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

All right. Thank you. Good afternoon. I'm Jamie Perse, the health care provider analyst here at Goldman Sachs. We're going to get started with our next session. We have Option Care Health. And from the company, we've got John Rademacher, President and CEO; and Mike Shapiro, CFO. I think, John, you were going to make a few opening comments.

Yes. Thanks, Jamie. Thank you for everyone for joining us today. Yes, just wanted to reaffirm some of the commentary that we've been making really since first quarter earnings call, and that is really proud of the response that the team had given some of the circumstances around the change health issue. Team responded extremely well. We had a very strong quarter that I think just shows the resilience of the enterprise, the diversity of our portfolio and the ability for us to respond to situations that are happening around us and making the most of it. As we sit here today, continue to make progress on the Change Health cleanup that exists there. We have talked about some of the challenges that were in the first quarter and our expectations that we'll be moving towards clearing things up on the Change Health side by the end of the year and certainly making some progress on some of the procurement disruptions. And we're on plan for both of those. We continue to make really good progress to really drive the results of the organization. And as we sit here today, we just feel really good about where we are in the platform. And stability that it provides. And more importantly, the progress that the team has been making in achieving our goals that we have provided for the full year.

Okay. Great. Well, what I wanted to start with was just the market backdrop. It feels like it's been a really strong market over the last couple of years. You guys have certainly done well in the last 3 years in terms of top line growth. So starting with the overall market, how would you frame the drivers of growth? And maybe in particular, I know there's a lot of infusion still done in upstream in hospitals and physicians' offices. To what extent are the migration into the home and into alternate sites like you guys are building capacity for that's driving the business?

Yes. The backdrop remains strong for some of the characteristics that you've talked about. So first and foremost, we are a home-centered business. So that ability to provide care in the home is highly sought after, especially for those patients that are immunocompromised or have some form of medical complexity, they're ambulatory constrained, that ability to reach into the home and with the network of nursing as well as the pharmacy infrastructure have continues to be a very high value on that and especially in some of those acute therapies being local, having national scale, but that local response. And this is something that we've worked hard to put in position, but I think positions us well as we're moving ahead. You also see a continued move in the chronic conditions and the products and the therapies that support that, whether it's moving out of a hospital outpatient department into one of our infusion centers, or ultimately into the home or out of physician practices. Again, being able to offer high-quality care at an appropriate cost in the setting in which the patients want to receive we think positions us extremely well, and that backdrop will continue to be there. We also see the opportunity as the focus around medical loss ratio and continued pressures for payers in that scenario that are focused around that total cost of care and thinking about holistically how to drive value to their members but really manage the cost on a total cost of care. We're well positioned to support those needs for the payer community as they're kind of realigning and refocusing around those key areas.

And how much has the broader utilization tailwinds that many of us have been talking about companies at the conference here then helping the broader business. I imagine that shows up more on the acute side, but generally, there seems to be a normalization in health care activity patients going back to the doctor or whatever it might be. How much do you think that's been a tailwind to the business over the last 1 to 2 years?

I think exiting COVID, certainly, there were some disruptive moves happening there. First -- at the first blush, there was that need to get patients out of the hospital and kind of free up facilities in order to take COVID patients on. And so we saw kind of a broader acceptance of transitioning patients to the home and seeing that they weren't returning, right? We can manage them effectively. I think continue that process. You then saw kind of that next tranche of patients that were going to community settings, but maybe immunocompromised or physically challenged and the ability for them to be, again, managed effectively in the home. You saw kind of a broader acceptance of home and alternate site infusion capabilities is moving down that path. So I think as you kind of fast forward to today, there's probably a broader acceptance of home and infusion suite capabilities. I think that with some of the constraints that exist both from a cost structure, but also in some of the nursing capabilities and capacity, that ability to help move those patients into these settings that are efficient and effective, I think is a positive aspect. And we as a team focused really on 2 things. One is there's still an opportunity to take share. When you look at the way that the industry is organized, there's over 800 home infusion providers that are kind of registered with the home infusion association that are providing those services. Our expectations is with that national footprint. But with that local reach, our ability to take share remains there. And it's competitive and you got to hustle. But I think as an organization, we feel really well positioned to continue with reach and frequency to capture that market demand. On top of that, we focus also on making share, and that is that introduction of new products entering into the channel and the ability to service those patients. And we highlighted that in the first quarter around some of the novel new drugs that are part of our portfolio at limited distribution products that, again, given the clinical complexities given the infrastructure we have, given the competencies of our team, we're a really great platform for some of those rare and orphan or those unique products that have that clinical touch that's required to be able to utilize that. So we think there's opportunity to make share with those new product launches and continue to manage and monitor the product pipeline. But we still think even with the existing portfolio of products that we have before you have that an opportunity to take share given the capability set that we have.

Well, it's a good segue to, I want to think about innovation in the market next. And one way I've framed the business in the past, many provider businesses, it's some function of volume and price simplistically. For you guys, there's this added layer of innovation and new therapies coming to the market that you can augment growth with. So I guess, just broadly, where are we in the innovation cycle upstream? I think you guys have talked about in the past, you have very good visibility to what's in clinical trials and what's being developed. And so where are we in the context of the last few years? What does the next few years look like in terms of new therapies coming to market that can support?

Yes. I think it's a similar setup as we're looking at that pipeline of products as well as other impacts on the maturity of our existing formulary and kind of where they are in their life cycle. I think there are a couple of really interesting therapeutic categories that we're keeping a very close eye on. One, I think you and I have talked about multiple times, and that is around Alzheimer's products. We've been very conservative in our approach, knowing that it was going to take time for that therapeutic category to kind of develop and for path to payment as well as medical policy to be building that out. But we think there's some unique opportunities there, especially when you look at our platform and the needs of those therapies as we're looking down the path. There's a robust pipeline of infused drugs that are in different order of Phase II, Phase III that are moving through that process as well. So I think it's as robust as it has been. You can't kind of count your chickens until they're hatched and getting FDA approval through that process. But we feel like it's a strong pipeline. And we think the platform that we've created of having that license in all 50 states, access to about 96% of the U.S. population, national consistency in our presence, but very local in our ability to execute, puts us in a really strong position to be a partner of choice and a channel partner as the innovative new products are entering the marketplace.

Well, maybe let's go to Alzheimer's since you brought it up, I mean, there's been positive news just this week on [ donanemab ] . What are you seeing in terms of adoption of Alzheimer's and just the progress that needs to be made over time to build this market?

Yes. I think with any of these products, right, they start at the academic medical centers. And I think that's where you're seeing some of the activity right now, especially with the products that are available. I think as additional products come in, and certainly, there becomes a level of confidence in the way that the patients respond to the therapy, maybe potentially some relaxing on the monitoring and some of the scanning that's required as part of that. All that starts to set up well for expanding into these other sites as opposed to just being primarily at academic medical centers. How that develops and grows? Again, I think we'll be on the conservative side of seeing how that develops. But when you're thinking of products that require an oversight to distribute the product in a very efficient way site in a well equipped -- like we've got all, well, within that is it starts to move from academic medical center to clinic to home or alternate site infusion providers within that environment.

And you mentioned other categories you're excited about it. Anything else that comes to mind in terms of what could be a big opportunity over the next --

You know what, I think the product portfolio we have has still a lot of runway left within that. But -- we're also looking at areas in oncology. Some of the products that are within that and especially the adoption of things like the PD-1s, the KEYTRUDAs, Opdivos, [indiscernible] -- they have a lot of the characteristics that we've seen within the chronic inflammatory disease. Again, those patients where they're served, a lot of them are in oncology practices today. But as that kind of expands and as economic starts within that. Again, we think there might be opportunities for broader participation in those type of products as they become a little more mainstream and start to move out from just the clinic setting in which those patients are served.

Maybe just talk about the oncology opportunity a little bit more. I think you guys are -- there's a couple of big players there that have high share. I think you guys have been under-indexed on a relative basis. I mean, what's the strategy in oncology? Is this a new growth driver for the company over the next few years? How are you thinking about it?

It's aligning certainly resources to think about the commercial go-to-market on that. It certainly is working upstream with the pharma partners to make certain that the value of our channel is fairly represented within that. It is thinking more holistically around the full suite of products that we have. We do everything from nutrition support and antibiotics, that many patients that are struggling with cancer diagnosis have broader needs just beyond oncolytics. More broadly around the categories that we have and how to think about aligning those in the needs of those prescribers and their patients. So that opportunity that we have and again, I think the clinical competencies that are already embedded in the organization, set up well for it. It's -- there will be some tension in the system. [indiscernible] -- the things necessary to capitalize on the capacity that we have and the infrastructure that we've built.

Let's [indiscernible] to the existing portfolio. You've mentioned there's a couple of categories within your existing portfolio of drugs that have a runway. Talk about that a little bit. Where are you seeing really good traction and continued driving a disproportionate amount of your growth over the next 12 to 18 months or so?

I mean we've pulled out just the progress that we made in chronic inflammatory disease and some of the products associated with that, that has been a part of the growth algorithm that we've had over the last few years, and we think there's still opportunities to continue to grow there. IG as much as people have called that as that product is at the end of its life cycle, it continues to be one that continues to grow the utility that exists there is broad. And I think as you look at some of the data from the fractionators, et cetera, they still see a path to growth for the products. And we expect to fully participate in that growth. Antibiotics are going to grow slower. Nutrition supportable growth slower than kind of the fleet average, but they're very important products and especially at that discharge plan or case manager, being able to manage those patients and is there focusing around vending management and total cost of care, all those kind of fit well within that. And where we're investing our time and investment dollars into our facilities, our people are process our technology, really makes that full spectrum of products and the clinical competencies that are required to service those patients in a very efficient and effective way, position us to continue to grow really across that portfolio.

And part of managing this business over time is you've got headwinds, you've got tailwinds, and you've described the collection of drugs that you're serving has changed over the last 5 to 10 years, pick a time horizon. I think there's some concern around what the next leg of that looks like. There's drugs like STELARA coming off patent. There's a range of headwinds, things coming off patent over the next 5 years. How are you thinking about the risk to growth and some of the specific therapy categories that are coming off IP protection?

Yes. Biosimilars kind of operate a little bit unique based on the therapy, and kind of how the market kind of enter in and move forward. I think we're always looking at that pipeline. We're always understanding where biosimilars are going to enter within our portfolio. We understand where subcutaneous or other forms of administration made have some impact on that. That's why we focused a lot around that pipeline of new products. I mean, when Mike and I started in the business back in 2015, hemophilia was a big part of home infusion and a significant part of our portfolio at that point in time and with introduction of products like [ HEMLIBRA ] and others, that's kind of moved in more of a specialty pharmacy direction than a home and find other products and utilize our infrastructure with those new products that have entered in. So that's just a constant aspect of what we manage as part of the business is there's going to be products that go through different forms of their lifestyle or of their life cycle. And we also know that as a pharma manufacturer, the easiest form of administration is a little white pill that you take with water, right? And -- but some of the molecules that are utilized to treat these disease states just need to be injected or need to be intravenously administered, or have some complexities from a clinical standpoint that require health care professional oversight. -- even on a subcu administration. And so everything we're doing is to align and make certain that we're utilizing our resources efficiently and effectively in support of therapies that have those characteristics and where we drive value in managing those patients and managing those disease states.

The only thing I'd add on that is, look, over the last 5 years, and it's amazing. It's been 5 years in merged with BioScrip to create Option Care Health in its current form. Over that 5 years, we've delivered revenue growth on average of more than 12%. And one of the things we preach internally and externally is just the diversification and the balance. I think that's something that's really unique about this platform. When you look at the diversification of our revenue base, which has grown again double digits over the last 5 years, whether it's with payers, whether it's with geographies, whether it's with individual therapies or therapy categories, we've really driven a very balanced, and the ballast isn't skewed towards one area or another. And we get the question quite often around well, Drug X is going subcu or Drug Y is going biosimilar. Nothing evolves in the portfolio that catches our trade relations and our business development teams off guard, and we anticipate each of these. And that's part of the calculus as John said, as we think about the portfolio today relative to what it was 5 years ago relative to what it is 5 years from now, it will continue to evolve. But as we look at all those macro trends, incorporating biosimilar and subcutaneous events, our conviction in this being a high single-digit growth enterprise, again, maintaining that balance and diversification remains very high.

And just to be very specific on this point, you don't think we are entering a phase over the next several years where there are greater headwinds that need to be offset due to either biosimilars, subcu..

This has been the tour of duty over the last 5 years. REMICADE, which is a phenomenal treatment in infliximab years ago, it was really the only infused treatment for chronic inflammatory conditions. Today, it's a very diversified base. Over that time, the ASP and the reference prices of REMICADE has truncated considerably. We exited, and these are all things we've talked about openly, we exited Radicava and Makena, which both were meaningful therapies for us. Cubicin, which was the most broadly prescribed intravenous antibiotic went generic and is now known by its generic name daptomycin. So -- and as John said, hemophilia factor has been deemphasized and been declining year-over-year. So short winded answer to a very simple question, is we're not entering a different phase that we have and this is a playing field we've been playing on for years.

Very clear. I want to move competitively. We've got a new public comp that gives us a little more visibility on what's going on in the market. We've seen some M&A activity by some of the managed care players in the space. Just what are you observing broad from a competitive standpoint? And then you mentioned earlier smaller players and your aim to take share over time? What are you seeing competitively?

Yes. It's a competitive marketplace. We know that we've got to bring our best every single day through that. I mean we're also clear in -- when you look at the portfolio of the products that we have and the way that we have to go, and really win market demand and be able to take that on. A lot of our acute patients that we'll have in the fourth quarter. We haven't met that. They're shorter duration. So there is that process that we know it's a very competitive environment, and we have to work through that. Do we see the moves of some of the payers getting captive capabilities or expanding capabilities in that? Yes. Does that create some form of of competitive threat? It does. But we also know that when we're having our conversations with the payer, the folks that are designing those networks that are so important for their members. They focus on 4 key things. And we have to make certain that we're driving value across those. First and foremost, we know we have to be cost competitive. And we think we can use our scale and the efficiencies to be efficient and cost-effective for those therapies. The second thing they need is they need access for their members. You can design the most high-performance network. But if your members can't get in to receive the care in those settings, it doesn't really matter. The third thing is they're focused around quality, making certain that things like hospital readmissions, line infection rates, like you're doing the things that you promise and more importantly, you're driving better clinical outcomes. And we spend a lot of time collecting the data sharing that back with the payers to show the value and the performance. And the fourth thing they're focused on is member satisfaction or in our instance, patient satisfaction. Because they too need to recruit members through open enrollment and other aspects and the providers -- and the provider network they have available is part of that decision point around that. So we do a lot to make certain we are communicating clearly with the payers around the value that we bring across those 4 dimensions, as well as working with them around things like site of care initiatives and other things that help them reduce that total cost of care. The fact that we're independent of the fact that we have reach to be able to be in all 10 of the top 10 national payers. We have over 800 payer relationships over 1,400 contracts. That makes us easier to do business with the referral sources, knowing that the vast amount of times that we can take the patient on to service because we're in network through that process. So that all fits kind of within that dimension. And again, we expect that those create [ phishing ] licenses, right, for us to be in network. And then it's a matter of making certain our people are being extremely responsive to the referral sources, and extremely responsive to the patients in order to keep them on service if they're chronic patients and to take more of that referrals in capturing the market demand as we're looking ahead.

Well, that's a good segue. I feel like the nursing, just the clinical resources and being able to be responsive to referral sources has been especially critical over the last couple of years. You guys have done a couple of acquisitions on the nursing network front. Can you give us an update on what those acquisitions have done in terms of your ability to meet the referral sources? And just more broadly, how do you think you're differentiated from a kind of access to clinical labor perspective?

Yes, it's -- I'm glad you asked. It's really transformed our clinical capabilities. Again, over the last couple of years, we've made acquisitions of infusion nursing enterprises, specialty pharmacy nursing network, Infinity infusion nursing and revitalized nursing. These were contract agencies with whom we had relationships when we wanted to augment some of our own employee nursing team when we had surge needs in certain markets. So having acquired these 3 and integrated what were 3 competing entities into one per diem nursing platform, has really changed our clinical capabilities. Again, just to level set, we employ approximately a thousand full-time and part-time nurses on the Option Care Health side. In addition to that, we operate [ Naven ] nursing, which is the rebranded integrated flex nursing enterprise. That nursing enterprise supports both Option Care Health as well as others in need of of infusion nursing capabilities. That allows us to aggregate demand, engage employ and retain a broader cohort of infusion nurses. And it's really been a game changer for us, because as we think about growing our patient census and expanding the scope of therapies that we can support, having access to vital clinical labor, which, frankly, is challenging to say the least -- is critical to executing on our strategy. And Naven has been invaluable. It's growing, it's profitable, and it's strategically, it's integral to our -- to the overall growth strategy.

That's really helpful. the National Home Infusion Association of which you guys are apart, one of their top advocacy priorities for their '23 to '25 strategic plan is around Medicare reimbursement having fair reimbursement there. It's not been a big part of the industry historically. What's the latest in terms of a legislative fix to improved reimbursement in the Medicare segment of the market?

Yes. The association as well as we independently continue to do the work behind that, getting bipartisan support and trying to move it forward. We have been working in the association has been working with the CBO. Any of these pieces of legislation need to be scored in that process. We've gotten some informal feedback that NHIA had around the initial view is that it was going to be a [ coster ] on that. And so trying to work through around some of the levers that can be pulled to try to get it closer to neutral or a savings, as you would expect. Right now, there's not a lot of legislation moving forward in Washington for obvious reasons. The expectations are that trying to fine-tune that legislative fix to be more in alignment with the CBO scoring methodology and have that correct and then try to get this as part of either an Ombudsman bill at the end of the year or those types of things is kind of the goal. There is, at least from what we're hearing, there's low expectations that anything is really going to pass between now and the elections in November. So everything that is being aligned is to try to be in a position where those Ombudsman bill kind of end of year wrap up, trying to get something in at that point in time. But even with that setting expectations, if that were to pass, it's not kind of a watershed event. It will be a positive. We think it's a great stepping stone to broadening access even farther. But a lot of that is more tied up in the Part B Demipost type of benefit that requires pump in the administration. And as we're looking at opportunities to think more broadly around how to serve that population. There's kind of steps that go behind that that could expand access even more broadly to replicate what you have in the commercial vein, both in Medicare Advantage as well as with the commercial population.

Let's go to financials. I'm going to actually skip top line because I think we touched on it a little bit and focus on gross profit dollars, which I think is a important way to look at the business. It's grown, I think, 11% CAGR over the last 3 years, a little bit slower growth in the first quarter. But you've talked about gross profit dollars growing slightly below revenue over time. I think you essentially reiterated the high single-digit revenue growth here in this conversation. So can you get back to high single-digit-ish type gross profit growth? What's the path? Just any comments on that?

Yes, I think we can. Again, we've tried to be as transparent as competitively possible. There were obviously some extenuating circumstances with prior year procurement benefits and some supply chain challenges. As John mentioned, naturally, the change health challenges of the first quarter were a little bit of a headwind for us, as well as the fact that there was a little bit of a divergence between top line and gross margin dollar growth in the first quarter, really because of some of the traction on some of the newer rare orphan and limited distribution therapies that we've launched over the last 12 to 18 months, which initially carry a lower gross margin rate. These are typically mid-single-digit gross margin rate therapies out of the gate, the dollars are attractive. And again, just to level set, as you know, Jamie, some of our gross margin rate is out of our control because the denominator is a reference price over which we have little to no control, whether it's the ASP or an AWP of a therapy. And make no mistake, the way that we manage this enterprise is to focus on gross profit dollar growth. And so there will be quarters where the revenue and the gross margin dollars diverge a little bit. There might be times when they converge and have similar growth profiles. But the growth algorithm of this enterprise, make no mistake, is focused on maximizing those gross margin dollars at a growth line. And that's absolutely -- we fight for every basis point. But it's really around what's that margin dollar growth.

And maybe layer on to that, just the infusion suite strategy. How much you think that can contribute to gross margin improvement over time?

Yes, the suite strategy has been incredible. We've opened the last couple of years. Today, we operate a network of 170 infusion suites, over 600 chairs nationally. About 30% of our nursing events are occurring in one of our conveniently located infusion centers. This helps us drive cost of service leverage for some of our more mature centers. We're seeing 20% or more nurse productivity which is great from our perspective because it helps our margins, but it's also as if we're saving 20% more nurse capacity, which helps, again, fuel the top line growth by having that confidence to take additional patients. And that will be part of our growth strategy for years to come.

We've got about a minute left here. Two quick topics maybe. First, just you've got your guidance out there for the year. Any comments broadly on how the years progressed relative to your expectations, the momentum in the business, or things that can move you across the range?

Yes. Look, we take our credibility very seriously, and we're proud of the fact that we've build a track record of delivering on what we've laid out for the [ Street, ] so to speak. We typically start out conservatively, and we were encouraged and pleased that in the first quarter, we were able to bring up the bottom end of our range despite a couple of unexpected curveballs in the first quarter.

Maybe on that point real quick. The change cleanup, as you referenced, where are we on that?

Yes. I mean we've -- the team has made really good progress. As we said at the end of the first quarter, like our expectation is that cash will be back the line by the end of the year. We're working aggressively to bring that forward. There is some inefficiencies, as you would expect, even as we're going through that cleanup that will be in the second quarter and a little bit will straddle into the third quarter. But we feel as if we're in a really good position. The team has done extraordinary work to make certain that it was not a revenue event that we could take those patients on. And now there's just kind of the cleanup of being able to take cash that we're receiving and applying it and those aspects. So some continued manual process that's just going to take us a little bit longer to get through, given the complexity of the situation with the initial stopping and utilizing that system, but things are coming back online and we feel very confident and really good about the progress that's being made.

And you guys have $300 million in operating cash flow, $30 million to $40 million of CapEx that leaves a lot of capital flexibility, clean balance sheet under 2x levered. What's your priority for use of cash?

Yes, we're thrilled that, look, this is a very strong enterprise in terms of cash flow generation. And we've established a multifaceted capital deployment strategy that centers around M&A and share repurchase. We did say that we reaffirmed our confidence in generating at least $300 million of cash flow from ops. And we did touch pause on capital deployment as we're in liquidity preservation mode at the outset of the change challenges. But as our cash position improves, I think our shareholders should expect to see us reengage on capital deployment on both of those fronts.

Great. With that, thank you, John and Mike. I appreciate it.

Thank you.

Thank you, everyone.