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

Our next presentation, we have Mike Shapiro, CFO, Chief Financial Officer at Option Care Health. Before I turn it over to you, I do want to thank you for always supporting us at our conferences here in Las Vegas and so forth. So I think is going to do a 5-, 10-minute presentation, then we'll open up to Q&A.

Great. Thanks, Larry, and thank you very much for the hospitality. We always enjoy this opportunity to engage with our leverage and investors. Just before we begin, obviously, I'll be making some forward-looking statements. I'd encourage you to review our safe harbor disclosures in the presentation that's been posted this morning as well as on our investor portal of the website. One of the reasons we love this conference is it has allowed us to engage with a broad array of leverage finance investors across a number of industries. So I thought I would just spend 5 minutes or so to provide an overview of who Option Care Health is. And then as Larry said, happy to take questions as well. So Option Care Health is the nation's largest provider of infusion therapy in the home or in the alternate site. So what does that mean? Every day, we have the privilege of providing advanced infusion therapy to thousands of patients across the United States in the comfort of their own home or in the convenience of one of our 170 infusion suites across the United States. We treat patients across a broad array of conditions, whether they're being discharged from the hospital after an acute event that sent them into the hospital or in many instances, we're treating chronic patients who are managing a chronic condition potentially for the balance of their life. Things like rheumatoid arthritis, Crohn's, primary immunodeficiency. We have the largest footprint of compounding pharmacies across the United States. We have 92 pharmacies, and we have access to virtually the entire U.S. population. Consequently, no surprise, we also have the broadest array of therapies partnering with pharma, and we're the only national provider that's in network with every major payer across the United States. As this is a leverage conference, one thing we'll be talking about is our capital structure as well as our healthy balance sheet. At the end of the third quarter, we have reported our lowest leverage profile in the history of Option Care Health at 1.5x net leverage. So when you think about the market in which we're operating, we think that the home and alternate site infusion market is very attractive. If you think about it, health care is expanding every single day across the United States. And we're hearing more and more about the themes and the undertones of care moving out of the hospital in the acute care setting into more preferred settings, including the home where clinically, it's more advantageous. It's strongly preferred by the patients. Anybody who's ever been admitted the hospital, the first question you ask the nurse is, "When do I get to go home?" And the payers really have embraced our model because the cost of care in the home is a fraction of what it is to treat those patients in the acute care setting. So it really is truly a win-win. Today, we estimate that the home and alternate site infusion market is around $20 billion. Again, not perfect market data, but we estimate around $1 and $5 of total infusion care is occurring in the home or in the alternate site. The balance is obviously in acute care settings, operating rooms, skilled nursing facilities, physician offices, et cetera. And we think that we have amongst the largest competitive positions, roughly around 1/4 of that market to the best of our knowledge across the portfolio of therapies that we're providing. And one thing we talk a lot about internally and externally is the balance of our portfolio. Interestingly, today, about 25% of our revenue comes from what we refer to as acute therapies. These are mostly generic therapies that facilitate hospital discharges and enable patients to recover in their home. These are things like intravenous antibiotics, parenteral nutrition, treatments for chronic congestive heart failure. And so these are mostly generics, high turnover. Typically, we're treating people from 2 weeks to 2 months. They recover from whatever acute event, sent them into the hospital, and hopefully, they never see us again. About 75% of our revenue are for chronic therapies. These are for conditions for folks that are managing conditions such as again, rheumatoid arthritis, Crohn's, colitis. These are conditions that more often than not, patients are managing for the balance of their life. Very costly therapies typically, and on average, we're treating these patients for in excess of a year. So very good balance in terms of the therapeutic breakdown. Interestingly, so who's paying our bills? More often than not, it's commercial payers. We actually have very limited and stroke risk with direct reimbursement from the governments, whether it's a state Medicaid or Medicare on a federal level. About 88% of our revenue today is coming from commercial payers. That does include indirect government programs such as Medicare Advantage, Medicaid, but that enables us to collaborate more constructively with those commercial payers who are relentlessly focused on cost efficiency, quality of care, patient satisfaction, et cetera. And when you look at that site, we only have one commercial payer that exceeds 10% of our revenue. We disclose that, obviously as required in our SEC disclosures. We have one payer, I'm sure everybody can guess who that is. Who is consistent and above 15% our revenue. So very good revenue balance across the portfolio. The company in its current form really emerged in mid-2019 when Option Care Health, a privately held enterprise, merged into BioScrip. That's really the current evolution of the enterprise. At the time of the merger, we maintained about 6.2x net leverage amazingly over the 5 years. We've deployed quite a bit of capital towards M&A as well as some share repurchase. And yet, again, at the end of the third quarter, we have a net leverage profile of 1.5x and stable credit profiles of BB-/Ba3 from both agencies. Very good constructive relationships with them. So one of the things we're really proud of is over the last 5 years, consistently delivering solid top line growth over that period. We've delivered a revenue CAGR of 12% and equally as important because of the investments we've made, we've delivered significantly leveraged growth at the EBITDA line with earnings growing 2x what revenue has done over the last 5 years. And of course, as a leverage conference, the revenue only counts, if it's cash that hits the bank account. And we're really, really proud of the increased in cash flow from operations. This year, we expect to generate more than $300 million of cash flow from operations, and this is an incredibly efficient capital business with CapEx only requiring around $30 million to $40 million of annual investment in the infrastructure. Really, I'm not going to drain the value proposition road map. But if you think about it every single day, we're treating thousands of patients on an annualized basis, we treat and have the privilege of supporting more than 0.25 million patients, again, whether it's folks being discharged from the hospital or folks that we've known for more than a decade that are managing that chronic condition. So candidly, we're managing relationships with patients who, frankly, would love nothing more than to go about their day without having to deal with this condition and having a health care professional and invade their personal lives. Yes -- when we talk to those patients, more than 93% of them give us very strong marks, we have more than 93% patient satisfaction scores, which, at the end of the day, the patient is at the center of everything we do. We're conscious that at the end of that dose is a loved one who has family members and maintaining that high level of patient quality care in high patient satisfaction is exceptional. And it's really around making sure that we leverage our unique clinical pharmacy and nursing capabilities on a national basis to make sure that we're providing the highest level of care in every single instance. And we do that by partnering not only with the peers, but also with pharma to make sure that we have the broadest array of therapeutic treatments in our portfolio while also collaborating with our referral sources at a local level. When we're dealing with the discharge planning team at Mount Sinai and Midtown Manhattan, they don't care how many dots on a map we have in Texas or California. They care about when they call our Queens pharmacy, are they picking up on the second ring or are they getting back to them within 45 minutes to help with that patient transition. It's really around just creating a resilient model that is responsive at the local level, but takes advantage of our national scale, which we do every single day. And then finally, I just wanted to touch on our last quarter. We -- it's been an interesting year for the Option Care Health team. Earlier this year, we were not immune from what was one of the largest cyber security events that affected Change Healthcare, which is a major set of technology tools that we utilize on an automated basis to manage our revenue cycle and referral stream. More recently, we've managed through Hurricanes Helene and Milton, which disrupted a significant component of our Southeast operations and continues to plague us with some limited supplies of critical intravenous solution containers. But yet throughout all of that, we've been able to maintain and actually increase our expected range of financial results for 2024. We're not in a position yet to share preliminary expectations on '25. But really proud of how committed the team has been and how they've performed in the face of adversity. Again, with that compass heading, making sure that we're maintaining that excellent level of clinical care for our patients. I get, as we articulated, the balance sheet has never been stronger. We've reiterated that we expect to generate more than $300 million of cash and we've also been very, very open around our intent to deploy that capital. Primarily through M&A and through share repurchase. I think where we are in our ratings profile and on the continuum, we have stated as part of our capital structure that we are very comfortable operating with net leverage up to 3x net levered on an adjusted EBITDA basis. We are willing to poke above 3x, if we have a clear line of sight to deleveraging. And again, I think something that we have consistently demonstrated is our ability to deleverage relatively rapidly. And so we will not be shy around utilizing our balance sheet to create value for all of our stakeholders, both our leverage investors as well as our equity investors. And we think that as we move forward, while there are some bumps in the road in the near term, we see the resiliency and the relevance of this clinical model being more important now more than ever. And as we talked about the growth algorithm going forward, we believe that this is an enterprise that should consistently over the medium term, deliver high single-digit top line. And again, that leveraged earnings growth in the low single digits with considerable cash flow generation for deployment there. And so really appreciate the opportunity to share the Option Care Health story and Larry, more than happy to entertain any questions.

Great, great. Like you said, I just thought I'd follow up, I know since [indiscernible] going back, you've continued to improve your margins. Can you -- what is -- do you have as much leverage going forward to continue that kind of trajectory on the margin side?

Yes, it's a great question. And there's some interesting dynamics at our margin level because if you think back to that pie chart, our chronic therapies are growing much faster than the acute therapies. Not that we don't love those acute therapies, but they're just more mature in their profile. The chronic therapies, the nature of those are such that the therapy is very, very expensive. It has a lower margin rate profile because we have that branded therapy or that more costly biosimilar therapy in our revenue line. So on a margin rate perspective, those are typically somewhere in the 5% to 30% gross margin range. But the way we manage the business, Larry, is really to focus on dollar generation. It might be a 10% gross margin therapy but it might be a $0.5 million a year of revenue for 10 years. That's really attractive from our opportunity, from our perspective. And so the way we manage the businesses because we don't control those reference prices, we're constantly and relentlessly focused on maximizing that gross profit dollar growth. And to your question, one thing we have a high degree of confidence is that managing that indirect spending below gross profit, we have a high degree of confidence that, that will continue to grow slower than the gross profit dollars. And if we do that, that will definitely result in leverage growth going forward. And we remain very confident in that scalability, not that we're not investing in this business, but we continue to deploy capital towards technology that's unlocked tremendous efficiency and productivity across the fleet.

Okay. Great. Can you -- I don't know what you can -- you had a discussion on the third quarter call about the supply chain challenges you're facing. Is there any way to frame, I guess, many ways of asking for possibly an update on where supply chain dynamics stands, say, kind of obviously with some of the challenges that you faced most recently?

Sure, yes. Look, first and foremost, we have one of the best trade relations teams in health care services. If you think about it every single day, we're orchestrating a complex supply chain effort to coordinate whether it's active pharmaceutical ingredients, procuring certain drugs, medical supplies, infusion pumps, IV bags to make sure we have the right product at the right place, at the right time. One of the things we've discussed recently is back to our acute portfolio. The majority of those patients utilize intravenous solution containers, or IV bags, to compound and deliver their therapies. We all know that Baxter had a meaningful disruption at their North Cove, North Carolina facility. They're the largest manufacturer in the United States. They're our primary supplier of intravenous solution containers. And so we've -- on the third quarter, have said been somewhat disciplined in our ability to take new patients because our first loyalty is to patients that are on service. And so the way I would characterize it, Larry, is, again, and I think not to speak for our friends at Baxter, but they're not back to 100% yet. Every day seems to get better. And it's a spectacular team, and they're working every single day to get more and more supply online. But that has been a limiter in terms of our acute therapy growth going into the fourth quarter. That's been incorporated into our revised guidance range. We don't have a specific date yet when we get -- when we expect to get back to full speed. And interestingly, there's some competitive dynamics that are actually presenting some opportunities on the acute side that we're very excited about, but we definitely need to get to a more secure and stable supply chain dynamic before we can fully capitalize on that.

Okay. Great. Stelara, can you touch on that?

Thought that might come up.

Yes, that would be my second data point. Can you just kind of frame potential impact? I know you've given some guidance around it.

Sure.

And the potential reduction in that spread, how we should be thinking about it within the broader business model and what the consumable potential impact may be?

Yes, happy to. And again, the underlying theme here is back to that diversification and just the broad array of base we have across literally hundreds of therapies that we provide every single day. On our third quarter call, we announced that -- and again, one of the things that we, as a management team, really strive for us to be as transparent as competitively possible. Again, we're the only public participant in this arena. And so we are limited somewhat in terms of what we can share. But we did share that Stelara, which is a very important therapy for us. We have a very long-standing and productive and collaborative relationship with Janssen. They've been phenomenal over several years. And we've built a unique platform in collaboration with Janssen to support a specific cohort of Stelara patients. Stelara is a great therapy for Crohn's and colitis. It's a chronic inflammatory therapy. And it's also facing increased price pressure under the IRA. It's one of the first 10 drugs that was announced to be targeted. And Janssen in the third quarter announced that they negotiated a 66% price reduction with CMS. Interestingly, Stelara is already set to go biosimilar in early 2025. We have consistently signaled that, look, we would expect ASP in reference price pressure. That reference price is what we utilize to bill payers. It's also what we negotiate discounts from Janssen to procure the drug. And so very transparent. We play a spread between what we're billing and what we're discounted and acquiring. We shared on our third quarter call that Janssen has notified us that their intention is to quickly and dramatically reduce that discount, thereby significantly reducing our spread on that therapy. Unfortunately and again, Larry, I know we've kind of signaled to folks, there's a monster in the closet going into '25. We have exactly given a lot of description around the monster, so to speak, because frankly, we're still in negotiations with Janssen. So once we do have further clarity, we will expeditiously share with folks what we think that impact is going to be. I know there is some concern around is this a precursor to other trends with other therapies, and we are very, very confident that this is an isolated situation. There's a confluence of a therapy that is migrating away from Stelara towards other platforms for chronic inflammatory conditions with the confluence of biosimilar competition as well as the impact of the IRA and in dialogues with Janssen and others. We do think that, a, this is a very isolated incident. As we look across our portfolio, and we're going into the first quarter, we're going to increase more of our dialogue around our broad revenue base. We don't have any other therapies in the portfolio that represents the potential margin exposure that Stelara does.

Okay. But you have said that -- if I'm correct, you've said that on the chronic side, it's basically biosimilars and 2 branded therapies, is that right, Stelara and ENTYVIO? So it's in terms of its -- today's kind of...

So we have a number -- yes, we have a number of branded therapies like rare and orphans and other very specific therapies. What we have said to help folks size this up is roughly 20% of our revenue today are chronic and inflammatory therapies. This is a relatively broad category that includes REMICADE, Inflectra [indiscernible] AVSOLA. It also includes 2 current branded therapies, ENTYVIO and Stelara. And again, Stelara will migrate to a biosimilar environment, we think, in the first half of 2025. So that chronic inflammatory base other than ENTYVIO, which is not one of the more material therapies in our portfolio, will effectively be a biosimilar category. And that typically carries a more stable environment.

Okay. And you said that this is kind of the way your discussions with the manufacturer has been kind of unusual relative to other therapies. If you could just kind of walk us through that?

Yes. Typically, when something is branded in facing little competition, the manufacturer's propensity to provide steep discounts off that reference price is pretty limited because frankly, they don't have to. They're the only show in town. We've been able to negotiate relatively healthy discounts off of that reference price for Stelara because we've created this unique patient model for highly complex, medically compromised. So typically, what you see is as the drug goes biosimilar, you go from a relatively tight discount because, again, the manufacturer doesn't face a lot of competition to them providing more incentives with biosimilar manufacturers on the horizon. They'll lean in and provide us with deeper discounts to help them maintain volume in that more competitive category. This is exactly the opposite where we're starting with a healthier margin, again, because of the clinical model that we've created. And so this is defying gravity because the manufacturer has notified us that, that discount is being dramatically reduced. So even though over time, those biosimilar entrants, we would expect to provide some -- a reasonable amount of margin expansion. The playing field is being rechopped and the discounts being reset. So this truly is, in our belief, a very unique situation.

Okay. Okay. Thank you for that. Do we have any questions in the audience? Go ahead, Jane.

[indiscernible].

Sorry. I got the first part of the question. I didn't get the second.

And revenues home versus center?

Yes. So really, the way we think about the centers is we never force a patient into one of our infusion centers. We make them aware of it. And if it works for them, we're happy to see them there. Currently, about 1/3 of our nursing events are occurring in an infusion suite versus the home. While we do see some acute patients in the suites, the majority of them, frankly, are folks that are managing a chronic condition who know that they need an infusion every 6 weeks. There's an infusion center that's less than a mile from their office, and they'd rather just come by the infusion suite, receive their maintenance dose on their terms. And so we haven't broken out from a revenue perspective but because the revenue per chronic patient is typically higher than acute, you can imagine that more than that 33% of the revenue is being seen in the center. Interestingly, again, back to one of my earlier comments around patient satisfaction. We've actually funded our patient satisfaction is higher in an infusion suite than in the home because a lot of the patients we found just want to leave the disease state outside of their home. They'd rather just manage it on their terms. It's the proverbial. I don't want to wait for the cable repair man. I'd rather just get the treatment on my terms. And that's something that's -- last comment on that is not only has it been great because our nurses, we see about a 20% efficiency gain in our nurse productivity. So it helps our margins back to how we deliver that leverage growth. But it also saves a finite amount of nursing resources. It's a growth enabler because we can take more patients with more nurse labor capacity.

So is the -- what is your capacity utilization at the centers? And can you just add additional days? Or is that...

Yes, it's been a great story. When we started -- we really started our center expansion strategy coming out of COVID. At that time, about 15% of our nurse events were occurring in one of the centers. So not only have we grown double digits top line. Our penetration or the percentage of those patients that we're seeing in our centers has actually more than doubled, which you're not paying for windshield time for nurses sitting on the interstate for half of the day. And so it's been a -- one of the ways that we've been able to drive that leverage growth. These centers are not costly. They typically cost us about $150,000 to $200,000 to open. It remarkably it looks like a 3, 4-room physician office. And so we've strategically opened more than 100 of these over the last couple of years. Again, all about patient convenience. We continue to open a couple of quarter, but we've really hit that density where we think we have a pretty good footprint. But we won't be shy about adding centers, if we need to, to continue to support growth.

Okay. And then just one more quick one for me. So in terms of the IRA and the drugs 11 to 20, I know you said you have no material exposure. But is there -- is there something in that next 20 that's acceptable to IRA negotiation that is in your suite of drugs?

Yes, it's a great question. We get that question often. We don't see anything else in our portfolio at this point that would appear to be on the radar. Again, when you think about our revenue profile, about 1/4 of our revenue are acute, which are all generic. So the drug cost is very, very limited. About 20% as we talked about are chronic inflammatory therapies, which are effectively biosimilar. That creates a more competitive environment. And it's hard to understand how biosimilars would be specifically called out and targeted by the IRA. About another 20% of our therapies are immunoglobulins, [ IGIV ] and subq IG. That's been biosimilar for more than a decade. So those 3 categories alone are about 2/3 of our revenue, which are either biosimilar or effectively generic, and we don't see really in the crosshairs. The last roughly 30% to 35% of our revenue. There are a number of branded in there. There's a number of generics and biosimilars in there as well. A lot of those, frankly, are for much more niche indications, rare and orphan, very specific disease states. And we don't really see those as having that broad appeal for CMS to be targeting through negotiations. So again, back to my earlier comment, as a leadership team, we really Stelara as a unique situation.

Mike, just to follow up. Obviously, your leverage at 1.5 turns. We obviously love it. But you've talked -- a couple of folks in the audience would like to hear a little -- you've obviously engaged in strategic opportunities in recent history. Outside your -- I won't to call your core competency, but your current competency.

Sure.

What comes to mind as to where you could deploy capital in a larger, more attractive business model?

Yes. We really see really 2 avenues. We don't really see deleveraging as a priority, given our cash generation and the strength of the balance sheet. Our propensity to lever up is really contingent on our cash generation capability, and we see 2 real priorities around capital deployment. Again, beyond very modest CapEx. We have started share repurchase, doesn't resonate as much with this audience, but we also see complementary M&A as being quite attractive. We're not looking at anything at this point that we believe would require more than cash on hand or modest incremental leverage to fund, and that also allows us to build on that national infrastructure. The types of assets we're looking at, Larry, are really bolt-on things of, call it, in the $5 million to $50 million of EBITDA contribution. And really, the great thing is the organic business is performing so well. We don't feel the need to pursue those. But from a complementary perspective, the 2 basic questions we ask is, what's the strategic value of this given our clinical foundation? And equally, in some bases, more important, what are those economic returns? If it's not accretive in a very short period of time in generating cash will pass.

Okay. And -- more broadly, on a larger scale, what would you look at in anyway?

We'll always look at complementary infusion providers. It's a relatively small neighborhood. We know everybody living on the street. We know who presents a sustainable and attractive opportunity for us. We'll also look at some adjacencies around specialty pharmacy assets, chronic care management enterprises, which really enables us to more holistically provide care in the alternate site setting. We're not -- I know there's a lot of questions around some of the deals that we were pursuing last year. I think those -- going that larger, that wide is not in the cards.

Okay. Great. I think we're out of time. So thank you, everyone. And thanks, Mike. Thanks for always joining us at our conference.

Thank you.