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

All right. Thank you. Good afternoon, everyone. I'm Jamie Perse, the health care provider analyst at Goldman Sachs. We've got our next panel, Option Care. We've got the -- on my far left, Mike Shapiro, CFO; and John Rademacher, President and CEO. Thank you, guys, for joining.

Pleasure being here. Thank you.

So one quick note before we get started. This will be a relief to some. Others will be disappointed. But due to Goldman Sachs' advisory role with the company, we won't be discussing the medicines or the transaction today. So we can focus just on Option Care and your strong 1Q results is where I want to start. Maybe just high level, I mean, what's the message coming off 1Q? I've got a bunch of follow-ups. So don't need to be exhaustive here, but what's the message from 1Q?

So I'll start, and Mike can certainly put some additional color on. First and foremost, just a really strong quarter. As the organization continues to execute, we knew we had some inflationary challenges. And the team really rallied around the opportunities that we had before us to think about productivity and efficiency as an organization and continue to execute on our plans, which are to make certain that we are expanding reach and frequency in the marketplace. We're capitalizing on the position that we have in the infrastructure from a pharmacy network standpoint and really being a partner of choice across the stakeholders that we operate with. So all in all, very pleased with the progress that the team made, still opportunities for us as we're looking moving forward but really solid performance and, again, really good execution.

Yes. The only thing I'd add is I'd really -- I'd agree with everything John said. I really described the first quarter as really balanced growth and execution across the portfolio. As you know, we have 2 very distinct portfolios of therapies, the acute therapies, which are admittedly a slower growth category of therapies, typically aiding in the discharge of individuals from a hospital setting and our faster-growing chronic portfolio. And we really had solid performance across both of those portfolios. And even in the first quarter where we went into the year knowing we still had some year-over-year inflationary pressures, the team really took that as a rally cry to offset, and we're thrilled to be able to expand margins despite some of those year-over-year headwinds.

Well, let's start with the top line. You guided 5% to 11% back in February. First, 1Q results were the top end of the range, 11% growth, and it's your most difficult comp of the year by, like, 500 basis points. So really strong start to the year. I want to start with the acute piece, the smaller piece. You've historically said this is a low-single-digit grower. You grew mid-single digits in the first quarter. I want to tease that apart a little bit. What drove acute specifically in the first quarter? And just in terms of the overall volume environment, the things that drive the business downstream, what are you seeing?

Yes. On the acute side, there's a little bit of a nuance with that. And we do expect the back half -- as you know, Jamie, we don't give quarterly guidance. We would expect the acute growth to temper a little bit in the back half. If you recall, middle of 2022, a number of scaled competitors exited a number of markets across the U.S., which presented us an opportunity to really execute to a greater extent on the acute side. Again, those are typically the therapies where you need the local presence to be a partner of choice with the hospital teams. And so we really saw an uptick in the middle of 2022 given some of those competitive closures, which really allowed us to seize the opportunity. In the back half of this year, obviously, the comps become a little bit more difficult. But nonetheless, I mean we're thrilled with how well we've executed across the country. It's stepping in and being that hospital discharge partner of choice.

What about on the utilization side, just procedures and things that tend to drive acute more broadly? Are you seeing changes in utilization or recovery? It was generally a strong quarter for...

Yes. I think if you take a look at some of the hospital discharge information, you saw some building strength through the quarter as things started to get a little bit more normal around that, certainly in an earlier flu season that was being dealt with. But as we built through the quarter, you saw hospital admissions and discharges kind of build through that. And we're well positioned, as I said, with that focus around reach and frequency and the relationships that we've developed at that local level, the opportunity to participate where that demand signal was in the marketplace, our team executed very well.

And on the competitive dynamics the market exits, are you able to quantify at all just how much that might have incrementally contributed to acute growth?

Yes. I mean I think we -- we've characterized the acute portfolio of therapies. These are more mature established therapies like intravenous antibiotics, parenteral and enteral nutrition. These are therapies that have been established and are widely used with the transition of care out of the hospital. And so these are more mature categories that we've characterized the overall markets are growing in the 1% to 3% range. We've always tried to strive to outperform the market. But I think just given some of those dynamics, I think that's really the difference between that lower growth profile in the mid-single digits that we've delivered over the last 3 quarters.

One question I often get asked and would love your perspective on is, why are folks exiting this market? I mean it seems like a good market. You guys have a great margin profile in this business. Why do you see people leaving the market?

I'll speak from our perspective. When we went through both the spin-out from Walgreens, but then more importantly, the integration with BioScrip, we saw a really unique opportunity to have a best-in-class pharmacy infrastructure. We made investments into the people, process, technology and facilities that are required to effectively and efficiently be able to compound dispense and distribute those products. And it's not easy, and it's local. And it requires a discipline within an organization in order to execute on that. Given the investments that we've made, our team continues to operate with a level of excellence within that area. Other competitors just haven't prioritized it the way we did within the opportunities we saw. And as Mike said, it's just -- you need to be local the responsiveness to be able to meet with the discharge planners to be able to take a patient at 4:00 on a Friday to have that smooth transition and then all of the infrastructure that's required to get the right dose to the right place at the right time. It's just what we do, and it's core to our operating platform. And as I said, I think we're very well positioned to continue to have a leading position in that as we look forward.

So if the market is growing in this 1% to 3% range, and you just spoke about the infrastructure you've built to be really competitive in this market, maybe others aren't as well positioned and exit the market. Just speculating here. But do you think you can grow above the market? I guess the question is, why is the low single-digit guide the right guide in the context of it seems like you guys are positioned to take share?

Yes. I mean, I think the way we approach the market, Jamie, is, look, overall, with these more mature therapies, it's really, as John mentioned, a local market. At the high level, we fight for every referral every day in every market. If we do that, if we try to be the partner of choice at Mount Sinai in New York and Baptist in Little Rock and Northwestern in Chicago, we're going to do quite well. And as John said, it's a challenging onboarding cycle, a challenging commercial interaction because, again, a lot of times -- I always like to use the baseball analogy of it, it's a lot of diving catches, and it's not easy. And I think we're pretty good at it. And I think if we can execute at the local level, because John is absolutely right, it absolutely is that, that hospital is in that case manager that's making the decision. If we do that consistently, I have no doubt we'll outperform the market. And again, from a margin perspective, this is an attractive portfolio for us because even though it takes a lot of assets and investment in technology to be responsive, it's a favorable margin profile. I mean these therapies typically are in the 50% to 70% gross margin range given the fact that most of the drug components are generics.

Okay. Two more on the acute side of the business. You laid out some headwinds to start the year in your guidance, some prescription patterns with hydroxyprogesterone and then pricing pressure and anti-infectives. Did those play out in the first quarter like you expected? Again, I'm just trying to tease out the strength in 1Q, if there's anything that was -- if that piece was...

Yes. Just to clarify, when we went into the year, we called out that there was about 200 basis points of headwind from a couple of chronic therapies that were exiting the market. One was hydroxyprogesterone, which is for high-risk pregnancies, as well as Radicava, which was an infused therapy for ALS. That was -- that had an oral indication approved. Both of those really started to affect us later in the first quarter. So we still benefited from some of that revenue. On the antibiotic side, we did also call out that we saw collectively ASPs representing about a point of headwind. That did start to feather in, in the first half of the -- or in the first quarter, but that'll become more pronounced throughout the year.

Okay. Last one on this, are you generally seeing momentum continue? I know you won't say too much about the quarter, but just in terms of the environment, the drivers, are they generally intact at this point?

Yes. Again, we don't -- we're in the middle of the quarter, so we won't necessarily speak of that. But as we exited the first quarter, certainly, we felt really good about the position that we had and continue to execute around that as we move forward with our execution plans and the depth of the relationships that we're building in those local markets.

Okay. Let's go to the chronic side, the 70% of the business or so. It's been a really nice growth story over the past 3 or 4 years. It seems like it's growing about mid-teens now. Acute grew mid-single digits. Here, too, I mean, what are you seeing generally what's driving the growth in the first quarter?

So as we position ourselves and working both upstream with biopharma around helping them move product into the marketplace and thinking of it as the channel and the platform that we have as well as the deepening of the relationships that we have with specialists in the marketplace, we have a dedicated selling part of our organization that is calling on those physician practices, those clinics, those specialists to really broaden the portfolio of products that we're able to bring, to make certain that we have programs that meet their needs. And then we work upstream with biopharma to execute the clinical protocols or put programs in place to support their patients and the disease states and the needs of those patient cohorts. So from an execution standpoint, again, reach and frequency is a big part of the strategy of building that out and making certain our team is in the right place, understanding where -- based on market data and where to best position people in the marketplace and the right call points. We utilize technology in order to manage our teams and align them for their territorial alignment and their call points through that process. And I think all that continues to set us up to be able to execute. Payers continue to focus around site of care initiatives, thinking about how do they look to reduce the total cost of care while maintaining quality and member satisfaction. And when we look at what we bring to that, it's a lower-cost setting. It's high-quality care. It's in a place in which patients want to receive it. Whether it's in one of our infusion suites or in their home, we have really strong patient satisfaction scores. So we continue to capitalize on not only the infrastructure we're building in the infusion suite, but our ability to have the right clinical resources in order to continue to grow and expand and meet the needs of the marketplace. So really pleased from that standpoint around the way that we positioned and the way that we continue to innovate with our teams to be that partner of choice for those local sources.

Are there any specific categories of therapies that are driving a disproportionate piece of dollar growth? And has that changed at all over the last 2 to 3 years, the growth drivers under the hood of chronic changing at all?

Yes. The fascinating thing is -- I think this might be one of the misconceptions of the chronic portfolio that everything is growing double digits. The fascinating thing is John and I have been here over 7 years. The portfolio of therapies that we're infusing on the chronic side today is completely different than the therapies that we were infusing 5, 6, 7 years ago. And interestingly, we see some therapies get introduced like Radicava, which was introduced 5 years ago, which was a phenomenal therapy that was introduced for ALS patients, which then effectively exited the infused market as it received the oral indication. And so as we look at the portfolio right now, it's actually quite balanced. Now that's not to say that we -- there aren't some therapies that are in decline. A perfect example is hemophilia factor. It was one of the biggest therapy categories when John and I joined. It's really gone more of the specialty pharmacy model. And so we've seen some therapies in decline. But overall, the growth has been quite balanced across a broad array of gastro and neuro therapies, chronic inflammatories, immune globulins, the portfolio of muscular dystrophy infused therapies that we collaborate on with Sarepta. We just introduced or we just announced a couple of weeks ago that we have a new partnership with Krystal for a new innovative therapy that is a topical indication that we can talk about. So as John said, I mean, the team is constantly looking for those new therapies. And so we feel really good that -- the word we like to use a lot internally is balanced, balanced growth across the portfolio.

I'll come back to Krystal in a minute, but just on the -- when you look out over the next 1 to 2 years, you've got some of these products that are in decline, some new drugs coming to market. How does it look relative to the last couple of years just in terms of the cadence of new products and new growth drivers taking over as some of these others decline?

There's always introduction of new products. Certainly, biosimilars get into that equation. As Mike said, our focus is on that balance of the portfolio. With IVIG and what we've seen there is a lot of products have kind of been introduced as a category, still big, but there's different products that kind of fit within that portfolio. You're seeing a lot within the chronic inflammatory disease, certainly, with REMICADE years ago. And now there are new biologics and biosims that are entering into the marketplace. And so our relationship upstream with biopharma to, again, be a channel partner and help to bring those products into the marketplace, things we think we're very well positioned there. We focus around the limited distribution drugs and the opportunity to use the platform to its fullest through that perspective. We look at the pipeline upstream on what's coming through the FDA pipeline of new products. There's a lot of infused products that are moving down that path towards approval. So a lot of work in conjunction to make certain that we are well positioned to utilize the platform to its fullest to deepen partnerships where -- and relationships where we can and to really tap into the clinical expertise that the organization can provide. And so it's a constant move. As Mike said, we have some products that are accelerating, some of that are in decline, but that ability to deepen those relationships not only with the referral sources but upstream with biopharma is important. The other aspect is to make certain that we maintain our market access, right? And so our independence, the ability that we have to work with all of the 10 -- top 10 of the payers, we have over 800 pay relationships, over 1,400 contracts. Having that broad spectrum of market access being an easy provider to work with because of the range and the depth of those relationships and how broad it is across all of the payers just makes it easier for us to do business with. And that helps us be a preferred provider for those referral sources that are looking to move their patients on to service.

I mean, it sounds like you feel like you're well positioned for new therapies coming to market. What about on the headwind side, are there drugs in the portfolio that are exposed to loss of exclusivity and might have competitive dynamics over the next couple of years? What does the headwind side of that equation look like?

Yes. Look, I mean, John and I is like the kid, we get paid to be paranoid. And we have a team that's constantly partnering with biopharma and with payers and prescribers to think about what are those next generation of therapies. There's new therapies that are coming out, whether it's a new administration, whether it's subcutaneous or oral or topical. There's biosimilars that are coming out. There's disruptive therapies that could disrupt some of the kind of the more historical therapies. And so that's where we're constantly looking, not only around how do we make sure we've got the broadest portfolio and thinking through what are some of those evolutions and making sure that we can still play a role, but it's also -- and part of the fun is, Jamie, we're able to challenge ourselves with the platform that we've built to think about how to better utilize the infrastructure that we've established. A couple of perfect examples. A couple of years ago, we would never have thought about injectables. But now for a new category that requires health care professional oversight, whether it's CABENUVA for HIV or SKYRIZI for patient onboarding, because of our more efficient administration site infrastructure with our infusion suites, which provides a much more efficient clinical care model, those are the kind of things where we can also challenge ourselves, not only around the current portfolio of therapies, but also are there other therapies that can bring into the mix.

Okay. Let's talk about just the partnership with Krystal for a minute. This is not an infused drug. You're leveraging your pharmacy infrastructure. What is the strategy? And is this something new for you guys? Or is it starting to open up a new opportunity for non-infused drugs and to use the pharmacy infrastructure in a different way?

Again, the platform that we have, we'll look for ways to utilize the clinical resources that we have to dispose. And we love the acuity level that we operate with and the ability to focus around having our teamwork at the closest to the highest level of their licensure. And this is a product that just had all of the dynamics and characteristics that really work within our infrastructure well, be able to compound, dispense and distribute the product, get it to the right place, whether it's in one of our infusion suites or into the home. It's a gene therapy. It requires special handling within the pharmacy when you're compounding for a patient-specific unit dose to be able to do that. The clinical wrapper that we can put around it with our nursing or, as we announced also in partnership with the Amedisys nursing a network to be able to do this, it just allows us to use the clinical resources, not only in the practice of pharmacy, but also in the practice of nursing to the fullest. And it requires a health care professional to oversee. It is a pretty sophisticated product from that standpoint. But gene therapy, small cohort of patients, there's about 3,000 patients in the United States that are afflicted with this disease. And so the ability to work with Krystal, to partner with them around the clinical protocols and then utilize the infrastructure that we have to meet a unique need that they have with their channel partner, couldn't be more thrilled about that. And I think to the broader part of your question, we'll always look for those opportunities. If it's an oral solid that's just being dispensed in a normal fashion, doesn't require a high level of oversight by clinical resources, there's probably better path for that product to follow. But if it requires manipulation in an aseptic clean room, if it requires health care professional oversight, if it requires very tight supply lines and networks to be able to get the product from the pharmacy to the home in a very efficient and effective manner, there are a lot of things that we can do with that infrastructure to experience the portfolio, but really capitalize, I think, on the unique position that we have in the markets that we serve.

Last one on this, and then we'll go to margins. But the long-term guidance here is high single digits. That's what kind of gets you to this 5% to 7% that you've guided to for the company long term. I guess, first, what do you think the market is growing? And given all the things that you've talked about and the track record over the last couple of years, it seems like you're taking share. So is the market growing slower than that and you're embedding share gains in your long-range plan? Or how should we think about that?

Well, first and foremost, our goal as an organization, it's always to take share. We -- as we work with our go-to-market plans, our commercial team, we have a lot within the platform. We've spent a lot of time making certain that we're training, and we're developing our teams, and we're putting them in the right position to win. We think we have a compelling value proposition on that standpoint. So from my chair, always expectations are that we're going to be taking share, that we're utilizing the position that we have to capitalize on the relationships that we're building. As we continue to move forward, that forward view remains that the opportunities are with there. We do see, as we've characterized, the acute products are going to be growing at a slower rate. They're mature in their life cycle. Many of them have high utility, but not an explosive amount of growth within that. Part of the chronic is there are going to be some years in which it's going to -- with new introductions and new products move at a higher rate. There's other ones that it's going to move at a lower rate. And our position all along is to make certain that we are looking at the totality of the portfolio. We're looking at the depth of the relationships at the call points. We're looking at the opportunity to work more deeply with payers around programs that they're looking to, to reduce the total cost of care. All of those things kind of fit in towards that longer view of if the market is growing in, let's call it, the 5% to 7%, our expectations are that we'd be above that. And then our expectations are that we can sweat the assets and really think about leverage growth by utilizing the platform to its fullest and continue to look for ways to drive productivity, efficiency and effectiveness of the infrastructure and the workforce that we're -- that we have the honor of being a part of.

You keep mentioning payers, and I haven't asked about the Seattle. I'll save my margin question for -- one more after this. What are you seeing from the payer community in terms of new models? And how do you participate in and shape those and be part of? I mean you keep mentioning the shift to total cost of care. How does Option Care fit into that?

Well, when you look at, again, the focus around high-quality care at an appropriate cost in a setting in which patients want to receive, we pretty much check all those boxes when you're looking from that perspective. The conversations that we have with the payer partners on that is always looking for ways to leverage the infrastructure to where they can help to support patients receiving care in this lower cost setting. We do a lot of work to demonstrate not only that we can do it in a very cost-effective way, that we focus around patient satisfaction, their member satisfaction, that we're hitting on all of the quality metrics that we put forward, that we're doing everything we can to have the broadest access to be able to bring their members on to service with us. And so all those things kind of fit within that. When you're looking at the totality of the total cost of care, we're a small piece in the infusion event alone, but it's a lower cost within our settings, whether in the infusion suite or in the home. And so we're looking for ways to wrap around those patients on a broader basis. How do we start thinking differently around not only the clinical protocols that we can execute, but especially for the chronic patients, how do we follow them more on a longitudinal basis that help manage them more effectively through that process? And so in conversations from that end, continue to think about our position and the influence that we can have on the way that care is delivered. And we also look at our role as being an extension of the 4 walls of the physician practice, right? We are administering their plan of treatment. We're helping to drive that forward. And so we've done a lot to put in place data capture and then sharing that back to help them improve the way that they're executing their plans of treatment and developing more comprehensive care plans.

Okay. That's helpful. Let's talk about the inflationary pressures that you saw last year, those anniversary-ed in the first quarter. Where are we now in terms of just the inflationary pressures that you're seeing?

Yes. Look, mid last year and middle of '22, we saw an impressive emergence of just a number of inflationary pressures, a lot of them related to crude oil, whether it's transportation, medical plastics. Obviously, we saw some inflationary pressures around some of the clinical labor categories. Obviously, crude oil and gas prices affect what we pay our nurses from a reimbursement perspective. I think for the most part, the cost categories, they're not improving, but they more or less stabilized. And we kind of saw that in the tail end of last year. The team has taken that as a rally cry. And I think one of the things that we were excited about and was demonstrated in the first quarter results is our ability to offset those cost pressures. As John likes to talk about, we've deployed a lot of technology in our revenue cycle area where 4 or 5 years ago, every single claim was touched by a human. Now that's about 80%. We've automated about 20% of our revenue cycle. And so that obviously drives a level of efficiency. And that's just one category we've been looking at delivery optimization, medical supplies rationalization, looking at our pump platforms and how to drive more efficiency across that. And so it's just embedded in the culture that what costs are going to do, what they're going to do, but it's our role to drive efficiencies and offset. And we like to say we fight for every basis point. And the other area where we've invested, which has paid considerably in terms of labor efficiency, is the expansion of our infusion suite infrastructure. We're going to open more than 20 this year, and that just allows us both from a growth strategy perspective because we can utilize our nurses more efficiently, which gives us confidence to take on new patients, but it also lowers that cost of service considerably.

Just to clarify, when you say the inflation pressures are not getting better, but they've stabilized, I mean, the baseline is reset since we've anniversary-ed the -- so has the growth rate come down relative to what it was in 1Q and now in 2Q, I mean...

Yes. I mean it's a little hard given how dynamic the business is with changing volumes and therapy mixes and geographic shift. The way I would answer the question, Jamie, is I'd say we're back to what is more of a normal inflationary environment. Of course, we're always going to give merit increases. Of course, transportation companies and medical supply manufacturers aren't calling us to give us rate cuts, but the increases or the adjustments are more commensurate with what we're used to in the past. I'd say we're probably facing a low single-digit cost inflationary environment that we were used to prior to the shocks of '22.

Okay. You mentioned in a moment ago, you've moved in-clinic up to 26% of your infusions. When you look at the capacity coming online, the capacity that you already have that's untapped today, where do you think that can go over the next 1 to 2 years? And any help on how to think about the margin difference in clinic versus in home, the savings you get from windshield time and things like that?

Yes. I think our normal answer on that is above 26%, right? It's going to go north of 26%. We don't force patients into the infusion suite, right? We offer it up. The way that we've looked at where we place those infusion suites, we take a look at gravity maps, we understand where our patient demand is. We want to be within a short driving distance of where they live or work in order to capture that. And we offer it as part of the way that we bring them on board and move that forward. So part of it is going to be a little bit dependent around kind of the mix of the business and how that flows. But there's a concerted effort by the organization and by our team to offer that and to make certain that it's as convenient as possible. And we're always going to be able to deliver care in the home for the medically fragile and those that really required there. But as we continue to build out the portfolio, especially in the areas of chronic, a lot of these patients are out doing activities of daily living. They're ambulatory. They're going to work. And what we hear a lot and clear from them is those that use the infusion suites, honestly, give us some really high scores from a patient satisfaction. They can schedule the visit on their way to -- or way to work or going back home. They can schedule during a break if required. So it just -- there's a convenience factor of being able to use the infusion suites. And so we'll capitalize on that as we move forward. And again, depending on what new products move through the pipeline, get approved and start to move that forward, we just think there'll be a significant opportunity to continue to expand and to utilize the capacity of those facilities. And today, we're not utilizing them at full capacity. Even in the best markets that we have, we still have opportunities to expand hours of operations or expand the utilization to continue to capitalize on that capacity and to meet the needs of the market at this point in time.

And Mike, any comments on the margin profile difference between...

Yes. I mean it really depends. And not to give you a nonanswer, but part of the way we think about it is just -- it's a platform for more efficient administration. And so whereas we may have had to send an infusion nurse across town so that he could do a blood draw or a dressing change, just utilizing that platform for more efficient administration. It's almost hard to put a finger on it. The way we think about it, we've said that in the more recent tranche of infusion centers that we've opened over the last 2 to 3 years, we're seeing north of a 10% labor productivity uplift. So if you assume that we're -- on average, a nurse is spending 2 hours with a patient for -- and again, there's some that last 30 minutes or some that last 6 hours. But on average, if the nurse is spending about 2 hours on a patient infusion, we're driving a 10% to 20% productivity factor, you can kind of get within a hand-grenade range of what that's worth to.

Okay. Running out of time here. So last quick one. EBITDA margin is 9.2%. I mean you're basically at all-time highs. Can you get to double-digit margins sustainably with this business? How to think about the...

I wouldn't rule it out. And again, we've always said, look, we could be a double-digit EBITDA margin today, but it's about balancing growth and some of the lower margin profile chronic therapies. But look, we fight for every basis point, and I definitely wouldn't bet against it.

All right. We'll end that. Great place to end. Thank you, guys. .

Thanks.

Thanks, Jamie. Thanks, everyone.