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

All right. Good morning, everyone. Thank you for being here this morning. My name is Cheri Mowrey. I'm Co-Head of U.S. Healthcare Investment Banking at Morgan Stanley. I'm pleased to have with me this morning the Option Care team, John Rademacher, the CEO and President of the company; as well as Mike Shapiro, the Chief Financial Officer. Before we get started, I'm going to read some disclaimers. For important disclosures, please see the Morgan Stanley research disclosure website at [ morganstanley/researchdisclosures.com. ] If you have questions, please reach out to the Morgan Stanley sales representative. So with that, this morning, Welcome.

Thank you.

Happy to have you this morning.

Great to be here.

John, could we start by giving a quick update on last 12 months on the company's operation?

Yes. Really exciting last 12 months, I'd say the business continued to execute well, continue to move forward on our strategic initiatives and making certain that we were in the right place as health care continues to evolve. Really active in starting to take a look at additional capability sets that we needed. We added 2 nursing agencies as part of our organization. So we did 2 acquisitions. They really expanded the pool of nurses that we have available to provide service to patients in the home or in one of our infusion suites. We continue to invest vigorously in our infusion suite infrastructure. And so yes, really, really pleased with the progress that we've made. The team has stepped through a lot of -- and over a lot of hurdles in the process, dealing with some of the inflationary pressures and labor challenges but rallied hard understanding that there's a loved one at the receiving end of every dose that we deliver. And again, really good progress from that perspective.

That's great. Well, I know it's been a challenging few years for everybody in the industry. So good to hear. Maybe can we start by discussing the shift to value-based care. And the fact that it's impacting all businesses throughout the health care ecosystem, particularly as health outcomes are becoming more and more important in the context of value-based care.

Yes. Look, we're in a really privileged position in the sense of -- we spend hours with most patients in their home or in one of our infusion suite. And so, we understand the value of the data that we're collecting, we understand the value of the insights that can provide not only to guide us around the clinical protocols that we're executing, but also sharing that with other partners through that process that are part of the care team aspect of that care plan. And so when we're looking at the value-based care and kind of the transition that we expect it's going to happen over time, we're looking for ways to partner more deeply with the payer community, some of it -- and sharing some of that data upstream. We're working closely with prescribers to be part of their care team in a greater way. And we're thinking about ways to look at how we best participate. Remember, we're a smaller sliver in kind of that total spend in the post-acute care, but an important aspect of it. And in many instances, a pretty expensive aspect, especially with some of the chronic conditions and the products associated with that. And so, the more we can enable a view of the total cost of care and help drive down that total cost by lower cost setting, high-quality care, better clinical outcomes, we think we have a right to participate. And we think we are in a really strong place in order to help that transition over to more value-based reimbursement or better clinical outcomes as they're looking at that total cost of care.

[ Rising ] Opportunity I think for you guys.

Agree.

So how have the conversations been with payers as contracts roll towards renewals? Interested in your view on how these contracts are being negotiated given the inflationary environment.

Yes, I'll start and then certainly look for Mike to talk about it because he helps with the underwriting of the risk as we're looking at it from that perspective. I'd say, look, no one knocks on our door saying we want to give you more reimbursement dollars. So every conversation is one in which we're finding that balance of the value that we're providing. And again, that position that we hold, right, high-quality care at an appropriate cost in a setting in which their members want to receive care. So that's kind of the area that we start with and the basis that we're approaching from. We get paid for 3 primary things. One is the reimbursement on the drug, a [ clinical per DM ] and then the nursing charges. A lot of the focus right now is on nursing, right? And the costs have gone up from that standpoint. And so look, as I said, I'll start with no one's saying, "Hey, here's more money." But we're having some progress. We do have some COLA in some of the agreements that allow us to move forward on that aspect. And we're trying to get some rate, especially in the nursing area. The only other thing I'd say is, look, we really like the position that we have. We're in all 10 of the top 10 national payers. None of those contracts are up for renewal. In the short run, we've got multiyear agreements and/or they're evergreen and they auto renew. So there's some aspects of that. But Mike, do you want to talk a little bit about that on the rating?

Yes, sure. I think as John mentioned, one of our key strategic advantage is the fact that we are the only scaled provider that's in network with virtually all major payers across the United States. We pride ourselves on our portfolio of collaborative payer relationships. Again, mechanics are such that most of our contracts, evergreen or renew without event. John and I have been here for over 7 years. We've never had a parting of ways with a major payer because they see us as a collaborative channel partner that's driving savings for them. And look, every payer today has a line out the door of individuals who want to tell us about their inflationary pressures. For our team, it's a call to arms. Yes, we're approaching payers to seek reimbursement adjustments where necessary. But it's also called arms for us to invest in that relationship and become more efficient and lean internally. So we're not just another sad story at their doorsteps talking about how costs are going up.

Very good. Thanks. Can you go back to the comment about the labor environment? Obviously, it's been an incredibly tight labor environment throughout the entire ecosystem. How have you been able to alleviate some of that pressure internally, either by automating processes or otherwise? And how are you staffing to meet the needs of the patients?

Yes. Again, our team has done a fantastic job. I mean we have a saying within the organization, look, we recruit our team members every single day, and we're still building a bigger team. And when we started this journey, when Mike and I started, we were about what Mike, 2,500 team members? And today, we're about 6,000, 6,500, part of that through the acquisition and the nursing networks. But we focus on being an employer of choice. And so we really believe that the model that we execute, the culture that we've built, the team environment that we're creating is one in which people want to be a part of and that's an important aspect because if you're losing more out the door than you're recruiting, it's a never-ending cycle there. The focus that we put in the technology we've deployed, we still believe that there's opportunities for us to drive productivity gain that when we're looking at how do we be an efficient organization, how do we drive that efficiency deeper, how do we use technology for self-service for some of the patient needs on that, how do we streamline the transitions that happened between our pharmacists, our nurses, our pharmacy technicians through that process. All those things, we continue to squeeze and tap into as we move forward. The other thing, and I'll go back to my comment even on the value-base care, data is so important, and it's an important part of our process. Because when you think about what we do, not only are we trying to deliver extraordinary care in every intervention that we have, we have to manage that entire revenue cycle from the moment the referral hits our door, we have to be thinking about the perfect claim till when we drop that bill and get reimbursed. So we look at that entire process -- that entire cycle from the moment we receive a referral until that discharge of that patient. And we've been really focused around taking waste and cost out of that process with better partnership with the prescribers with better partnerships with the payers to have less denials and higher efficiencies there as well as better handoffs and better use of the technology in those transitions within our team members. So again, there's still work to do there. We think that there's still [ opportunity ] for that and use of technology offset. We're doing some things with machine learning and AI, especially in the billing and collections area that, again, is taking steps out of the process so that we can become more efficient. So a lot of pressure there. But again, starting with being an employer of choice, having a good employee value proposition in that process and then looking for ways to be streamlined as possible.

Good. And can you discuss your current mix of chronic versus acute and how you see that progressing? Is there a shift in demographics that's going to change that?

Yes, sure. So today, about 30% of our revenue, what we characterize as acute therapy. These are more mature therapies typically for folks that are being discharged from hospitals. So think of it as intravenous antibiotics, parenteral or enteral nutrition. And so this is a relatively mature therapy category, relatively tied to hospital discharges for folks that were in the hospital for an acute event. We typically see these folks for 2 to 6 weeks. They recover from whatever event sent them to the hospital. And hopefully, we never see them again. This is a relatively mature therapy category. Again, this -- we've characterized as growing in the low double -- low single digits, excuse me, 1% to 3% range. Very valuable though, very profitable for us, and that endures us to the health systems who look for us to help collaborate with them. Around 70% of our revenue today are from chronic therapy. This is really the source of the majority of our growth going forward. We expect this category to be growing in the low double digits. These are chronic conditions that our patients are diagnosed with more often than not at a specialist office after a battery of tests, and they're diagnosed with a chronic condition, they're most likely going to be dealing with for an extended period. These are more costly therapies often running into 6 figures for payers to provide that service on an annualized basis. You can't turn on the TV without seeing commercials for a lot of the emerging chronic therapies that we're infusing. So Ocrevus, Stelara, Tepezza, Cabenuva, Entyvio, these are some of the newer branded therapies that are emerging that is helping to fuel our growth. And so going forward, again, our growth algorithm on the top line is such that we expect high single-digit growth with the 2 ends of the barbell being the 30% of acute that's going to grow low single digits and 70% of our revenue, which we expect to grow in the low double digits.

Thank you. To the hospital system partnerships, in particular, hospitals are looking to partner and offer more value. Can you talk a little bit about your ability to drive incremental value for the health systems?

Yes. We started this journey 40 years ago really helping with that transition of that patient out of the hospital into that home setting. And from that origins, we've really been building deeper relationships with the health systems from that standpoint. A lot of the work that we do is starting with what we call as our quality management program that really aligns with the incentives of the hospital, trying to find ways to help with that transition of the patients safely and effectively making certain that the quality standards are at the highest, looking for opportunities to drive efficiencies around that discharge and the ease of that discharge on to service with us. We provide performance guarantees through that process, things like line infection, rates or readmissions back into the hospital guaranteeing that our performance is going to drive that high standard. And we look for ways to have other forms of partnerships, whether it's through 340B programs or other support at the pharmacy within that network in which we can bring additional value through that process. And so again, we look at that around all of those areas. We focus around that transition and making certain that we're as efficient as possible. If there's discharge planners or case managers are spending a lot of time trying to find that partner, it's just an inefficient aspect for them. So being independent, having all -- we have 800 payer relationships over 1,400 contracts, some ways that makes it easier to do business with us and that ease of use, ease of doing business is something that we focus on, knowing that it's important for them to be efficient as well within their operations.

And in terms of the performance guarantees with the hospital systems, is that consistent throughout all of your contracts? Or how should we think about?

We kind of work within the local markets around that, looking for the opportunities to have programs that are in alignment with kind of their mission and values and the things that are driving them. So we try to standardize where possible, and we offer it kind of with key customers based on size, scale, volumes, things that are kind of segmentations of them through that process. So -- but it's pretty well received by that customer base as we look at ways to deepening the relationships there.

Yes. So speaking of that, on competitive positioning, can you just spend a minute within the acute space, but also the chronic. We're seeing a lot of pressure with some of your competitors, right? Pharmacy is closing, it would be good to hear your views on the competitive environment and how the company is positioned going forward?

Yes. Look, it's a competitive marketplace. I mean every market that we have, there are various competitors, whether it's a hospital-owned infusion, home infusion capability or local competitors within that marketplace. And so -- with some of the repositioning in the -- I guess, reevaluation that may be going on in -- with some of those closures, we think we're extremely well positioned to, again, be a partner of choice in those marketplaces. We had invested really since Mike and I started with the organization, over $100 million into people process technology facilities to have a really efficient dynamic network that's highly reliable and very local, right? You have to be local, especially for those acute therapies where the discharge happening at 4:00, you need to make certain that you can bring them onto service, compound dispense and distribute the drug and marry it up with a nursing in 12 hours or less in many instances. So you've got to be very local there, and we've created a really resilient network in order to do that. Our focus has always been -- look, we've got to take share in every single market. That's what our commercial team is out knocking on doors and developing relationships to do. We think we are really well positioned in order to do that. But again, there's competition in every one of those markets. And we expect that, that competition is going to continue to be there. And there's going to be folks fighting for every discharge just as we do. But again, we like the position that we have. The scale aspects of our business, we think does create a competitive advantage. When you have over 100 pharmacies, you're in 45 states, you've got this national network that's extremely resilient, and the technology allows us to use capacity across that entire network where licensure allows and where we have capacity within those settings. But we've been able to be very nimble and be able to up, I guess, quickly respond to the market needs in those markets where we've seen opportunities with closures and retreat.

Can you just spend a few minutes on capital deployment and how you're thinking about capital deployment, especially post the BioCure, Infinity, Wasatch and SPNN acquisitions? Can you talk through how you're thinking about opportunities going forward? And how you plan to capture more in the value-based care?

Why don't we start with -- why don't you start with just the cap structure? Just where we are from that standpoint, and I'll talk a little bit about where we're going.

Yes, we feel really good about the cap structure that we've developed. Again, at the end of the second quarter, we were 2.7x net levered. Again, at the time of the merger a couple of years ago, we were 6.2x levered after inheriting a cap structure that was [indiscernible] of leverage. So last year, we refinanced much and part of the benefit and insight and assistance from the Morgan Stanley team to completely reset our entire capital structure. So we have a complete cov-lite debt load that with no maturities until 2028. So really good cap structure with the foundation to think more about capital deployment going forward. That, combined with the cash flow generation of this business puts us in an enviable position where, again, based on the foundation of what John was articulating, we have the privilege of deploying capital in shareholder-friendly manner. We think the most accretive way to utilize capital is through M&A. We've done 4 modest deals over the last year. We've deployed over $100 million. As John articulated, we acquired a small IG provider in the Southeast. We acquired 2 nursing agencies that's been highly complementary to our clinical strategy. And last December, we also acquired Wasatch Infusion, which is a very different -- a really unique patient experience with infusion centers operated in the Utah market, which is a growing strategic market for us. We've already learned a lot about some higher-end aspects of running some infusion centers. So going forward, we absolutely expect to be active. John and I are spending a lot more time on the M&A areas of focus. And as we've talked recently, we see that more around broadening our scope on a modest basis and around opening the aperture. Again, as John articulated, we have a privileged position in that we're interacting with the patient thousands of times in the home, how can we broaden our skill sets and capabilities to help collaborate again upstream with the payers. And so going forward, we would expect that M&A to be the primary area of focus for capital deployment.

And Mike and I have been working and kind of thinking through to your question around value-based care, this is that opportunity like we've got the strength of the balance sheet, certainly in cash flow generation to allow us to spend more time thinking about where do we add value, especially as Mike said, when we're in the home areas around data, areas around additional service lines. Everything that we're looking again, knowing that the core of what we do is home infusion. And we want our team working at the highest level of their licensure. We want to utilize the clinical capabilities to its fullest. But we also know that in many instances, as I said, we're spending hours with most of those patients in their home, we get some privileged insights there, many physicians spend 8 to 10 minutes with the patients in an office visit. So what can we be doing to kind of augment the intelligence that exists around that patient? It's an intimate relationship that we developed in the sense that you knock on the door, and they let you in their house. And so there's a lot of things that we can do to help to drive better clinical outcomes, even beyond the area of just the infusion event. And so we're looking for opportunities to play that bigger role in the post-acute space. And we think we've got a right to win, but we also start from a position strength given the relationships that we have, and the services that we provide.

I completely agree. Let me just ask the audience if there's a question in the audience, please just raise your hand, and we'll try to get to you here. Can you go back and discuss a little bit of the current environment and the supply chain. So you previously discussed shortages in Nutrition. Are you seeing that across your portfolio? What's the update on that front?

Yes. Look, it's been well documented, some of the challenges with some of the nutrition products in the marketplace with plants in Michigan and other things being offline for a period of time. And so with our enteral product set that's been under a lot of strain in trying to move things around and be able to do that. I would say, for the supply chain in general, some of the challenges during the COVID, early days of PPE and some of the other medical supplies as well as products. A lot of that has kind of flowed through, and if the flow is better, you've got inflationary impact on that but at least we can get the product, it just costs a little bit more, especially for the oil derivative products on that. So I'd say that has stabilized other than kind of in that nutrition support area, which still is a little bit choppy, given some of the market nuances there. One of the areas that I think we had signaled 12 months ago or so was -- and really early in the COVID impact was really around IG supply, given that it's a plasma derivative, people weren't donating blood through that process. I'd say for the most part, we feel good about that. We've got deep relationships -- direct relationships with all of those manufacturers. There's always a little bit of challenges in the plant management and the maintenance that they do through that process. But I'd say, very stable from that standpoint. And the supply side from our standpoint is certainly making certain that we have access to the product. So you have the drug on the shelf, but it's also the nursing because we could dispense the drug, but if you can't marry it up with a nurse. So we've kind of looked at those 2 things. And again, we have not had constraints on growth because we neither had product or we didn't have the nursing. So -- that's something that we're pretty proud of is the ability to kind of navigate through that. And as I said, I think the team has done a tremendous job of putting us in a position where we can continue to grow, serve more, increase our patient census and do it in a way that is safe and effective for those patients through that process.

Impressive, what you've been able to accomplish. Mike, can I just go back and ask you about Wasatch. You mentioned that there were some learnings coming out of that acquisition. Can you tell us a little bit more about that?

Sure. And this is -- we were really excited about this one. This was admittedly a smaller enterprise. But again, as we look across the markets, I think it's important to underscore that every one of the markets, as John alluded, is very different. They have different competitive dynamics. Many of you are aware, the Utah market is growing demographically, and we saw this as a great opportunity to increase our presence across the state in the growing metropolitan areas. The Wasatch team we had known well. They operated about half a dozen high-end infusion centers where they really focus more around the local patient experience, how to market locally, how to create a presence when the patient arrives, just -- what are the aesthetics and what are the -- what's the experience of a patient walking through the hall. Admittedly, historically in this industry, you think about a patient showing up to receive infusion care, and they really focused on how do we create an experience where the patient has a favorable interaction with the team, almost like -- they know the patients, they know. something simple like they know that when Mr. Rademacher shows up for his infusion, he likes a bag of rold gold pretzels and a Dr. Pepper. Things like that, it seems really -- it doesn't seem that scientific. But that increases the patient experience and when we really diligence then we realize how in the world do they have this patient experience level that's off the charts. And it's -- little things like that, it's about how they interact with the local physician community to ensure they entrust the care to the Wasatch team. And we've already started to export some of those learnings around really to make it that patient-centric experience. In addition to being a more efficient modality of care for us as a provider.

And so has that involved changing technology and what's embedded in the patient record?

More so, it's changed how we create the onboarding experience across. And again, we've opened 12 new infusion centers last year, we're going to open 25 this year. So a lot of their patient onboarding and engagement interactions and tools is how we're kind of tweaking our strategy going forward.

Great. We only have a few more minutes. I'll just see if -- there's one question in the audience here. Could we get a microphone, please?

Thank you. [ A lot of the ] therapies that you mentioned earlier are exploring subcutaneous administration methods. I can think of arguments as to whether that would be a headwind or a tailwind to your business, but just curious of your thoughts over the next couple of years if those trials are successful?

Yes. Our team, we've got a dedicated team that works upstream with biopharma and is tracking all things, whether it's new infused drugs or different administrations of existing drugs. And -- to your point, look, we think sometimes it creates opportunities, sometimes it's a little bit of a threat. If it requires health care professional oversight, in many instances, part of the infrastructure that we're building with the infusion suites allows that to be in a very efficient way to do some of the subcu administrations on that. Our portfolio, again, is never static. It's going to continue to run through that cycle. But Mike and I started in 2015, factor for bleeding disorders was one of the larger areas of product portfolio for home infusion. Today, it's a small portion. So it's going to continue to regenerate. Again, we've got a dedicated team that's working upstream with biopharma in order to identify where we can be a channel partner and where those opportunities are. We focus around those launches of limited distribution drugs or new product entrants for us to be able to participate. And so we expect that cycle will continue to go forward, but we think we've got a platform, both with the infusion suites to support that as well as the clinical capabilities to really capitalize on that. One thing I'd kind of dovetail on top of that is we are working upstream with biopharma with the acquisition of some of the capabilities within the SPIN and Infinity organizations. They support decentralized clinical trials directly with biopharma, so I think it gives us a window into some additional opportunities that may exist as we're thinking about the forward view of additional products that are coming in the marketplace. So we're pretty excited about that because it just, again, increases our surveillance and visibility into the marketplace and our expectations given the platform we have and can become a partner of choice as they've been choosing who are the channel partners, we're a known quantity as they're making some of the decisions around their go-to-market.

That's great. With that, we are out of time. Thank you so much for being here today. It's great to see you both.

Great to see you. Thank you.

Thank you, everyone.