to the right, where customers and health systems can choose to drive different KPIs and with automation and digitization kept to the next level. And earlier, we talked about the significant issues in pharmacy. So we do see, definitely see the demand here, and it's great to see also the industry movement here. We've probably stated before that we believe most of our customer base is between Level 1 and 2 as far as automation. And with our current customers that we believe we can deliver a level of automation and digitization slightly above Level 3. So we continue to innovate and to get to the next levels. And it's also important to point out on the available market slide, that is actually the TAMs that we have there and that we talked about is based -- those are based on the current solution set. So let's go to the example of Omnicell One. What does that look like? So Omnicell One is the optimization engine. So again, if you're the pharmacy leader in a health system, let's say, you have 30 locations, you have many, many -- 30 buildings. You have many, many locations where you keep meds. They're also called par locations, and you could have tens of thousands of locations where you keep medication. You, of course, want to be able to manage that across and Omnicell One actually executes the insights and actually comes with recommended work actions, a task list that then an the pharmacy tech, as you can see on the iPhone at the bottom right, can execute. So you typically -- could be a recommendation to move medication from one location to another location, where in the existing location the medication might expire based on the historical usage and projected usage that Omnicell One calculates the algorithms. And in a location where it's recommending to move it to, there might be a shortage coming because of the current stock level and the expected patients that will be there in that ward. So a very elegant solution, very impactful as well, that really brings to power the total visibility and actions across all your connected devices in your health system. Let's talk about our go-to-market strategy as well. So I mentioned earlier that we focus on the top 300 U.S. health systems as defined by Definitive Healthcare. We believe that around 70% to 80% of the TAMs that we discussed earlier are within these top 300 U.S. health systems that are winning in the market, if you will. They are expanding geography-wise, and they're offering additional services also in outpatients. So more than half of the top 300 U.S. Health Systems are current Omnicell customers. And with 143 of these, we do have long-term sole source partnership agreements, which means that we, Omnicell, are the exclusive partner, so more than a vendor. We're more strategic than a vendor. We've become the partner for that health system to help them develop medication management automation strategy and plan that accordingly. For most of these, we have a customer success executive, either located or sometimes now virtually, embedded at the health system to help them develop that strategy. And the majority of these have multiyear co-development plans, and we have an example of that on the next page. So on the next page, and you can find this also in the investor deck that we posted on our website. It's in the October deck. So this is a real example of a 12-location health system, 1 of the 143. So of the 12 locations, a number of those are hospitals, but many others are outpatient clinics or surgery centers. And you can see here investments in every single year in automation, in point of care, in XR2 robotics in, IV robotics, and also in anesthesia workstations for most of these locations. And you can see actually the health system driving KPIs to the right side as well. Now this is a summary of the more detailed a multiyear medication management automation plan, which you can kind of see the concept here. So this is the partnerships we have are in constant contact with these large health systems to really help them drive the KPIs to the next level. I think also about here, so a customer like this probably has a pharmacy staff of 200, 300 or 400 people to really manage medication. So automation and digitization is very, very critical. And how does this then summarize in a financial perspective? So let's talk about our financial framework. We talked about the large market opportunities. We talked about the leading medication management automation platform. We talked about our product and services and then the long-term partnerships as well. And you can see on the right, of course, that has led to a very strong -- some revenue growth. Talking about the dynamics within 2020, we have said publicly in the last earnings call that, by and large, our customers have returned to more normalized business operations. Many of them are at 100% admission rate. And most in general, on average, the elective surgery levels are also increasing. And it is our belief, and what we hear from customers, is that there is a trend to be roughly at pre-COVID levels on 95% of elective surgeries, again next year. We've also seen that it's very clear now that medication management automation has even become more strategic and we've seen our customers now executing again on their multiyear automation plans at the same investment levels as pre-COVID. And as a result of that, we have reinstated our original product bookings guidance for the year in the last earnings call. So let's talk about also our business model. So we believe that we have the leading medication management automation platform. We have a very, very high customer retention, and we have very high revenue visibility. So we have, of course, recurring revenue from the consumables, the packaging with very good visibility from the recurring maintenance services, but also the roughly remaining 60% of connected device revenue, we have very high visibility as well because we have these 143 long-term sole source agreements, which, by and large, for the majority, we have multiyear medication management automation plans as well that we've co-developed. So very, very high visibility. And we also have a very strong free cash flow conversion. So let's talk about the growth drivers in the different types of products. So point-of-care that we talked about earlier, our biggest revenue driver there is expansion in current customers. Current customer base who really land and expand, if you will. We have a prior generation upgrade cycle that is still fairly early, and then we continue to gain market share from a competitive perspective, and we'll continue to innovate as well. In central pharmacy, we do have a prior generation installed, central pharmacy robots that we're now in for an upgrade cycle. We also have -- and this more brownfield, an upgrade cycle from Carousel to robotics, and in Carousel, the way we would describe it, is an open bookshelf system, semi-automated with a scanner and open box essentially. We believe there are around 3,000 of these Carousels in the installed base in the U.S. from different vendors, including Omnicell. And that's a really nice upgrade and opportunity as well. And then last the greenfield where there's no automation in central pharmacy. Between those 3 growth drivers, if we look at the opportunities, the bookings and the revenue, they're equal in size, roughly 1/3, 1/3 and then 1/3. And then lastly, on the retail, institutional and payer, our EnlivenHealth platform has been driving innovation, and we've announced additional modules over time as well. And we also have meaningful modules that really help payers make sure that they're insured patients of population [ adhere to ] medications and therefore, preventing hospitalizations, if you will, for the same ICD-10 code. So overall, we believe we can grow organically between 10% and 12%. Let's talk about the profitability goals for us as well. So from a margin perspective, we have built and architected the company to really be able to scale very well. A big driver of our gross margin expansion are -- is volume leverage or economies of scale. The long-term sole source agreements also help on the margin side because there are no RFPs and price is set. And then we have a very rigorous program around manufacturing savings, where we work with our vendors to get parts at equal quality or better quality at lower cost, if you will, very rigorous program there and then, of course, with the continuous process improvements program as well. And then part of these margin expansion drivers, we reinvest in innovation, and we talked about where we are in the autonomous pharmacy and the issues that are in pharmacy and that need automation solutions. We're also investing in customer success and experience, and then we're consolidating and streamlining some of our internal systems. Overall, we're very comfortable with a long-term operating margin goal of 18%. And then tying it all together, in summary, so our long-term financial framework is an organic revenue growth CAGR of 10% to 12%; a long-term non-GAAP operating margin goal of 18%; free cash flow conversion goal of 90% to 110% of GAAP net income, and we've achieved that for many quarters; and the strategic acquisitions remain part of the strategy. Thank you. Maybe Jailendra, we can move to questions.

Sure. That was good, very detailed and very insightful. Actually I want to follow up on your last comment around financials. Good free cash flow conversion. I mean I think over the past few quarters, you have been paying down your debt. Maybe talk about the capital deployment strategy. How do you think about investing in more organic growth and innovation versus some M&A opportunities? And just maybe also spend some time, what kind of M&A targets make more sense for you guys?