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

All right. We're getting started with our next session here. I'm Jamie Perse, the health care provider analyst at Goldman Sachs, and we've got Option Care here for our next session. John Rademacher, President and CEO. Thanks for joining.

Yes. No, my pleasure.

What -- I wanted to start the last 2 years have been really strong for you guys. What do you attribute that to? Is it market? Is it execution? I'm sure a mix of both, but just love some context on what surprised you most about your ability to grow through what's been a challenging period for the industry?

Yes. I mean, first and foremost, have to recognize just the execution of our team. We closed on the merger with BioScrip in August of 2019. We put together integration plans that kind of span the 18- to 24-month horizon and shortly into 2020. So only 6 or 7 months into it, the pandemic hit. Continue to execute extremely well. Found ways to accelerate that integration to make certain that we capitalize on the synergy realization, but more importantly, just creating a comprehensive network and a solution set that we felt was going to increase our relevance in the marketplace. So execution, just a really great job by the team to kind of work through some challenges, but find ways to use -- necessity is the mother of invention, and therefore we capitalize there. There are some changes happening in health care, and COVID had both positives and negatives kind of through that. And then certainly, I'd be remiss if not just recognizing just the toll it's had on the communities in that aspect. But when you think of site of care initiatives, the home becoming more adopted as the center of care and the ability to capitalize on those providers that could help to transition patients safely and effectively out of the hospital setting into the home. We were able to be well positioned as that started to move forward and support our hospital partners that were trying to clear out beds in preparation. And then more importantly, to be well positioned for those patients that are -- have chronic conditions and are looking for infusion services that may be not in a community setting that may be -- especially for those that are immunocompromised in a much more controlled setting in their home or in one of our infusion suites. So some puts and takes there, but again, really well positioned. And I think from an execution plan, the team has done just a great job of capitalizing on the position that we held.

You mentioned some market factors that have been favorable and executing against those. The chronic business has probably been the bigger outperformer within your business mix. How should we be thinking about the long-term growth rate, just given some of these market changes? Is it right to think that in this new environment, and patients preferring the home and payers supporting that move, that the long-term growth rate for this market has gone up?

Yes. There's a couple of factors with that. Number one is certainly a lot of the new products are entering into the chronic space. So you've got some new therapies that are entering there. And certainly, it's a higher price tag for those therapies and some of the acute therapies that are longer in their life cycle and more mature from that perspective. I mean we've defined that we think the acute will grow probably in the low single digits on that and continue to be a very important part of the portfolio, but kind of grow at that slower pace. And we think with the chronic both with the introduction, but also with kind of the shift of care into our settings that, that would be in the low double digits and see that. So we like the balance of the portfolio. We've said high single digits kind of as a combined. We think we're well positioned as an organization given the network that we have and the infrastructure that we've built. I mean we kind of look at the world in two lenses on that in the sense of our commercial team, the viewpoint is we should be taking share, right? We've got a great network and our reach and frequency should allow us to be the partner of choice on there. So we've got a strategy that is about take share of the existing market. And then we work upstream with biopharma and other partners to make sure, right, to look for opportunities for new products being entered or site of care shifts to kind of preference the home or one of our infusion suites. And so we look at it from both of those perspectives and execute around that path.

You mentioned on the chronic side, not as mature of a market as the acute care side. How do you think about penetration across some of the key therapies driving the chronic business today? Are we in early stages in those long runway or middle stages? You can take the baseball analogy, if you like. But where is penetration today on...

Yes, I would say probably middle innings, maybe a little bit earlier on that. I think that there's still opportunity. I mean there's some aspect of the undiagnosed that, again, I think may start to show and move forward there. I think that when you look at site of care initiatives and the acceptance of these alternate sites as part of the post-acute care model, I think there's opportunities for continued progress there. And I do think with a pipeline of new products and other things, some of the biosimilar and other aspects, I think there still is some growth trajectory that's there that we should be well positioned to capitalize on.

You guys have a lot of therapies across your portfolio. When you think about the growth outlook over the intermediate term, what are the few therapy areas that like this one has to be part of the story if we're going to grow at these rates. But what are the key therapies that come to mind as part of that algorithm?

Yes. Chronic inflammatory disease is one in which there is a lot of movement, and you're starting to see a lot of things being pushed in that direction. And we've been able to be well positioned to participate in that. And you think in some of the oncology space, you're going to start to see that become a little bit bigger with some of the monoclonal antibodies and some of that aspect that kind of fits well within our model. I mean the chemo itself doesn't necessarily fit within our model as well as some of the more, let's call it, shelf-life products that you could have in some of the monoclonal antibodies, the OPDIVOs and KEYTRUDAs and some of the other within that. And I think as the payers are looking at site of care initiatives and other things, I would say that would probably be a growing area that in most instances, home infusion didn't participate as robustly in the oncology space is what potentially the future may hold.

What about on the new therapy side, just as you evaluate the drug pipeline for your biopharma partners. What do you see that excites you in the next 2 to 3 years? And how would you compare it historically, both from a cadence and size perspective to what a typical 2- to 3-year window of time typically looks like?

Yes. We always have kind of a pipeline of opportunities, and we cultivate that and really work. We've got a dedicated team in business development that's working upstream to identify those and partner earlier in the process through it. A lot of times, they've been smaller cohorts of patients with some rarer disease states on that. I think the one that's interesting, I think, for most people is some of the Alzheimer's. [indiscernible] certainly well documented some of the challenges there. But there are some interesting products that are moving through the approval pathway that could be game changers around cognitive impairment. When you look at the size of that population, depending on what stats you look at, there could be anywhere between 2 million to 4 million Americans that could benefit from some of those products. So you just take a look at kind of the size of that. Path to payment would have to be clear. Certainly, we'd have to be working with CMS around some of the reimbursement models, especially in Medicare for that population. But I think that would be one of the biggest opportunities if the efficacy of those therapies, patterns in the way in which early indications are showing some positive impact.

It's been a difficult environment to run clinical trials. And so as it relates to that last question, do you see these biopharmaceutical companies as a group kind of delayed in their development of drugs and, therefore, maybe impacting your business in -- over the next year or 2? Or is that not material?

There might be better folks to kind of respond to that. I guess from our position, part of the acquisitions that we did. So the recent acquisitions of Infinity Infusion Nursing and Specialty Pharmacy Nursing Network, or SPNN, kind of increases our ability to participate and support in decentralized clinical trials. And we are seeing decentralized clinical trials kind of increasing in the pace in which folks are looking at that moving away from the center dominated process because it just gives broader access to the patient base. And so we're working to provide nursing services around that. We work with CROs and manufacturers to help support some of that path. In some ways, we're seeing an increase in that, Jamie, that gives us some hope that they're going to continue to move forward and find ways to continue down that approval pathway. But we think there's going to be opportunities as that moves ahead, both in our ability to utilize this new capability set in support of that, but also then having a better eye into that pipeline as we're participating in different ways in the DCT and the decentralized clinical trial support and working with other market participants in CROs and other aspects to have a view into the future.

But I've asked you about the pipeline. The other side of the coin is things falling off path and that can be a headwind for you guys. What do you see there as it relates to the next couple of years again, just in terms of relating to the historical cadence and size of drugs falling off path and the types of pricing headwinds that can create?

Yes. I mean biosimilars are probably going to be the biggest part of that of continued expansion of biosimilars in some of the therapy sets. And it's not the cliff like a normal generic event as you see in some of the oral solids and where truly is a generic from an equivalent standpoint. And we think that will continue to move forward. I mean one of the things Mike and I talk about a lot is when we first started with Option Care, hemophilia factor was a big part of the portfolio and that's kind of moved away. And a lot of it going more towards specialty pharmacy, self-administration with [indiscernible] and a couple of their products within that. So we always have to cultivate the pipeline of new products to be able to keep that fresh and retain our relevance. And we think, again, with the investments we make in business development and having the team kind of focus on that, we should be able to continue to replenish that. I think with the biosimilars, we'll feel some probably revenue pressure as that kind of marks down. But there are ways for us to look at gross profit and just margin by being able to manage that as we move forward with better negotiation with manufacturers around acquisition costs and some of the other things as that then starts to come into the marketplace. So we try to pull on those levers wherever we can. And certainly, we think scale does have advantage in our direct relationships with many of the manufacturers for those products given the scale and the size of the patient census that we manage.

Okay. Just on the acute side of the business, this has obviously just been impacted by hospital volumes and surgical volumes. How far are you below where you would have been in the counter factor where COVID had it happened? And is that the right way to think about where the acute business could recover to in a sustained sort of low COVID environment?

Look, the utility of what we do within the acute space is -- remains high, right? Those patients that are receiving an antibiotic or need nutrition support or inotropic therapy, like all those things, we think that will continue to hold high value, and we'll continue to do really good work with partnering with the hospital systems on those discharges moving forward. That range of kind of the low single digits, we think is right. That's mostly -- that's volume, right, on that. We don't really factor in much pricing change as we're trying to think forward on that because there's puts and takes through that process. And we think that, that will continue in that low single-digit rate. We love the balance of the portfolio on that. I mean you know when we've talked about the gross profit is a lot different in the profile, certainly, a lower dollar per patient on the acute side. But a lot of the value that we create on having the network that we have, really the volume of the acute patients and the relationships that we build with the referral sources just helps to really position us well not only for acute transitions onto service with us, but also position us well for some of their chronic patients. So we think that, that low single digit is the right view. And we don't know that there's anything that's going to really disrupt that. There'll be quarters in which there's puts and takes, but we feel it's pretty consistent in the discharges.

Okay. So no real catch-up in the acute. It's just kind of getting back to normal...

Yes. Unlike some of the other participants in the post-acute care, like most of our patients aren't -- although we get some derivatives from elective surgeries and other things where there might be an infection that comes out of that or something that, most of our patient base is pretty constant. And they were receiving care because of the urgent nature of their needs regardless of COVID or not, that admission is going to happen. And so that transition, we don't see a big catch-up on that. On the chronic side, there is a school of thought around some of the undiagnosed that weren't going out to have their annual checkups and other things through COVID. There might be some latent demand in some of the catch up if there is undiagnosed population there that we should be well positioned to benefit if that were to come to fruition.

We've been asked everyone about real-time indicators of volume and utilization. So would just love your perspective on this. So on the chronic side, what are you seeing in terms of referrals, if that's picking up post the Omicron wave? And then on the acute side, any indicators to suggest what the volume environment looks like right now?

Yes. I mean we monitor referral patterns kind of on a daily, weekly, monthly basis to kind of understand the trends. We are seeing some uplift in referral patterns on both acute and chronic through that process. And again, part of it I think is execution. Part of it is the marketplace opening up a little bit more. Maybe some of those undiagnosed are starting to get diagnosis on it. We do feel kind of support of the payer community around some of the site of care and continuing that as it moves forward. So we're feeling some of the positive inputs of that and referral patterns are pretty strong. I mean we kind of gave that feedback at the Q1 earnings call that we saw some strength, certainly some softness in the early part of the year when Omicron was kind of at its peak. But as things have started to stabilize behind that, the referral volume has remained strong.

Just on the industry structure, there's a couple of big players. You've been the largest independent. There's a lot of small players that may not have the ability to compete as well, especially as health care that's more complicated and in challenging environments like we're in. What are you seeing from the smaller independents? Are they exiting the market? Is that helping share accrue to larger players like yourselves? And are there opportunities to accelerate that acquire smaller businesses or is that not really part of the strategy?

Yes. I mean we -- as we demonstrated last year, look, we will continue to look and be opportunistic from an M&A standpoint on if there's opportunities either in a certain geography or where there's a player that has some unique capabilities that we'll look at that as being part of the inorganic growth on that. We like the coverage map we have. We cover 96-plus percent of the U.S. population with the infrastructure that we have. Our focus is around maximizing that using our commercial team on reach and frequency and driving that forward. Local competitors, it's -- it really depends. There's a wide variety of kind of those players in the market. Some have really good strength and deep relationships within the communities that they're a part of. Others are probably a little bit more challenged in some of the economic models and maybe even access to nursing that could constrain their ability to grow moving forward. So look, we'll continue to look for those opportunities. We do think scale has an advantage from a competitive standpoint. But I think, as you know, health care is local. And so our focus is on making certain that we're doing everything we can within those local markets with our care management center and the teams to be the best in that market in order to win because just having kind of a national presence, but not being really good at the local level, doesn't allow us to execute the plans that we put forward.

You've mentioned on some recent calls expanding service lines, and I don't expect you to show all your cards today, but how should we think about what might be adjacent opportunities from you from either your product or service line capability perspective, given your access to patients in the home and in clinic? Just what types of things should we be thinking about as opportunities for you?

Yes. I mean I'll start with, look, we have done -- and Mike and the team have done a tremendous job of just putting our balance sheet in a position in which M&A is going to be a part of the future. And we've said publicly that our expectations are that we'll generate over $200 million of cash flow from operations. We'll have the ability to continue to be acquisitive on that. We've talked a little bit and signaled around opening the aperture a little bit wider on that, just so that people understand that it's not just we're out there only going to buy pharmacies and do just the roll up. And I think what you saw with some of the -- of the four acquisitions we've done in the last 12 months, Three of them I say are in that adjacency. So we acquired Wasatch Infusion which we're really thrilled about. And they're an infusion center operator in Utah that brought us just capabilities and knowledge and know-how that we can use across our entire infusion suite infrastructure. The two acquisitions of Infinity Infusion Nursing and SPNN, or Specialty Pharmacy Nursing Network, again, are near adjacencies, something that we needed to ensure that we had access at the point of care to those clinical resources. So not too far from the core of what we do, but certainly a different model and an adjacency in the services that they provide. And as I said earlier, that allows us to kind of expand what they do as a nursing service in support of decentralized clinical trials and kind of relationships and broader participants in the marketplace. And so I'm excited about those. I think as we're looking at our role and the value that we can bring as the health care ecosystem continues to evolve and to change. We look at kind of our role in post-acute and are trying to think more broadly. When a patient is on service with us, especially one that is on a chronic therapy, anything we can do to help follow that patient on a longitudinal basis to think about that whole patient, not just the infusion event, but the role that we can play more broadly in making certain that the patient is responding well to the therapy, that they're living and the activities of daily living continue to improve or their health status is stable or improving on that. And so we don't discount the privileged position that we have of, look, we knock on the door of thousands of patients a day, and they actually open it up and invite us in. And that gives us a responsibility, but we think also a privilege position to think about what else can we be doing while we're there to help support not only our payers, the prescribers, but the patients themselves through that process. And so those are the things that we'll be looking at to kind of augment. I will caveat that and say, look, we're not looking to become a home health agency. We're not looking to do personal care. Our nurses are specialized in infusion therapy, and we want them working at the highest level of their licensure and the acuity of the patients that we have is somewhat complex from that standpoint. But we do think there's additional value that we can deliver through that. And those are the things that we're looking at. And some of it may include remote monitoring and other capability set that just provide Sentinel and longitudinal view of the patient and their health stats.

Interesting. Gives us some things to think about. Let's talk about drug pricing for a few minutes. The narrative around that's picked up. Just give us some context for how you think about risks of broader drug pricing, Medicare negotiating rates for drugs. I know your business is mostly commercial today. But just give us some context for how you think about a broader initiative to reduce drug prices for major therapy lines?

Yes. So in some ways, right, just to reinforce, about 88% of our revenue is commercial. A portion of that -- about 1/3 of that is Medicare Advantage. But the big -- vast majority is the commercial payers on that. We expect that there will be some I guess, direction coming out of what may happen from drug price reform that would kind of go into both commercial as well as government through that process. It's hard to kind of size it at this point in time because the dialogue is so diverse in the approaches that may be taken. What we've continued to reinforce is, the way that we get reimbursed is certainly the drug and a spread on the drug. We get paid a clinical per diem and then we get paid a nursing rate. And we always look for balance in that as we move forward. Historically, the drug was probably the bigger -- just from a dollar amount, it's going to be the bigger piece. But even the contribution, it was the bigger piece, and we're looking to find balance on that. There are no perfect hedges in that if there's significant downdraft on the reform. But one would expect that the acquisition cost is going to be pushed out as well for us. So not a perfect hedge by any stretch of the imagination, but there is protection for us on that in the sense that the acquisition cost would kind of move down as potentially ASP or other things would move down as well. So we think we're -- we've got some inherent protections around kind of the worst case scenario on that. But as I said, it's just hard for us to even start to handicap it, given there isn't much clarity around the path that's going to be pursued.

And you said from a dollar perspective, the drug plus ASP spread is the bigger portion from a contribution perspective. Is that a gross margin comment? I get it on revenue. It's clearly a big piece, but as you get down to the gross margin line, it seems like the service capabilities are a big contributor, too. How should we size the drug versus...

Yes. I mean we don't really disclose it to that level on it. So I won't really respond to that. But look, from where we understand where the value is, we think that the point of care is a big portion of where the value of our model is and our focus around making certain that we've got balance and that we're being paid fairly for where that value is being delivered and point of care in that clinical oversight is the biggest portion of the value from our perspective.

Okay. Let's talk about the cost environment for a minute. Obviously, you employ a lot of nurses. You said $500 million in labor expense is the base. You're anticipating a couple of hundred basis points incremental headwind for that. You've also called out some other areas of increased costs and $10 million to $12 million of incremental expense for the rest of the year each quarter. How do you think about your wage competitiveness and if the increases you're putting in place are enough to keep turnover at adequate levels? And is that the primary input into that incremental $10 million to $12 million? Or how would you size some of these other inflationary pressures?

Look, we have listening posts in every market and continue to monitor kind of what it requires to make certain that we're retaining our teams. I mean one of the things I talk about our team is recruiting our team members every day, right? We've got a responsibility as a leadership team and our leaders to make certain that we're doing that. And compensation is a part of it, but the culture and kind of the environment they're working in also pays a big portion of people staying with the company. We have invested in development programs, in training. We have done things to make certain that we are driving high levels of employee engagement and we monitor that. And so starting with -- look, there's kind of this broader view of an employee value proposition that we look at as an organization and being an employer of choice. There are always going to be the market nuances and we'll be responsive both in a proactive and sometimes reactive way if there -- we're feeling different market forces in a local market around wage pressures, et cetera. Up to this point, we haven't seen a significant increase in turnover. We're probably operating at pre-COVID levels of turnover on that. So we haven't seen a spike beyond that. But we monitor it closely and we kind of manage at the local level as opposed to kind of on a national knowing that there's those nuances. When we look at the broader cost pressures, look, we pay reimbursement for mileage for our nurses to drive and reimbursement rates for mileage reimbursement are going up. And so that's factored into kind of the numbers we put out there. We use a lot of oil derivative products in the tubing and other aspects of medical plastics that are going to be dependent on the price of oil on the barrel price from that perspective that we'll start to feel on that. And I think what Mike and I were trying to signal there is -- look in Q1, we didn't have the full load of merit increases from our annual cycle on that and we were still burning off inventory that was purchased before some of the inflationary pressures really came into vogue. So as we're replacing you're going to start to see that kind of in the back 3 quarters start to move it ahead. What we try to do is look for productivity offsets and how do we leverage the different tools that we have and some of the technology we've deployed to be more efficient and effective, how do we look at nursing productivity by utilizing our suites, how are we thinking about conservation efforts to utilize the products that we have to their fullest through that process. So that's what we get paid to do. I mean our job is always looking for those efficiencies and productivity gains to look for offsets. I think now more than ever, we're pushing ourselves to think how to leverage the technology in different and new and innovative ways, especially in some of the patient administration components and revenue cycle management. Looking for repetitive process automation and other capabilities that reduce some of the burden on our teams, but also allows us to look for efficiency within our operating model.

Just on the point of efficiency, you've got the in-clinic portion of your business that's 20%, 25%, I think, of treatments. Does this type of environment inflation and gas prices all the rest, does it incrementally push you in that direction? Are you -- how do we think about the intermediate term? Is that going to be growing faster than your home business? And what's the kind of margin efficiency offset from doing that?

Yes. So part of our strategy, and we've said publicly, look, we expect to put more than 20 new stand-alone infusion centers up during this year, and we're on pace to doing that. On that, it isn't a big CapEx burden. Most of those facilities are $100,000 to $150,000 when you think about it from a CapEx. So pretty efficient from that standpoint. We look at that primarily as being a productivity lift. And we look at, to your point, about 20% of our nursing visits are done in one of our infusion suites. And we're looking to drive utilization we start though with the patient, right? And some of it, we're looking at patient satisfaction and trying to create a network in which it's convenient and it's one in which patients seek within that process and going down there. Looking at the productivity that, that can drive hard to gauge, but we look at it as primarily a nursing productivity. Certainly, it helps with some of the delivery costs and other things when we're just getting the product to that site as opposed to kind of getting it out to the patient home and marrying it up there. So there's some lift on both sides of that. And I think we look at it when it's fully operational, it can be anywhere between a 5% to 7% productivity lift in the nursing area, if we can effectively drive utilization and occupancy of those tariffs.

Okay. Well, I think we're up on time. So with that, John, I'll thank you for your time, and enjoy the rest of the conference.

Thank you. Appreciate it. Thank you, everyone.