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

Thank you, everyone, for joining us in our next presentation. Obviously from Option Care Health, we have about, I guess, about 7 or 8 slides, and then we're going to open it up to Q&A. Joining Mike Shapiro, Chief Financial Officer; and Nicole Maggio, Senior Vice President are here with us from Option Care. Thank you, Mike. Thank you, Nicole, for joining us, as always. Truly appreciate it. I'll turn it over to you to get us kind of kick it off, walk through the slides and then I'll come back with Q&A.

Thanks, Larry. Really appreciate the hospitality. I think this is our seventh year in a row that we've participated down here. Interestingly, I think on our -- the first time we presented, we were a B3/B credit, and we're thrilled to be sitting here today at BB- /Ba3. So really good progress. Before we jump in, I just want to remind everybody that we'll be making forward-looking statements, and I would refer you to our SEC filings for details on our disclosures as actual results may vary. Given this is in a health care-specific conference, thought I would just take a minute and just ground on Option Care Health and provide a little bit of an overview. So we are the largest independent national provider of home and alternate site infusion therapy. So every single day across the country, we provide life-saving and life-sustaining therapy to critically ill or chronically ill patients across our network of compounding pharmacies and infusion centers with a team of more than 7,000 individuals. We have 95 compounding pharmacies across the U.S. We have the ability to access virtually all of the U.S. population. And given our size and scale, we have a very unique set of clinical and operational capabilities and we're actually the only ones that are in network with all major payers. As I mentioned, we've been down here participating for the last 8 years. Over that time, we have a very strong track record of both organically as well as in deploying capital through an M&A strategy. And as we sit here today on the end of the third quarter, we have a very favorable cap structure with net leverage currently at 1.7x. From a competitive position, we feel very good about where we're positioned within the health care ecosystem. Again, we operate in the post-acute space, where we're providing vital infusion therapy to more than 0.25 million patients every single year, who entrust us with their care to either help them transition out of the hospital, which are our acute therapies or to help maintain their health status as they battle a chronic condition. And that portfolio of therapies represents a little over 70%. So as we take a step back and look at the market in which we operate, we're very excited. Today, the home and alternate site infusion market is a little under 20% of how we characterize the overall infusion market across the U.S., which would include, obviously, folks in the hospitals, skilled nursing facilities, ICU and the emergency room, et cetera. So a little less than 20% of the total infused therapies in the U.S. are relevant within the home or in the alternate site market. As we look at that competitive landscape, and there's over 800 providers nationally of home infusion therapy. Again, we believe we are the largest provider with the only true national footprint as well as the broadest payer access. The -- ourselves and other scaled nationals, we estimate represent approximately half of the overall market. And then the other 50% is either regional providers, local providers, a number of hospital and health systems also maintain their own home infusion capabilities as well. So not only do we see this as an attractive growth market where we see home and alternate site infusion therapies growing in the mid-single digits. We think we have a very strong competitive position which would suggest that we have share of opportunities over the medium term at our opportunity. As we think about our portfolio, we talk a lot internally and externally about our balance. We have the broadest array of therapies, including more than 50 limited distribution therapies. We also have a number of rare and orphan conditions, which given the infrastructure that we've built allows us to scale and launch those from a clinical perspective very efficiently. Earlier this year, we launched VYJUVEK which is a novel gene therapy that we launched with Krystal Bio over the infrastructure and that added to, again, a very unique portfolio of therapies. We have very good payer mix as well. Again, we're the only ones that are in network with all national payers. No. It was only one payer that represents more than 10% of our revenue. And we have very little direct pen stroke risk with the government as direct government revenue only represents around 12%. So overall, we feel very good not only about the growth opportunities of the industry as well as our competitive position within that market.

So as Mike alluded to, we've made significant progress as a company. Just to level set, for those of you that aren't familiar with our history, the performance that we're talking about for Option Care Health, as you know it today, actually began through the merger with BioScrip back in August of 2019. So that's really the starting point for all of these -- all these metrics that we're going through. We did exist as a private company previously, which is why we're something here for 8 years. But everything that we're talking through is really from that starting point. And even though it's a -- that was our starting point for the company, we're a very, very different company than we were when we started back then. As Mike alluded to, went from a 6.2 leverage to a 1.7 as of the end of the third quarter, all the while, while continuing to invest back into our business. We've seen consistent revenue growth. We've seen even more consistent EBITDA growth, being able to grow in the double digits consistently. And then our cash flow from operations has never been better. We're very encouraged by the upgraded ratings, as Mike mentioned, and really our are very well positioned heading into the end of the year and heading into 2024 to further capitalize on this structure. Again, great progress from where we started and looking forward to continuing this trajectory.

So as we think about the value proposition road map going forward, we're really excited, and it really starts with that patient care. Again, over the last several years, we've invested tens of millions of dollars in state-of-the-art pharmacies, expanding our ever-growing footprint of infusion centers. We now have over 600 infusion chairs across the country as well as a resilient IT environment that allows consistently -- consistency of both the clinical services we provide as well as the utmost operational efficiency. We like to say this ensures that we can ensure for a large national payer that their member in Portland, Maine receives the exact same clinical experience as Portland, Oregon, and that matters around providing that clinical consistency. And as we think about the opportunity going forward to leverage that infrastructure that we've invested, creating a truly unique convergence of the largest scale across the country along with the broadest portfolio of therapies and payer relationships, we think it positions us very well going forward. Obviously, one of the things you hear from all health care service providers is it's really the people that are the integral part of the strategy. We have thousands of clinicians, whether they're dieticians, compounding pharmacy technicians, pharmacists and also in probably the largest roster of infusion nurses in the industry. We invest a significant amount of time back into our team. And we're really excited to be announced as a Gallup Exceptional Workplace Award and most recently in the last few weeks, very excited to be designated as a 2024 military-friendly employer. Just affirmation externally that we continue to strive to recruit our folks every day and make sure we're an employer of choice.

We issued our Q3 financial results at the end of October. We've all had a chance to see them. It was another great quarter with 7% revenue growth and 28% adjusted EBITDA growth. Cash flow from operations is also a great story. Although I will highlight to you to look to the year-to-date results rather than the quarter. If you recall, we received a $106 million breakup fee after the Amedisys deal fell through. That was received in Q2. And in Q3, we not only returned the capital to our shareholders via share repurchase. We've also had to pay some of the bills that came through after with the $100 million. So again, really great progress. We continue to see improvement in this area over the course of the years and throughout this year as well. I guess before I hand it back for over to any questions, we just really want to again highlight that the guidance that we provided at the end of the last quarter's call, really puts us in a position to close out a productive year and really excited for what the Option Care Health team will be able to do.

Great. Thank you for that introduction. Obviously, acquisitions, you talked -- about acquisition decision opportunities, you continue to look at opportunities. Coming off the Amedisys transaction, how should we think about framing kind of.

Yes. This has been a key topic of interest and this is something we provided some prepared remarks on the third quarter call. And obviously, we welcome the opportunity to clarify. Look, we see M&A as a way to augment what is an incredibly well performing base business. We think organically, we've reiterated that our conviction in a high single-digit top line, low double-digit earnings engine on an organic basis, our confidence and that remains very, very high. As we have -- as Nicole alluded, the cash flow generation commensurate with that earnings growth has been very favorable. And we see deployment of cash on a strategic level, one of the most critical responsibilities we have as a leadership team. On our last call, we reiterated our capital policy, which is to say, look, we are willing to invest and exceed 3x net leverage from a capital structure. But let me clarify that while we said that we would be willing to go above 3x net levered for the right opportunity. We would only do that if we had a line of sight, would make a verbal commitment to deleverage quickly thereafter to get back under 3x. And again, as Nicole alluded in 4 years, we went from 6.2x to 1.7x. So we've shown a propensity and ability to deleverage relatively quickly. So I just want to make -- take a moment just to clarify that, again, we're not saying our long-term leverage target is 3 to 4x net leverage. We're just saying that given the confidence in the cash flow generation we have tremendous access to capital before issuing equity to make those investments. And we see augmenting that double-digit, low double-digit earnings organic engine by complementing that, whether it's with complementary assets in the infusion space, infusion center operations more of that chronic care and specialty pharmacy capabilities. We see those as tangential areas where we think, again, relative to the Amedisys opportunity that we were pursuing earlier this year, it's much closer to the core business, and we think we can still create tremendous value, again, not only from the organic basis, but also complementing that with some M&A.

Right. Okay. And so I'm clear of the message around leveraging, if you push through 3x on a larger scale transaction, the target I mean it would be -- bringing back down, low cost rate...

And as we've reiterated multiple times, anything we look at has to be both strategic and economic. And as you can imagine, in a higher interest rate environment, that raises the bar on the accretion. Anything we bring forward has to have a line of sight to near-term accretion. And so that's something that we would look at. . And again, while we would be willing to go above -- I mean, for the majority of the time that we've been at this conference, we've been well north of 3x net leverage. But if we were to exceed 3x, we would expect to make a commitment externally as to a time frame to come back down below 3x in a rather expeditious manner.

Okay. The local -- kind of the regional local providers within the infusion space, is that also an area that could be -- I mean what does that landscape look like in terms of acquisition targets potentially?

So the interesting thing, Larry, is so this is a pretty small neighborhood. We know most of the competitors. And as a logical strategic exit for subscale providers in this industry, we're a common first or second call to see a way of interest. Back to my earlier comment around the strategic merits as well as the economic given the fact that we have a national presence, we have 96 compounding pharmacies across the U.S., there aren't a lot of gaps in the map, so to speak, that we need to complete. But we are always aware of those formidable smaller competitors because the interesting thing is even though we have that beautiful dot that shows -- the map that shows a lot of dots across the country, those local referral sources Mount Sinai in New York City doesn't care how many dots on a map we have in California. They want to know when they call us, are we picking up on the first ring and are we being responsive to their local patient needs. And so that's why there are still quite a few formidable local competitors who even though we leverage our national scale every single day, it's still a very locally competitive dynamic. And so we know of a number of those smaller folks that would be of strategic value. One that I would highlight back in August of 2022, we acquired Rochester Home Infusion up in Rochester, Minnesota. They had a very entrenched and long-standing relationship with the Mayo Clinic and anybody that's been to Rochester, Minnesota knows the majority of folks that get carried, Mayo aren't from Rochester, Minnesota. And we saw a lot of strategic value to integrating with Rochester Home Infusion, where they had the local relationship with Mayo. We had the national presence and capability to help transition patients home to wherever the flight home was landing. And so those are the kind of local providers where we have a very keen strategic interest. And where there's a number of those that we're not just waiting for the call. We quite often will reach out to see if there's of interest on their end.

Okay. Great. Thank you for that. Does anyone in the audience have any questions related to -- got back, right?

Got a view that was something -- Texas was amount needed is very large. How many large-ish its are there out there? So is it more an anomaly? Or are there several more of that scale that you can look at?

Yes. I think we've tried to switch the concerns over obviously, one of the things that we learned of the Amedisys transaction was there was limited appetite given some of the size and scale and change in the revenue composition of the pro forma enterprise. . We saw Amedisys as a very unique opportunity. And again, back to my comment around deploying capital. It's something that we take very seriously. We saw Amedisys as a very unique opportunity at the right place, at the right valuation, with the right capabilities. I wouldn't characterize our M&A efforts as a never-ending elephant hunting excursion. That one we saw as a unique opportunity that obviously was of a size and a scale that was unprecedented given the track record that we've showed. Short of listing out the companies that are of interest. I think John and I have tried to make as many comments to alleviate concerns that there's anything close to that scale. And again, as we think about the M&A opportunity going forward, we would expect assets that are closer to our core business and smaller in scale, hence, my comments on the third quarter call around given the access to capital and a modest amount of leverage capacity, we don't foresee in the near term that we would be looking to do anything of that scale utilizing equity.

I see the synergies of the home health Amedisys in the concept of bringing the companies together. I'm curious just because I struggle with this. How did you get comfortable with the amount of uncertainties on the regulatory front and the business of home health in terms of like clawbacks and rates. And what they're going through there. I'm more just trying to think of -- is there a comfort level or -- and maybe I'm overplaying the regulatory risk in some of the other home health spaces, but I felt like it's a much different profile of reimbursement risk that you're currently facing. I'm just curious through the diligence how you kind of got comfortable with that, when looking at that process?

Yes, sure. It's a great question. And obviously, a little bit in the rearview mirror, but we spent a lot of time given and this was all laid out in the merger proxy. Our engagement with them was the better part of a year, where we spend a lot of time with leading external experts to quantify what were some of the rate risks, the behavioral clawbacks, et cetera. It was a very different reimbursement environment. And obviously, if we were going to be endeavoring to merge with Amedisys, obviously, we spent quite a bit of our diligence efforts on educating ourselves. Obviously, back to my earlier comment, we view that as an attractive opportunity at the right place, at the right price, at the right time. If you look at where we had negotiated relative to where their equity value had been, we thought that a lot of those of those risks and uncertainties were priced in. Again, a little bit of this point is it's water under the bridge. But again, from a -- as we spelled out, we thought it was still very much a strategic and economically attractive opportunity given what were some clear present and known risks to their reimbursement environment.

Mike, could you touch on -- sorry -- could you touch on post BioScrip margins, kind of pro forma, if you will or running about 6% today or almost 10% actually. Yes. Almost 10%. Is there more to be -- to driven from a margin perspective? Or is that fully-graded? You'd always talked about going back 3 or 4 years ago, that's where you could get your margins. So now you're kind of there or even through it, really. By which of -- and a vision going forward. Can you...

There's always margin to be -- my boss will yell at me if I don't say that there's always margin, Larry. No. All kidding aside. One of the things that we were really excited about when we brought together the merger with BioScrip, the companies were -- and we were living in a pro forma world back then. We were in the mid to high 5% range. And so over the last 4 years by harvesting deal-related synergies, leveraging the industry-leading technology. We've been able to consistently grow EBITDA at a faster pace than revenue. And that's the magic and the growth algorithm that we see in this business is on a high single-digit organic top line, we consistently see low double digit as a base case, a conservative view of the engine. If we do that, we will consistently accrete to higher EBITDA margins. It's important that we grow, but that we grow profitably, and we grow profitably translating that into cash flow from operations. A lot of the things -- and again, this is a small ball when it comes to driving margin improvements. It's looking at every therapy, trying to squeeze out procurement savings, it's negotiating better transportation with FedEx and UPS, it's investing in our ambulatory infusion centers to drive labor savings on the infusion nursing team. And so it's constantly looking for ways to look for coins in the sofa cushions and the team that's been our rally cry and we've consistently been able to do that. And I would expect and again, I know this year, there's a little bit of choppiness with some of the procurement gains that have shown outsized earnings, even when you peel that back, we're still growing earnings this year in the mid-teens when you normalize for the procurement wins that we've called out, which were somewhat transitionary. And so we absolutely would expect to continue to grow earnings faster than revenue, and that should continue to add basis points to the EBITDA margin over time.

Does -- to that end, the staffing labor side. I know you made a small acquisition on that front recently. What are your thoughts on kind of the staffing labor side that -- what are the headwinds, so to speak, in labor, were you manageable?

In Healthcare Services, look, recruiting, nursing, labor will never be easy. It's something where we've remained on offense. A couple of years ago, we began a strategy to vertically integrate. We acquired the 2 leading infusion nursing platforms, Infinity Infusion Nursing, and Specialty Pharmacy Nursing Network. We've since made a small acquisition of revitalizing nursing up in the Northeast. And we've now created, and we're really, really excited about this. An independent nursing platform called Naven. These are time in per diem nurses where we're aggregating market demand. Again, this is separate from our base business, but we've added over 1,500 nurses to our core who are working on a part-time flexible basis, which augments our ability to provide nursing. Recruiting and maintaining and expanding our nursing capacity is the lifeblood of our ability to continue to grow. So by investing in infusion centers. That allows us to recoup and capitalize on a more efficient nurse base. We're not paying for a windshield time, they can infuse concurrent patients in one of our centers. So we can see a 10% to 20% uplift in nurse productivity in our centers. And at the same time, we've added over 1,500 flexible nurses through our Naven platform, which has been tremendous. And these are per diem nurses who might work in a pediatrician office or in a school nursing office, and they want a moonlighting work 5 hours, 20 hours, 30 hours a week. We pay them competitively. We allow them to focus on one-on-one patient care. And for those nurses that are becoming frustrated or burn out in a hospital setting. It's a very lucrative place for us to recruit and again, expand our nursing role. So we're -- nobody feels great about the recruiting of nurses, but we recruit our team every day, and I think we're doing pretty well on that segment.

On that exact topic. Can you give me some sense of -- it sounds like you've managed the volume, the ability to capture nurses. Can you give me some sense of the rate, pre-peak and where you are today and what's left and from a rate perspective and maybe your outlook on rate on the nursing going forward.

In terms of the cost side...

Yes. The cost -- like cost per hour rates like where they were before peak, where they were peak and where they are today.

Yes. Look, I mean, we are -- we have local listing posts and the markets of recruit nursing in Midtown Manhattan is very different than it is in Manhattan, Kansas. And so we have very local compensation structures where we are always going to be -- we have to be competitive on a rate basis. But part of it was also the quality of life. For that clinician who's been working in an ICU for 15 years and is thinking of hanging it up, but he wants to continue to focus on being a nurse providing one-on-one patient care and can work 10 hours a week or 15 hours a week. We most likely will not match the salary of somebody working in an ICU. But when it comes to the work benefits as well as we're constantly tweaking the package of compensation and benefits and perks for our clinicians. For example, we have affinity programs where if a per diem nurse is working 10 to 15 hours a week, if they consistently offer 20, they think of it as going from the gold to the platinum level. And so there are certain incentives where we give them the ultimate balance to set their schedules and the more they devote to Naven, we make it very much worth their while. And it's part of what John Rademacher, our CEO talks about. And this is whether it's nurses, accountants or pharmacists, we have to recruit our workforce every single day.

And that's helpful. And I know we've come off of the highs and all that. And so I understand market by market is different. I guess maybe I would just ask what are your thoughts on labor then just going forward as you're looking forward in terms of like...

On What, sorry?

Labor. In terms of just a broad like just trends. Is it just standard of trends of 5% or 6% I'm just looking for a number kind of thing.

I think '22 was obviously an outlier. I think we, overall, would expect high single-digit labor inflation across all of our categories. And again, in certain markets, certain clinical disciplines will point in command higher rate than others.

Mike, I guess I hear you had exited a couple of chronic therapies. Can you talk to just decision-making behind, the drivers behind to exit therapies and the economics? And can you just kind of frame that for us.

Yes. And I think it brings up a broader point. I think one of the misconceptions is that the therapy portfolio of drugs and treatments that we infuse as static. It's never -- it's constantly shifting and it's always changing. And we have a business development team that's the best in the industry, where we have direct relationships with pharma. So no developments come up that we're surprised by. Earlier this year, we identified there were 2 therapies, Radicava, which was a treatment that was introduced to treat ALS. The manufacturer of Radicava received an oral indication, which was great for the ALS population. And so whereas we were previously providing the therapy exclusively intravenously. The patient population would either take it orally or through a feeding tube, we knew that therapy was going away. Makena, which has hydroxyprogesterone, which was infused for a high-risk pregnancies. The FDA changed the label. And so that therapy exited the market. And so we pride ourselves on trying to be as transparent as possible. Unfortunately, that did create a little bit of year-over-year comparison challenges for the investor community, but we did call out that those 2, along with the fact that we sold the respiratory therapy business in Q4 of last year was about 200 basis points of top line headwind for the year. Again, the midpoint of our guidance range is 7% revenue growth. When you normalize for those exited therapies, we're actually very much at the high end of that high single-digit range. And I think the other thing I would just highlight, Larry, is, look, in constant dialogues with pharma, there's no developments on the therapies that evolve, which surprised us, whether it's something going biosimilar or subcutaneous or other developments in the administration. These are all developments that we fully anticipate as we articulate our confidence that we still believe this enterprise is poised to grow in the high single digits.

Okay. Great. I think we're at the top of the hour here, so to speak. So thank you, every one. Thank you, Mike. Thank you, Nicole as always.

Thanks, Larry, as always.