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

Good morning, everyone. Thank you so much for joining us for the Bank of America SMID Best Ideas Conference. Second day today. My name is Joanna Gajuk. I'm a health care facilities and managed care analyst at Bank of America Global Research. And I have lead coverage of some of the home care names. And it's my pleasure now to host this session with Option Care. The company is the largest home infusion services provider in the U.S. And today with us, we have John Rademacher, who's the President and CEO; and Mike Shapiro, the CFO. So before we go into the questions, maybe for the benefit of the audience, if people are not familiar with the company, I'll turn it to the team first for any high-level overview of the company. Then I'll go through my questions, and comment to the audience that you can ask some of your questions. There is a window next to the WebEx, where you see us. You can submit your questions, and I'll be happy to post the question to John and Mike today. So I'll turn it to John and Mike for any high-level comments on -- about the company.

Yes. Great. Thanks, Joanna, and good morning, everyone. Again, a high-level view of Option Care Health. So as Joanna said, we are the nation's largest independent home infusion provider. And our organization is primarily focused around providing care in the home for those patients that require infusion services. We have about 7,000 team members across the country. We're in all 50 states. We have operations in 45 of the 50 states. And we cover about 96% of the U.S. population, by best estimates, from our standpoint. When you look at the organization, it really is clinically focused. So it's comprised of pharmacists, pharmacy technicians, nurses, dietitians, respiratory therapists, all with the focus around helping patients either transition out of the hospital into the home to continue to receive infusion services through that transition, or we work with specialists, physicians, clinics that have patients that have chronic disease that require infusion services for maintenance doses and to continue to improve their health status and their ability to live a more fruitful and productive life. So the enterprise really has been around for about 40 years, really starting back as an organization that was focused on nutrition support and expanding through that. And we'll go through some of the details, but clinically focused. The patient is at the center of everything that we do. And with the team of clinicians that we have, we provide what we believe is extraordinary care that changes lives of our patients and their families.

Yes. Thanks for that. And so I guess, to continue to stay at a very high level, maybe we should first talk about the long-term growth for this business and the main drivers. And can you kind of flesh out to us the different drivers of the top line growth? And what kind of level of growth would you expect longer term for the company and also how it translates to EBITDA growth over time?

Yes. Look, we've characterized and, as we continue to take a look at the business, we believe that the top line of this is a high single digits. We'll talk a little bit, I'm sure, about the break of the portfolio of products that we sell. But when we look at the top line, we believe it's a high single-digit top line growth. However, what we've been able to build with the platform, the technology solutions that we've delivered, our ability to be efficient and effective in the way that we operate our facilities and tap into the clinical resources, we think that we can continue with leveraged growth that will allow that high single-digit top line to convert to about a mid-teens bottom line growth as we look at the midterm forward.

And I guess just talking to your point about different parts of the business because, clearly, there is -- a majority of the revenues of 70% or so comes from chronic patients, right? So can you kind of flesh to us -- and the remaining 30% from the acute. So can you kind of compare and contrast those 2 different businesses in terms of the growth profile and also the margin profile?

Yes. I'll start at the high level, and Mike can go through some of the details as we think about this forward. So as you said, about 70% of our revenue comes from chronic conditions, patients that require that support. Those are primarily branded drugs. A lot of those are the biologics. These are for patients that are on service with us for months, years and, in many instances, a lifetime. And so there is a process in which onboarding and then the continuity of that service that we provide adds significant amount of stability into the way that we look at the business in that patient census that we manage over time. The 30% of the revenue that we generated for the acute therapies, these are more mature therapies, antibiotics, nutrition support, congestive heart failure drugs, other assets. Primarily, those patients are being discharged out of the hospital. And so we've got a significant amount of resources that we align into making certain that we are well positioned to be a partner of choice for that transition of care out of the hospital into the home. As I said, those are more mature products. A lot of those, antibiotics and nutrition support. They present a higher volume of patients. But as you expect, those are more lower duration for the length of service that we provide. So that's anywhere between 3 weeks to 9 weeks -- a 10-week type of regimen since those patients transition out of the hospital into the home continue to receive those services. So we love the balance of that portfolio. We really benefit from the fact that we have balance not only in the therapies themselves, but then the makeup of these therapies between the acute and chronic. It allows us to leverage that platform that we've created of over 97 pharmacies across the country to really complement each other in our ability to serve the communities that we're part of, but also be efficient and effective in the way that we offer it. Mike, do you want to talk a little bit about the margin profiles?

Sure. Absolutely. As John mentioned, one of the benefits we see in our revenue base is the diversification. The -- and as John articulated, on the acute side, these are mostly generic therapies. So the gross margin rate is considerably higher than the chronic portfolio where we're bearing the branded cost of that therapy. And so very different portfolios of therapies that give us very good revenue balance. Again, on the one side, we have a slower growing portfolio of acute therapies, shorter treatment regimen, lower revenue per patient start or patient treatment regimen, but very attractive margin rates. And on the other side, we have the chronic portfolio, where those patients typically provide us with much better visibility going forward on the revenue stream, with significantly higher revenue per patient start over the course of the regimen. But again, because of that branded therapy in our revenue line, it does deflate the gross margin rate, again, even despite the fact that the dollars are quite attractive.

Great. So would you just say that the chronic is faster than the high single digits, and then the acute is slower, and I guess, it blends into this high single digits?

Yes. No question, Joanna. The way we describe it almost is a barbell. On the one end, you have the acute portfolio growing in the low single digits. We estimate that the chronic portfolio is growing in the low double digits, and that blends to the high single digits on a collective basis. And again, we use broad brush strokes. But the reality is we have dozens of therapy categories, each with their own growth profiles, some of which are growing north of 20%, 30% a year, some of which are declining more than 10% a year. So it's that portfolio effect that gives us a good derisking of the revenue base.

And I guess, talking about the different therapies at different work profiles by the therapy, maybe you can also kind of highlight to the audience the size of the market and also the market share that Option Care has. And also inside this market, and I guess, as it relates to the growth outcome that you outlined for us, is this growth more coming more from gaining market share? Or is it just the market itself is expanding, and that's what's driving this very attractive growth rate here?

Yes. So the best estimates that we can get, and again, it's -- there isn't this perfect data as in some other areas in the practice of pharmacy. The TAM for home infusion is anywhere between $17 billion and $18 billion is kind of the best estimates that we have seen out there. To your point -- or your question, look, our goal as an organization in the way that we've aligned our resources from a commercial standpoint is really to focus around 2 aspects of a go-to-market strategy. One is our expectations are that we should take share of that given the infrastructure that we've built, given the service part that we're able to deliver, given the quality of the care that our team is able to execute and provide on a daily basis. Our expectations are we should be a partner of choice. And that as patients are choosing as well as the referral sources are selecting who they want those patients to help transition the care over to, we want to be well positioned to take share. The other aspect of that is as new products are entering the marketplace, there's an opportunity for us to make shift, right, is to be a participant upstream with biopharma as new products are being entered -- entering into the market, and they're looking for channel partners in order to do that. We have about 50 limited distribution drugs that we have access to that allows us to expand that opportunity as new products achieve FDA approval and market entrance. And so we're looking at the world kind of through both of those lens, being well-equipped and that partner of choice to take share as well, as continue to be a partner of choice with biopharma as they're making selection of where they're looking for channel partners and in a make-share type of capability.

And I guess, I would also think that another driver of this growth for the industry and the company is also the payer decisions, right? So maybe you can talk about that, too, in terms of just the savings that are being created when a member of a health plan is using home infusion versus infusion in the hospital that you mentioned earlier. And also, to the degree you can differentiate also, if a patient would have been going to a physician office to take the infusion drug but now he's going to home, is that also creating savings for the payer?

Yes. So there certainly is a level of focus at the payer level of right side in care, right, of making certain that patients are receiving the care with the highest quality at the most appropriate cost. And we're in the right side of that conversation as to looking at patients that require infusion services. Best estimates, again, and it depends on therapy aspect of that, but there is a significant savings from the hospital, anywhere between 30% to 50% savings of a patient using or receiving infusion services in the home versus in patients in the hospital. There's also a significant amount of savings out of the hospital outpatient department in making certain that the patients transition out of that HOPD that has significantly higher reimbursement rates and cost structure than the home or one of our infusion suites. So we have very productive conversations with our payer partners as we're looking at the opportunities to help reduce the total cost of care in their viewpoint, making certain that we are providing that high-quality care at an appropriate cost. And the other benefit is it's in a setting in which patients want to receive that care. So when you're looking at both the home or one of our infusion suites, it's very efficient, very effective and it's, from a patient satisfaction standpoint, one in which we receive high scores from patients in the ability for them to receive their care in one of those 2 settings.

Thank you for that. And I guess, just looking at the last 2 years, obviously, over unusual times, but the company's revenues grew a 20% CAGR or so over the last 2 years. So can you kind of flesh out to us how the pandemic impact the 2 businesses, the chronic versus the acute? And also, how do you think about the timing of the return to a more normal for these businesses? And I guess, do you expect some of the faster chronic growth that we saw the last 2 years? Is that sustainable? Because, obviously, to some degree, you might have been benefiting from, again, patients, to your point, choosing home and also physician -- referring physicians sending patients home rather than keeping them in the hospital. So can you kind of talk about this, the benefits from COVID, and does that create essentially a headwind as things normalize going forward?

Yes. Let me try to maybe unpack some of the growth dynamics, Joanna. Look, the last couple of years, if you think about it, three years ago last week is when we put this organization together. Amazing to think we're at the third year anniversary of what was the creation of Option Care Health. At that time, we tried to socialize this as a high single-digit top line growth engine, similar to how I broke it out. Suffice to say, over the last couple of years, it's been anything but a typical landscape for the health care ecosystem. What we saw in 2021, because we brought these organizations together, we really created a unique, best-in-class commercial organization in this industry, the reality is, with the disruption of mid-2021, we have an immediate surge of hospitals, HOPDs, clinics, physician offices that wanted to clear out their facilities. And so we saw a rush in Q2 of 2021 of referrals and patient transfers to treat people in the comfort and security and isolation of their home. We then saw some sustained period thereafter, where, obviously, we saw in the acute side, especially, some lethargic referrals. And even on the chronic side, we saw episodes where patients weren't going to their specialists on a regular basis. So a lot of different data points. But the punch line is, starting in 2021 to where we are today -- or excuse me, in 2020, to where we are today, very dynamic referral patterns, which also creates for baseline growth comparisons from a previous year that's somewhat dynamic. The reality is, though, when you unpack all of that, the chronic portfolio really has been driving the growth. But we've been consistently reporting growth in the higher teens. Some of that, for example, this year, we've gotten a couple of hundred basis points of growth from the 4 acquisitions we've done over the last couple of years. But as we like to say, given a lot of the strengths that John articulated, we believe that we are -- while we might not be stepping into the batter's box as often because there's still some delayed response of folks going to see their specialists, our batting average through our dependability and our ability to respond to payers and referral sources has been consistent throughout the dynamics over the last 3 years. And so -- look, is it sustainable? We have also benefited from some newer therapies and therapies that were in shorter supply that the supply chain improved. In this industry, sometimes you see disease states where there was a previously untreated population, which is addressed for a new and infused therapy, and then you stable and kind of level off, but that's where we're constantly looking for what are those new therapies to fuel it. And so look, we fight for every dollar of revenue growth. Thus far, we've been able to operate above that lower single -- lower double-digit chronic growth trajectory. Time will tell, but we still think that's a reasonably consistent way to think about the growth of that portfolio.

Thank you. And another topic, I guess, to some degree, correlated with the pandemic and what's going on is the labor cost inflation that we're seeing and shortages in health care, specifically. But based on how we look at the company, it seems like among other health care providers, one of the companies actually least exposed in terms of exposure as a percent of revenue. So we estimated maybe 15% or so maybe of the revenues is labor cost. So I guess, first, maybe if you can confirm, is it in the ballpark? And also, I guess, more importantly, can you talk about how the company has managed through this labor situation that we're dealing with? And also, specifically, what levers do you have to offset that pressure? Because it seems like you've been holding pretty well in terms of your margins. And also, I guess, to your point about acquisitions, if you can flesh out what are the benefits of the recent deals that you did in the -- specifically in the nurse staffing industry?

Sure. So I'll take at the high level. Mike can talk a little bit more about some of the numbers and specifics on it. So first and foremost, look, our team has done a fantastic job of making certain that we're well positioned from a capacity standpoint in absorbing and being able to continue to hit the growth that you talk about, Joanna, and expand the team as necessary through that. We, as an organization, have invested a lot in our technology infrastructure to allow us to be very efficient in the way that we're looking at capacity and driving productivity as a portion to be able to offset some of the inflationary pressures. Again, as everyone has seen, certainly, labor and wage inflation are 2 things that we monitor very closely as an organization and are working really hard in order to make sure that we're well positioned on that. On the labor front, look, we have a saying in the organization of we recruit our team every single day. A big part of making certain that we're well positioned is making certain that we don't have a significant amount of turnover, that we are managing and recruiting our team members and thinking about how to create an organization that is an employer of choice through that process. And so a lot of time and energy has been focused around the culture of the team and making certain that we're creating opportunities for development and growth as people are thinking about where their career should be. And that's been a big focus of us as an organization, and I think, has provided a significant amount of benefit. The other aspects that we've done is -- to your question is, look, we acquired 2 organizations in Infinity Infusion Nursing as well as the Specialty Pharmacy Nursing Network, or SPNN, to really add capability set and capacity into our reins. Nursing is highly publicized as being an area in which there is labor shortage or scarcity. Home infusion has been a little bit, I guess, insulated from some of the big headline news around traveling nurses and some of the other cost structure on that. We didn't feel as much pain as some of the hospital or other providers did. But it is a pretty dynamic market. We've had to make market adjustments based on dynamics within those local markets to make certain that we were competitive with our -- all of our team members within that market. And so we've been very thoughtful around the way that we've looked at wage increase and making certain that we're competitive from that standpoint. We look at those other dynamics of the culture and the way that we're creating an organization that wants to attract and retain the best and the brightest. And we continue to focus our energy around how do we use that technology to its fullest as well as now an expanded network of nearly 3,000 nurses that we added with Infinity and SPNN to capitalize on where we see the growth, where we see the opportunities and where we need the capacity in order to continue to fuel the growth and the patient census that we are trying to serve. So Mike, I don't know if you want to talk a little bit about some of the inflationary pressures that we're also feeling?