Option Care Health, Inc. (OPCH) Earnings Call Transcript & Summary

Guys, thank you for joining us. My name is Michael Ha. I work on the managed care and health care facilities team. With us today, we're very pleased to have the Option Care management team, President and CEO, John Rademacher; and CFO, Mike Shapiro. We appreciate you guys for participating. As you guys may have noticed, we actually published our Option Care initiation today with an overweight rating. Option Care Health is the largest independent provider of home and alternate site infusion services currently licensed in all 50 states in the U.S. The company has a national network of 158 locations in 45 states, which includes full service pharmacies and ambulatory infusion sites. And also before we start, just wanted to remind everyone, please feel free to submit questions via the event center, and I'll be monitoring the list for the Q&A session. With that said, I'll go ahead and pass you off to John.

Thank you, Michael. And again, I wanted to thank you and the team for initiation of coverage, a really important relationship that we have with JPMorgan and thrilled around that. Just for everyone to know, we will be making -- I will be making some forward-looking statements. I ask that everyone would refer to Slide 2 in the presentation that we posted today that outlines the disclaimers associated with that. With that, if you flip to Slide 3, as Michael had covered, we believe that we are uniquely positioned as Option Care Health. As the largest independent home infusion and alternate site infusion service provider. Our ability to reach 96% of the U.S. population, being licensed in all 50 states and really having a broad spectrum of service capabilities across those sites, we believe, is a competitive advantage. When you look at the clinical leadership that we can provide based on our scale as well as the competencies of our clinical team, as an organization, we have over 2,900 clinicians, that's pharmacists, pharmacy techs, nurses as well as dietitians and respiratory therapists that are providing service to our patients. We have over 500 front line selling resources within our commercial team that are calling on referral sources and being able to position us as an organization to help support those transitions of patients under care with us. We have access to over 50 limited distribution or exclusive drugs that are part of our portfolio and part of the breadth of the services that we can offer. And again, we believe that there is continued movement, not only into the home but into the infusion suites that we operate. And so as an organization, we continue to look for opportunities to leverage and to operate efficiently and effectively within that construct. As I sit here today and I think about 2020 and the commitments that we made as an organization, we really focused on 5 key areas as an enterprise as we entered into the 2020 year. And a lot of that we outlined within the presentation that we gave at the last year's JPMorgan conference. Those 5 key areas were to drive the integration and create a culture of the cohesive and inclusiveness that allowed us to operate with high performance. We also identified and committed to realizing over $60 million of net cost synergy savings as part of the bringing of the organizations together. We focused around delivering top line acceleration and organic growth as we repositioned our selling resources, and we really focused around increasing our reach and frequencies as an enterprise. We talked about strengthening our balance sheet and deleveraging to improve the leverage ratio moving forward by both cap generation as well as the ability to drive earnings growth. And we committed to improving our effectiveness to convert every claim to cash knowing that, that revenue cycle management process is key to home infusion and making certain that we're focused around creating the perfect claim from the minute of the referral and executing effectively all the way through as we drop those claims to the payers and seek reimbursement. As I sit here today, I'm real pleased with the progress that we've made as an organization, really across all 5 of those dimensions. All of that done in an environment in which none of us anticipated in March where COVID really started to flare up, and it caused us to change our approach in many of the instances, moving virtual and realigning our organization to be positioned even with all of the threats associated with COVID and all of the challenges that, that brought. As an organization as you look on Page 4, we really believe that we are uniquely positioned when you think about all of the different dimensions that we bring, the balance of our portfolio, the ability for us to flex and to be nimble in our ability to adjust the challenges in the marketplace that we operate and to participate in emerging therapies as we deploy a significant amount of technology and a significant amount of effort in developing deeper relationships not only at the referral and -- of those referral sources, but also in partnering with biopharma to be a channel partner and a platform to bring innovative new therapies into the marketplace. Flipping to Slide 5. As we look at the position in the marketplace, we have defined the market as well as others of looking at about a 5% to 7% growth per annum. When you look at our position within that marketplace, we expect that to continue to grow. We think there are some significant forces in the marketplace to continue that favorable trend. We know that the home is being embraced as the center of care for health care, and we participate vigorously within that as well as the introduction of significant number of specialty drugs that are infused or injected in which we can play a meaningful role from the clinical competencies. As an organization, we believe we're well positioned to continue to drive on that growth. And although the top 3 providers really account for a little bit less than half of the marketplace. We believe that there's opportunity for us to not only take share as we're looking at the competitive advantage -- the competitive environment, but also to make sure as we partner with biopharma in introducing those new therapies into the marketplace. On Slide #6, we have really invested significantly into the patients, into the technology that really helps to facilitate a seamless approach to that patient journey and have an ecosystem that allows us to participate effectively and efficiently within that process. It really starts from the front end really deploying technology to help our selling resources identify and target through segmentation as well as track the activities with our referral sources, all the way through the process of having an integrated ecosystem that builds on best-in-class technology solutions to allow us to efficiently, effectively and transparently work with those patients from a clinical standpoint. This allows us to facilitate a very effective way to create the perfect claim from the minute we initiate from a referral to when we drop the claim for payment and reimbursement from the payer community. And every step along the way, we are looking for ways to utilize that technology to drive better clinical outcomes as well as operating efficiency. And although we have focused around the cost synergies as an organization as part of the combination and looking for redundancies and overlap as part of that we believe that as we're looking forward, there continues to be opportunities for us to operationally drive efficiencies and think around how to sweat the assets and utilize this technology platform to its fullness. Part of that is even with some of the innovations around telehealth and areas in which we can use our technology platform to facilitate virtual teachers, virtual discharges and e-visits for our resources that allow us to operate within the COVID environment in reducing the impact where we may have limited access to the patients, but also to drive operating efficiencies as we move forward. On Slide 7, you can see that very strength and diversity of our portfolio. We focus on both acute as well as chronic. And we do believe that, again, as I mentioned earlier, that shift in the embarrassing of the home as the center of care as well as continued development and approval -- infused drug in the specialty space, give us a unique opportunity to continue to look for growth patterns. You'll see that our therapy is split 35% to acute, 65% to chronic. The chronic products continue to grow at an increase in pace. Part of that both for the introduction of new products as well as site-of-care initiatives that have been driven by payer communities really to focus around driving white side of care and getting that balance of cost and quality and able to serve the patient base. We believe we have low risk of -- pen stroke risk based on the portfolio. 87% of the volume that we have or 86% of the volume is coming from commercial payers, 14% coming from direct government fee-for-service. And we're encouraged by some of the conversations that we've had. And we'll outline some of the activities that happened recently in operating with health and human services, CMS and operations work speed, but we believe that there's opportunities for us to continue to participate vigorously in the marketplace in both the acute as well as the chronic space. When you look at that balanced portfolio of therapies on Slide 8, you really go into a lot more of the detail, focused around the acute and then the chronic. In the acute area, again, our reach and the infrastructure that we have from our pharmacy network really allows us to participate vigorously with those referral sources at the local level. A lot of these are very time-sensitive based on the discharge of the patients from the hospital. Our ability to be responsive, easy to do business with as well as coordination of the services is of critical importance. And we've invested a lot of time and energy to make certain that we are well positioned based on the deployment of our commercial team based on the responsiveness of our pharmacy team and based on the broad access that we have on our nursing network to really support that transition of care out of the hospital to the home. On the chronic, again, longer duration, a lot of these patients are on service for months, years and in many instances, lifetime with us and will require the therapy. And so our focus around driving a positive memorable customer experience for those patients, high satisfaction as well as high-quality as well as focused around the clinical outcomes in a safe and effective way is something that we've continued to foster and grow. When you look at some of the new therapies that are entering the marketplace, our participation in things like Radicava for Lou Gehrig's disease or new products that are entering for immune -- autoimmune deficiency, multiple sclerosis and muscular dystrophy. We believe we are well positioned and have an incredible platform to work with those innovators to help commercialize new products or with pharma companies as they're looking to expand channel access to serve patients in the home or in one of our infusion suites. Part of our focus over the past year is to make certain that we secure the payer relationships, and we're pleased with the progress that we've made. We are in all 10 of the top 10 national payers. We had announced previously expanded relationships with both United, Aetna, Centene, Humana and Cigna. And today, we're pleased to announce that we have extended our relationship with Anthem to continue to support their members across the country and being able to provide our services to them. Again, we continue to work with local providers like Highmark, Blue Cross Blue Shield to innovate and provide unique programs at the local level. And today, we have over 800 payer relationships, over 1,400 contracts, all of those focused around making certain that we are in a position to provide high-quality services and clinical outcomes to their members and work with them uniquely within those marketplaces. We believe that we have a complementary role to all of the payers. And even if they have captive capabilities within their own organization, we can wrap around and provide additional services as well as access to some of the limited distribution drugs that we have access to as part of complementary focus for those national payers to meet the needs of their patients. And that national network that we have of being able to serve 96% of the U.S. population and the licensure of all 50 states, really allows us to support the concept of being able to provide consistent high-quality care to a patient, whether they're in Portland, Oregon or in Portland, Maine and anywhere in between. When you look at the road map for value creation on Slide 10 and really the different levers that we are focusing on pulling, we do have that we are well positioned to look for acceleration of organic growth. As an organization, we are working to transform the patient experience. We had announced earlier last year that we were focused around repositioning our selling resources, getting them in position to build and develop meaningful relationships at the referral level and really devote their time, both to the acute and chronic referral sources through that process. And look, with COVID, some of that access to the physician practices as well as the hospital has been disrupted. We invested time and energy into training and education as well as better targeting and segmentation. And we believe our team is well positioned to continue that momentum that we saw in the third quarter and continue to drive into 2021 of that organic growth. We believe we can continue to leverage the infrastructure that we have and continue to sweat the assets, not only from the technology platform and the facility infrastructure, but we're also learning new things around the way that we're operating our model based on some of the COVID learnings, utilizing remote workforce and really tapping into some ingenuity of our team in order to continue to drive operating leverage as we move ahead. We have a dedicated group of resources that are facilitating and fostering relationships with innovators in the biopharma space for the introduction of new products and new therapies and expansion for channel access of existing therapies. And so we believe that this will be a meaningful growth driver for us. Again, we had articulated before that anywhere between 2 to 3 new therapies enter into our wheelhouse on that basis, and we're going to continue to focus our energy of fostering those relationships as we move ahead. We will continue to focus around improving our capital structure. We have generated a significant amount of cash in 2020. We expect that, that's going to continue to move forward as we're looking at 2021 and that brings us flexibility to not only accelerate that cash flow generation to delever when we're looking at the leverage profile, but opportunity to potentially restructure as we're looking at the capital structure moving ahead. all brings continued strength in our balance sheet and a continued opportunity for us to have flexibility in that capital structure as we're looking going forward. And that really brings to the last point, which is really around M&A and looking for opportunities for us to expand to find either in-time tuck-ins that will continue to operational growth as well as allow us to leverage the infrastructure that we have, but also looking for new adjacencies that may expand our product and service portfolio as we're looking ahead. And with the ability for us to execute from the business standpoint, certainly on the cash generation and focused around the capital structure, it brings us that flexibility to continue to look for opportunities to do that in a very disciplined way. Finally, on Slide 11, some of the recent developments that we wanted to highlight, and we would like to reaffirm our guidance that we had provided near the top end of that guidance range as we're looking forward. We're in a fight period because of the blackout. But as an organization and as a management team, we wanted to reaffirm that guidance. We extended that relationship with Anthem, which we think is critical for us to maintain not only the strength of the relationship historically, but also look for new opportunities to collaborate with the team at Anthem and looking for innovative new ways to serve their members. We announced earlier today and continue to utilize the cash on the balance sheet so that we voluntarily paid down $50 million of the second lien. This really helps to improve our position in utilizing that cash on hand and also reduce our annual interest run rate of the cash interest that would be payable for that. So really strong results from the team and a good use of that cash on hand to pay down what is a pretty high interest rate on that second lien. And then finally, there was a claim from legacy BioScrip around a shareholder claim. We have been working diligently to get that cleared up and to work with resolving that. We're pleased to announce that, that has been -- that claim has been resolved. And we have had the ability to reduce 7 million shares that were being held in escrow that were anti-dilution shares as part of the deal for Madison Dearborn through the process, and those have now been reduced from our share count. So that as we move forward, looking at positive EBITDA growth as well as net income that certainly will help our earnings per share as we're looking at it as becoming an EPS-positive enterprise moving forward. So with that, again, I'll wrap by saying, look, significant amount of progress. I want to highlight the great work of our team. We have 6,000 team members across the country that have been extremely flexible, have been extremely resilient based on all of the challenges that have been thrown our way through the pandemic. We've made significant progress as an organization around achieving the stated goals that we have put out there. But also moving the organization forward, always focused around delivering extraordinary care to every patient that we serve making certain that the clinical quality and the integrity of our organization is front and center. And finding innovative ways to work with suppliers, whether it's personal protection equipment, whether it's medical supplies or whether it's the drug manufacturers to make certain that we have strong access and a strong supply chain to meet the needs of our patients today and into the future. So very pleased with the progress that we've made, very excited about what the future holds and I think that we have put together an extremely unique platform that allow for continued value creation as we look forward. So with that, Michael, I'll turn it over for questions.

Great. Thank you very much, John. So just to jump into -- right into the first question. In the third quarter, your organic growth seems to have benefited from COVID-deferred acute starts over the first half of the year. With COVID now reaccelerating pretty dramatically in the fourth quarter, can you update us on just the trends and assumptions around fourth quarter acute revenue that's embedded in your 2020 EBITDA guidance? And if we did see accelerated fourth quarter acute deferrals, any reason not to expect a catch-up at some point, maybe in 2021?

Yes. Let me first address just what we're seeing in the marketplace. Again, a little bit interesting in being in the blackout period. But as I said -- stated earlier, I mean, we are reaffirming our guidance in the top end, and we can kind of derive from that, that our expectations were in alignment with our forecast and from that standpoint. When you look at the way that the COVID flare-ups have impacted, again, it's not consistent across the country. We've seen situations where communities that reverted back to locking down and reducing the number of elective and scheduled surgeries. We've seen other markets open up in the quarter that brought additional opportunities for us. So it really isn't consistent. We think that is part of the strength of the balance of our portfolio, having that national reach and being able to participate in all of those aspects and all of those markets. So look, we normally see some level of seasonality uplift on both the acute and the chronic. I would say that at this point in time, we would characterize it as that following with the historical norms that we saw there. And to your other question, we're all eager to see what a post-COVID world will look like. And what will be the referral patterns as we move forward. We have done everything we can, and we're going to continue to do everything we can to position ourselves to be well positioned to capture demand as it returns to the marketplace, whether it's in the acute or in the chronic space.

Great. That makes sense. So now just moving on to United and Aetna. Can you explain your in-network positioning with United and Aetna, both of which do operate infusion divisions? Are you in network with the same kind of cost-sharing in all markets where your infusion operations overlap? Are United and Aetna willing to do so because they want to guarantee home infusion prescriptions are filed immediately rather than trying to drive referrals through their own infusion divisions?

Yes. So look, I would characterize both of the relationships that we have with United as well as with Aetna as very productive. They're very collaborative within that structure. And yes, look, we compete vigorously with their captive pharmacies and their captive resources as we move -- as that moves ahead. I differentiate them a little bit for that Aetna, certainly, quorum has a comprehensive national platform and national network of pharmacies. And again, we compete vigorously with them. We're in network, we work closely with the referral sources. We work closely with the network management team at Aetna to make certain that they have access for their members of high-quality providers at an appropriate cost. And so look, we don't underestimate the strength of our competitors. We are going to continue to do everything we can to position ourselves as being a partner of choice there. And we'll work aggressively within those markets in order to win those referrals and win the hearts and minds of those referral sources as they're helping to identify the best provider for the patient. On the United network, United does not have as broad of a pharmacy infrastructure. I think most folks know their network was built really around their acquisition of AxelaCare as well as the diplomat assets. We have a very complementary structure in that there are a lot of markets in which they don't have full spectrum capabilities and we are well positioned to cover all 50 states and 96% of the U.S. population, so can service their members in all of those states, even if they do or do not have full spectrum of capabilities, and so have a very productive relationship there. Again, we don't underestimate them as a competitor either with Optum Infusion. They are a great organization. And our focus is around delivering that extraordinary care to every patient that we serve and working closely with the referral partners to be that partner of choice as they're making their referral recommendations to their patient base. One thing I would say is, look, as an organization across all of those areas, when we work with the network contracting people, right, like, they're focused on 4 key areas. Certainly, price is front and center and something that they're looking to negotiate aggressively with their providers. But they also look at quality and the quality of the providers. They look at access for their members, and they look at patient satisfaction or member satisfaction as being part of those elements. And so we work across all 4 of those dimensions. We've invested a lot in quality in making certain that we're driving clinical outcomes to the highest standards of care of making certain that our facilities operate with independent credentialing of quality marks. And making certain that from a patient and member satisfaction that we're focused around that extraordinary care and that extraordinary experience. So look, we're doing everything we can to position ourselves above all of our competition, whether they're captive or not from their capability set. And we're investing in people process technology in our facilities to make certain that we're well positioned moving forward.

Great. Great. So with Biogen's Alzheimer's drug, they've had a bad panel review, and now it seems unlikely that the FDA will approve. But that was a potential infusion blockbuster. I mean 5 million people with Alzheimer's, 3 million currently on home and alternate site infusion. So I wanted to get your thoughts, like any particular view there? More generally, how do you view also the pipeline for infused drugs? I know some industry sources suggest the majority of specialty drug pipeline is IV administration?

Yes. Look, we have a dedicated team in business development that is cultivating those relationships across a broad group of biopharma and innovators on that. I'm not going to necessarily respond specifically to the Biogen. I know that they're going through a process to receive approval through that. We think we have an incredible platform, whether it's for Biogen's product or other specialty drugs that are infused or injected that require the clinical competencies that we have as a organization. And we're working across all of those biopharma and innovators to make certain that they're aware of the capabilities that we have of making certain that they understand the platform and channel access that we can provide them. And in some instances, working really ahead of their approval process, whether it's in Phase II or Phase III, to help them think through what is their commercialization and what are the clinical protocols that would need to be executed. So look, we're very optimistic that the pipeline is robust. There are a significant number of infused products that could receive FDA approval as they move forward. And when you look at the platform that we have, not only the footprint and the geographic reach but the clinical competencies as well as the technology capability set that we have, we think we are well positioned to be a partner of choice for those introduction of these products into the infusion, home infusion or infusion suite channel moving forward.

Great, great. So kind of switching gears to the Medicare benefit. So as we know, Medicare home infusion benefit is not adequately funded. So do you believe CMS is directed by Congress, if you do so, I mean, with all the value-based care models coming out of CMMI, who is really holding up this opportunity? Any particular reason to believe or hope that the Biden administration will seriously reevaluate? Or do we have to kind of wait and see who the new CMS administrator will be?

Yes. Look, as part of the announcement that we made around working with Amedisys and operation work speed to be able to help with the monoclonal antibody infusions within the long-term care is to continue to be relevant and have the conversations at the right level of government as we move that forward. Look, I think we're going to have to wait and see a little bit on the Biden administration around who they're putting in place and what is their agenda moving forward. But the thing that we always hold true, and look, we're working independently as well as with the National Home Infusion Association, we truly believe that we're on the right side of this conversation. When you look at high-quality and appropriate cost in a setting in which patients want to receive, care, and now more than ever, a very safe environment for those patients to receive their care. We think that there is a meaningful role that Option Care Health as well as home infusion can play in meeting the needs of the beneficiaries moving ahead. One of the big challenges has been, we believe that we have Bipartisan support. We had a legislative fix for the permanent fixed for that wrap around for the drug, for all the care that we provide for the patients. One of the things that has been limiting is the Bipartisan Budget Act that really does not allow CMS to take savings from Part A and apply it Part B. We think that over time, with the right review and the right mindset within the administration as well as within HHS and CMS that logic will prevail and that we can drive meaningful savings for CMS and Medicare at large by able to -- with the ability to have a fair reimbursement that's in alignment with every commercial payer that has a managed Medicare Advantage or managed Medicaid program. They embrace home and alternate infusion suites as being a preferred a preferred site of administration. And we believe that will ultimately prevail.

Great. So then talking -- I guess, staying on that topic and talking about the growth impact. How do you think about the possibility of a fully funded Medicare fee-for-service, home infusion benefit impacting your growth rate? Your 5% to 7% organic annual growth rate does seem a little conservative to us in general, just given the pipeline of specialty infused drugs. And our back of envelope suggests that your growth rate could even perhaps double to 10% to 15% for a few years, if the Medicare fee-for-service population truly does receive and have access to that funded benefit. So I just wanted to get your thoughts about the potential benefit there?

Yes. Like, look, there's a big word within the sentence you provided there, and that is if. And as an organization, we've been very focused around controlling what we can control around that. It is going to require a significant rethink at CMS and HHS in order to do that. And so what we're articulating around our growth strategy is within the areas that we can control. We think the 5% to 7%, again, whether it's conservative, there are -- it's a broad portfolio of products that we provide. And so some of them are at the end of their maturity of their life cycle, we have products that are going generic that will have impact on that top line growth. So yes, there are puts and takes, there's introduction of new products and new services. And again, we believe that we're well positioned to participate in that. There are also some headwinds around generic events as well as changing in practice patterns and prescriptions for some of the products. And so look, we're trying to take a balanced approach to that. And our belief and the challenge to us and what might can actually challenge the organization is we expect that we're going to be at the top end of that range. We expect that our team is going to be winning more than they're losing. We believe that we're putting the infrastructure as well as the mindset in place in order for us to win more than we lose. But we also want to be very thoughtful in articulating what is that top line and what is the growth opportunities that sit before us.

Yes. That definitely makes sense. So in regard to chemo infusion, I just wanted to ask, what are commercial and Medicare Advantage payers doing with respect to home chemo? I know the American Society of Clinical Oncology is generally against it because of stated safety concerns. But I've also read other articles arguing that for many patients, it's actually pretty safe. So is this an area where payers are successfully driving any movement or care at all?

Yes. Look, we're seeing a limited amount of conversion of that. I mean part of it is those patients that have been going for weeks or months or, in some instances, years into their physician practice to -- or their oncology practice to receive their care are going to continue down that path. There are some opportunities for some of the biologics and the immunocompromised drugs to potentially participate in those as we move forward. We're actively in dialogue with some of the biopharma manufacturers on that. Our focus has been on the infused drugs. There are some nuances within chemo and especially some of the administration of that. They don't necessarily make a good home infusion type of situation. So we're going to continue to evaluate it. We're going to continue to look for the opportunities to present themselves. But we aren't baking right now on a significant shift of chemotherapy moving into the home at this point in time.

Got it. And it looks like we're almost running up on time. Just one more question on my end. So you're now about 18 months post-BioScrip merger. You've talked about incremental tuck-ins as you did earlier from a fragmented industry. It seems like the COVID disruption might be pressuring smaller companies. So it might be a great time to consider accelerating your acquisition activity. Is that a reasonable expectation?

Look, as Mike and I have outlined, we are going to be very disciplined in our approach, right? We're committed to deleveraging the organization. We've committed to making certain that we had a strengthened balance sheet as we move ahead. I think the flexibility of the cash generation that we had within 2020. And I think as we're looking forward, is going to allow us a lot more flexibility to start looking at those opportunities. We're going to be very disciplined in anything that we do. And we're looking for opportunities to either expand within a geography that maybe there's an opportunity for us to strengthen our position. We're looking for opportunities to leverage the infrastructure that we have or for newer adjacencies that expand our service or capability set from a technology standpoint. So look, our phone rings weekly on opportunities, Mike, is front and center to make certain that we're evaluating those opportunities that come forward. But we're going to be disciplined in our approach. And we do see this mix between organic as well as potentially inorganic could be an opportunity for us to really accelerate the growth on the top end and bottom line.

Got it. Makes sense. We actually have one question coming in. And I think you actually already touched on it. It's -- please elaborate on how Option Care views emerging competition from vertically integrated platforms? And yes, I think you did touch on it with the 4 tier areas of price, quality, access, patient satisfaction. But if you wanted to maybe just touch on that really briefly again?

Yes. Look, as an organization, we continue to be focused around serving those patients. And as you have outlined, Michael, look, the network-contracting people have a focus around that. We believe we are a great partner given our scale, given our competencies and given our reach to work with all payers and really supporting the needs of their members. And it's -- having a backup is also something that they look at in their access strategies. And the ability to have a robust provider network is something that they need, and we believe we are well positioned to participate whether it's captive or whether it's a payer that doesn't have any captive capabilities. We think we're well positioned.

Great, great. And with that, we're actually a minute over. And just wanted to say thank you very much, John and Mike, for joining us. And to everyone else. Yes, have a great afternoon and rest of your conference.

Great. Thank you, everyone.