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

[Audio Gap] analyst at Bank of America covering health care facilities and manage care names, and thank you so much for joining our conference. And we're going to start the day with Option Care, the largest home infusion provider in the U.S. And today with us, we have John Rademacher, who's the President and CEO; and Mike Shapiro, CFO. And I guess, John, you want to have some introductory remarks before I go into Q&A?

Certainly. First and foremost, as always, we may be making some forward-looking statements in today's presentation. We ask that you review our safe harbor language on our investor website for full disclosures as that as we move ahead. I'd like to start by just saying really strong first quarter. We are really pleased with the progress that the organization made, really balanced in the portfolio as we looked at the execution lot of moving pieces as we were exiting the fourth quarter with some of the things like the bag shortages and some of the competitive exits. But the team responded extremely well. Our ability to utilize our national scale with local responsiveness was something that we take great pride in, but really pleased with the progress that the team made as well as the execution during that period of time. Pretty much every measure that we have put out there, again, we don't give quarterly guidance, but as we set our internal markers, pretty much every measure that we had, we were at or exceeded as we exited the first quarter. So really strong results. I really feel like we're well positioned to continue that and deliver a good year.

So I guess let's start on the core business. I know there's a lot of questions around policy things and such. But maybe first, to continue on your thought in terms of the guidance for this year, right, when you exclude the Stelara headwind, calls for 20% EBITDA growth, call it, at the midpoint or so. So maybe walk us through the drivers, right? Like is this the growth sustainable? How much, I guess, is the benefit of CVS, I guess, exiting and you're gaining share, but also maybe some easy comps from last year. So kind of walk us through the build to that core number.

Yes. I would say, again, you'll hear the word balanced, but really balanced results. And as we were looking at the year and the guidance that we put forward, our expectations were continued strength of growth in the acute therapies, certainly capitalizing on competitive exits and the opportunities that, that creates for us in those markets in which we exit. But we believe there's a halo effect associated with that as well. We're seeing growth not just in those exit markets, but growth in other markets as we continue to execute. We think part of that is hospital and health systems expand and are across multiple MSAs, their ability to have partners who are reliable, that can provide consistent high-quality care are ones that they seek and that ability for us to continue to execute. We were really pleased on the progress. And again, we think that is part of that growth driver. We continue to see strong execution in the chronic space, whether it's in our rare and orphan and to continue to capitalize on the platform that we have from that perspective as well as our core products, whether it's the chronic inflammatory disease as well as our IG portfolio of products. So really feel as if the growth is going to come from all of those dimensions. When you pull out some of the impacts of the Stelara on that, another strong year of top and bottom line performance, we feel really good about the composition of that and the balance that, that brings given the value proposition that we bring into the marketplace. And that value proposition, I'd say, is both with the referral sources, again, that responsiveness that we have, the reliability, the consistency of the clinical outcomes, but also as we're working with the payer community and looking for opportunities to deepen our relationships there, especially as they're working with -- through challenges with medical loss ratios and others, they're looking for partners that can help to reduce the total cost of care. And when you think of what we can do, offering high-quality care at an appropriate cost in a setting in which their members want to receive that, we're really well positioned to continue to deepen those relationships and provide real value to those 2 key stakeholders for us.

Yes. The topic of today is high trend. So maybe as it relates to your relationship with managed care, can you talk about their strategies when they try to address the trend and [indiscernible] changes and all these other things? Is it something that you can leverage on your end to kind of more, I guess, with certain managed care plans as they try to address these issues?

Yes. A lot of our conversations are -- when you think of the value that we create for a payer, it really -- when you look at the different portfolios of products that we have, helping them manage bed days by being able to safely and effectively transition patients out of the higher cost inpatient settings into the home or into one of our infusion suites is significant value when you're looking at the total cost of care. And so a lot of our conversations with payers is how do we help to support that, how do we utilize our pharmacy infrastructure, our nursing community to be able to support that transition in a very efficient and effective way. And when they're looking at the total cost of care, not just the unit cost of a product or a service, they're looking at that total cost of care. Home infusion is significantly less expensive than going to a skilled nurse facility or staying in an inpatient setting. So a lot of the conversations that we're having with the network management people is how do we facilitate that in a more efficient and effective way? How do we bring that more to your members. Similar thing in the chronic conversations when we're talking about their membership that have chronic conditions that require the infusion services that we can offer. The ability for us to work with them on site of care initiatives to be able to help their members identify areas in which they can receive care at a high quality, but at that lower cost, moving out of the hospital outpatient departments that tend to be 20% to 40% more expensive than what it is in the home or in one of our infusion suites. We're helping them manage situations where they have high complexity from the medical needs and our health care professional oversight can provide value there. Those are the things that we're really working in earnest with. And I think this has come up before. You had asked questions before Joanna. We felt site of care initiatives were starting to move forward with some level of interest from the payers until COVID. And then COVID happened and really the world got turned upside down. There were many situations where a lot of the focus was just around the stability of the network and the supply chains and those types of things. I think as we're emerging out of that and getting back to looking at how do we manage the business and how do we drive better clinical outcomes at a more appropriate cost. They're starting to pursue those types of programs to help support their members and help to reduce that total cost of care. So we feel really good about the position we have. We think that the uniqueness of our platform, especially when you're in those conversations with the national payers who may have members in Maine and in California and every state in between, that opportunity that we have to be licensed in all 50 states to have coverage of 96% of the U.S. population and the capacity within our pharmacy and nursing network really positions us well to be that partner of choice.

So are you seeing more of an interest from payers coming to you and trying to -- a little bit more?

Yes. Those conversations are picking up pace. And they're trying to think of ways to utilize those types of programs to influence their members to make better choices.

Great. And I guess you mentioned your, I guess, access points, right? So you have the business of nursing pool that's available to you, but maybe we can talk also about your physical assets, right, because that's been part of the growth in terms of the infusion suites, but then also most recently the advanced care practitioner model. So maybe you can talk about kind of the trajectory there and how we should think about how this is aiding the growth, how much capacity there is? And I guess, how much is used and what are you looking for and kind of why you're doing it [indiscernible].

We continue to invest. I mean one of the things that we have the flexibility with the balance sheet that we operate as well as with the focus that we have as an organization of making that investment into the business. On a CapEx basis, on an annual basis, we're anywhere between $30 million and $40 million is what we spend on that. And that's putting new pharmacies into the infrastructure. We had highlighted that we have a new state-of-the-art facility in New York, in Tampa, Florida; in Richmond, Virginia. That really allows us to continue to invest in that fleet of pharmacies to ensure that we have the capacity, but also that we're operating at the highest levels of quality across that. We also invest in our infusion suite capability. We're now over 750 chairs that we operate across the U.S. And those infusion suite and the capabilities that we have there either support patients that are -- we're operating under the practice pharmacy. And now we're building out more capabilities with advanced practitioners. That allows us to expand the portfolio of products that we're able to manage and to be able to oversee. It also allows us to tap into a different class of trade as we're thinking about the way that we're sourcing the product. And it also gives us an opportunity to manage more medically complex patients given the fact that those advanced practitioners can help manage and modify the care plans associated with those patients. So we like the duality that, that brings to us. We like the optionality that allows us to match the service that we can provide with the needs of the patient. And we also like that opportunity that we have to go based on what we've been able to demonstrate with the medically complex to continue to invest in and grow our capabilities to serve more patients where clinical protocols and/or the oversight that's required is more complex than just a pharmacy-led infusion event.

So on the advanced practitioner setting, can you talk about the type of patients that you've sort of addressed to? Because I want to say in the past, you talk about Alzheimer's and even oncology it sounds like that's a new area that may be something that you guys are trying to expand into?

Yes. It opens it up in a couple of dimensions. One is in situations like with Medicare fee-for-service, where there's limited access because of -- there's just not coverage under the home infusion therapy aspects of direct fee-for-service. It allows us to expand and serve a broader base of patients given that you can use the advanced practitioner model in order to support them there. On the complex patients, certainly, Alzheimer's and the emerging therapies in that space, more medically complex. Certainly, those patients require a different level of care and handling and monitoring through that process. So having those additional capabilities and competencies of the advanced practitioner model helps there. And then the other area of emerging interest as well as we think opportunity is really in the oncology area. And starting with a lot of the, I'd say, the more standard products like the PD-1s, the Keytruda, Opdivo, Yervoy, a lot of those have the same characteristics of our chronic inflammatory diseases, require health care professional to oversee it, have some comorbidities with those patient populations that ability for us to be able to bring those patients into the advanced practitioner model and really tap into that as well as also tap into some of the site of care initiatives that are happening at the payer level. We think this sets us up very well in order to do that. There historically has always been a bit of a resistance to do oncology in the home. ASCO and other bodies have been resistant to that. Having the infusion suite infrastructure that we've been able to build out allows us to demonstrate our capabilities and do that in a clinic setting, if you want to think of it that way, that allows us to expand and to take on some additional products that may not be really but we can still serve those patients and serve those referral sources with the patients.

So how many of these advanced practitioners locations do you have?

So the broader strategy that we will be executing is all of our infusion suites will operate in this hybrid model. It takes time. Each state has different aspects of corporate practice of medicine and other things that are the requirements through that process. But we see that expanding as rapidly as possible and being able to tap into this opportunity. But it's going to take us, I'd say, a couple of years to get that fully executed given the things that you have to do from a corporate practice medicine and then being able to build along. We're going to continue to be building our infusion suite capabilities along that path with that longer-term vision around how to use the facilities. And again, to your earlier question, that just gives us broader capacity and be able to utilize our nursing resources more efficiently and effectively.

You mentioned that -- I know that's going to have [indiscernible]. So maybe you can expand a little bit more about specific therapies that are driving that [indiscernible].

Yes. And with high [indiscernible], some of the rare and orphan products that have really -- we've been able to tap into the strength of our platform and the clinical competencies as an organization. So products like Vyjuvek, Vyepti are ones that we have called out before. These are products that, again, expand on the capabilities set that we have, both in the practice of pharmacy as well as our health care professional oversight in our nursing community. Our clinicians, especially with products like Vyjuvek can set up clinical protocols that are unique to that therapy. Our learning management system helps to deploy any of the training that is required for our nurses to oversee and to execute on that, both in a just-in-time as well as a reinforcing aspect to that. And that brings a significant amount of value to our manufacturer partners who are looking for a platform to be able to bring their products into the marketplace. So we always have an eye towards continuing to look for rare and orphan limited distribution drugs and be able to continue to push those programs forward and execute around that. We feel like we're well positioned. And one of the things that we focus on is certainly new product launches and those opportunities to do that. But it's also existing products that are in the marketplace and some of the manufacturers are looking for different partners or better partners for their products and channel partners to be able to serve their products. And so we're always kind of working through those relationships broadly and looking for the opportunities to select the assets and to really utilize the platform to its full.

Maybe switching gears, Stelara has been a very topical topic, I should say, recently. So now the next -- so you were able to quantify the headwind for '25. But how should we think about biosimilars coming online? So we're starting to see some of those maybe entering the market right now? And how we should be preparing and thinking about how it's going to play out through this year and into next year?

Yes. It's still early to tell, Joanna. There has been a lot of talk. I think most of the focus has been really around the pens and the self-injectable aspect of those products. And there are a lot of Stelara patients, again, just defining the world that we operate in. The patients that we serve is a small cohort of patients that are on Stelara that have letters of medical necessity. They have medical needs in which they cannot do a self-administration. So it's a very small subset of the broad patients that participate in Stelara. A lot of the focus has been on those that are self-administered and that use the pens to do those self-injections through that process. Most of the patients that we have are -- we use vials, and we are doing it as an intravenous application or administration of that as opposed to a self-injectable. So we think that the uptake will be more focused around those self-administered patients as it moves forward. We're in active conversations with all of the biosimilar manufacturers around bringing their products on to formulary, how the economics will work on that. As we reported in the first quarter, the patients that we have, the census that we were operating at the end of the year through first quarter, we've retained a vast majority of the Stelara patients and retain them on service. Again, Stelara is still a profitable therapy for us. It's just less profitable given some of the shipping economics from Janssen. But our view is that we're going to continue to -- like with every other biosimilar event, we're going to manage that as efficiently and effectively. It gives us some different leverage points in the conversations, both with biosimilar manufacturers as well as the original innovator around the economics that we can participate in given the value that we bring to those patients and the uniqueness of the patient cohort. So we're going to continue to work on that. Again, we haven't given '26 guidance. And one of the things that's a little bit -- I'd say I don't want people to jump to is there are a lot of moving components as we start going through the rest of the year. Part of it is going to be around the biosimilar uptake and how that kind of fits into the equation and what the economics look like for that product. The other thing is what is the census of patients that we have as we roll through '25 into '26 that are on Stelara, that are on the biosimilars, that are potentially moving to the next-generation products like TREMFYA, et cetera. So that's why it's not like a linear only one variable type of equation and why we are trying to be really thoughtful around the way that we're approaching it. We feel good based on the results of the first quarter and how things are trending, that the $60 million to $70 million range that we gave for 2025 is in alignment and what we would expect for the remainder of the year through that process. But it's really early to try to hazard a guess around the implications for '26, given some of the various variables that will be part of that overall equation.

And I guess as you mentioned in the last question on Stelara about the -- there's some confusion, I guess, around how to think about the headwind, right, from Stelara this year when you said $60 million, $70 million for the year, but end of Q1 was much lower. So I guess automatically people kind of assume, hey, that's going to create additional headwind into next year. Can you walk us through...

I [indiscernible] my allotment of Stelara answer.

I'm trying to cut down as well, Joanna. Look, as John said, we would caution on anchoring on one variable going into '26. As you know, Joanna, we operate in a very dynamic environment. As John said, there's a lot of moving pieces around the biosimilar uptake, what our census looks like, what is the approach of Janssen with the legacy Stelara brand going into '26. When we laid out the $60 million to $70 million range, that was specifically linked to the guidance that we articulated for '25. As you know, we don't provide '26 guidance at this point. And that $60 million to $70 million included a consideration that we, like every other year, use our balance sheet at the end of the year to mitigate some of the price adjustments on certain drugs by using our balance sheet to build some inventory. And so the $60 million to $70 million as we see it is our high confidence interval, as John said, around the impact for '25. At this point, it's way too early. And I would just caution because there are so many dynamics, whether it's in the acute portfolio, whether it's in the rare and orphan portfolio, just within our cost structure, relationships with payers. So to anchor and I understand the math that, well, I need to adjust my '26 number by $10 million to $15 million for this wraparound in a bubble where absolutely nothing else changes in our business, which just simply isn't the case. I think that would be a safe assumption. But again, we're just not in a position to unpack even our thoughts on how Stelara will look going into '26 at this point.

So there are a couple of other big topics. I know there's a lot of uncertainty, but maybe any initial comments on the executive order yesterday in terms of trying to influence how the pharmacy chain works in the U.S. and how this potentially could flow through to you?

Yes. It's -- I think everyone is really trying to understand the executive order. I think in principle, trying to reduce the cost of drugs in the U.S. or at least have better balance between the U.S. and other developed nations. I think people understand that aspect. How it actually would be executed as it was laid out would create a significant amount of challenges, I think, for everyone. And first and foremost, reimportation, there's challenges with counterfeit and other aspects that have to be taken into consideration. It's really hard for us at this point in time to understand how it would actually ripple through to us given the uncertainties of the way that the executive order kind of outlined on that. As we've said before, we do make a margin on the drug. We do get paid a clinical per diem and we do get paid a nursing rate. And we have those 3 levers that we operate. Some of our payer contracts are tied to -- from the drug price to average selling price, the ASP. And that's -- less than 50% of our revenue comes from contracts from that standpoint. There's other mechanisms like AWP, et cetera, that we'll use for the majority of our contracts on that. So how this all patterns out, Joanna, it will be interesting to see. We're always looking for balance across those 3 legs of the stool as we move forward. And we know the cost structure that we have and the value that we bring to the patients. And when you're looking at the total cost of care, the way that we manage from that perspective. So we're always working with the payers around getting that appropriate amount of value across those 3 dimensions. I think that as this starts to move forward, if we see changes in the drug prices and things associated with that, we're always going to be looking for ways to pull on with the other levers to make certain that we're being paid fairly through that process. So a lot to see as it kind of unfolds and develop before that. At this point in time, I just don't see how this gets applied in the way that it was written and disclosed yesterday.

Right. But in theory, right, if this is where things are headed and there's more pressure on cost of drugs, is there something that you could do in response to that? I mean I understand there's this -- the 3 legs of the stool in terms of going into maybe more nursing and per diem rates to try to kind of margin. Is there something else?

I guess from our perspective, it's always been a challenging market from a pricing standpoint. Just because there's an ASP or a reference price out there doesn't mean that the payers doesn't give us free road on that. I mean they're adjusting our prices as to what's the ASP plus or the WAC minus that we're getting. So like we've been operating in a very thin margin business and operating dynamic from that standpoint. So look, we're always going to be fighting for every basis points. We would look for, as Mike says, pennies and nickels and the cushions. Like that's the orientation of our business. and the way that we operate from that standpoint. So we're always going to be looking for ways for those offsets, Joanna. We're always going to be pushing around what can we be doing in the investments in our technology to drive efficiency and effectiveness within our operating model. How do we take cost out of our systems in order to do that? How do we leverage the infrastructure, sweat the asset? Like all of those things are part of the way that we've operated the business. But as I said, like we've worked through pricing challenges. We've worked through changes that have happened within the environment and I think have shown agility and resilience as an enterprise to kind of work through those challenges to a very good outcome for our shareholders.

The only thing I'd add, Joanna, is when we think about -- and we're constantly triaging and analyzing some of these developments that seem to be coming out on a daily basis. As we've recently articulated, 75% of our gross profit comes from therapies that are either generic or biosimilar today. And those are already very efficiently priced therapeutic areas where you have multiple competitors, which are keeping prices relatively competitive. I would say of the 50% of our revenue, which are "branded drugs" which presumably would be some of the areas that the EO would be targeting, roughly half of those are limited distribution or rare and orphan therapies, which are higher cost for very small patient population. And again, our branded therapies, as we've talked about, on a relative basis, contribute less at that gross profit line. Not that we're not monitoring this. But as we look at the portfolio of therapies, we see a lower risk profile.

Exactly that's what I was trying to ask you, but you answered that question before I asked it. There was a actual exposure to where those prices could show up. On the flip side, right, before this executive order, there was a lot of focus on tariffs, potential tariffs, right, especially on drugs, in particular, right, and as it relates to how this impacts the company. So can you walk us through that? Any updated thoughts on how we should think about it? And same thing in terms of like where it will show up in your portfolio?

Happy to. Yes. And look, we're in an environment where we navigate and manage through variable drug reference prices on a daily, if not weekly basis. So whether drugs prices increase or decrease, those are dynamics that we've reacted and managed proactively quite often. I know one of the prevailing concerns is while there's delays in ASP and when it's calculated, would the company have exposure on an interim basis. That's just not -- that's just categorically not correct. Less than half of our revenue is anchored to payer contracts that utilize ASP as the reference price. If there are inflationary impacts on drugs, again, we make a spread over the medium term on the drugs. And we have demonstrated that we can very well manage interim disruptions around timing differences with reference prices. AWP and WAC are typically updated more frequently in more real time. But even with ASP delays because that usually is -- it's managed by CMS, we can very well manage those interim -- the dissonance between the reference price and the drug cut.

[indiscernible]

Yes. Just because this had come up before is, look, we manage med supplies. We're maniacal in the way that we look at how do we source and drive that forward. As we had called out, it's not material. I mean we will, again, find the right ways to do that from the med supply standpoint. So tariff shouldn't be an impact that's material for us.

Right. It sounds like we have 3 minutes. Okay. So my other topic was around free cash flow because company generated...

I love it.

Free cash flow. So maybe walk us through any updated thoughts on the deployment. Obviously, you've been buying a lot of stock, but there's also deals there. So kind of walk us through the targets you're looking at and how we should think about that?

Yes. Look, I think one of the hallmarks of this platform is our ability to convert revenue and earnings into cash flow. We like to say EBITDA doesn't pay light build cash does. And last year, we generated more than $0.25 billion of free cash. As John said, our capital expenditures are quite efficient around $30 million to $40 million. And our guidance this year is we'll generate at least $320 million of cash flow from ops. That implies that we should be this year generating and would expect to clear more than $250 million of free cash flow. Given the health of the balance sheet and our leverage profile, we're very comfortable that people should expect us to at least deploy our free cash flow in shareholder-friendly manners. And I think our balance sheet and our confidence in the cash flow affords us the flexibility and the optionality in terms of how to deploy that. We see 2 primary avenues. First and foremost is through M&A. We were thrilled in the first quarter to deploy $117 million towards Intramed Plus, highly complementary regional provider who we've respected for decades that shores up our offerings in the Southeast. At the same time, in the first quarter, we deployed $100 million and bought back more than 3 million shares. So in the first quarter, we deployed over $200 million alone, and yet our leverage profile remains at 2.1 at the end of the first quarter. And so I think folks should expect us going forward to continue to be actively deploying capital. M&A isn't as predictable and smooth as our ability to project timing of share repurchase, but we'll constantly monitor the forward view of actionable M&A. And if we think we have excess capital at our disposal, we won't be shy about buying back stock.

Great. Sounds good. This is, I think, the end of the session. Thank you so much gentlemen.

Thanks Joanna.

Thank you, everyone.